-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NusDCSYssOKYFR40QJeQr4IZwecbFGM9gnCVtrKaHOYgXNzuQdBA15RQfJj6UbmP PYSJzneDRGgMoXXv1SEKpQ== 0000891618-96-001220.txt : 19960716 0000891618-96-001220.hdr.sgml : 19960716 ACCESSION NUMBER: 0000891618-96-001220 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19960715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RASTER GRAPHICS INC CENTRAL INDEX KEY: 0000753081 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 943046090 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06617 FILM NUMBER: 96594923 BUSINESS ADDRESS: STREET 1: 3025 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4082324000 MAIL ADDRESS: STREET 1: 3025 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 S-1/A 1 AMENDMENT #1 TO THE FORM S-1 DATED JULY 15,1996 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1996 REGISTRATION NO. 333-06617 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ RASTER GRAPHICS, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 3577 94-3046090 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification Number) incorporation or organization)
3025 ORCHARD PARKWAY, SAN JOSE, CALIFORNIA 95134 (408) 232-4000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) RAKESH KUMAR PRESIDENT AND CHIEF EXECUTIVE OFFICER RASTER GRAPHICS, INC. 3025 ORCHARD PARKWAY SAN JOSE, CALIFORNIA 95134 (408) 232-4000 (Name and address, including zip code, and telephone number, including area code, of agent for service) ------------------------------------ COPIES TO: MICHAEL W. HALL BROOKS STOUGH EDMUND S. RUFFIN, JR. ROBERT G. SPECKER KEITH A. MILLER Gunderson Dettmer Stough Venture Law Group, A Professional Corporation Villeneuve Franklin & Hachigian, LLP 2800 Sand Hill Road 600 Hansen Way Menlo Park, California 94025 Palo Alto, California 94303 (415) 854-4488 (415) 843-0500
------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 RASTER GRAPHICS, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS - ------------------------------------------------- -------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.... Facing Page; Cross Reference Sheet; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus................................ Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors 4. Use of Proceeds............................. Prospectus Summary; Use of Proceeds; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Determination of Offering Price............. Outside Front Cover Page; Underwriting 6. Dilution.................................... Dilution 7. Selling Security Holders.................... Principal and Selling Stockholders 8. Plan of Distribution........................ Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered................................ Prospectus Summary; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel...... Not Applicable 11. Information with Respect to the Registrant................................ Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; The Company; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Legal Matters; Experts; Additional Information; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 15, 1996 PROSPECTUS 3,000,000 SHARES LOGO COMMON STOCK Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 are being sold by the Company and 1,000,000 shares are being sold by Selling Stockholders. The Company will not receive any proceeds from the sale of shares by Selling Stockholders. See "Principal and Selling Stockholders." Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $9.00 and $11.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol RGFX. ------------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (1) COMPANY (2) - ------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - ------------------------------------------------------------------------------------------------- Total (3)........................ $ $ $ - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $850,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1996 at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST PRUDENTIAL SECURITIES INCORPORATED , 1996 4 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Raster Graphics logo, ColorStation(R) and PrimaScript(R) are registered trademarks of the Company. PosterShop(TM) and DuraPrint(TM) are trademarks of the Company. This Prospectus also contains the trademarks of other companies. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Raster Graphics, Inc. ("Raster Graphics" or the "Company") develops, manufactures and markets high-performance, large format color printing systems and sells related consumables for the on-demand, large format digital printing ("LFDP") market. The LFDP market consists of color print jobs with run lengths ranging from one to 200 copies and output sizes of 20-inches by 30-inches or larger. Applications include point of purchase ("POP") signs, trade show exhibit graphics, banners, billboards, courtroom graphics and backlit signage. The primary users of the Company's products are color photo labs, reprographic houses, graphic arts service bureaus, exhibit builders, digital color printers, screen printers and in-house print shops. The Company's Digital Color Station ("DCS") printing system, consisting of the DCS Printer and PosterShop system software, allows users to print short runs of high quality color graphics on demand at substantial time and cost savings relative to traditional printing methods. According to IT Strategies, the LFDP printers and consumables market is projected to grow from annual sales of approximately $319 million in 1995 to approximately $1.9 billion in 1998. The rapid growth in this market is being driven primarily by the increasing desire and need for customized, large format color graphics, as well as significant advances in short-run printing and desktop publishing technologies. Traditional graphics printing methods, consisting of photographic, screen and offset printing, do not meet the requirements for production short-run print jobs due to the time consuming, multi-step processes and set up costs involved. As a result, digital printing was developed to fulfill the unmet demand of short-run users by allowing graphics to be printed directly from desktop publishing systems to paper. Raster Graphics offers a complete printing solution, consisting of its DCS printers, integrated image processing software and related consumables, to meet the performance, cost, versatility and quality demands of the on-demand production LFDP market. With a production printing speed of 600 to 1,000 square feet per hour, the DCS printing system can produce 50 to 60, full-color, 36- by 48-inch posters in one hour, which the Company believes is significantly faster than comparable digital printers. DCS printing systems are more cost-effective for short-run print jobs in comparison to traditional methods which have high set-up and labor costs. Using digital printing technology, DCS systems allow content to be customized on a print-by-print basis. DCS printing systems also offer two printing resolution modes, which allow the user to adjust the quality level depending on the application. The Company also markets a line of consumables, including specialized inks and print media, which the Company believes will continue to generate increasing recurring revenues to the extent that the installed base of DCS printing systems expands. Raster Graphics' objective is to build on its position as a market leader in providing digital printing systems and related consumables and services, for the on-demand production LFDP market. In August 1995, as part of the Company's strategy to provide a complete system solution, the Company acquired Onyx Graphics Corporation ("Onyx"), a leading developer of image processing software. The Company was established in 1987 initially to develop low-cost electrostatic printers for computer aided design ("CAD") applications. In 1993, the Company shifted its product focus to leverage its proprietary print head technology to address the new opportunities in the high performance production LFDP market. The Company currently sells DCS products to a wide range of customers both domestically through direct and independent sales forces, original equipment manufacturers ("OEMs") and value-added resellers ("VARs") and internationally through distributors, OEMs and VARs. Raster Graphics has received five highly acclaimed industry awards for its contribution to digital printing technology, including Digital Printing and Imaging Association's 1994 Product of the Year; Top 10 New Repro Products for 1994 by Modern Reprographics; Hot Product for 1994 by Electronic Publishing; 1994 Editor's Choice from Computer Graphics World; and 1994 Industry Excellence Award by IEEE Computer Graphics and Applications. 3 6 THE OFFERING COMMON STOCK OFFERED BY THE COMPANY.............. 2,000,000 shares(1) COMMON STOCK OFFERED BY THE SELLING STOCKHOLDERS................................... 1,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING....................................... 8,341,350 shares(2) USE OF PROCEEDS.................................. General corporate purposes including working capital, capital expenditures, research and development and potential acquisitions of businesses and technologies. See "Use of Proceeds." NASDAQ NATIONAL MARKET SYMBOL.................... RGFX
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SIX MONTHS ENDED ---------------------------------------------------- ------------------- DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUNE 30, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- STATEMENTS OF OPERATIONS DATA: Net revenues.................. $ 7,770 $ 8,525 $ 14,719 $ 13,235 $ 26,045 $ 11,652 $ 18,151 Gross profit.................. 1,659 2,410 4,777 3,531 9,447 3,951 7,165 Operating income (loss)....... (1,919) (1,725) 106 (2,229) 111 550 1,322 Net income (loss)............. $ (1,963) $ (2,061) $ 41 $ (2,128) $ 77 $ 275 $ 1,201 Net income (loss) per share(3)................... $ 0.01 $ 0.04 $ 0.16 Shares used in per share calculation................ 7,187 7,095 7,412
JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 1,775 $ 19,525 Total assets........................................................ 16,052 33,802 Long-term debt...................................................... 318 318 Total stockholders' equity.......................................... 7,942 25,692
- --------------- (1) Excludes up to 450,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Excludes 167,789 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $2.18 per share and 1,355,652 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.33 per share at June 30, 1996. See "Management--Stock Options and Incentive Plans and note 7 of Notes to Consolidated Financial Statements." (3) See note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing net income (loss) per share. (4) Adjusted to reflect the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the receipt of the estimated proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------------------ Except as otherwise noted, all information in this Prospectus (i) assumes a 1-for-5 reverse stock split of the Common Stock and Preferred Stock to be effective prior to this offering, (ii) assumes the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering, (iii) reflects the reincorporation of the Company from California to Delaware prior to the closing of the offering and (iv) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." 4 7 RISK FACTORS The Common Stock offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. The Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. Limited History of Profitability and Uncertainty of Future Financial Results. The Company has incurred a net operating loss in each year subsequent to its inception in 1987, except for the years ended December 31, 1993 and December 31, 1995. As a result, the Company had an accumulated deficit as of June 30, 1996 of approximately $17.2 million. The Company has a limited history of profitability. There can be no assurance that sales of the Company's products will generate significant revenues or that the Company can sustain profitability on a quarterly or annual basis in the future. The Company expects to expand its manufacturing and administrative capabilities, technical and other customer support, research and product development activities. The anticipated increase in the Company's operating expenses caused by this expansion could have a material adverse effect on the Company's operating results if revenues do not increase at an equal or greater rate. Also, the Company's expenses for these and other activities are based in significant part on its expectations regarding future revenues and are fixed to a large extent in the short term. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and the Consolidated Financial Statements. Significant Fluctuations in Quarterly Results. The Company's quarterly operating results have varied significantly in the past and are likely to vary significantly in the future based upon a number of factors including general economic conditions, the introduction or market acceptance of new products offered by the Company and its competitors, changes in the pricing polices of the Company or its competitors, the volume and timing of customer orders, the level of product and price competition, the relative proportion of printer and consumables sales, the continued availability of sole source components, the continued availability of consumables from independent vendors, fluctuations in research and development expenditures, the impact of future Company acquisitions, the continued availability of financing arrangements for certain of the Company's customers, the Company's success in expanding its direct sales force and indirect distribution channels and the risks related to international operations, as well as other factors. Additionally, because the purchase of a DCS printer or printing system involves a significant capital commitment, the Company's DCS printer and printing system sales cycle is susceptible to delays and lengthy acceptance procedures associated with large capital expenditures. Moreover, due to the Company's high average sales price and low unit volume per month, a delay in the sale of a few units could have a material adverse effect on the results of operations for a financial quarter. Quarterly revenues and operating results depend primarily on the volume, timing, shipping and acceptance of orders during the quarter, which are difficult to forecast due to the length of the sales cycle. A significant portion of the Company's operating expenses are relatively fixed in the short term, and planned expenditures are based on sales forecasts. If revenue levels are below expectations, net income, if any, may be disproportionately affected because only a small portion of the Company's expenses vary with revenue in the short term, which could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has experienced growth in revenue in recent years, there can be no assurance that the Company will sustain such revenue growth or be profitable on an operating basis in any future period. For the foregoing reasons, the Company believes that period-to-period comparisons of its results are not necessarily meaningful and should not be relied upon as indications of future performance. Further, it 5 8 is likely that in some future quarter the Company's revenues or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. Dependence on a Single Product Line. Substantially all of the Company's sales are derived from one principal product line, the DCS printing systems, printers and related software and consumables, such as specialized inks, varnish, vinyls and papers. The Company anticipates that it will continue to derive substantially all of its revenues in the next several years from sales of this product line. Dependence on a single product line makes the Company particularly vulnerable to the successful introduction of competing products. The Company's inability to generate sufficient sales of the DCS product line and to achieve profitability due to competitive factors, manufacturing difficulties, or other reasons, would have a material adverse effect on its business, financial condition and results of operations. Moreover, some of the Company's DCS printing system and printer customers have purchased and will continue to purchase consumables such as ink and paper from suppliers other than the Company. If a significant number of current or future purchasers of the DCS printing systems and printers were to purchase consumables from suppliers other than the Company, the Company's business would be materially adversely affected. See "Business--Products" and "--Competition." Competition. The market for printing equipment and related software and consumables is extremely competitive. Suppliers of equipment for the LFDP market compete on the basis of speed, print quality, price and the ability to provide complete solutions, including service. Certain of the Company's competitors are developing or have introduced products to address the LFDP market. Among these companies are Xerox ColorgrafX Systems, a subsidiary of Xerox Corporation, ("ColorgrafX"), Encad, Inc. ("Encad"), Hewlett-Packard Corporation ("Hewlett-Packard") and Lasermaster Corporation ("Lasermaster"), which manufacture LFDP printers, and Cactus, Infographix Technologies, Inc. ("Infographix") and Visual Edge Technology Digital Printing Systems ("Visual Edge"), which develop LFDP image processing software. A variety of potential actions by any of the Company's competitors, especially those with substantial market presence such as ColorgrafX, could have a material adverse effect on the Company's business, financial condition and results of operations. Such actions may include reduction of product prices, increased promotion, announcement or accelerated introduction of new or enhanced products, product giveaways, product bundling or other competitive actions. In addition, companies that are currently targeting the photographic enlargement, screen and offset printing markets may enter the LFDP market in the future or may increase the performance or lower the costs of such alternate printing processes in a manner that would allow them to compete more directly with the Company for LFDP customers. Furthermore, companies that supply consumables, such as ink and paper, to the Company could compete with the Company by not selling such consumables to the Company or by widely selling such consumables directly or through other channels to the Company's customers. Such competition would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition" and "-- Suppliers." Many of the companies that currently compete with the Company or that may compete with the Company in the future have longer operating histories and significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than the Company. As a result, these competitors may be able to respond more quickly and/or effectively to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sale and support of their products than the Company. Consequently, the Company expects to continue to experience increased competition, which could result in significant price reductions, loss of market share and lack of acceptance of new products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete against current or future competitors successfully or that competitive pressures faced by the Company will not have a material adverse effect upon its business, financial condition and results of operations. See "Business--Competition" and "--Intellectual Property." 6 9 Reliance on Third-Party Distribution. The Company relies heavily on original equipment manufacturers ("OEMs"), value added resellers ("VARs") and a network of distributors for both domestic and international sales. In particular, OEM sales to Oce Graphics France S.A. ("Oce") accounted for 10.9% of the Company's revenue in 1995. While the total percentage of Company revenue represented by sales to Oce has been reduced significantly in recent years as the Company has expanded its distribution channels, Oce remains one of the Company's largest single customers. The Company's agreement with Oce expires in October 1997. There can be no assurance that the Company will continue to sell substantial quantities of its products to Oce or that, upon any termination of the Company's relationship with Oce, the Company will be able to obtain suitable distribution of its products in Europe through alternate distributions channels. Such failure would have a material adverse effect on the Company's business, financial condition and results of operations. The Company also currently maintains OEM, VAR and distribution agreements for its printing systems and printers with 3M Commercial Graphics, a division of Minnesota Mining and Manufacturing Company ("3M"), Cactus, C-4 Network, Inc., Management Graphics Inc. and Ahearn & Soper Inc. for distribution of its products in North America; Sumisho Electronics Ltd. ("Sumisho"), Sumitomo-3M Ltd. ("Sumitomo-3M"), Marubeni Electronics Co. Ltd. ("Marubeni") and Kimoto Co., Ltd. ("Kimoto") for distribution of its products in Japan; and Oce and Sign-Tronic ("Sign-Tronic") for distribution of its products in Europe. In addition, the Company distributes its image processing software products through a number of domestic and international OEMs, VARs and distributors such as CIS Graphik and Bildverarbeitung GmbH, The David Group, Access Graphics and Encad. There can be no assurance that the Company's independent OEMs, VARs and distributors will maintain their relationships with the Company or that the Company will be able to recruit additional or, if necessary, replacement OEMs, VARs or distributors. The loss of one or more of the Company's OEMs, VARs or distributors could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's agreements with its OEMs, VARs and distributors are not exclusive, and each of the Company's OEMs, VARs and distributors can cease marketing the Company's products with limited notice and with little or no penalty. Some of the Company's OEMs, VARs and distributors offer competitive products manufactured by third parties. In addition, some of these customers may consider Onyx's products to be competitive offerings and, as a result, there can be no assurance that such customers will continue marketing the Company's products. Further, there can be no assurance that the Company's OEMs, VARs and distributors will give a high priority to the marketing of the Company's products as compared to competitors' products or alternative solutions or that such OEMs, VARs and distributors will continue to offer the Company's products. Any reduction or delay in sales of the Company's products by its OEMs, VARs or distributors could have a material adverse effect on the Company's business, financial condition and results of operations. For further description of the Company's OEM, VAR and distribution agreements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--Customers, Sales and Marketing." Although the Company seeks information from foreign customers that purchase products from the Company's OEMs, VARs and distributors, it generally does not deal directly with them and cannot directly observe their experience with the Company's products. The Company also does not have direct control over the marketing and support efforts of its OEMs, VARs and distributors in foreign countries. This may result in the inability of the Company to identify potential opportunities with these customers and a potential delay by the Company in the recognition and correction of any problems with such OEM, VAR or distributor sales or support organizations. Failure of the Company to respond to customer preferences or experience with its products or the failure of OEM, VAR or distributor supported customers to market and support the Company's products successfully, could have a material adverse effect on the Company's business, financial condition and results of operations. Further, third-party distribution provides the Company with less information regarding the amount of inventory that is in the process of distribution. This lack of information can reduce the Company's ability to predict fluctuations in revenues resulting from a surplus or a shortage in its distribution 7 10 channels and contribute to volatility in the Company's financial results, cash flow, and inventory balances. See "Business--Customers, Sales and Marketing." Limited History of Product Manufacturing and Use; Product Defects. The Company's DCS printers are based on relatively new technology, are complex and must be reliable and durable. Companies engaged in the development and production of new, complex technologies and products often encounter difficulties and delays. The Company began commercial production of the DCS 5400 in June 1994 and the DCS 5442 in January 1996. The DCS 5442 was developed as a second generation to the DCS 5400 and, consequently, the Company has been slowly phasing out production of the DCS 5400. The Company is continuing to make upgrades and improvements in the features of the DCS 5442. Despite extensive research and testing, the Company's experience with volume production of the DCS 5442 and with the reliability and durability of the DCS 5442 during customer use is limited. Consequently, customers may experience reliability and durability problems that arise only as the product is subjected to extended use over a prolonged period of time. The Company and certain DCS 5442 users have encountered some operational problems which the Company believes it has successfully addressed. However, given the recent introduction of the DCS 5442, there can be no assurance that the Company has successfully resolved these operational issues or that the Company will successfully resolve any future problem in the manufacture or operation of the DCS printers or any new product. Failure by the Company to resolve manufacturing or operational problems with the DCS printers or any new product in a timely manner would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Manufacturing" and "-- Competition." The Company's image processing software products are extremely complex as a result of such factors as advanced functionality, the diverse operating environments in which they may be deployed, the need for interoperability, the multiple versions of such products that must be supported for diverse operating platforms and languages and the underlying technological standards. These products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new software products after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Such loss or delay would likely have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Products." Susceptibility of Certain Customers to Economic and Financing Conditions. Many of the Company's end user customers are small businesses that are more susceptible than large businesses to general downturns in the economy. In some cases, these customers finance the purchase of the Company's products through third-party financing arrangements. To the extent that such customers are unable to obtain acceptable financing terms or to the extent that a rise in interest rates makes financing arrangements generally unattractive, such customers could forgo the purchase of a LFDP product. Consequently, the Company's access to a significant portion of its present customer base would be limited. Moreover, competitors, such as ColorgrafX, that have significantly greater financial resources than the Company may be able to provide more attractive financing terms to potential customers than those available through the Company or through third parties. There can be no assurance that the Company's small business customers will, if necessary, be able to obtain acceptable financing terms or that the Company will be able to offer financing terms that are competitive with those offered by the Company's competitors. The Company's inability to continue to generate sufficient levels of product revenue from sales to such customers due to the unavailability of financing arrangements or due to a general economic downturn would have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainty Regarding Development of LFDP Market; Uncertainty Regarding Market Acceptance of New Products. The LFDP market is relatively new and evolving. The Company's future financial performance will depend in large part on the continued growth of this market and the continuation of present large format printing trends such as use and customization of large format advertisements, use 8 11 of color, transferring of color images onto a variety of substrates, point-of-purchase printing, in-house graphics design and production and the demand for limited printing runs of less than 200 copies. The failure of the LFDP market to achieve anticipated growth levels or a substantial change in large format printing customer preferences would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, in a new market, customer preferences can change rapidly and new technology can quickly render existing technology obsolete. Failure by the Company to respond effectively to changes in the LFDP market, to develop or acquire new technology or to successfully conform to industry standards would have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Industry Background." The Company's products currently target the high-performance production segment of the LFDP market. The future success of the Company will likely depend on its ability to develop and market new products that provide superior performance at acceptable prices within this segment. In addition, the Company's future success will likely depend on the Company's ability to successfully introduce lower-cost products aimed at a broader segment of the LFDP market. Any quality, durability or reliability problems with such new products, regardless of materiality, or any other actual or perceived problems with new Company products, could have a material adverse effect on market acceptance of such products. There can be no assurance that such problems or perceived problems will not arise or that, even in the absence of such problems, new Company products will receive market acceptance. A failure of future Company products to receive market acceptance for any reason would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the announcement by the Company of new products and technologies could cause customers to defer purchases of the Company's existing products, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Products," "--Product Technology, Research and Development." International Revenues. The Company's international revenues accounted for approximately 48.1%, 55.9%, 51.3% and 54.3% of the Company's revenues in 1993, 1994, 1995, and the first six months of 1996, respectively. The Company expects that international sales will continue to account for a significant portion of its total revenues in future periods. International sales are subject to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, government controls, political instability, longer payment cycles, increased difficulties in collecting accounts receivable and potentially adverse tax consequences. The Company's inability to obtain foreign regulatory approvals on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. Fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to end users in a particular country, leading to a reduction in sales in that country. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, the Company has not found it appropriate to hedge the risks associated with fluctuations in exchange rates, as substantially all of the Company's foreign sales have been transacted in U.S. dollars. However, it is possible that the Company may undertake such transactions in the future. There can be no assurance that any hedging techniques implemented by the Company would be successful or that the Company's results of operations will not be materially adversely affected by exchange rate fluctuations. In general, certain seasonal factors and patterns impact the level of business activities at different times in different regions of the world. For example, sales in Europe are adversely affected in the third quarter of each year as many customers and end users reduce their business activities during the summer months. These seasonal factors and currency fluctuation risks could have a material adverse effect on the Company's quarterly results of operations. Further, because the Company has operations in different countries, the Company's management must address differences in regulatory environments and cultures. Failure to address these differences successfully could be disruptive to the Company's operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations" and "Business--Customers, Sales and Marketing." 9 12 Dependence on Sole Source Subcontractors and Suppliers. The Company relies on subcontractors and suppliers to manufacture, subassemble, and perform first-stage testing of DCS printer components and may, in the future, rely on third parties to develop or provide printer components, some of which are, or may be, critical to the operation of the Company's products. The Company relies on single suppliers for certain critical components, such as rubber drive rollers, electrostatic writing head circuit boards, and application-specific integrated circuits. In addition, the Company relies on limited source suppliers for consumables, such as specialized inks, varnish, vinyls and papers, that the Company sells under the Raster Graphics brand name. The Company's agreements with its subcontractors and suppliers are not exclusive, and each of the Company's subcontractors and suppliers can cease supplying DCS printing system components or consumables with limited notice and with little or no penalty. In the event it becomes necessary for the Company to replace a key subcontractor or supplier, the Company could incur significant manufacturing set-up costs and delays while new sources are located and alternate components and consumables are integrated into the Company's manufacturing process. There can be no assurance that the Company will be able to maintain its present subcontractor and supplier relationships or that the Company will be able to find suitable replacement subcontractors and suppliers, if necessary. Further, there can be no assurance that the Company's present subcontractors and suppliers will continue to provide sufficient quantities of suitable quality DCS product components and consumables at acceptable prices. The loss of subcontractors or suppliers or the failure of subcontractors or suppliers to meet the Company's price, quality, quantity and delivery requirements would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Products," "--Suppliers" and "--Manufacturing." Risks Associated with Intellectual Property. The Company relies primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect its proprietary technology. The Company has been issued nine United States patents related to its printer technology and one United States patent related to its image processing software. Despite the Company's precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technologies without authorization or to develop competing technologies independently. Furthermore, the laws of certain countries in which the Company does business may not protect the Company's software and intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. If unauthorized copying or misuse of the Company's products were to occur to any substantial degree, or if a competitor of the Company were to effectively duplicate the Company's proprietary technology, the Company's business, financial condition and results of operations would be materially adversely affected. See "Business -- Intellectual Property." Although the Company has not received notices from third parties alleging infringement claims that the Company believes would have a material adverse effect on the Company's business, there can be no assurance that third parties will not claim that the Company's current or future products or manufacturing processes infringe the proprietary rights of others. Any such claim, with or without merit, could result in costly litigation or might 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, or at all, which could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business--Intellectual Property." Recent Acquisition of Onyx. In August 1995, the Company acquired Onyx, which, like Raster Graphics, is at an early stage of development. There can be no assurance that Onyx will be able to successfully develop, manufacture and commercialize its products in the future. In addition, there can be no assurance that the managements and operations of the two companies can be successfully combined. Furthermore, some of Onyx's current customers may perceive the Company as a potential competitor. As a result, there can be no assurance that such customers would continue to purchase Onyx's products which would cause a material adverse effect on the Company's business, financial 10 13 condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." Difficulties in Managing Growth. The Company has experienced significant growth in its business over the past two years, which has placed demands on the Company's administrative, operational and financial personnel and systems, manufacturing operations, research and development, technical support and financial and other resources. Certain of the Company's officers have recently joined the Company, including the Company's Chief Financial Officer, and the Company anticipates further increases in the number of its senior managers. Failure to manage these changes and to expand effectively any of these areas would have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business--Manufacturing." Key Personnel. The success of the Company depends to a large extent upon its ability to retain and continue to attract highly skilled personnel. Competition for employees in the high technology sector in general, and in the LFDP industry in particular, is intense, and there can be no assurance that the Company will be able to attract and retain enough qualified employees. If the business of the Company increases, it may become increasingly difficult to hire, train and assimilate the new employees needed. The Company's inability to retain and attract key employees would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Employees," and "Management--Officers and Directors." Environmental. The Company is subject to local laws and regulations governing the use, storage, handling and disposal of the inks sold for use with the Company's printers. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, and while the Company is not aware of any notice or complaint alleging any violation of such laws or regulations, risk of accidental contamination, improper disposal or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future. Concentration of Stock Ownership. Upon completion of this offering, the present directors and officers and their affiliates will beneficially own approximately 28.6% of the outstanding Common Stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Principal and Selling Stockholders." No Prior Public Market; Possible Volatility of Stock Price. There has been no public market for the Common Stock prior to this offering, and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be determined through negotiations among the Company, the representatives of the Underwriters and the selling stockholders. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The negotiated public offering price may not be indicative of the market price for the Common Stock following this offering. In recent years, the stock market in general, and the stock prices of technology companies in particular, have experienced extreme price fluctuations, sometimes without regard to the operating performance of particular companies. Factors such as quarterly variation in actual or anticipated operating results, changes in earnings estimates by analysts, market conditions in the industry, announcements by competitors, regulatory actions and general economic conditions may have a significant effect on the market price of the Common Stock. Following fluctuations in the market price of a corporation's securities, securities class action litigation has often resulted. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention 11 14 and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Dilution. The initial public offering price is substantially higher than the book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will therefore incur immediate, substantial dilution. See "Dilution." Shares Eligible for Future Sale. Upon completion of this offering, the Company will have outstanding 8,341,350 shares of Common Stock, assuming no exercise of any outstanding stock options or warrants after June 30, 1996. On the date of this Prospectus, 3,007,500 shares of Common Stock (including the 3,000,000 shares offered hereby and assuming no exercise of the Underwriters' over-allotment option) will be immediately eligible for sale in the public market. An additional 120,000 shares of Common Stock will be eligible for sale beginning 91 days after the effective date of the Registration Statement unless earlier released, in whole or in part, by Hambecht & Quist LLC. An additional 4,844,744 shares of Common Stock (including approximately 687,033 shares issuable upon exercise of vested options) will be eligible for sale beginning 181 days after the date of this Prospectus, unless earlier released, in whole or in part, by Hambrecht & Quist LLC. In addition, at various times after 181 days after the date of this Prospectus, an additional 1,056,139 shares will become eligible for sale in the public market upon expiration of their respective two-year holding periods, subject to certain volume and resale restrictions as set forth in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). In addition, holders of warrants exercisable for an aggregate of 79,626 shares of Common Stock will be eligible to sell such shares beginning 181 days after the date of this Prospectus, unless earlier released, in whole or in part, by Hambrecht & Quist LLC. Certain stockholders holding 4,478,786 shares of Common Stock (assuming exercise of outstanding warrants for 167,789 shares of Common Stock) are entitled to registration rights with respect to their shares of Common Stock. The Securities and Exchange Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modification will have a material effect on the timing of when shares of Common Stock become eligible for resale. Sales of substantial amounts of such shares in the public market or the prospect of such sales could adversely affect the market price of the Common Stock. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." Blank Check Preferred Stock; Anti-Takeover Provisions. The Company's Board of Directors has the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change of control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The Company has no present plans to issue shares of Preferred Stock. The Company's Certificate of Incorporation and Bylaws provide for, among other things, the prospective elimination of cumulative voting with respect to the election of directors, the elimination of actions to be taken by written consent of the Company's stockholders and certain procedures such as advance notice procedures with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors. In addition, the Company's charter documents provide that the Company's Board of Directors be divided into three classes, each of which serves for a staggered three-year term. The foregoing provisions could have the effect of making it more difficult for a third party to effect a change in the control of the Board of Directors. In addition, these provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company, and may complicate or discourage a takeover of the Company. See "Description of Capital Stock." 12 15 THE COMPANY The Company was incorporated in July 1987 in the State of California and was reincorporated in Delaware in July 1996. The Company's principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. Its telephone number at that location is (408) 232-4000. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby are estimated to be $17,750,000 ($21,935,000 if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and commissions and estimated offering expenses and assuming an initial public offering price of $10.00 per share. The Company intends to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and research and development. A portion of the proceeds may also be used to acquire or invest in complementary businesses or products, to obtain the right to use complementary technologies and to acquire or expand distribution channels. From time to time, the Company evaluates potential acquisitions of such businesses, products or technologies. However, the Company has no present understandings, commitments or agreements with respect to any material acquisition of other businesses, products or technologies. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade obligations. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. 13 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996 (i) on an actual basis and as adjusted to give effect to the conversion of all outstanding Preferred Stock of the Company into Common Stock upon the closing of this offering and the changes in the number of authorized shares of Common and Preferred Stock (all of which will occur in connection with the sale of Common Stock offered hereby) and (ii) as adjusted to give effect to the sale by the Company of the shares of Common Stock offered hereby at an assumed initial public offering price offered hereby of $10.00 per share and the application of the estimated proceeds therefrom. This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of long-term debt.................................... $ 361 $ 361 ======= ======= Long-term debt....................................................... $ 318 $ 318 Stockholders' equity: Preferred Stock, 2,000,000 shares authorized; no shares issued or outstanding................................. -- -- Convertible Preferred Stock, $0.001 par value, 6,030,000 shares authorized, actual 5,892,716 shares issued and outstanding, actual; no shares authorized, none issued or outstanding, as adjusted... 6 -- Common Stock, $0.001 par value, 50,000,000 shares authorized, 448,634 shares issued and outstanding, actual; 8,341,350 shares issued and outstanding, as adjusted(1).......................... -- 8 Additional paid-in capital......................................... 25,596 43,344 Retained earnings (accumulated deficit)............................ (17,222) (17,222) Deferred compensation.............................................. (418) (418) Notes receivable from stockholders................................. (20) (20) ------- ------- Total stockholders' equity...................................... 7,942 25,692 ------- ------- Total capitalization....................................... $ 8,260 $26,010 ======= =======
- --------------- (1) Excludes, as of June 30, 1996, 167,789 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $2.18 per share, 1,355,652 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.33 per share and 39,197 shares available for future issuance under the 1988 Stock Option Plan. See "Management--Stock Option and Incentive Plans," "Description of Capital Stock" and note 7 of Notes to Consolidated Financial Statements. 14 17 DILUTION The net tangible book value (total tangible assets less total liabilities) of the Company at June 30, 1996 was approximately $7,816,000, or $1.23 per share of Common Stock. After giving effect to the sale by the Company of the 2,000,000 shares of Common Stock offered hereby, the Company's pro forma net tangible book value at June 30, 1996 would have been $25,566,000, or $3.07 per share. This represents an immediate increase in net tangible book value of $1.84 per share to existing stockholders and an immediate dilution in net tangible book value of $6.93 per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution: Assumed initial public offering price per share........................... $10.00 Net tangible book value per share before the offering................... $1.23 Increase per share attributable to new investors........................ 1.84 ------ Pro forma net tangible book value per share after the offering............ 3.07 Dilution per share to new investors....................................... $ 6.93
The following table summarizes, on a pro forma basis, as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by (i) existing stockholders and (ii) new investors (before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders(1)........ 6,341,350 76.0% $24,235,000 54.8% $ 3.82 New investors(1)................ 2,000,000 24.0 20,000,000 45.2 10.00 ----- ------ ----- ------ Total......................... 8,341,350 100.0% $44,235,000 100.0% ===== ====== ===== ======
The foregoing computations assume no exercise of the Underwriters' over-allotment option, outstanding warrants or outstanding options after June 30, 1996. As of June 30, 1996, there were outstanding warrants to purchase 167,789 shares of Common Stock at an exercise price of $2.18 per share, and outstanding options to purchase 1,355,652 shares of Common Stock, at a weighted average exercise price of $2.33 per share. To the extent these warrants and options are exercised, there will be further dilution to new investors. See "Capitalization," "Management--Stock Option and Incentive Plans," "Description of Capital Stock" and note 7 of Notes to Consolidated Financial Statements. - --------------- (1) Sales by Selling Stockholders in this offering will reduce the number of shares held by existing stockholders to 5,341,350 shares or approximately 64.0% of the total shares of Common Stock outstanding after this offering and will increase the number of shares held by new investors to 3,000,000 shares or approximately 36.0% of the total shares of Common Stock outstanding after the offering. 15 18 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The following selected consolidated financial data for the years ended December 31, 1993, December 30, 1994 and December 31, 1995 and as of December 30, 1994 and December 31, 1995 have been derived from the Company's Consolidated Financial Statements included elsewhere in this Prospectus which have been audited by Ernst & Young LLP, independent public auditors, whose report thereon is also included elsewhere in this Prospectus. The following selected consolidated financial data for the years ended December 27, 1991 and December 25, 1992 and as of December 27, 1991, December 25, 1992 and December 31, 1993 have been derived from the audited financial statements of the Company not included in this Prospectus. The selected financial data for the six months ended June 30, 1995 and 1996, and as of June 30, 1996, have been derived from unaudited interim consolidated financial statements of the Company contained elsewhere herein and reflect, in management's opinion, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for these periods. Results of operations for interim periods are not necessarily indicative of results to be expected for the entire year.
YEARS ENDED SIX MONTHS ENDED ---------------------------------------------------- --------------------- DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUN. 30, JUN. 30, 1991 1992 1993 1994 1995(1) 1995 1996 -------- -------- -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenues................................ $ 7,770 $ 8,525 $14,719 $13,235 $26,045 $11,652 $18,151 Cost of revenues............................ 6,111 6,115 9,942 9,704 16,598 7,701 10,986 ------- ------- ------- ------- ------- ------- ------- Gross profit................................ 1,659 2,410 4,777 3,531 9,447 3,951 7,165 Operating expenses: Research and development.................. 1,497 1,638 2,179 2,748 3,373 1,426 2,244 Sales, general and administrative......... 2,081 2,497 2,492 3,012 5,074 1,975 3,599 Acquired in-process research and development(1).......................... -- -- -- -- 889 -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.................... 3,578 4,135 4,671 5,760 9,336 3,401 5,843 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)..................... (1,919 ) (1,725 ) 106 (2,229 ) 111 550 1,322 Interest income (expense), net.............. (44 ) (336 ) (60 ) 101 49 22 3 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes..................................... (1,963 ) (2,061 ) 46 (2,128 ) 160 572 1,325 Provision for income taxes.................. -- -- 5 -- 83 297 124 ------- ------- ------- ------- ------- ------- ------- Net income (loss)........................... $(1,963 ) $(2,061 ) $ 41 $(2,128 ) $ 77 $ 275 $ 1,201 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share(2).............. $ 0.01 $ 0.04 $ 0.16 ======= ======= ======= Shares used in per share calculation........ 7,187 7,095 7,412 ------- ------- -------
DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUN. 30, 1991 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEETS DATA: Cash and cash equivalents.............................. $ 1,440 $ 1,695 $ 4,148 $ 1,607 $ 1,550 $ 1,775 Total assets........................................... 4,397 5,899 9,010 7,912 12,343 16,052 Long-term debt......................................... 108 10 -- 338 504 318 Total stockholders' equity............................. (798 ) (2,861 ) 5,900 3,801 6,713 7,942
- --------------- (1) In August 1995, the Company acquired Onyx and incurred a charge of $889,000 for acquired in-process research and development. See note 3 of Notes to Consolidated Financial Statements. (2) See note 1 of Notes to Consolidated Financial Statements for an explanation of the computation of net income (loss) per share. 16 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Raster Graphics was established in 1987 initially to develop low-cost electrostatic raster printers for the computer-aided design ("CAD") market. Raster Graphics commenced shipments of its first printer, a 22-inch printer, in 1989, followed by a 24-inch printer in 1990 and a 36-inch printer in 1992. In 1993, the Company identified the on-demand production LFDP market as a new opportunity to leverage its proprietary print head technology. As a result, in 1993 the Company shifted its product focus and began to develop the DCS 5400 specifically for the LFDP market. The Company began shipping the DCS 5400 in July 1994. In order to provide a complete digital printing solution to its customers, the Company began shipping Onyx's image processing software with its DCS 5400 printer in July 1994. Onyx develops and markets image processing software for digital printers such as the Company's DCS 5400 and 5442 printers as well as printers manufactured by companies such as CalComp, Encad, Hewlett-Packard and ColorgrafX. In August 1995, the Company acquired Onyx. Onyx supplies its software to Raster Graphics and also sells its software products to OEMs, VARs, systems integrators and other printer manufacturers. Raster Graphics also sells related consumables, including specialized inks and papers which it acquires from third party suppliers and resells under the Raster Graphics name. The sale of consumables generates recurring revenues which the Company believes will continue to increase to the extent that the installed base of DCS printing systems expands. See "Risk Factors -- Competition" and "-- Dependence on Sole Source Subcontractors and Suppliers." In the United States, Raster Graphics also derives revenues from maintenance contracts of installed DCS systems and printers, as well as the Company's installed base of 22-inch, 24-inch and 36-inch printers. Revenue is also generated from the sale of spare parts. Raster Graphics' end user customers, OEMs, VARs, and international distributors submit purchase orders that generally require product shipment within two to eight weeks from receipt of order. Accordingly, the Company does not use order backlog as a primary basis for management planning for longer periods. Revenues are recognized upon shipment if there are no contingencies. If contingencies exist, revenues are recognized only when such contingencies are removed by the customer. Cost of revenues includes materials, labor, overhead and software royalties. Cost of revenues as a percentage varies depending upon the revenue mix generated through end user, OEM, VAR and distributor revenues, and the revenue mix generated from Onyx software license fees, DCS printing systems sales, consumables sales and service fees. Raster Graphics expenses research and development costs as incurred. Research and development expenses have increased from year to year, and Raster Graphics expects further increases in research and development expenses in the future due to the development of new products. Raster Graphics' sales and marketing expenses and general and administrative expenses have also increased to support the revenue growth of the Company. The Company's strategy is to distribute its products through a direct sales force and independent representatives in selected markets (currently the United States and Germany), as well as through OEMs, VARs and distributors. Raster Graphics also incurs sales and marketing expenses in connection with product promotional activities. The Company has a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, attract, retain and motivate qualified persons, and continue to upgrade its technologies and commercialize products and services incorporating such 17 20 technologies. There can be no assurance that the Company will be successful in addressing these risks. As of June 30, 1996, the Company had an accumulated deficit of $17.2 million. Although the Company was profitable in 1995 and the six months ended June 30, 1996, there can be no assurance that the Company will be profitable in the future. See "Risk Factors -- Significant Fluctuations in Quarterly Results," "-- Limited History of Profitability and Uncertainty of Future Financial Results," "-- Uncertainty Regarding LFDP Market; Uncertainty Regarding Market Acceptance of New Products," "-- Competition," "-- Dependence on a Single Product Line," "-- Reliance on Third-Party Distribution," "-- Dependence on Sole Source Subcontractors and Suppliers," "-- Difficulties in Managing Growth" and "-- Key Personnel." RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected items of the Company's consolidated statements of operations expressed as a percentage of its net revenues:
YEARS ENDED SIX MONTHS ENDED ------------------------------------------ -------------------- DECEMBER 31, DECEMBER 30, DECEMBER 31, JUNE 30, JUNE 30, 1993 1994 1995 1995 1996 ------------ ------------ ------------ -------- -------- Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues....................... 67.6 73.3 63.7 66.1 60.5 ----- ----- ----- ----- ----- Gross profit........................... 32.4 26.7 36.3 33.9 39.5 Operating expenses: Research and development............. 14.8 20.8 13.0 12.2 12.4 Sales and marketing.................. 10.8 15.5 14.0 11.8 15.1 General and administrative........... 6.1 7.2 5.5 5.2 4.7 Acquired in-process research and development(1).................... -- -- 3.4 -- -- ----- ----- ----- ----- ----- Total operating expenses............. 31.7 43.5 35.9 29.2 32.2 ----- ----- ----- ----- ----- Operating income (loss)................ 0.7 (16.8) 0.4 4.7 7.3 Interest income (expense), net......... (0.4) 0.7 0.2 0.2 -- ----- ----- ----- ----- ----- Income (loss) before provision for income taxes......................... 0.3 (16.1) 0.6 4.9 7.3 Provision for income taxes............. -- -- 0.3 2.5 0.7 ----- ----- ----- ----- ----- Net income (loss)...................... 0.3% (16.1)% 0.3% 2.4% 6.6% ===== ===== ===== ===== =====
- --------------- (1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000 for acquired in-process research and development. See note 3 of Notes to Consolidated Financial Statements. SIX MONTHS ENDED JUNE 30, 1995 AND 1996 The Company's results of operations for the six months ended June 30, 1996 include the results of operations of Onyx, which the Company acquired in August 1995. See Onyx Financial Statements appearing on page F-24. Net Revenues. Net revenues increased from $11.7 million in the six months ended June 30, 1995 to $18.2 million for the comparable period in 1996 for an increase of 55.8%. The increase was primarily due to increased sales of printer systems following introduction of the DCS 5442 printing system in January 1996, increased sales of consumables, sales by the Company's new German subsidiary and consolidation of sales following the acquisition of Onyx. For the six months ended June 30, 1995, one customer accounted for 14.2% of net revenues. Gross Profit. Gross profit was $4.0 million, or 33.9% of net revenues, for the six months ended June 30, 1995, compared to gross profit of $7.2 million, or 39.5% of net revenues, for the comparable 18 21 period in 1996. The absolute dollar increase in gross profit was primarily the result of increased net revenues, while the improvement in gross profit as a percentage of net revenues was due to improvements in manufacturing efficiency, the allocation of fixed costs over a larger number of units sold and increased sales of higher margin DCS printing systems and software products. Research and Development. Research and development expenses were $1.4 million, or 12.2% of net revenues for the six months ended June 30, 1995, compared to expenses of $2.2 million, or 12.4% of net revenues, for the comparable period in 1996. The absolute dollar increase in research and development expenses was primarily the result of new product development activities. Sales and Marketing. Sales and marketing expenses were $1.4 million, or 11.8% of net revenues, for the six months ended June 30, 1995, compared to expenses of $2.7 million, or 15.1% of net revenues, for the comparable period in 1996. This increase was due primarily to the personnel and related costs associated with the Company's acquisition of Onyx, the establishment of the Company's German subsidiary and increased sales activities. General and Administrative. General and administrative expenses were $600,000, or 5.2% of net revenues, for the six months ended June 30, 1995, compared to expenses of $864,000, or 4.7% of net revenues, for the comparable period in 1996. Provision for Income Taxes. For the six months ended June 30, 1995 and June 30, 1996, income taxes have been provided for based upon estimated annualized effective tax rates of 51.9% and 9.4%, respectively, applied to the earnings for the period. The provision for income taxes for the six months ended June 30, 1995 reflects unbenefited foreign losses and the tax benefits of utilizing net operating loss carryforwards. The provision for the comparable period in 1996 reflects the tax benefits of utilizing net operating loss carryforwards. FISCAL YEARS ENDED DECEMBER 1993, 1994 AND 1995 Net Revenues. Net revenues were $14.7 million, $13.2 million and $26.0 million in 1993, 1994 and 1995, respectively. The decrease in net revenues in 1994 primarily resulted from a decrease in sales of 24-inch and 36-inch raster printers (which the Company no longer actively markets) in the first six months of 1994, which the Company believes was due to competitive pressures attributed to introduction of ink jet printers by Hewlett-Packard. In the second half of 1994, the Company's DCS 5400 began gaining market acceptance, which partially offset the decrease in net revenues in the first six months of 1994. In addition, sales of consumables increased in 1994 as a result of increased orders for DCS printing systems, further offsetting the reduction in sales of 24-inch and 36-inch printers. The primary reason for the $12.8 million increase from 1994 to 1995 was continued growth in sales of DCS printing systems and increased sales of consumables, spare parts and the consolidation of net revenues from Onyx after August 10, 1995. Future revenue growth will depend on a number of factors, including the Company's ability to develop, manufacture, market and sell innovative and reliable new products, customer satisfaction, market growth, competitive developments, product mix, vendor performance and the Company's ability to handle growth. There can be no assurance that the Company's revenues will continue to grow at current rates, or at all. See "Risk Factors -- International Revenues." International sales, which include export sales and sales shipped by the Company's European operations, were $7.1 million, $7.4 million and $13.4 million for 1993, 1994 and 1995, respectively. These sales represented 48.1%, 55.9% and 51.3% of net revenues. The increases in international sales were a result of the increased international customer acceptance of the DCS printing systems and establishment of new distribution arrangements. Future international revenues will depend on the factors set forth above, and will be subject to unexpected changes in regulatory requirements and tariffs, longer customer payment cycles, fluctuation in currency exchange rates, seasonal factors and risks associated with managing business operations in geographically distant locations. No assurance can be given that international revenues will continue to grow at current rates, or at all. See "Risk Factors -- International Revenues." 19 22 One customer, a related party in 1993, accounted for 33.4%, 20.6% and 10.9% of net revenues for 1993, 1994 and 1995, respectively. Another customer accounted for 18.4% of net revenues in 1993. There were no other customers which accounted for more than 10% of net revenues during these years. Any material reduction in purchases by the first customer could have a material adverse effect on the Company and its operations and financial condition. Gross Profit. Gross profit was $4.8 million, $3.5 million and $9.4 million, or 32.4%, 26.7% and 36.3% of revenues, for 1993, 1994 and 1995, respectively. The decrease in gross margin from 1993 to 1994 was primarily due to competitive pricing pressures from Hewlett-Packard with respect to the Company's 24-inch and 36-inch printers (which the Company no longer markets) and higher fixed overhead costs being allocated over fewer units in the first six months of 1994. In 1994, this decrease was partially offset by sales of the new DCS systems, which contributed a higher margin. The improved gross margin in 1995 was primarily due to a change in product mix to a greater percentage of relatively higher-margin DCS printing systems. The Company's future level of gross profit will depend on a number of factors, including product mix and its abilities to control variable expenses relative to revenue levels, maintain a revenue base over which to allocate fixed costs and continue to develop, manufacture, market and sell innovative and reliable new products. Research and Development. Research and development expenses were $2.2 million, $2.7 million and $3.4 million, or 14.8%, 20.8% and 13.0% of net revenues, for 1993, 1994 and 1995, respectively. The absolute dollar increase from 1993 to 1994 was primarily due to engineering material expenditures related to the development of new products. The absolute dollar increase from 1994 to 1995 was primarily due to increased payroll and related expenses, including the Onyx engineering staff, and to a lesser degree increased engineering material expenditures and increased facility costs related to the Company's new facility. The Company has a purchase commitment of approximately $1.0 million to a supplier over the next year in connection with research and development activities. The Company intends to continue to dedicate substantial resources to research and development activities. Accordingly, the Company believes that research and development expenses generally will continue to increase in dollar amounts, and may increase as a percentage of revenues, in the future. Sales and Marketing. Sales and marketing expenses were $1.6 million, $2.1 million and $3.6 million, or 10.8%, 15.5% and 14.0% of net revenues, for 1993, 1994 and 1995, respectively. The primary causes of the absolute dollar increase have been increases in payroll and payroll-related expenses due to increases in personnel, and to a lesser degree, travel-related expenses. Spending also increased in 1995 due to the opening of sales offices in Germany and the United Kingdom to support increased sales activities in Europe. The Company believes that sales and marketing expenses will continue to increase in dollar amounts, and may increase as a percentage of revenues, in the future. General and Administrative. General and administrative expenses were $901,000, $958,000 and $1.4 million, or 6.1%, 7.2% and 5.5% of net revenues, for 1993, 1994 and 1995, respectively. The absolute dollar amounts of general and administrative expenses were comparable in 1993 and 1994. The increase in 1995 was primarily related to increased payroll and payroll-related expenses and increased costs related to the Company's new facility. The Company believes that general and administrative expenses will continue to increase in dollar amounts, and may increase as a percentage of revenues, in the future. Acquired In-Process Research and Development. In August 1995, the Company acquired Onyx for stock and other consideration valued at $1.5 million. The assets acquired included tangible assets valued at $866,000, intangible assets of $454,000, less liabilities assumed of $570,000, and software in the development stage valued at approximately $750,000 which was expensed in the September 1995 quarter as it had not yet reached technological feasibility and did not have alternative future uses. In addition, the Company wrote off $139,000 in the September 1995 quarter for redundant PostScript licenses that the Company had purchased for the Company's development of a similar image processing software product. 20 23 Interest Income (Expense), net. The Company's net interest expense was $60,000 in 1993, due to interest expense of $173,000 primarily related to interest on related-party notes, which was offset in part by interest income. Net interest income was $101,000 and $49,000 in 1994 and 1995, respectively. Provisions for Income Taxes. The provision for income taxes was $5,000 and $83,000 for 1993 and 1995, respectively. There was no provision for income taxes for 1994 as the Company incurred operating losses. The provision for income taxes for 1993 differs from the statutory federal income tax rate, primarily due to the utilization of net operating loss carryforwards. The provision for income taxes for 1995 differs from the statutory income tax rate, primarily due to unbenefited foreign losses and the tax benefits of utilizing net operating loss carryforwards. As of December 31, 1995, the Company had federal and state net operating loss carryforwards of approximately $13.2 million and $4.4 million, respectively. The Company also has federal and California research and development tax credit carryforwards of approximately $753,000 and $325,000, respectively. The net operating loss and credit carryforwards will expire, if not utilized, at various dates beginning in 1996 through 2010. Utilization of the net operating losses and credits will be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the "Code") and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Under Statement of Financial Accounting Standards No. 109, deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Based on the weight of available evidence, which includes the Company's historical operating performance, the reported loss in 1994, only marginal profitability in 1993 and 1995, and the uncertainties regarding future results of operations, the Company has provided a full valuation allowance against its net deferred tax assets of $7.3 million at December 31, 1995, as it is more likely than not that the deferred tax assets will not be realized. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly financial information for the six quarters ended June 30, 1996, as well as such data expressed as a percentage of the Company's net revenues for the periods indicated. In the opinion of management, the data has been prepared on a basis consistent with the Company's audited consolidated financial statements included elsewhere in the Prospectus and includes all necessary adjustments, consisting only of normal recurring accruals, that management considers necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future period. 21 24
QUARTERS ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1995 1995 1996 1996 --------- -------- ------------- ------------ --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net revenues..................... $ 5,720 $5,932 $ 6,835 $7,558 $ 8,591 $9,560 Cost of revenues................. 3,792 3,909 4,315 4,582 5,305 5,681 ------ ------ ------ ------ ------ ------ Gross profit..................... 1,928 2,023 2,520 2,976 3,286 3,879 Operating expenses: Research and development....... 642 784 948 999 934 1,310 Sales and marketing............ 632 743 975 1,290 1,364 1,371 General and administrative..... 284 316 408 426 421 443 Acquired in-process research and development(1).......... -- -- 889 -- -- -- ------ ------ ------ ------ ------ ------ Total operating expenses.... 1,558 1,843 3,220 2,715 2,719 3,124 ------ ------ ------ ------ ------ ------ Operating income (loss).......... 370 180 (700) 261 567 755 Interest income (expense), net... 3 19 16 11 (3) 6 ------ ------ ------ ------ ------ ------ Income (loss) before provision for income taxes............... 373 199 (684) 272 564 761 Provision for (benefit from) income taxes................... 194 103 (355) 141 75 49 ------ ------ ------ ------ ------ ------ Net Income (loss)................ $ 179 $ 96 $ (329) $ 131 $ 489 $ 712 ====== ====== ====== ====== ====== ======
- --------------- (1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000 for acquired in-process research and development. See note 3 of Notes to Consolidated Financial Statements.
QUARTERS ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1995 1995 1996 1996 --------- -------- ------------- ------------ --------- -------- STATEMENT OF OPERATIONS DATA: Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................. 66.3 65.9 63.1 60.6 61.8 59.4 ----- ----- ----- ----- ----- ----- Gross profit..................... 33.7 34.1 36.9 39.4 38.2 40.6 Operating expenses: Research and development....... 11.2 13.2 13.9 13.2 10.9 13.7 Sales and marketing............ 11.0 12.5 14.2 17.1 15.8 14.4 General and administrative..... 5.0 5.4 6.0 5.6 4.9 4.6 Acquired in-process research and development(1).......... -- -- 13.0 -- -- -- ----- ----- ----- ----- ----- ----- Total operating expenses.... 27.2 31.1 47.1 35.9 31.6 32.7 ----- ----- ----- ----- ----- ----- Operating income (loss).......... 6.5 3.0 (10.2) 3.5 6.6 7.9 Interest income (expense), net... -- 0.3 0.2 0.1 -- 0.1 ----- ----- ----- ----- ----- ----- Income (loss) before provision for income taxes............... 6.5 3.3 (10.0) 3.6 6.6 8.0 Provision for (benefit from) income taxes................... 3.4 1.7 5.2 1.9 0.9 0.5 ----- ----- ----- ----- ----- ----- Net Income (loss)................ 3.1% 1.6% (4.8)% 1.7% 5.7% 7.5% ===== ===== ===== ===== ===== =====
- --------------- (1) In August 1995 the Company acquired Onyx and incurred a charge of $889,000 for acquired in-process research and development. See note 3 of Notes to Consolidated Financial Statements. 22 25 QUARTERLY TRENDS Net Revenues. Net revenues increased and gross margins improved in the third and fourth quarters of 1995 as compared with the first half of 1995 primarily due to the higher gross margin sales associated with Onyx, which was acquired in August 1995. Fluctuations in Quarterly Results. The Company's operating results have historically been, and will continue to be, subject to significant quarterly and annual fluctuations due to a number of factors, including fluctuations in capital spending domestically or internationally in one or more industries to which the Company sells its products, new product introductions by the Company or its competitors, changes in product mix and pricing by the Company, its suppliers or its competitors, availability of components and raw materials, failure to manufacture a sufficient volume of products in a timely and cost-effective manner, any failure to introduce new products on a timely basis or to anticipate changing customer product requirements, lack of market acceptance or shifts in the demand for the Company's products, changes in the mix of sales by the distribution channel, changes in the spending patterns of the Company's customers, and extraordinary events such as litigation or acquisitions. The Company's gross margins may vary depending on the mix of higher margin DCS printing systems and software products. The Company's operating results will also be affected by general economic and other conditions affecting the timing of customer orders and capital spending. The Company generally recognizes product revenue upon shipment. The Company's net revenues and results of operations for a fiscal period will therefore be affected by the timing of orders received and orders shipped during such period. Because the purchase of a DCS printer or printing system involves a significant capital commitment, the Company's DCS printer and printing system sales cycle is susceptible to delays and lengthy acceptance procedures associated with large capital expenditures. Due to the Company's high average sales price and low unit volume per month, a delay in the sale of a few units could have a material adverse effect on the results of operations for a financial quarter. A delay in shipments near the end of a fiscal period, due for example to product development delays or to delays in obtaining materials, could materially adversely affect the Company's business, financial condition and results of operations for such period. Moreover, continued investments in research and development, capital equipment and ongoing customer service and support capabilities will result in significant fixed costs which the Company will not be able to reduce rapidly. If the Company's sales for a particular fiscal period are below expected levels, the Company's business, financial condition and results of operations for such fiscal period could be materially adversely affected. There can be no assurance that the Company will be able to increase or sustain profitability on a quarterly or annual basis in the future. Certain seasonal factors and patterns impact the level of business activities at different times in different regions of the world. For example, sales in Europe are adversely affected in the third quarter of each year as many customers and end users reduce their business activities during the summer months. These seasonal factors, along with currency fluctuation risks, could have an adverse impact on the Company's quarterly results of operations. Moreover, because orders constituting the Company's backlog are subject to changes in delivery schedules and in certain instances are subject to cancellation without significant penalty, the Company's backlog may not be indicative of demand for the Company's products or actual net revenues for any future period. In addition, a significant percentage of the Company's bookings frequently occur in the last month of each fiscal quarter. This fact, coupled with the relatively short lead-time associated with many of the Company's customer orders, limits the Company's ability to determine quarterly results until relatively late in the period. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private sales of preferred stock and common stock of $24.2 million, issuance of convertible debt, bank loans, 23 26 equipment lease financing and private loans and cash provided by operations for the quarter ended June 30, 1996. Cash used in operations was $342,000, $2.2 million and $638,000 in 1993, 1994 and 1995, respectively, and for the quarter ended June 30, 1996, $624,000 of cash was generated by operations. For 1995, net cash used in operations was due primarily to increases in inventories and accounts receivables associated with higher net revenues, which were partially offset by an increase in accounts payable. Net cash provided by operations for the six months ended June 30, 1996 was primarily from net income, adjusted for depreciation and amortization and an increase in accounts payable and other accrued liabilities, partially offset by an increase in accounts receivable and inventories associated with higher net revenues. Net cash used in investing activities was $813,000, $805,000, $1.0 million and $497,000 for 1993, 1994, 1995 and the six months ended June 30, 1996, respectively, due primarily to the purchase of capital equipment. The Company currently has budgeted $2.4 million in 1996 for capital expenditures. The Company has a purchase commitment of approximately $1.0 million to a supplier over the next year in connection with research and development activities. Financing activities provided net cash of $3.6 million, $487,000 and $1.6 million, respectively, for 1993, 1994 and 1995, due primarily to sales of equity securities offset by payments on notes and capital lease obligations. Financing activities provided net cash of $98,000 for the six months ended June 30, 1996, due primarily to proceeds from the bank line of credit, partially offset by payments on notes and capital lease obligations. The Company has not invested in derivative securities or any other financial instrument that involves a high level of complexity or risk. Management expects that, in the future, cash in excess of current requirements will be invested in investment grade, interest-bearing securities. At June 30, 1996, the Company had $1.8 million of cash and cash equivalents. The Company also has available a $2.0 million bank line of credit agreement that expires on October 15, 1996, which is secured by the tangible assets of the Company. At June 30, 1996, there was $250,000 of borrowings outstanding under the bank line of credit. The Company believes that existing cash and cash equivalents of $1.8 million, together with anticipated net proceeds of approximately $17.8 million from this offering, will be sufficient to finance its capital requirements through at least the next two years. Thereafter, 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 bank borrowings and public or private sales of its securities, including equity and debt securities. The Company's future capital requirements, however, depend on numerous factors, including, without limitation, the success of marketing, sales and distribution efforts; the progress of its research and development programs; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; competition; competing technological and market developments; and the effectiveness of product commercialization activities and arrangements. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms or at all. 24 27 BUSINESS Raster Graphics develops, manufactures and markets high-performance, large format, digital color printing systems, and sells related consumables for the on-demand LFDP market. The Company's products are designed to meet the short-run, on-demand production market requirements of quality, speed, flexibility, reliability and low per copy cost. The LFDP market consists of color print jobs with run lengths typically ranging from one to 200 copies, and output sizes of 20-inches by 30-inches or larger. Applications include POP signs, trade show exhibit graphics, displays, transit advertising, fleet graphics, banners, billboards, courtroom graphics, backlit signage, posters and sports and corporate events. The primary users of Raster Graphics' DCS printing systems are color photo labs, reprographic houses, graphic arts service bureaus, exhibit builders, digital color printers, screen printers and in-house print shops. DCS printing systems allow users to print short runs of high quality color graphics on-demand at substantial time and cost savings relative to traditional printing methods. INDUSTRY BACKGROUND Graphics Market Size and Trends The overall graphics market, consisting of offset, screen, photographic and digital printing, is a large and mature market. According to U.S. Commerce Daily, in 1995, the graphics market in the United States had sales of $160 billion with an estimated growth rate of 8% per year. However, according to the 1996 Electronic Hard Copy Research report by IT Strategies, a printing industry market research firm (IT Strategies), the LFDP segment of this market is projected to grow more rapidly from an estimated annual sales of $2.7 billion in 1995 to $10 billion in 1998, for a compound annual growth rate of over 50%. Another study, Wide Format Color Inkjet Graphics Printing -- January 1996, by CAP Ventures, a market research company, projects that the LFDP segment of the market will grow to $18 billion in 1999. The anticipated growth of the LFDP market is being driven by the following factors: - Customization. The ability to vary content electronically on a print-by-print basis enables companies to create highly-focused marketing campaigns customized to market segment characteristics, such as nuances in language, culture and geographic location. - Demand for Color. The use of color in graphics design has become pervasive as digital technology has made full color printing as accessible as black and white printing. End users strongly prefer to use full color in all forms of communications and advertising because of its positive impact on awareness and retention. - Available Technology. Advances in high speed, large format digital printing technology enable cost effective, high quality, on-demand color print jobs in run-lengths from one to 200 copies. The Company is a leader in the development of these higher speed production digital technologies. - Desktop Publishing. Recent innovations in desktop publishing have provided graphics design capabilities to thousands of users through the use of widely available software packages such as Adobe Illustrator, Aldus PageMaker and QuarkXPress which have revolutionized desktop graphics design. This digital desktop publishing technology enables users to create new designs easily and quickly and print them directly using LFDP systems. - Market Expansion. The installed base of thousands of low-cost, color inkjet printers is helping to fuel the growth of many new applications such as corporate presentations, POP displays and exhibit graphics. As end users become accustomed to color graphics and demand higher performance capabilities including speed, graphics size and outdoor applications, the demand for LFDP should expand. - Efficiency of Large Format Print Advertising. The Traffic Audit Bureau for Media Measurement, Inc., estimates in its Planning for Out of Home Media Report that large format print advertising is six-to-nine times more cost effective than newspaper and television advertising. As a result, Outdoor Services, Inc., a marketing research company, estimates that large format print advertising is one of the fastest growing advertising media, rising from sales of $260 million in 1970 to $3.5 billion in 1995. LFDP technology enables adoption of this cost-effective medium by a new class of regional users desiring a smaller number of prints. 25 28 Traditional Printing Methods Prior to the availability of LFDP technology, graphic printing methods were limited to the following three categories: photographic enlargement, screen printing and offset printing. - Photographic Enlargement. The photographic enlargement process involves imaging a digital file on a film recorder and using an enlarger to expose large photographic paper or backlit film. While this method provides a cost-effective solution for a small number of prints, it requires extensive chemical-based processing, which requires special handling. Furthermore, the image quality for line art, such as text, can lose its sharpness as the image is enlarged. Also, the photographic process is primarily suited for indoor applications. - Screen Printing. In the screen print process, the image is first created on four sets of film -- one for each of the four process colors, representing Cyan, Magenta, Yellow and Key (black) ("CMYK"). These films are then exposed onto four screens to produce masks for each color. Ink pigments are applied through these masks by a squeegee to produce the final graphics. While screen print quality is acceptable for most distance-viewed applications, this multi-step process is expensive and time-consuming, making it uneconomical for runs shorter than 50 to 100 copies. - Offset Printing. Offset printing requires the creation of four films which are then used to make printing plates. The plates are physically mounted on a press, ink is applied to the plates, and the image is then transferred by an intermediary blanket onto the final paper. In addition to film and plate-making, offset printing also requires extensive press setup. Offset printing is an expensive, time-consuming process and is uneconomical for runs shorter than 1,000 copies. However, offset printing offers the highest quality graphics and lowest cost per copy for runs over 1,000 copies. Because of the multi-step process and high set-up costs, each of these traditional printing technologies is only cost-effective within certain ranges of run lengths. The Company believes the following graph shows the range over which each traditional printing method and LFDP are cost-effective, while the succeeding table provides a comparison of the four methods' capabilities. LOGO * Determination of image quality is subjective, involving individual taste and perception. The above chart indicates the Company's estimates of generally-accepted industry perceptions of image quality. 26 29 PRINTING METHODS' CAPABILITIES HIGH IMAGE ON- SHORT OUTDOOR METHOD QUALITY* DEMAND RUNS APPLICATIONS -------------------------------------------------------------------------------- LFDP 'X' 'X' 'X' 'X' Photograph 'X' 'X' 'X' Screen 'X' 'X' Offset 'X' 'X' --------------------------------------------------------------------------------
* Determination of image quality is subjective, involving individual taste and perception. The above chart indicates the Company's estimates of generally-accepted industry perceptions of image quality. Digital Printing Digital printing fulfills the unmet demand of short-run users, as it does not require expensive chemicals, films, screens, masks or set-up processes. Furthermore, this technology allows graphics to be printed directly from a variety of desktop publishing programs onto paper. Currently, there are two primary methods of digital printing, electrostatic and inkjet. Electrostatic print heads form images by depositing small dots of electrical charge across the full width of the paper. The image is developed by the attraction of the ink to the charged dots. Inkjet printers form images by spraying very small dots of water-based inks as the print head moves horizontally in a scanning-type process. Electrostatic printers achieve the speeds required for runs of up to 200 copies (referred to as the production market), whereas inkjet printers are considerably slower and are generally used for very short runs of fewer than five copies. Furthermore, electrostatic technology utilizes weather-durable pigment-based inks that can be used for both indoor and outdoor applications. Inkjet technology is primarily used for indoor applications. The following chart compares the electrostatic and inkjet methods: LFDP TECHNOLOGIES
TECHNOLOGY LIST PRICE TYPICAL PRINT TIME DURABILITY - -------------- ------------------- ------------------ ------------------ Inkjet $3,000 - $10,000 20 - 30 min. Currently indoor applications only Electrostatic $35,000 - $120,000 1 - 5 min. Indoor and outdoor applications
- --------------- Source -- Raster Graphics, Inc. RASTER GRAPHICS' SYSTEM SOLUTION Raster Graphics offers a complete printing system solution to meet the demands of the on-demand production LFDP market. Raster Graphics' solution consists of its electrostatic DCS printers, integrated image processing software and related consumables and services. Key benefits of the DCS printing systems include: High Performance. With a production printing speed of 600 to 1,000 square feet per hour, the DCS printing systems can produce 50 to 60 full-color, 36- by 48-inch posters in one hour, which the Company believes is significantly faster than comparable printers. Runs of up to 200 prints can be easily produced in a single shift. Low Cost for Short Runs. Primary job costs of DCS printing systems are variable and are principally composed of consumables costing approximately 30c to 50c per square foot for paper-based 27 30 graphics. In contrast, conventional printing methods involve relatively high fixed overhead, set-up and labor costs for each printing job. Furthermore, the on-demand capability of digital printing reduces the waste of surplus or outdated copies. As a result, the Company believes that the DCS printing systems provide the most cost-effective solution for runs up to 200 copies as illustrated for four color printing below. PRINTING METHODS COMPARISONS
FEATURE OFFSET PRINTING SCREEN PRINTING DCS SYSTEM - ------------------------------------------- --------------- --------------- ---------- Job Turnaround Time 3 - 5 days 5 - 9 days 1 day Estimated Total Cost for 50 copies $4,500 $900 $300 Estimated Total Cost for 200 copies $5,000 $1,100 $1,100 Quality of Output* Excellent Good Very Good
- --------------- Source -- Raster Graphics, Inc. * Determination of image quality is subjective, involving individual taste and perception. The above chart indicates the Company's estimates of generally accepted industry perceptions of image quality. Targeting and Customizing or "Narrowcasting." The DCS printing systems allow content to be varied on a print-by-print basis. Fixed and variable data are printed in one process at the same quality level. This permits narrowcasting marketing campaigns that are customized to a specific market segment. High Print Quality and Flexibility. The DCS printing systems offer two printing resolution modes, a 200 x 200 dots per inch ("dpi") mode and a 200 x 400 dpi mode, allowing utilization of the same system for two levels of image quality to meet the needs of both close-up graphics and distance-viewed graphics. Raster Graphics has received five highly acclaimed industry awards for its contribution to digital printing technology. The Company's DCS 5400 product received the Digital Printing and Imaging Association's 1994 Product of the Year award; was named among the Top 10 New Repro Products for 1994 by Modern Reprographics; was designated a Hot Product for 1994 by Electronic Publishing; received a 1994 Editor's Choice Award from Computer Graphics World; and was honored with the 1994 Industry Excellence Award by IEEE Computer Graphics and Applications. See "Risk Factors -- Limited History of Product Manufacturing and Use; Product Defects" and "-- Dependence on Single Product Line." STRATEGY Raster Graphics' objective is to build on its position as a market leader in providing digital printing systems and related consumables and services for the on-demand production LFDP market. The Company's strategy for growth includes the following: Provide System Solutions. In August 1995, the Company acquired Onyx, a leader in image processing software, enabling the Company to develop highly integrated systems solutions for its customers. Raster Graphics plans to continue developing additional products and services to provide complete integrated solutions to its customers. The Company believes that customers prefer an integrated solution since most customers lack the expertise or time to source and integrate individual and potentially incompatible components from multiple suppliers. Focus on Large Format Digital Segment. Raster Graphics plans to continue to focus its efforts on producing LFDP systems with capabilities that target and address specific needs of the production customer, such as paper graphics, backlit graphics, vinyl graphics and textile graphics. The Company believes that the rapid growth in small format on-demand color printing will also stimulate demand for comparable large format solutions by raising the level of awareness of the benefits of short-run printing. 28 31 Increase Recurring Revenues Base. Raster Graphics plans to continue expanding its services and specialized consumables businesses which provide recurring revenues to the Company. The Company currently sells various inks, varnish, specially-coated papers, vinyls and maintenance and training services. Leverage Core Technologies. Raster Graphics plans to leverage its technological expertise to expand its product offerings. The Company has expertise in a number of core technologies, including knowledge of complex print head design and manufacturing; high speed paper transport; high speed data transfer; and image processing software. Pursue Acquisitions, Joint Ventures and Alliances. Raster Graphics will seek to acquire strategic businesses and technologies and establish joint ventures with companies offering complementary products or synergistic distribution. For example, by utilizing Onyx's leadership position in image processing software, Raster Graphics plans to build alliances with manufacturers and distributors of entry level low-speed graphics printers. The Company believes that this large base of low-speed graphics printing systems will become upgrade prospects for the Company's high performance production systems. Expand International Markets. Approximately half of the Company's revenues are derived from sales in international markets. The Company believes that these markets offer attractive growth opportunities fueled by a variety of languages and cultural and business customs which result in the need for customization. Raster Graphics plans to continue expanding its direct presence in international markets by establishing additional foreign subsidiaries and forming joint ventures. PRODUCTS DCS Printing System Architecture The DCS printing system consists of two primary components: the DCS printers and PosterShop, a client/server-based image processing system. Raster Graphics DCS Printer. DCS printers are currently available in two models: DCS 5400 and DCS 5442. Both models are capable of producing 54-inch wide graphics, in lengths of up to 30 feet for the 5400 model and up to 100 feet for the 5442 model. Raster Graphics began designing its first DCS printer, the DCS 5400, in early 1993 and began product shipments in June 1994. The Company introduced and began shipping the DCS 5442 in January 1996. See "Risk Factors -- Dependence on Single Product Line" and "-- Limited History of Product Manufacturing and Use; Product Defects." DCS PRINTER SPECIFICATIONS
MODEL RESOLUTION(S) PRINTING THROUGHPUT MAX. PRINT LENGTH LIST PRICE - -------- ------------------ ----------------------- ----------------- ---------- DCS 5400 200 x 200 dpi Up to 600 sq feet/hr. Up to 30 feet $ 99,950 DCS 5442 200 x 200 dpi and Up to 1,000 sq feet/hr. Up to 100 feet $ 109,950 200 x 400 dpi
Raster Graphics, in its DCS printers, is the only manufacturer offering the following four innovative features to satisfy the requirements of the LFDP market: - High Performance Using Non-Multiplexed Writing. Raster Graphics' patented, non-multiplexed print head, the Silicon Imaging Bar, simultaneously images across the full 54-inch width of paper allowing DCS printers to operate at much higher speeds than traditional multiplexed printers. In multiplexed electrostatic printing, a segmented print head images across the width of the paper one segment at a time. 29 32 LOGO LOGO - Five Color Capability. DCS printers utilize a unique five color process that allows printing spot colors or applying varnish. Spot colors enable the printing of precise corporate identity colors (e.g. Coca-Cola red or Kodak yellow), accent metallic colors or neon colors. Varnish enables the application of a protective finish coat. Traditional four-color printing processes using only CMYK cannot offer these capabilities. - Dual Resolution Printing Mode. The DCS Model 5442 printer is capable of printing images in 200 x 200 dpi mode or 200 x 400 dpi mode without any special printer setup. Images are processed faster in 200 x 200 dpi mode, while 200 x 400 dpi mode provides better image definition. A user can select the appropriate mode to match the application needs. Currently, comparable electrostatic printers do not offer this dual resolution printing mode. - Seamless Integration of DCS Printers with System Software. DCS printers permit real time interaction between the printers and the image processing server to manage job attributes (e.g. type of media on which to print, type of ink, rush vs. normal priority, number of inking passes per color, etc.), and keep the operator informed of the job and print engine status. Traditionally, printers and image processing software have been developed independently with limited communication capabilities. As a result, operators have been forced to manually track job attributes, requiring additional time and causing workflow inefficiencies. DCS System Software. The Company's PosterShop DCS system software, based on client/server architecture, is designed to facilitate the workflow in a graphics production shop. A typical environment consists of multiple PosterShop clients connected to a single Digital Equipment Corporation's Alpha workstation ("Alpha workstation") or PC server. The PosterShop software allows clients to prepare printing jobs and send them to the server. Job preparation tools include previewing, sizing and tiling the images; color calibrating the printer; selecting the screening dot pattern and specifying the media type and ink. The server manages the job queues, performs the raster image processing ("RIP") function and communicates with the printer(s) and clients. Clients can also remotely access job and printer status from the server. In addition, the DCS system software can concurrently process and print, thereby maximizing throughput. See "Risk Factors -- Limited History of Product Manufacturing and Use; Product Defects." The list price for the PosterShop DCS system software, including an Alpha workstation, is $39,995 and the list price for PosterShop DCS system software without the workstation is $24,995. 30 33 LOGO Inkjet Image Processing Software. In addition to the PosterShop software sold with the DCS printing systems, the Company offers specialized versions of PosterShop to inkjet printer manufacturers and distributors under the Onyx brand name. The Company also markets a hardware image processing solution for inkjet customers called Qube, which is an integrated hardware/software product that plugs directly into an existing Macintosh network. PosterShop software products for inkjet printers have list prices ranging from $495 for the Lite package to $6,995 for the Encad 50-inch server product. Qube sells for a list price of $5,995. See "Risk Factors -- Limited History of Product Manufacturing and Use; Product Defects." Consumables Color printing requires the consumption of significant quantities of inks and papers. Raster Graphics' product offerings include a range of consumables, such as specialized process color inks, spot color inks and varnish, vinyls and various indoor and outdoor papers. The Company performs qualification testing on these consumables before releasing them for customer shipment. See "Risk Factors -- Dependence on Sole Source Subcontractors and Suppliers." The specialized inks, concentrates and varnish are created specifically for the DCS products to optimize image quality and printer performance. The Company currently offers over 50 different ink, concentrate and varnish products. Ink and concentrate consumption varies depending upon both the content and number of rolls printed. A graphic with a primarily white background will require much less ink than a graphic with high image content. A full four color set of inks and concentrates lists for approximately $2,000 and can print eight to ten rolls of paper. See "Risk Factors -- Dependence on Sole Source Subcontractors and Suppliers." Raster Graphics markets seven different types of specially coated papers for use in the DCS products. The list prices for papers range from $190 to $645 per roll. The Company also offers various types of vinyl products to complete its product offering of consumables. The list prices for vinyls range from $435 to $800 per roll. 31 34 Services The Company devotes significant resources in striving for excellence in customer service. Service response and repair data is recorded and tracked via an on-line customer dispatch system. Product performance and customer call history is reviewed and updated and reports are provided to Raster Graphics management. Complete customer history files are maintained at Raster Graphics corporate offices in San Jose, California. Raster Graphics has also developed a state-of-the-art maintenance manual for its DCS printers that resides on a laptop computer and is interactive with the printer. Using the laptop computer, the operator can diagnose and test the various components of the printer. See "Risk Factors -- Limited History of Product Manufacturing and Use; Product Defects." In the United States, Raster Graphics provides installation and 90-day on-site warranty support. After the initial warranty period, the Company offers service maintenance contracts to its installed base of customers. The Company's service organization consists of technical support personnel, technical trainers, field service technicians, a customer call dispatch center and inventory and logistics support. The field service technicians are located in 12 key locations across the United States. Internationally, Raster Graphics provides 90-day (12 months for print head) return-to-factory parts warranty. Maintenance service is provided by authorized dealers and distributors. See "Risk Factors -- Reliance on Third-Party Distribution." Raster Graphics provides classroom and on-site training for all products sold domestically. All of the Company's training programs are listed in the Company product/price book. The Company also trains its international dealers and distributors at the Raster Graphics training center in San Jose, California. MARKETS The Company's current DCS printing systems are targeted for the high performance electrostatic segment of the on-demand LFDP market. According to IT Strategies, the installed base for the entire LFDP market in the United States, consisting of both inkjet and electrostatic systems for all performance segments of this market, is projected to be as follows in 1998:
ESTIMATED NUMBER MARKET SEGMENT OF SITES - ---------------------------- ---------------- Quick Printers 3,000 - 7,000 Sign Printers 840 - 1,680 Color Photo Labs 324 - 1,260 Exhibit Builders 2,000 - 2,000 Screen Printers 720 - 2,500 Reprographic Houses 1,105 - 1,445 In-House Print Shops 2,000 - 3,750 Graphic Arts Service Bureaus 583 - 1,590 Digital Color Printers 1,200 - 1,200 ---------------- Total 11,772 - 22,425
- --------------- Source -- IT Strategies IT Strategies also estimates that the annual sales of professional large format color printers to these worldwide customers were 3,960 units or $126 million in 1995 and are projected to grow to 8,900 or $286 million in 1998. In addition, sales of consumables (inks, varnish, papers, vinyls and other substrates) to these customers were $193 million in 1995 and are projected to grow to $1.6 billion in 1998. This growth trend is depicted by the following chart. See "Risk Factors -- Uncertainty Regarding Development of LFDP Market; Uncertainty Regarding Market Acceptance of New Products." 32 35 LFDP MARKET
MEASUREMENT PERIOD (FISCAL YEAR COVERED) PRINTERS CONSUMABLES 1995 126 196 1998 200 1704
The major markets and applications for LFDP are as follows: - - POP Displays - Museums/Galleries - - Vinyl and Cloth Banners - Presentations/Seminars - - Corporate Identity Graphics - Backlit and Reflective Posters - - Mall Graphics - Courtroom Graphics - - Exhibit/Trade Show Graphics - Seasonal/Travel Promotions - - Billboards - Advertising/Merchandising Tie-ins - - Sports/Concert/Event Graphics - Customer Commercial Wallpaper
CUSTOMERS, SALES AND MARKETING Raster Graphics sells complete DCS printing systems, DCS printers and Poster Shop image processing software to customers both internationally and domestically. To address these customers, the Company has adopted a dual distribution strategy that encompasses both a direct sales organization and third-party distributors, including OEMs and VARs. See "Risk Factors -- Reliance on Third-Party Distribution." In the United States, Raster Graphics employs a direct sales force and a network of independent sales representatives as its primary sales method, each accounting for approximately one-half of the Company's sales. These individuals sell DCS printing systems to end user customers such as commercial photo labs, reprographics service bureaus, exhibit builders, screen printers, digital printing centers, pre-press trade shops and in-plant printers. Current customers include a variety of leading companies, such as May Department Stores, Skyline Displays, Irvine Photo and Eller Media. This sales force also assists OEMs and VARs, such as 3M and Cactus, in reselling printers when the image processing software system is supplied by such OEMs or VARs. 3M markets the Company's printers under the 3M ScotchPrint system brand name and differentiates its offerings by providing specialized, premium-priced long-durability consumables. Internationally, the Company sells and supports its products through non-exclusive agreements with a number of distributors. In 1995, the Company formed a wholly-owned subsidiary in Germany to support the existing distributors in Germany and Switzerland. As of July 1996, this subsidiary will also directly sell systems and consumables to the Company's German customers. The Company intends to form additional subsidiaries in major European markets to expand its direct sales efforts. See "Risk Factors -- International Revenues" and "-- Reliance on Third-Party Distribution." Raster Graphics also sells stand-alone DCS printer products to international OEMs and systems integrators/VARs. These customers integrate these printers with an image processing system. Some key customers in this category are Oce and Sign-Tronic. Oce private labels the DCS printers as Oce model 5500 and Oce model 5510. In 1995, Oce contributed 10.9% of the Company's revenues. The OEM 33 36 agreement with Oce was signed in October 1990 and expires in October 1997. See "Risk Factors -- Reliance on Third-Party Distribution." After the United States and Europe, Japan is the third largest market for the Company's products. The Company sells its products in Japan through four key distributors: Sumisho, Sumitomo-3M, Marubeni and Kimoto. Raster Graphics' Japanese sales efforts are managed by a United States-based Japanese national who is a consultant to the Company. In addition, the Company also distributes specialized versions of the PosterShop image processing software to inkjet printer manufacturers and distributors under the Onyx brand name. Some of the key distributors of these versions of PosterShop include CIS Graphik & Bildverarbeitung GmbH, The David Group and Access Graphics, the primary distributor of Hewlett-Packard inkjet printers. In March 1996, Onyx signed an agreement with Encad to supply the Qube image processing system for printing graphics from Macintosh computers onto Encad's new 50-inch printer. The Company employs a dedicated sales force located in Salt Lake City, Utah to work with these inkjet customers. The Company promotes its DCS printing systems, DCS printers and PosterShop products through public relations, direct mail, advertising, trade shows and on-going customer communication programs. The Company utilizes telemarketing programs to market consumables to its installed customer base. Additionally, the PosterShop product is also promoted through the inkjet printer dealer channel by offering free, time-limited copies of PosterShop image processing software with the printer sales. PRODUCT TECHNOLOGY, RESEARCH AND DEVELOPMENT DCS Printer Technology Raster Graphics' DCS printers utilize electrostatic technology to print on roll stock. A paper transport system advances the paper through the printer and the Silicon Imaging Bar printhead deposits small dots of electrical charge on the paper. The inking system then applies the inks to develop the image. This process is repeated for each color. Throughout the entire process, the printer control system is responsible for all operations of the printer. See "Risk Factors -- Risks Associated with Intellectual Property," "-- Limited History of Product Manufacturing and Use; Product Defects" and "-- Dependence on Sole Source Subcontractors and Suppliers." 34 37 LOGO Paper Transport System. DCS digital printers use a roll-to-roll paper transport system. A roll up to 400 feet in length is loaded on the supply hub. A paper transport system moves the paper across the Silicon Imaging Bar print head, and then across a specific color inking station. A take-up reel winds the paper up as it moves through the printer. An advanced control system, which utilizes registration marks, cameras and an encoder provides precise registration from one color pass to the other. Print speed can range from 10 feet per minute to 40 feet per minute (20 feet per minute maximum for 200 x 400 dpi). Silicon Imaging Bar Print Head. Raster Graphics' patented Silicon Imaging Bar print head consists of a full 54-inch wide circuit board assembly with 10,656 copper trace styluses spaced every 1/200th inch. Each stylus is controlled by an individual (non-multiplexed) high-voltage driver circuit, or "switch." In the writing stage of electrostatic printing, the styluses maintain contact with the paper as the paper moves across the Silicon Imaging Bar. The styluses are switched on in every location where an image is desired, resulting in the deposition of small dots of negative electrical charge, thus creating a latent image on the paper. Inking System. The inking system consists of the following components: four inking stations, one for each process color (CMYK) and one optional spot color mounted on a sliding drawer, a 2.5 gallon container for each color of digital ink, four 32-ounce color concentrate bottles and a color control unit. - Digital Inks. The ink consists of solid color pigment particles suspended in a clear petroleum base. Because the ink is made of solid pigments, as opposed to dyes, there is greater ultraviolet and moisture resistance over water-based inks, making these inks suitable for outdoor applications. - Concentrates. Concentrate bottles are used to provide color pigment to the inking system to replenish the depleted color particles and maintain color intensity. 35 38 - Color Control Unit. The color control unit is responsible for automatically maintaining precise color density for each of the four process colors. The ink supply from each of the color bottles is pumped to the color control unit which optically senses the color value and, if required, adds color concentrate to the ink, to maintain the required color density. Spot color density is controlled manually. LOGO During the inking process, the paper moves across a specific inking station and the image is developed as follows. At the start of each color printing pass, the inking station for the desired color is positioned in place. The ink flows through a slot called the fountain, contacts the negatively charged latent image on the paper, and the positively charged pigment particles in the ink instantly develop the image. As the paper continues to move across the inking station, a spinning roller removes the excess ink from the paper and a fan assembly dries the image. The roller is kept dry by a blade which scrapes off the excess ink from the roller. A drain at the bottom of the inking station returns the excess ink to the ink container. At the end of the process, the paper is rewound, the next inking station is positioned in place, and the process is repeated three more times, once for each of the remaining CMYK process colors with an additional pass if a spot color or varnish is desired. Printer Control System. Based on Intel's i960 processor with 16MB of memory and 1GB disk (2GB optional), this system is responsible for all printer control and diagnostic functions, as well as providing bi-directional communications to the image processing system. The DCS printer's on-board disk acts as temporary storage for print files. It buffers the next job while one job is being printed. It is also used to store prints for subsequently making additional copies. The bi-directional link to the image processing system is used to send print files and control commands to the printer from the image processing system. Control commands can include such attributes as number of copies desired, resolution, print speed, number of color passes per color and sequence of color passes. Over this link, the printer also provides status information such as the name of the job being printed, type of media loaded, amount of media used, amount of media left, type of ink and amount of ink. This closed-loop operation allows the image processing system to intelligently manage the workflow. PosterShop Image Processing Software PosterShop software, developed by the Company's wholly-owned subsidiary Onyx, provides a complete set of tools for producing large-format color graphics in a wide variety of printers. PosterShop, which is Onyx's second generation image processing software, includes the following tools: - Preview and Size. Preview and sizing module displays the image on the screen, rendered with the same software that is used to create the final print. This WYSIWYG display also provides an 36 39 easy drag-and-drop cropping box to select the size and area to be printed. The image can be enlarged to any size up to 50 feet by 50 feet. - Tiling. Tiling enables PosterShop to automatically create panels or tiles when an image will not fit on a single page. These tiles are displayed on the screen with easy drag-and-drop lines so the user can easily edit them. The user can also specify an overlap so that the image is duplicated along the adjoining edges. - Color Correction. Using several sliders, the color correction tool is used to control the image appearance. These sliders are highlights, midtones, shadows, contrast, brightness and saturation. These adjustments are displayed both on screen and on the printout. This color tool also has more advanced features for sophisticated users, such as set white, set black, histograms, GCR, UCR, CMYK curves, sample point and others. Up to four views of the image can be displayed at the same time. - Color Calibration. Color calibration is used to provide device-independent color when changing media, ink or dot pattern. Calibration reads a color swatch using a densitometer to create color tables associated with each media resolution and dot pattern. - PostScript RIP and Font Manager. PosterShop features a full PostScript level 2 RIP. This RIP converts the PostScript graphics files to binary data formats specific to each printer. The RIP function utilizes a number of specialized dot patterns including FDRP, a patented Onyx dot pattern. A font manager is included to add special fonts to the RIP. Research and Development Raster Graphics plans to continue to devote substantial resources to research and development for the continuous advancement of its proprietary technologies to address LFDP market requirements. The Company believes the continued enhancement of the DCS printing systems, including PosterShop image processing software, to be vital to its future success. The Company intends to expand its product lines, including printers, to achieve lower price points and higher image quality. Raster Graphics will continue to design its products to be compatible with computer systems and data standards commonly used in the graphics industry. See "Risk Factors -- Uncertainty Regarding Development of LFDP Market; Uncertainty Regarding Market Acceptance of New Products" and "-- Risks Associated with Intellectual Property." The Company's engineering team consists of over 20 engineering professionals. The Company's research and development efforts include significant activities in precision mechanics, paper conveyance techniques, real time computer software development, circuit design, high speed data transfer and software for color management, image processing and rasterization. Recent software activities have focused on revamping the image processing software into a family of products, including client-server versions, which run efficiently on computers using Windows 95 and Windows NT operating systems. Research and development expenses consist primarily of payroll and related costs, occupancy, outside consultants, and material and consumable costs associated with fabricating and testing of engineering prototypes. Raster Graphics spent $2.2 million, $2.7 million and $3.4 million on research and development for the fiscal years 1993, 1994 and 1995, respectively. Raster Graphics expects future increases in research and development expenses as it accelerates spending on future products. INTELLECTUAL PROPERTY As of May 31, 1996, the Company holds 10 issued United States patents covering design features and fabrication methods used in Raster Graphics' printers and color rendering techniques used by its image processing software. The expiration dates of these patents range from 2006 to 2010. Topics 37 40 covered in these patents include methods for fabricating electrostatic writing heads, paper positioning and stabilizing systems, and devices for applying digital ink on paper. The Company expects to continue to seek patents on innovations related to its products under development. There can be no assurance that the Company will be successful in obtaining necessary patents, that the Company's patent applications will result in the issuance of patents, that the Company will develop additional proprietary technology that is patentable, that any issued patents will provide the Company with any competitive advantages or will withstand challenges by third parties or that patents of others will not have an adverse effect on the Company. In addition to patents, the Company believes its competitive position is dependent on its unpatented industrial know-how, its copyrighted software, and the timing of the introduction of product innovations in advance of potential future competitors. There can be no assurance that others will not independently develop similar products, duplicate the Company's products or design products that circumvent any patents used by the Company. No assurance can be given that the Company's processes or products will not infringe patents or proprietary rights of others or that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. In addition, the Company could incur substantial costs in defending itself in suits brought against the Company on such patents or in bringing suits to protect the Company's patents against infringement. If the outcome of any such litigation is adverse to the Company, the Company's business could be adversely affected. See "Risk Factors -- Risks Associated with Intellectual Property." MANUFACTURING Raster Graphics' in-house manufacturing is performed in San Jose, California. This operation consists primarily of writing head manufacturing, electro-mechanical assembly and printer and system testing. The Company's patented writing head manufacturing process is extremely complex and is subject to stringent in-house controls. All other electronic components and assemblies are subcontracted to qualified suppliers. All products are subjected to rigorous testing prior to shipment to customers. The PosterShop image processing software manufacturing is performed by Onyx in Salt Lake City, Utah. Raster Graphics also contracts with a warehouse and distribution center in Rotterdam, Netherlands to store and distribute consumables for the European markets. Consumables for the United States and the rest of the world are supplied from the Company's San Jose headquarters. See "Risk Factors -- Limited History of Product Manufacturing and Use; Product Defects." Raster Graphics' inventory delivery and control systems include MRP, Just-In-Time and KANBAN systems. These and other systems enable the Company to meet its manufacturing requirements while minimizing assets tied up in inventories. The Company has embarked upon a corporate wide Total Quality Management program which allows the Company to focus on continuous critical process improvement. These programs include early supplier involvement on new products, product qualification testing on new products, a qualified supplier base, in-line statistical defect tracking systems and an outgoing and incoming inspection capability. Raster Graphics obtains safety certification for its products with the assistance of Underwriters Laboratories ("UL") and TUV Product Services. This allows Raster Graphics to affix UL and CE mark labels to its equipment. A self certification process is employed to confirm that Raster Graphics printers conform to the required standards for electromagnetic emissions. Testing is typically carried out under the supervision of CKC Laboratories, who document the results. Raster Graphics then affixes the appropriate FCC, CSA and CE mark labels to the products. The Company also maintains a complete CE mark technical file for each product as required by the European Economic Community. 38 41 SUPPLIERS The Company maintains strong business relationships with its key suppliers, many of whom have been with the Company since its inception. With the exception of three key components of the DCS printers (two rubber drive rollers and electrostatic writing head circuit boards), as well as paper transport belts for its discontinued CAD products, all components have multiple sources. To date, the Company has experienced no material problems or delays in dealing with its sole source suppliers. However, in case of loss of any of the suppliers of these parts, the Company's ability to deliver its products on a timely basis would be adversely affected and the Company's competitive position could be otherwise impaired. See "Risk Factors -- Dependence on Sole Source Subcontractors and Suppliers." The inks, concentrates and varnish currently used in DCS products are specially developed by two suppliers, neither of which has generally marketed these products directly to the end user. However, each of these suppliers has agreements with one OEM each to supply the DCS inks and concentrates. There is no assurance that these two suppliers will continue to sell to the Company or will not distribute these consumables through additional channels. Also, there is no assurance that a new supplier will not enter the market and provide consumables that compete with the Company's offerings. Papers used in DCS products are developed by two additional suppliers. A number of other companies also acquire papers from these two suppliers and compete with the Company in the sale of paper to end users. See "Risk Factors -- Dependence on Sole Source Subcontractors and Suppliers." COMPETITION The market for LFDP equipment in general is extremely competitive. The Company believes that the key competitive factors in the LFDP market are speed, print quality, price and the ability to provide complete system solutions, including service. Many of the Company's competitors, including ColorgrafX and Lasermaster, are well established and have substantially greater resources than Raster Graphics. See "Risk Factors -- Competition" and "-- Susceptibility of Certain Customers to Economic and Financing Conditions." In the printer market, ColorgrafX offers a series of four color electrostatic printers that are priced slightly below the Company's printers. The Company's DCS printers offer greater production speed, have the ability to print with an additional fifth color and can be set to produce either 200 x 200 dpi or 200 x 400 dpi images. Furthermore, Raster Graphics believes that it compares favorably against ColorgrafX by offering complete solutions and services. A second competitor, Lasermaster, markets a solid inkjet printing system that is less expensive than the Company's DCS printing system and allows the user to print graphics directly onto both paper and vinyl. However, Lasermaster's products are significantly slower than the Company's DCS printers and have a higher per square foot cost of solid ink. In addition, Encad recently introduced a 50-inch version of the NovaJet Pro inkjet printer for the LFDP market at a significantly lower price which offers high image quality but is substantially slower than the Company's DCS printers. In the image processing software market, there are a large number of companies that compete with the Company's PosterShop product, such as Cactus, InfoGrafix and VisualEdge. However, with the exception of Lasermaster, Raster Graphics is the only other manufacturer of both the printer and the software. This allows the Company to offer a highly integrated printer and software solution resulting in increased productivity. In the consumables market, Oce and Cactus supply consumables, including inks and papers, to their customers using the Company's printers. In addition, 3M markets a set of special premium-priced, long-durability inks. A number of other companies compete with the Company for the paper business. See "Risk Factors -- Competition," "Dependence on Sole Source Subcontractors and Suppliers" and "Business -- Suppliers." 39 42 EMPLOYEES As of May 31, 1996, Raster Graphics had 146 full-time employees in the following areas: 49 in manufacturing; 28 in customer support; 26 in research and development; 26 in sales and marketing; and 17 in general and administrative functions. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its relations with employees are good. See "Risk Factors -- Key Personnel" and "-- Difficulties in Managing Growth." FACILITIES Raster Graphics has facilities in three locations. Its main headquarters of 62,000 square feet is located in San Jose, California; 11,000 square feet in Salt Lake City, Utah; 3,000 square feet in Union City, California; and 4,000 square feet in Germany. The lease on the Company's main facility expires in December 31, 2001. The Company anticipates that it will need additional space as business expands and believes that it will be able to obtain suitable space as needed. See "Risk Factors -- Difficulties in Managing Growth." LITIGATION Raster Graphics is not currently involved in any material litigation. 40 43 MANAGEMENT OFFICERS AND DIRECTORS The officers and directors of the Company and their ages as of May 31, 1996 are as follows:
NAME AGE POSITION ------------------------------ --- ----------------------------------------------------- Rakesh Kumar.................. 51 President, Chief Executive Officer and Chairman of the Board Dennis R. Mahoney............. 42 Vice President and Chief Financial Officer James Louis Harre............. 38 Vice President, Sales and Marketing Robert Wallace Johnson 57 Vice President, Engineering Ph.D. ...................... Sebastian Joseph Nardecchia... 54 Vice President, Operations Michael Willingham............ 48 Vice President, Customer Service Chuck Edwards................. 37 Director and President of Onyx Frank J. Caufield............. 56 Director Promod Haque(1)............... 48 Director Lucio L. Lanza(2)............. 51 Director W. Jeffers Pickard(1)(2)...... 53 Director Delbert W. Yocam(2)........... 52 Director
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Mr. Kumar joined the Company in 1991 as President and Chief Executive Officer. From 1988 to 1991, he was Group Marketing Manager, Engineering Systems, for Digital Equipment Corporation, where he was responsible for worldwide marketing to technical customers. From 1985 to 1987, he was Vice President of Sales and Marketing for Precision Image Corporation, a manufacturer of electrostatic printers. Prior to 1985, Mr. Kumar held a number of management positions with Phoenix Data Systems, an electronic design automation software company, Applicon, Inc., a CAD systems company, and Digital Equipment Corporation. Mr. Mahoney joined the Company in 1996 as Vice President and Chief Financial Officer. From 1995 to 1996, he was Vice President and Chief Financial Officer for Electronics For Imaging, Inc., a manufacturer of hardware and software products for on-demand, small format color printing. From 1993 to 1995, he was Vice President, Chief Financial Officer and Corporate Secretary for ADAC Laboratories, a nuclear medical diagnostic imaging and healthcare information systems company. From 1991 to 1993, he was Vice President, Finance and Administration and Chief Financial Officer for Pharmetix Corporation, a drug delivery technology company. Prior to 1991, Mr. Mahoney was Vice President, Internal Operations and Control for Triton Container International Ltd. and held several senior financial management positions at Syntex Corporation. Mr. Mahoney is a certified public accountant. Mr. Harre joined the Company in 1994 as Vice President of Sales and Marketing. From 1990 to 1994, he was Executive Vice President of Onyx, responsible for the sales and marketing of Onyx software products worldwide. Prior to 1990, Mr. Harre held various sales and marketing positions in the computer industry. Dr. Johnson joined the Company in November 1994 as Vice President of Engineering. From 1984 to 1994, he was Vice President of Engineering at Versatec, Inc., a subsidiary of Xerox Corporation, where he was responsible for printer and systems development. Prior to 1984, Dr. Johnson held various research and management positions at Control Data Corporation. Dr. Johnson is currently on medical leave for an undetermined period of time. His return date is uncertain. Mr. Willingham joined the Company in 1993 as Vice President of Customer Service. From 1991 to 1993, he was a Vice President for Phoenix Service, a provider of supplies and service for electrostatic printers. From 1986 to 1991, he held positions as Vice President, Sales and Service and Director of 41 44 Field Engineering for Precision Image, a manufacturer of electrostatic printers. Prior to 1986, Mr. Willingham held various field service positions for semiconductor and computer manufacturers. Mr. Nardecchia joined the Company in 1993 as Vice President of Operations. From 1990 to 1993, he was Vice President of Product Operations for Barneyscan Corporation, a manufacturer of color scanners. Prior to 1990, he held various management positions in manufacturing, operations and product development at Xerox. Mr. Caufield has served as a director of the Company since November 1988. Since 1978, Mr. Caufield has been a general partner of Kleiner, Perkins, Caufield & Byers. Prior to the formation of Kleiner, Perkins, Caufield & Byers, he was a General Partner and Manager of Oak Grove Ventures, a venture capital firm. Mr. Caufield also serves as director of Quickturn Design Systems and America Online. Mr. Edwards has served as a director of the Company since August 1995. In 1989, he founded Onyx where he continues to serve as President. From 1987 to 1989, he served as Product Marketing Manager for Logic Automation, an electronic design automation software company. From 1985 to 1987, he was a partner of ALS, Inc., where he developed software design tools for GE Semiconductor. Prior to 1985, Mr. Edwards was an engineer at Intel Corporation. Mr. Haque has served as a director of the Company since May 1993. Since 1990, he has served as Vice President of Norwest Venture Capital Management Inc., a venture capital firm. He also is a general partner of Itasca Partners, which is a general partner of Norwest Equity Partners IV, a Minnesota limited partnership. He also serves as director of Forte Software, Inc.; Optical Sensors, Inc.; Prism Solutions, Inc.; and Transaction Systems Architect, Inc. Mr. Lanza has served as a director of the Company since May 1993. Since 1990, Mr. Lanza has been a partner of U.S. Venture Partners, a venture capital firm, and an independent consultant to semiconductor and software companies. In 1986, Mr. Lanza founded EDA Systems, and served as Chief Executive Officer until 1989 when EDA was acquired by Digital Equipment Corporation. Prior to 1986, he served in a number of marketing, engineering and general management positions in the electronics industry. Mr. Lanza also serves as director of Landmark Graphics Corporation. Mr. Pickard has served as a director of the Company since November 1988. Since 1980, Mr. Pickard has been general partner of Merrill, Pickard, Anderson & Eyre Management Co., a venture capital firm. Mr. Yocam has served as a director of the Company since April 1995. Since 1994, he has been an independent consultant. From 1992 to 1994, he served as President, Chief Operating Officer and director of Tektronix, Inc. Prior to 1992, he was an independent consultant and from 1979 to 1989 served in a variety of executive management positions at Apple Computer, Inc. Mr. Yocam is also a director of Adobe Systems, Inc.; Castelle, Inc.; Integrated Measurement Systems, Inc.; Oracle Corporation; Sapiens International Corporation; and several privately held technology companies. DIRECTOR COMPENSATION AND OTHER INFORMATION Directors are reimbursed for certain reasonable expenses incurred in attending Board meetings. In addition, Mr. Yocam receives $1,000 for each Board of Directors meeting attended and receives an annual consulting fee of $30,000. In October 1993, Mr. Lanza received an option to purchase 2,500 shares of Common Stock at an exercise price of $0.50 per share. In April 1995, Mr. Yocam was granted an option to purchase 40,000 shares of Common Stock at an exercise price $0.50 of per share. In May 1996, Mr. Edwards, President of Onyx, was granted an option to purchase 20,000 shares of Common Stock at an exercise price of $7.00 per share. Nonemployee directors of the Company are eligible to participate in the Company's 1996 Directors' Stock Option Plan. See "-- Stock Option and Incentive Plans -- 1996 Directors' Stock Option Plan." There are no family relationships among the directors or officers of the Company. 42 45 TERM OF OFFICE OF DIRECTORS AND OFFICERS The Company's Bylaws currently provide for a Board of Directors consisting of seven members. Upon qualification of the Company as a "listed corporation," as defined in Section 301.5(d) of the California Corporations Code (hereinafter referred to as a "Listed Corporation"), the Board of Directors will be divided into three classes with the directors of each class serving staggered terms. The Class I directors are Messrs. Caufield and Pickard, whose current terms will end in fiscal 1997, the Class II directors are Messrs. Haque and Lanza, whose current terms will end in fiscal 1998 and the Class III directors are Messrs. Kumar, Edwards and Yocam, whose current terms end in fiscal 1999. Directors hold office until their terms expire and their successors have been elected and qualified. The Board of Directors elects the Company's officers, and such officers serve at the discretion of the Board of Directors of the Company. COMMITTEES OF THE BOARD OF DIRECTORS There are currently two standing committees of the Board of Directors, the Audit Committee and the Compensation Committee. The Audit Committee reviews the Company's annual audit and meets with the Company's independent auditors to review the Company's internal controls and financial management practices. The Board's Audit Committee currently consists of Promod Haque and W. Jeffers Pickard. The Compensation Committee recommends compensation for certain of the Company's personnel to the Board and, together with the Board of Directors, administers the Company's stock and option plans. The Compensation Committee currently consists of Lucio L. Lanza, W. Jeffers Pickard and Del Yocam. EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation paid to the Company's Chief Executive Officer and each of the other four most highly compensated officers who were serving as officers on December 31, 1995 (the "Named Officers") whose aggregate annual compensation exceeded $100,000 for the fiscal year ended December 31, 1995. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------------ -------------------------------- SECURITIES NAME AND PRINCIPAL POSITION SALARY BONUS AND COMMISSION UNDERLYING OPTIONS - -------------------------------------------- -------- --------------------- ------------------ Rakesh Kumar................................ $161,539 -- 60,000 President and Chief Executive Officer James Buckley............................... 107,923 -- 20,000 Vice President and Chief Financial Officer(1) James L. Harre.............................. 100,000 $45,293 20,000 Vice President, Sales and Marketing Robert W. Johnson........................... 130,000 -- 20,000 Vice President, Engineering Sebastian J. Nardecchia..................... 111,539 -- 30,000 Vice President, Operations
- --------------- (1) Mr. Buckley resigned from the Company in January 1996. Dennis R. Mahoney, the Company's current Vice President and Chief Financial Officer, began employment with the Company in May 1996. 43 46 The following table provides certain summary information concerning options granted during the fiscal year ended December 31, 1995 to the Named Officers. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1) POTENTIAL -------------------------------------------------------- REALIZABLE VALUE PERCENT OF AT ASSUMED ANNUAL NUMBER OF TOTAL OPTIONS RATES OF STOCK SECURITIES GRANTED IN PRICE APPRECIATION UNDERLYING FISCAL YEAR EXERCISE OR FOR OPTION TERM(3) OPTIONS ENDED DECEMBER BASE PRICE EXPIRATION ------------------ NAME GRANTED(2) 29, 1995 ($ PER SHARE) DATE 5% 10% - -------------------------- ---------- -------------- ------------- ---------- -------- -------- Rakesh Kumar.............. 60,000 11.9% $ 0.50 3/14/2005 $18,867 $47,811 James R. Buckley.......... 20,000 4.0% 0.50 3/14/2005 6,289 15,937 James Harre............... 20,000 4.0% 0.50 3/14/2005 6,289 15.937 Robert W. Johnson......... 20,000 4.0% 0.50 3/14/2005 6,289 15,937 Sebastian Nardecchia...... 30,000 6.0% 0.50 3/14/2005 9,434 23,906
- --------------- (1) Consists of stock options granted pursuant to the Company's 1988 Stock Option Plan. The Company's options generally become exercisable at a rate of 12.5% after six months following the date of grant and approximately 2% per month thereafter, as long as the optionee remains an employee with, consultant to or director of the Company. The maximum term of each option granted is ten years from the date of grant. The exercise price is equal to the fair market value of the stock on the grant date as determined by the Board of Directors. See "-- Stock Option and Incentive Plans." (2) On May 16, 1996, Messrs. Harre, Johnson, Kumar and Nardecchia were granted options to purchase 20,000, 10,000, 100,000 and 10,000 shares of Common Stock at an exercise price of $7.00 per share under the Company's 1988 Stock Option Plan. (3) The 5% and 10% assumed compounded annual rates of stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance that the actual stock price appreciation over the ten-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the persons named in the Summary Compensation Table. The following table provides certain summary information concerning the shares of Common Stock represented by outstanding stock options held by each of the Named Officers as of December 31, 1995. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------- ----------- ------------- ----------- ------------- Rakesh Kumar.................................. 172,750 77,250 $ 172,750 $77,250 James R. Buckley.............................. 9,450 66,550 9,450 66,550 James Harre................................... 28,750 51,250 28,750 51,250 Robert W. Johnson............................. 20,000 60,000 20,000 60,000 Sebastian Nardecchia.......................... 23,750 36,250 23,750 36,250
STOCK OPTION AND INCENTIVE PLANS 1996 Stock Plan The Company's 1996 Stock Plan (the "1996 Stock Plan") was adopted by the Board of Directors in June 1996 and will be submitted for approval by the Company's stockholders in July 1996. An aggregate of 800,000 shares of the Company's Common Stock are reserved for issuance under the 1996 Stock 44 47 Plan. Upon adoption of the 1996 Stock Plan, the Company's Board of Directors determined to make no further grants under the 1988 Option Plan. The 1996 Stock Plan provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Code, for the granting to employees, consultants and nonemployee directors of nonstatutory stock options and for the granting to employees of stock purchase rights. The 1996 Stock Plan may be administered by the Board of Directors or a committee of the Board (the "1996 Administrator"). The 1996 Administrator determines the terms of options and stock purchase rights granted under the 1996 Stock Plan, including the number of shares subject to the option or right, exercise price, term and exercisability. The maximum number of shares which may be subject to options or stock purchase rights granted to any one employee under the 1996 Stock Plan for any fiscal year of the Company shall be 500,000. The exercise price of all options granted under the 1996 Stock Plan must be at least equal to the fair market value of the Common Stock of the Company on the date of grant. The exercise price of any option granted to an optionee who owns stock representing more than 10% of the voting power of the Company's outstanding capital stock must equal at least 110% of the fair market value of the Common Stock on the date of grant. The minimum purchase price of shares acquired by exercising stock purchase rights is 85% of the fair market value of the Common Stock on the date of grant. Payment of the exercise price may be made in cash, promissory notes, shares or other consideration determined by the 1996 Administrator. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the maximum term of an incentive stock option must not exceed five years. The term of all other options may not exceed ten years. If the Company consolidates or merges with or into another corporation, then each option will be either assumed or an equivalent option substituted by the successor corporation or, if not assumed or substituted, the unvested portion of each option will be accelerated. If not terminated earlier, the 1996 Stock Plan will terminate in 2006. The 1996 Administrator has the authority to amend or terminate the 1996 Stock Plan as long as such action does not adversely affect any outstanding option. 1996 Employee Stock Purchase Plan The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in June 1996 and will be submitted for approval by the Company's stockholders in July 1996. An aggregate of 400,000 shares of the Company's Common Stock are reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by a series of overlapping offering periods of 12 months' duration, with new offering periods other than the first offering period commencing on or about January 1 and July 1 of each year. Each offering period will consist of two consecutive purchase periods of six months duration with the last day of such period being designated a purchase date. The initial offering period is expected to commence on the date of this offering and continue through June 30, 1997, with the first purchase date occurring on December 31, 1997 and subsequent purchase dates to occur every six months thereafter. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Employees (including officers and employee directors) of the Company, or of any majority-owned subsidiary designated by the Board, are eligible to participate in the Purchase Plan if they are employed by the Company or any such subsidiary. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's Common Stock at the beginning of the offering period or on the purchase date. If the fair market value of the Common Stock on a purchase date is less than the fair market value at the beginning of the offering period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. 45 48 The Purchase Plan provides that in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation, unless the Board of Directors shortens the offering period so that employees' rights to purchase stock under the Purchase Plan will be exercised prior to the merger or sale of assets. The Board of Directors has the power to amend or terminate the Purchase Plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. If not terminated earlier, the Purchase Plan will have a term of 20 years. 1996 Directors' Stock Option Plan The 1996 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors on June 1996 and will be submitted for approval by the Company's stockholders in July 1996. An aggregate of 150,000 shares of the Company's Common Stock are reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the Board of Directors. To the extent they arise, it is expected that conflicts of interest will be addressed by abstention of the interested director from both deliberations and voting regarding matters in which he or she has a personal interest. The Directors' Plan provides that each person who is or becomes a nonemployee director of the Company shall be granted a nonstatutory stock option to purchase 10,000 shares of Common Stock (the "First Option") on the date on which the optionee first becomes a nonemployee director of the Company or for current directors on the date of this offering. Commencing in 1997, on the first calendar day of each fiscal year each nonemployee director shall be granted an additional option to purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such date, he or she shall have served on the Company's Board of Directors for at least six months. The Directors' Plan sets neither a maximum nor a minimum number of shares for which options may be granted to any one nonemployee director, but does specify the number of shares that may be included in any grant and the method of making a grant. No option granted under the Directors' Plan is transferable by the optionee other than by will or the laws of descent or distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. The Directors' Plan provides that the First Option shall become exercisable in installments as to 33% of the total number of shares subject to the First Option on each of the first, second and third anniversaries of the date of grant of the First Option, and each Subsequent Option shall become exercisable in full on the first anniversary of the date of grant of such Subsequent Option. If a nonemployee director ceases to serve as a director for any reason, he or she may, but only within 90 days after the date he or she ceases to be a director of the Company, exercise options granted under the Directors' Plan to the extent that he or she was entitled to exercise such options at the date of such termination. To the extent he or she was not entitled to exercise any such option at the date of such termination, or if he or she does not exercise such option (which he or she was entitled to exercise) within such 90-day period, such option shall terminate. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of the Common Stock on the date of grant of the option. Options granted under the Directors' Plan have a term of ten years. In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, each option will be assumed or an equivalent option substituted by the successor corporation. The Board of Directors may amend or terminate the Directors' Plan; provided, however, that no such action may adversely affect any outstanding option, and the provisions regarding the grant of options under the Directors' Plan may be amended only once in any six-month period, other than to comport with changes in the Code. If not terminated earlier, the Directors' Plan will have a term of ten years. 46 49 1988 Stock Option Plan A total of 1,560,000 shares of Common Stock has been reserved for issuance under the Company's 1988 Stock Option Plan (the "1988 Option Plan"). The 1988 Option Plan was adopted by the Board of Directors in November 1988 and approved by the stockholders in April 1989. As of June 30, 1996, options to purchase 165,150 shares of Common Stock had been exercised and options to purchase a total of 1,355,652 shares at a weighted average exercise price of $2.33 per share were outstanding. The Board of Directors has determined that no further options will be granted under the 1988 Option Plan after the offerings. Outstanding options granted under the 1988 Option Plan generally become exercisable at a rate of 12.5% of the shares subject to the option six months after the date of the grant and approximately 2% per share thereafter, as long as an optionee remains an employee with, consultant to or director of the Company. The term of each outstanding stock option is ten years. The exercise price of all options granted under the 1988 Option Plan is equal to the fair market value of the Common Stock of the Company on the date of the grant as authorized by the Board of Directors. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation and Bylaws provide that the Company shall indemnify its directors and officers against any damages arising from their actions as an agent of the Company to the fullest extent permitted by Delaware law. The Bylaws further provide that the Company may similarly indemnify its other employees and agents. In addition, each director has entered into an indemnification agreement with the Company, pursuant to which the Company has agreed to indemnify such director to the fullest extent permitted by Delaware law. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding which might result in a claim for such indemnification. CERTAIN TRANSACTIONS In February 1995, shares of the Company's Series C Preferred Stock, convertible into an aggregate of 595,363 shares of Common Stock, were sold at an as converted price of $2.50 per share to investors that included, among others, Norwest Equity Partners IV, a Minnesota limited partnership, 117,584 shares; U.S. Venture Partners III, 114,056 shares (which includes 1,175 shares sold to U.S.V. Entrepreneur Partners); Kleiner Perkins Caufield & Byers IV, 76,271 shares; Associated Venture Investors II, 58,766 shares (which includes 970 shares sold to Associated Venture Investors - PGF); Merrill, Pickard, Anderson & Eyre IV, 54,660 shares; and Bay Partners IV, 47,669 shares (which includes 3,813 shares sold to California BPIV, L.P.). In August 1995, the Company acquired Onyx in exchange for shares of the Company's Series C Preferred Stock, convertible into an aggregate of 443,360 shares of Common Stock. In December 1995, the Company amended the Agreement and Plan of Reorganization with Onyx to provide for the release from escrow to the former Onyx stockholders on January 1996 of the Company's Series C Preferred Stock convertible into 133,008 shares of Common Stock. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal stockholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 47 50 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect the sale by the Company of the shares of Common Stock offered by this Prospectus, (i) by each person who is known by the Company to beneficially own 5% or more of the Common Stock, (ii) by each of the Company's directors and Named Officers, (iii) by all current executive officers and directors as a group and (iv) by the Selling Stockholders. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO THE OFFERING SHARES TO AFTER THE OFFERING** --------------------- BE SOLD --------------------- NAME AND ADDRESS NUMBER PERCENT IN OFFERING NUMBER PERCENT - ---------------------------------------------- --------- ------- ----------- --------- ------- 5% STOCKHOLDERS Norwest Equity Partners IV, 857,584 13.5 0 857,584 10.3 a Minnesota Limited Partnership 245 Lytton Avenue, Suite 250 Palo Alto, CA 94301 U.S. Venture Partners III(1) 857,583 13.5 0 857,583 10.3 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 Kleiner Perkins Caufield & Byers IV(2) 653,519 10.3 0 653,519 7.8 Four Embarcadero Center San Francisco, CA 94111 Entities Managed by 581,583 9.1 337,427 244,156 2.9 Hancock Venture Partners, Inc.(3) One Financial Center, 44th Floor Boston, MA 02111 Associated Venture Investors II(4) 490,131 7.7 0 490,131 5.9 One First Street, No. 12 Los Altos, CA 94022 Merrill, Pickard, Anderson & Eyre IV(5) 463,724 7.3 0 463,724 5.5 2480 Sand Hill Road, Suite 200 Menlo Park, CA 94025 Electronic Marketing Ltd.(6) 431,834 6.8 240,922 190,912 2.3 5/F., General Electronics Building FSSTL 96, Sheung Shui New Territories, Hong Kong Walden Ventures(7) 387,669 6.1 32,000 355,669 4.3 750 Battery Street, 7th Floor San Francisco, CA 94111 Bay Partners IV(8) 347,669 5.5 0 347,669 4.2 10600 North DeAnza Blvd., Suite 100 Cupertino, CA 95014 OFFICERS AND DIRECTORS Lucio L. Lanza(9) 860,083 13.6 0 860,083 10.3 Promod Haque(10) 857,584 13.5 0 857,584 10.3 Frank Caufield(11) 653,519 10.3 0 653,519 7.8 W. Jeffers Pickard(12) 463,724 7.3 0 463,724 5.5 Rak Kumar(13) 211,250 3.2 0 211,250 2.5 Chuck Edwards(14) 162,560 2.5 0 162,560 1.9 James Harre(15) 42,083 * 0 42,083 * Sebastian Nardecchia(16) 33,750 * 0 33,750 * Robert Johnson(17) 33,333 * 0 33,333 * Delbert Yocam(18) 13,333 * 0 13,333 * 1264 North Shore Road Lake Oswego, OR 97034 All executive officers and directors 2,700,200 39.4 0 2,700,200 30.5 as a group (11 persons)(9), (10), (11), (12), (13), (14), (15), (16), (17), (18), (19)
48 51
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO THE OFFERING SHARES TO AFTER THE OFFERING** --------------------- BE SOLD --------------------- NAME AND ADDRESS NUMBER PERCENT IN OFFERING NUMBER PERCENT - ---------------------------------------------- --------- ------- ----------- --------- ------- OTHER SELLING STOCKHOLDERS Hilltop Enterprises Ltd.(20) 191,834 3.0 100,000 91,834 1.1 Malcolm Burne 136,576 2.2 79,240 57,336 * Mitsui Comtek Corp. 80,000 1.3 46,415 33,585 * NKK U.S.A. Corporation 80,000 1.3 46,415 33,585 * 13 stockholders each beneficially owning 183,907 2.9 117,581 66,326 * less than 1% of the Company's Common Stock(21)
- --------------- * Less than 1%. ** Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of shares, the Common Stock options or warrants held by that person that are currently exercisable, or become exercisable within 60 days following May 31, 1996, are deemed outstanding. However, such shares are not deemed outstanding for purposes of computing the percentage ownership of any other person. (1) Includes 25,727 shares held by Second Ventures Limited Partnership and 8,575 shares held by U.S.V. Entrepreneur Partners. (2) Includes 23,679 shares held by KPCB Zaibatsu Fund I. Also includes 23,668 shares issuable pursuant to presently exercisable warrants. (3) Includes 52,577 shares held by Falcon Ventures, L.P., 242,314 shares held by Hancock Venture Partners III L.P. and 242,314 shares held by Mayflower Fund Limited Partnership. Also includes an aggregate of 44,378 shares issuable pursuant to presently exercisable warrants (includes 4,142 shares held by Falcon Ventures, L.P., 20,118 shares held by Hancock Venture Partners III L.P. and 20,118 shares held by Mayflower Fund Limited Partnership). Assumes exercise of such warrants after June 30, 1996. (4) Includes 7,079 shares held by Associated Venture Investors-PGF and 37,270 shares held by AVI Partners II, N.V. Also includes an aggregate of 24,257 shares issuable pursuant to presently exercisable warrants (includes 367 shares held by Associated Venture Investors-PGF and 1,940 shares held by AVI Partners II, N.V.). (5) Includes 2,937 shares held by MPAE Technology Partners. Includes 14,201 shares issuable pursuant to presently exercisable warrants. (6) Includes 120,000 shares held by Luzon Investments Ltd. Also includes 11,834 shares issuable pursuant to presently exercisable warrants. Assumes exercise of such warrants after June 30, 1996. (7) Includes 80,000 shares held by O, W & W Pacrim Investments Limited, 24,332 shares held by Walden Capital Partners, 97,334 shares held by Walden International III, C.V. and 117,334 shares held by Walden Investors. (8) Includes 27,813 shares held by California BPIV, L.P. (9) Includes 823,281 shares held by U.S. Venture Partners III, 25,727 shares held be Second Ventures Limited Partnership and 8,575 shares held by U.S.V. Entrepreneur Partners. Because Mr. Lanza is a general partner of U.S. Venture Partners, the general partner of these entities, he may be deemed to be a beneficial owner of such shares. Mr. Lanza disclaims beneficial ownership of such 857,583 shares except to the extent of his interest in such shares arising from his interest in U.S. Venture Partners. Also includes 2,500 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (10) Includes 857,584 shares held by Norwest Equity Partners IV. Because Mr. Haque is a general partner of Norwest Equity Partners, the general partner of Norwest Equity Partners IV, he may be deemed to be a beneficial owner of such shares. Mr. Hague disclaims beneficial ownership of such shares except to the extent of his interest in such shares arising from his interest in Norwest Equity Partners. 49 52 (11) Includes 606,172 shares held by Kleiner Perkins Caufield & Byers IV and 23,679 shares held by KPCB Zaibatsu Fund I. Also includes 23,668 shares issuable to Kleiner Perkins Caufield & Byers IV pursuant to presently exercisable warrants. Because Mr. Caufield is a general partner of Kleiner Perkins Caufield & Byers, which is the general partner of Kleiner Perkins Caufield & Byers IV and KPCB Zaibatsu Fund I, he may be deemed to be a beneficial owner of such shares. Mr. Caufield disclaims beneficial ownership of such shares except to the extent of his interest in such shares arising from his interest in Kleiner Perkins Caufield & Byers. (12) Includes 446,586 shares held by Merrill, Pickard, Anderson & Eyre IV and 2,937 shares held by MPAE Technology Partners. Also includes 14,201 shares issuable pursuant to presently exercisable warrants. Because Mr. Pickard is a general partner of Merrill, Pickard, Anderson & Eyre, the general partner of these entities, he may be deemed to be a beneficial owner of such shares. Mr. Pickard disclaims beneficial ownership in such shares arising from his interest in Merrill, Pickard, Anderson & Eyre. (13) Includes 201,250 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (14) Includes 148,560 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (15) Includes 42,083 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (16) Includes 33,750 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (17) Includes 38,333 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (18) Includes 13,333 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (19) Includes 22,500 shares issuable upon exercise of options exercisable within 60 days of June 30, 1996. (20) Includes 11,834 shares issuable pursuant to presently exercisable warrants. Assumes exercise of such warrants after June 30, 1996. (21) Includes an aggregate of 20,117 shares issuable pursuant to presently exercisable warrants. Assumes exercise of such warrants after June 30, 1996. 50 53 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, par value $0.001 per share, and 2,000,000 shares of undesignated Preferred Stock, par value $0.001 per share, after giving effect to the amendment and restatement of the Company's Certificate of Incorporation to delete references to the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and increase the authorized number of shares of Common Stock, which will occur upon conversion of such Preferred Stock into Common Stock upon the closing of this offering. COMMON STOCK As of June 30, 1996, there were 6,341,350 shares of Common Stock outstanding that were held of record by approximately 99 stockholders (as adjusted to reflect the conversion of all outstanding shares of the Company's Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock into Common Stock at a one-to-one ratio upon the completion of this offering). Stock options to purchase an aggregate of 1,355,652 shares of Common Stock were outstanding as of June 30, 1996. Warrants to purchase an aggregate of 167,789 shares of Common Stock were also outstanding (as adjusted to reflect the conversion of all outstanding shares of Preferred Stock). There will be 8,341,350 shares of Common Stock outstanding (assuming no exercise of the Underwriters' overallotment option or exercise of outstanding options under the Company's stock and option plans after June 30, 1996) after giving effect to the sale of the shares of Common Stock to the public offered hereby at an assumed offering price of $10 per share. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions available to the Common Stock. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon completion of this offering, the Board of Directors will be authorized to issue 2,000,000 shares of undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action by the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, the Company has no plans to issue any shares of Preferred Stock. See "Risk Factors -- Blank Check Preferred Stock; Anti-Takeover Provisions." REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of 4,478,786 shares of Common Stock or warrants exercisable for Common Stock (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an 51 54 investors' rights agreement (the "Rights Agreement") between the Company and the holders of Registrable Securities. The holders of at least 20% of the Registrable Securities may require, on two occasions at any time after six months following the effective date of this offering, that the Company use its best efforts to register the Registrable Securities for public resale; provided, among other limitations, that the proposed aggregate selling price, prior to deductions for underwriting discounts and commissions, is at least $10 million. The Company may delay such registration by up to 90 days for business reasons (but not more than once in any 12-month period). If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in the registration. A holder's right to include shares is subject to certain conditions and limitations, including lock-up agreements restricting the sale of such shares for 180 days after the effective date of the registration statement filed in connection with this offering and the right of the underwriters to limit the number of shares included in such registration. Holders of Registrable Securities may also require the Company, on no more than two occasions over any 12-month period, to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company, provided, among other limitations, that the proposed aggregate selling price is at least $500,000. The right of holders of Registrable Securities to have such shares registered on Form S-3 is subject to the right of the underwriters participating therein to limit the number of shares included in such registration. The Company may delay such registration on Form S-3 by up to 90 days for business reasons. Subject to certain limitations contained in the Rights Agreement and subject to the following sentence, all fees, costs and expenses of registrations effected pursuant to the Rights Agreement must be borne by the Company and all selling expenses (including underwriting discounts and selling commissions) relating to Registrable Securities must be borne by the holders of the securities being registered. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW The Company's Certificate of Incorporation provides that any action required or permitted to be taken by the stockholders of the Company may be taken only at a duly called annual or special meeting of the stockholders and eliminates cumulative voting in the election of directors upon qualification of the Company as a Listed Corporation. The Certificate of Incorporation and Bylaws also restrict the right of stockholders to change the size of the Board of Directors and to fill vacancies on the Board of Directors. The Bylaws also establish procedures, including advance notice procedures, with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors or for stockholder proposals to be submitted at stockholder meetings. In addition, the Company's Certificate of Incorporation provides that the Board of Directors will be divided into three classes of directors, with each class serving a staggered three-year term, upon qualification of the Company as a Listed Corporation. A classified board may maintain the incumbency of the Board of Directors, as it generally makes it more difficult for stockholders to replace a majority of the directors. The amendment of any of these provisions would require approval by holders of 66.67% or more of the outstanding Common Stock. The Certificate of Incorporation also authorizes the issuance of up to 2,000,000 shares of Preferred Stock. The rights of the holders of the Common Stock will be subject to, and may be subordinated to, the rights of the holders of any Preferred Stock that may be issued in the future and, as a result, the issuance of such Preferred Stock could have a material adverse effect on the market value of the Common Stock. The Company has no present plan to issue shares of Preferred Stock. These and other provisions could have the effect of making it more difficult for a third party to effect a change in the control of the Board of Directors and therefore may discourage another person or entity from making a tender offer for the Company's Common Stock, including offers at a premium over the market price of the Common Stock, and might result in a delay in changes in control of management. In addition, these provisions could have the effect of making it more difficult for proposals favored by the stockholders to be presented for stockholder consideration. 52 55 The Company has also included in its Certificate of Incorporation provisions to eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the Delaware Law and to indemnify its directors and officers to the fullest extent permitted by Section 145 of the Delaware Law. The Company is subject to the provisions of Section 203 of the Delaware General Corporate Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the stockholder, and an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's outstanding voting stock. This provision may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. In addition, upon completion of this offering, certain provisions of the Company's charter documents, including a provision eliminating the ability of stockholders to take actions by written consent, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of the Company's Common Stock. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer Corporation. Its address is 1745 Gardena Avenue, Glendale, CA 91204, and its telephone number is (818) 502-1404. 53 56 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 8,341,350 shares of Common Stock, assuming no exercise of options or warrants after June 30, 1996. Of these shares, 3,007,500 shares (including the 3,000,000 shares sold in this offering and assuming no exercise of the underwriters' overallotment option) will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 of the Securities Act. The remaining 5,333,850 shares will be "restricted securities" as that term is defined under Rule 144 (the "Restricted Shares"). Sales of Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In addition to the 3,000,000 shares sold in this offering, 7,500 shares of Common Stock held by current stockholders will be immediately eligible for sale in the public market without restriction pursuant to Rule 144(k) of the Securities Act. An additional 120,000 shares of Common Stock will be eligible for sale after expiration of a contractual lock-up beginning 91 days after the effective date of the Registration Statement, unless earlier released, in whole or in part, by Hambrecht & Quist LLC. An additional 4,844,744 shares of Common Stock (including approximately 687,033 shares issuable upon exercise of vested options) will be eligible for sale after expiration of a contractual lock-up beginning 181 days after the date of this Prospectus, unless earlier released, in whole or in part, by Hambrecht & Quist LLC. In addition, at various times after 181 days from the date of this Prospectus, 1,056,139 shares will become eligible for sale in the public market upon expiration of their respective two-year holding periods, subject to certain volume and resale restrictions set forth in Rule 144. In addition, holders of warrants exercisable for an aggregate of 79,626 shares of Common Stock will be eligible to sell such shares beginning 181 days after the date of this Prospectus unless earlier released, in whole or in part, by Hambrecht & Quist LLC. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the number of shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock as reported through the Nasdaq National Market during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. In addition, a person who is not deemed to have been an "affiliate" of the Company at any time during the 90 days preceding a sale, and who has beneficially owned for at least three years the shares proposed to be sold, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. The Securities and Exchange Commission has recently proposed to reduce the Rule 144 holding periods. If enacted, such modification will have a material effect on the timing of when shares of the Common Stock become eligible for resale. In general, Rule 701 permits resales of shares issued pursuant to certain compensatory benefit plans and contracts commencing 90 days after the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirements, contained in Rule 144. The Company intends to register on a Form S-8 registration statement under the Securities Act, during the 180-day lockup period, (i) assuming no exercise of options after June 30, 1996, a total of 1,355,652 shares of Common Stock issuable upon exercise of outstanding options under the 1988 Option Plan, (ii) 800,000 shares of Common Stock reserved for issuance under the 1996 Stock Plan, (iii) 150,000 shares of Common Stock reserved for issuance under the Directors' Plan and (iv) 400,000 shares of Common Stock reserved for issuance under the Purchase Plan. Such registration will permit the resale of shares so registered by non-affiliates in the public market without restriction under the Securities Act. Prior to this offering, there has been no public market for the Common Stock of the Company, and any sale of substantial amounts of Common Stock in the open market may adversely affect the market 54 57 price of the Common Stock offered hereby. In addition, after this offering, the holders of 4,478,786 shares of Common Stock (assuming exercise of outstanding warrants for 79,626 shares of Common Stock) are entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights of Certain Holders." If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were to include in a Company initiated registration any Registrable Securities pursuant to the exercise of piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. 55 58 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their Representatives, Hambrecht & Quist LLC and Prudential Securities Incorporated, have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Common Stock:
NUMBER OF NAME SHARES ---------------------------------------------------------------- --------- Hambrecht & Quist LLC........................................... Prudential Securities Incorporated.............................. ---- Total................................................. ====
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and independent auditors. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Selling Stockholders and certain other stockholders of the Company, including the officers and directors of the Company, who will own in the aggregate 5,202,350 shares of Common Stock after the offering have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them during the 180-day period following the date of this Prospectus. Stockholders of the Company who will own in the aggregate 120,000 shares of Common Stock after the offering have 56 59 agreed they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock owned by them during the 90-day period following the date of this Registration Statement. The Company has agreed that it will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus, except that the Company (i) may issue shares upon the exercise of stock options granted prior to the date hereof under the Company's stock option plans and may grant additional options under the Company's stock option plans, and (ii) may issue shares under the Company's 1996 Employee Stock Purchase Plan. The Underwriting Agreement prohibits the Company from releasing shares from any lock-up agreements with stockholders of the Company without the prior written consent of Hambrecht & Quist LLC. The Representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Prior to the offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock will be determined by negotiation among the Company, the Selling Stockholders and the Representatives. Among the factors to be considered in determining the initial public offering price are prevailing market conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover page of the preliminary prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Venture Law Group, A Professional Corporation, Menlo Park, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, Palo Alto, California. EXPERTS The Consolidated Financial Statements and schedule of the Company as of December 30, 1994 and December 31, 1995, and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The statements of operations and cash flows of Onyx for the year ended September 30, 1994 included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 57 60 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the North Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, NY 10048, and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. 58 61 INDEX TO FINANCIAL STATEMENTS RASTER GRAPHICS, INC. Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Stockholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7 RASTER GRAPHICS, INC. AND ONYX GRAPHICS CORPORATION Unaudited Pro Forma Condensed Combined Financial Statements Unaudited Pro Forma Condensed Combined Financial Information.......................... F-21 Unaudited Pro forma Condensed Combined Statement of Operations........................ F-22 Notes to Unaudited Pro Forma Condensed Combined Statement of Operations............... F-23 ONYX GRAPHICS CORPORATION Report of KPMG Peat Marwick LLP Independent Auditors.................................. F-24 Statement of Operations............................................................... F-25 Statement of Cash Flows............................................................... F-26 Notes to Financial Statements......................................................... F-27
F-1 62 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Raster Graphics, Inc. We have audited the accompanying consolidated balance sheets of Raster Graphics, Inc. as of December 30, 1994 and December 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Raster Graphics, Inc. at December 30, 1994 and December 31, 1995, and the consolidated results of its operations and its cash flows for the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Jose, California February 23, 1996, except as Note 13, as to which the date is July , 1996, ------------------------------------ The foregoing report is in the form that will be signed upon the completion of reincorporation of the Company from California to Delaware and the reverse stock split. /s/ ERNST & YOUNG LLP San Jose, California July 11, 1996 F-2 63 RASTER GRAPHICS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 30, DECEMBER 31, 1994 1995 ------------ ------------ JUNE 30, PRO FORMA 1996 STOCKHOLDERS' ------------ EQUITY JUNE 30, (UNAUDITED) 1996 ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents....................... $ 1,607 $ 1,550 $ 1,775 Accounts receivable, net of allowance for doubtful accounts of $246 in 1994, $467 in 1995 and $562 in 1996......................... 2,201 5,567 6,884 Amounts receivable from related parties......... 666 -- -- Inventories..................................... 1,893 3,248 5,097 Prepaid expenses................................ 223 132 379 -------- -------- -------- Total current assets.............................. 6,590 10,497 14,135 Property and equipment, net....................... 1,049 1,452 1,491 Deposits and other assets......................... 273 136 300 Intangible assets related to the acquisition of Onyx Graphics Corporation....................... -- 258 126 -------- -------- -------- Total assets...................................... $ 7,912 $ 12,343 $ 16,052 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit............................. $ -- $ -- $ 250 Accounts payable................................ 414 1,817 3,944 Accrued payroll and related expenses............ 416 583 267 Accrued warranty................................ 347 287 252 Other accrued liabilities....................... 453 970 1,516 Deferred revenues from related parties.......... 152 -- -- Other deferred revenues......................... 1,845 1,114 1,202 Current portion of long-term debt............... 146 355 361 -------- -------- -------- Total current liabilities......................... 3,773 5,126 7,792 Long-term debt.................................... 338 504 318 Commitments Stockholders' equity: Preferred stock: Authorized shares -- 2,000,000 pro forma Issued and outstanding shares -- none pro forma....................................... -- -- -- $ -- Convertible preferred stock, $0.001 par value: Series A, authorized, issued and outstanding shares -- 320,000 in 1994, 1995 and 1996, none pro forma.............................. -- -- -- -- Series B, authorized shares -- 1,050,000 in 1996, none pro forma issued and outstanding shares -- 1,023,998 in 1994, 1995 and 1996, none pro forma.............................. 1 1 1 -- Series C, authorized shares -- 4,660,000 in 1996, none pro forma issued and outstanding shares -- 3,509,990 in 1994, 4,548,718 in 1995 and 1996, none pro forma............... 4 5 5 -- Common stock, $0.001 par value: Authorized shares -- 8,000,000 in 1996, 50,000,000 pro forma Issued and outstanding shares -- 200,426 in 1994, 344,657 in 1995, 448,634 in 1996 and 6,341,350 pro forma......................... -- -- -- 6 Additional paid-in capital.................... 22,296 25,130 25,596 25,596 Accumulated deficit........................... (18,500) (18,423) (17,222) (17,222) Deferred compensation......................... -- -- (418) (418) Notes receivable from stockholders............ -- -- (20) (20) -------- -------- -------- -------- Total stockholders' equity........................ 3,801 6,713 7,942 $ 7,942 ======== -------- -------- -------- Total liabilities and stockholders' equity........ $ 7,912 $ 12,343 $ 16,052 ======== ======== ========
See accompanying notes. F-3 64 RASTER GRAPHICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED ----------------------- YEAR ENDED ------------------------------------------ JUNE 30, DECEMBER 31, DECEMBER 30, DECEMBER 31, ----------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ---------- ---------- (UNAUDITED) Net revenues (includes related party revenues of $6,206 in 1993 and $123 in 1994)......... $ 14,719 $ 13,235 $ 26,045 $ 11,652 $ 18,151 Cost of revenues................. 9,942 9,704 16,598 7,701 10,986 ------- ------- ---------- ---------- ---------- Gross profit..................... 4,777 3,531 9,447 3,951 7,165 Operating expenses: Research and development....... 2,179 2,748 3,373 1,426 2,244 Sales and marketing............ 1,591 2,054 3,640 1,375 2,735 General and administrative..... 901 958 1,434 600 864 Acquired in-process research and development............. -- -- 889 -- -- ------- ------- ---------- ---------- ---------- Total operating expenses......... 4,671 5,760 9,336 3,401 5,843 ------- ------- ---------- ---------- ---------- Operating income (loss).......... 106 (2,229) 111 550 1,322 Interest income.................. 113 106 106 59 37 Interest expense................. (173) (5) (57) (37) (34) ------- ------- ---------- ---------- ---------- Income (loss) before provision for income taxes............... 46 (2,128) 160 572 1,325 Provision for income taxes....... 5 -- 83 297 124 ------- ------- ---------- ---------- ---------- Net income (loss)................ $ 41 $ (2,128) $ 77 $ 275 $ 1,201 ======= ======= ========== ========== ========== Pro forma net income per share... $ 0.01 $ 0.04 $ 0.16 ========== ========== ========== Shares used in computing pro forma net income per share..... 7,187,423 7,095,141 7,411,659 ========== ========== ==========
See accompanying notes. F-4 65 RASTER GRAPHICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK ------------------------------------------------------------- SERIES A SERIES B SERIES C COMMON STOCK ------------------ ------------------ ------------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------ ---------- ------ ----------- ------ ---------- ------ Balance at December 25, 1992........ 320,000 $ -- 1,023,998 $1 -- $ -- 368,808 $ -- Issuance of Series C preferred stock, net of issuance costs..... -- -- -- -- 3,509,990 4 -- -- Repurchase of common stock......... -- -- -- -- -- -- (28,000) -- Issuance of common stock under stock option plan................ -- -- -- -- -- -- 10,533 -- Forgiveness of interest on notes receivable from stockholders..... -- -- -- -- -- -- -- -- Accrued interest on notes receivable....................... -- -- -- -- -- -- -- -- Net income......................... -- -- -- -- -- -- -- -- -- -- --------- --------- ---------- --- --------- --- Balance at December 31, 1993........ 320,000 -- 1,023,998 1 3,509,990 4 351,341 -- Repurchase of common stock......... -- -- -- -- -- -- (154,000) -- Issuance of common stock under stock option plan and upon exercise of warrants............. -- -- -- -- -- -- 3,085 -- Forgiveness of interest on notes receivable from stockholders..... -- -- -- -- -- -- -- -- Net loss........................... -- -- -- -- -- -- -- -- -- -- --------- --------- ---------- --- --------- --- Balance at December 30, 1994........ 320,000 -- 1,023,998 1 3,509,990 4 200,426 -- Issuance of Series C preferred stock, net of issuance costs..... -- -- -- -- 595,368 1 -- -- Issuance of Series C preferred stock for Onyx Acquisition....... -- -- -- -- 443,360 -- -- -- Issuance of common stock under stock option plan and upon exercise of warrants...................... -- -- -- -- -- -- 144,231 -- Net income......................... -- -- -- -- -- -- -- -- -- -- --------- --------- ---------- --- --------- --- Balance at December 31, 1995........ 320,000 -- 1,023,998 1 4,548,718 5 344,657 -- Unearned compensation related to stock options (unaudited)........ -- -- -- -- -- -- -- -- Issuance of common stock under stock option plan and upon exercise of warrants (unaudited)...................... -- -- -- -- -- -- 103,977 -- Note receivable from stockholder (unaudited)...................... -- -- -- -- -- -- -- -- Net income (unaudited)............. -- -- -- -- -- -- -- -- -- -- --------- --------- ---------- --- --------- --- Balance at June 30, 1996 (unaudited)...................... 320,000 $ -- 1,023,998 $1 4,548,718 $ 5 448,634 $ -- ========= == ========= == ========== === ========= === NOTES ADDITIONAL RECEIVABLE TOTAL PAID-IN ACCUMULATED DEFERRED FROM STOCKHOLDERS' CAPITAL DEFICIT COMPENSATION STOCKHOLDERS EQUITY ---------- ----------- ------------ ------------ ------------- Balance at December 25, 1992........ $ 13,689 $ (16,413) $ -- $ (138) $(2,861) Issuance of Series C preferred stock, net of issuance costs..... 8,706 -- -- -- 8,710 Repurchase of common stock......... (42) -- -- 42 -- Issuance of common stock under stock option plan................ 6 -- -- -- 6 Forgiveness of interest on notes receivable from stockholders..... -- -- -- 12 12 Accrued interest on notes receivable....................... -- -- -- (8) (8) Net income......................... -- 41 -- -- 41 ------- -------- ----- ------- Balance at December 31, 1993........ 22,359 (16,372) -- (92) 5,900 Repurchase of common stock......... (66) -- -- 66 -- Issuance of common stock under stock option plan and upon exercise of warrants............. 3 -- -- -- 3 Forgiveness of interest on notes receivable from stockholders..... -- -- -- 26 26 Net loss........................... -- (2,128) -- -- (2,128) ------- -------- ----- ------- Balance at December 30, 1994........ 22,296 (18,500) -- -- 3,801 Issuance of Series C preferred stock, net of issuance costs..... 1,476 -- -- -- 1,477 Issuance of Series C preferred stock for Onyx Acquisition....... 1,098 -- -- -- 1,098 Issuance of common stock under stock option plan and upon exercise of warrants...................... 260 -- -- -- 260 Net income......................... -- 77 -- -- 77 ------- -------- ----- ------- Balance at December 31, 1995........ 25,130 (18,423) -- -- 6,713 Unearned compensation related to stock options (unaudited)........ 418 -- (418) -- -- Issuance of common stock under stock option plan and upon exercise of warrants (unaudited)...................... 48 -- -- -- 48 Note receivable from stockholder (unaudited)...................... -- -- -- (20) (20) Net income (unaudited)............. -- 1,201 -- -- 1,201 ------- -------- ----- ------- Balance at June 30, 1996 (unaudited)...................... $ 25,596 $ (17,222) (418) $ (20) $ 7,942 ======= ======== ===== =======
See accompanying notes. F-5 66 RASTER GRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED ------------------------------------------ JUNE 30, DECEMBER 31, DECEMBER 30, DECEMBER 31, --------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)......................... $ 41 $ (2,128) $ 77 $ 275 $ 1,201 Adjustments to reconcile net income (loss) to net cash used in operating activities: Deferred revenue from related parties............................. (810) (267) (152) -- -- Other deferred revenue................ 436 951 (760) (1,010) 88 Depreciation and amortization......... 672 731 1,782 267 590 Forgiveness of interest on shareholders' notes receivable...... 12 26 -- -- -- Changes in operating assets and liabilities: Accounts receivable................. 575 (1,558) (2,169) (547) (1,317) Inventories......................... (803) 318 (1,283) (697) (1,849) Prepaid expenses and other assets... (289) (129) 280 77 (411) Accounts payable.................... (95) (19) 1,035 418 2,127 Accrued payroll and related expenses......................... 70 88 123 (213) (316) Other accrued liabilities........... (151) (236) 429 506 511 ------- ------- ------- ------ ------ Net cash provided by (used in) operating activities.............................. (342) (2,223) (638) (924) 624 INVESTING ACTIVITIES Capital expenditures...................... (813) (805) (1,082) (449) (497) Cash acquired in acquisition.............. -- -- 55 -- -- ------- ------- ------- ------ ------ Net cash used in investing activities..... (813) (805) (1,027) (449) (497) FINANCING ACTIVITIES Proceeds from notes payable............... -- 484 418 -- -- Proceeds from the bank line of credit..... -- -- -- -- 250 Repayment of note......................... -- -- (450) (67) (150) Repayment of note to related party........ (5,000) -- -- -- -- Payments on capital leases................ (108) -- (23) -- (30) Issuance of note receivable............... -- -- -- (255) -- Proceeds from issuance of common stock.... 6 3 196 -- 28 Proceeds from issuance of Series C preferred stock......................... 8,710 -- 1,467 1,467 -- ------- ------- ------- ------ ------ Net cash provided by financing activities.............................. 3,608 487 1,608 1,145 98 ------- ------- ------- ------ ------ Net increase (decrease) in cash and cash equivalents............................. 2,453 (2,541) (57) (228) 225 Cash and cash equivalents at beginning of year.................................... 1,695 4,148 1,607 1,607 1,550 ------- ------- ------- ------ ------ Cash and cash equivalents at end of year.................................... $ 4,148 $ 1,607 $ 1,550 $ 1,379 $ 1,775 ======= ======= ======= ====== ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest.................... $ 650 $ 5 $ 57 $ 37 $ 34 Cash paid for taxes....................... $ 19 $ 15 $ 28 $ 2 $ 83 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Forgiveness of note receivable on return of common stock......................... $ 42 $ 66 $ -- $ -- $ --
See accompanying notes. F-6 67 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Raster Graphics, Inc. (the Company) was incorporated on July 27, 1987 in the State of California. The Company designs, manufactures, and markets large format digital printing systems. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Onyx Graphics Corporation, Raster Graphics GmbH, a German Corporation, and Raster Graphics Limited, a company incorporated in England and Wales. Fiscal Year In 1993 and 1994, the Company reported on a fiscal year ending on the last Friday in December. Effective in 1995, the Company changed its fiscal year-end to the calendar year-end. In addition, the quarter ends were changed to the calendar quarters. Interim Financial Information The interim financial information at June 30, 1996 and for the six months ended June 30, 1995 and 1996 is unaudited but, in the opinion of management, includes all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and results of operations for the interim period. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of results for the full year. Cash Equivalents For financial statement purposes, the Company considers all highly liquid debt instruments with original maturities of ninety days or less and with insignificant interest rate risk to be cash equivalents. At December 31, 1995 and June 30, 1996, cash equivalents consisted of commercial paper and money market funds. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). The adoption of FAS 115 had no material effect on the Company's results of operations or financial position. The Company considers its applicable cash equivalents as held-to-maturity investments in accordance with FAS 115. Any unrealized gains or losses were immaterial. F-7 68 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Inventories Inventories are stated at the lower of cost (first-in, first-out) or fair market value and consist of the following (in thousands):
DECEMBER 30, DECEMBER 31, JUNE 30, 1994 1995 1996 ------------ ------------ --------- Raw materials................................. $ 578 $ 784 $ 549 Work-in-process............................... 205 588 1,061 Finished goods................................ 1,110 1,876 3,487 ------ ------ ------ $1,893 $3,248 $ 5,097 ====== ====== ======
Property and Equipment Property and equipment is stated at cost and depreciated, using the straight-line method, over the shorter of the estimated useful life (one to five years) or, if applicable, the term of the related lease. Long-Lived Assets In 1995 the Financial Accounting Standards Board released the Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of " (FAS 121). FAS 121 requires recognition of impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. FAS 121 is effective for fiscal years beginning after December 15, 1995. The adoption of FAS 121 is not expected to have a material impact on the Company's financial position or results of operations. Revenue Recognition The Company generally recognizes revenue at the time of shipment and provides for the estimated cost to repair or replace products under warranty provisions in effect at the time of sale. Revenue under maintenance contracts is recognized ratably over the term of the related contract, generally twelve months. The Company does not warrant its software products. Income Taxes The Company accounts for income taxes using the liability method as required by the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Net Income (Loss) Per Share Net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares from convertible preferred stock (using the if-converted method) and from stock options and warrants (using the modified treasury stock method). Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common stock and common equivalent shares issued by the Company at prices below the assumed public offering price during the twelve-month period prior to the proposed offering have been included in the calculation as if they were outstanding for all periods presented regardless of whether they are dilutive (using the modified treasury stock method at an assumed public offering price). F-8 69 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Per share information calculated on the above noted basis is as follows:
SIX MONTHS ENDED YEAR ENDED ------------------------------------------ JUNE 30, DECEMBER 31, DECEMBER 30, DECEMBER 31, ------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ----------- ----------- Net income (loss) per share.... $ 0.01 $ (1.88) $ 0.01 $ 0.04 $ 0.16 =========== ========== =========== =========== =========== Shares used in computing net income (loss) per share...... 5,181,236 1,131,744 7,187,423 7,095,141 7,411,659 =========== ========== =========== =========== ===========
Pro Forma Net Income Per Share Pro forma net income per share has been computed as described above and also gives effect, even if antidilutive, to common equivalent shares from convertible preferred stock that will convert upon the closing of the Company's initial public offering (using the if-converted method). Pro Forma Shareholders' Equity (Unaudited) If the offering contemplated by this Prospectus is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into an aggregate of approximately 5,893,000 shares of common stock. The number of shares of common stock that the convertible preferred stock converts into is based on an assumed public offering price of $10.00 per share. Unaudited pro forma stockholders' equity at June 30, 1996, as adjusted for the conversion of preferred stock, is disclosed on the consolidated balance sheet. Employee Stock Plans The Company accounts for its stock option and employee stock purchase plan in accordance with the provisions of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123). FAS 123 provides an alternative to APB Opinion No. 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its employee stock plans in accordance with the provisions of APB Opinion No. 25. Accordingly, FAS 123 is not expected to have any material impact on the Company's financial position or results of operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. CONCENTRATIONS Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash equivalents and receivables from customers. The Company invests in F-9 70 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) cash equivalents, primarily commercial paper of A1 or P1 grade, placed in high-credit quality financial institutions. The Company is exposed to credit risks in the event of default by the financial institutions to the extent of the amount recorded on the balance sheet. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations. Dependence on Major Subcontractors and Suppliers The Company relies on subcontractors and suppliers to manufacture, subassemble, and perform first-stage testing of DCS printer components. The Company relies on single suppliers for certain critical components. The loss of certain subcontractors or suppliers or the failure of subcontractors or suppliers to meet the Company's price, quality, quantity, and delivery requirements could have a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on a Single Product The majority of the Company's sales are derived from one principal product line, the DCS printing systems, printers and related consumables, and the Company anticipates that it will derive the bulk of its revenues in the next several years from sales of these products. If the Company is unable to generate sufficient sales of the DSC product line due to competitive factors, manufacturing difficulties, or other reasons, it may be unable to continue its business. Major Customers One customer, a related party in 1993, accounted for 33.4%, 20.6%, 10.9% and 14.2% of net revenues for 1993, 1994, 1995 and the six months ended June 30, 1995, respectively. Another customer acounted for 18.4% of net revenues in 1993. 3. ACQUISITION On August 10, 1995, the Company acquired Onyx Graphics Corporation (Onyx) for the following amounts (dollars in thousands): 443,359 shares of Series C preferred stock of the Company for all the issued common stock of Onyx............................................... $1,108 Assumption by the Company of options to purchase Onyx common stock.......... 63 Note due from Onyx.......................................................... 259 Acquisition costs........................................................... 70 ------ $1,500 ======
F-10 71 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) The purchase price was allocated, based on an independent appraisal obtained by the Company, to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values on the date of acquisition as follows (in thousands): Current assets.............................................................. $ 709 Equipment................................................................... 157 Intangibles................................................................. 454 Liabilities assumed......................................................... (570) In-process research and development......................................... 750 ------ $1,500 ======
To determine the value of completed software, the expected future cash flows of each existing software product were discounted, taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the life cycle stage of each product. This analysis resulted in a valuation of $280,000 for completed software, which had reached technological feasibility and therefore was capitalizable. This software was amortized on a straight-line basis over an eight-month period. To determine the value of the software in the development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income, and associated risks. Associated risks include the inherent difficulties and uncertainties in completing each project, thereby achieving technological feasibility, and risks related to the viability of potential changes in future target markets. This analysis resulted in a valuation of $750,000 for software in the development stage that had not yet reached technological feasibility and did not have alternative future uses. In accordance with generally accepted accounting principles, the software in the development stage was expensed in August 1995 as acquired in-process research and development. In addition, the Company wrote off $139,000 in the September 1995 quarter for redundant PostScript licenses that the Company had purchased for the Company's development of a similar image processing software product. Other intangible assets will be amortized on a straight-line basis over estimated useful lives ranging from three to five years. As part of the Agreement and Plan of Reorganization, 30% of the Series C preferred stock included in the consideration was deposited into an escrow account. The escrow shares were to be distributed to Onyx stockholders on August 1, 1996 and were for the full satisfaction of losses to the Company resulting from misrepresentations or omissions in the Agreement that totaled greater than $50,000. Management of the Company believed that on the date of acquisition that it was certain that all escrow shares were going to be distributed to Onyx shareholders, and in fact, the Company did distribute the escrow shares to Onyx stockholders. The following unaudited pro forma combined results of operations of the Company and Onyx for the years ended December 30, 1994 and December 31, 1995 have been prepared assuming that the acquisition of Onyx had occurred at the beginning of the period presented. The following pro forma information results (in thousands, except per share data) are not necessarily indicative of the results F-11 72 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) that would have occurred had the transaction been completed at the beginning of the period indicated nor is it indicative of future operating results:
DECEMBER 30, DECEMBER 31, 1994 1995 ------------ ------------ Net revenues.............................................. $ 15,829 $ 27,709 Income (loss) from operations............................. $ (2,057) $ 1,364 Net income (loss)......................................... $ (2,027) $ 1,170 Net income (loss) per share............................... $ (0.28) $ 0.16
The results of the operations of the acquired business have been included in the consolidated results of operations for the period subsequent to the acquisition date. 4. BALANCE SHEET COMPONENTS Property and equipment consist of the following (in thousands):
DECEMBER 30, DECEMBER 31, JUNE 30, 1994 1995 1996 ------------ ------------ -------- Machinery and equipment......................... $4,501 $3,869 $4,274 Furniture and fixtures.......................... 187 303 355 Leasehold improvements.......................... 147 162 202 ------ ------ ------ 4,835 4,334 4,831 Accumulated depreciation........................ 3,786 2,882 3,340 ------ ------ ------ $1,049 $1,452 $1,491 ====== ====== ======
Fully depreciated fixed assets with an original cost of approximately $2,000,000 were written off in 1995. Intangible assets consist of the following (in thousands):
DECEMBER 31, JUNE 30, 1995 1996 ------------ -------- Assembled work force.......................................... $ 80 $ 80 Trademarks and tradenames..................................... 54 54 Developed technology.......................................... 280 280 Distributor relationships..................................... 40 40 ---- ---- 454 454 Accumulated amortization...................................... 196 328 ---- ---- Net intangible assets......................................... $258 $126 ==== ====
5. BORROWINGS In June 1996 the Company's bank line of credit credit agreement was amended. The facility was extended to $2,000,000, and the term to October 15, 1996. Interest is charged at the lenders prime rate plus 0.5 percentage points. At June 30, 1996, $250,000 was outstanding under the bank line of credit. F-12 73 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) The Company's long-term debt includes two notes payable. The first note issued on August 29, 1994 had a principal balance of $336,056 at December 31, 1995 with interest being charged at 0.75% above the lenders prime rate. An additional note issued on June 5, 1995 had a principal balance of $418,835 at December 31, 1995 with interest being charged at a rate of 0.5% above the lenders prime rate. Such prime rate was 8.5% at December 31, 1995. The notes are secured by the tangible assets of the Company. The notes include various financial covenants which make reference to the Company's profitability and liquidity. If the Company fails to satisfy these covenants, all outstanding amounts of the principal and unpaid interest immediately become due and payable. In addition, the Company's subsidiary, Onyx, has two notes payable (the "Onyx Notes"). The first note issued in August 1992 had a principal balance of $33,342 at December 31, 1995 with interest being paid at the lenders prime rate plus six percentage points. A second note issued in August 1993 had a principal balance of $58,023 at December 31, 1995 and incurs interest at a rate equal to the lenders prime rate plus eight percentage points. Both notes expire in August 1997. The lenders prime rate at December 31, 1995 was 8.5%. The Onyx Notes are secured by all equipment of the borrower and all finished goods, materials, and other personal tangible property purchased with the proceeds of the notes. Future principal maturities on the notes payable for the years ended December 31 are as follows (in thousands): 1996.......................................................................... $355 1997.......................................................................... 347 1998.......................................................................... 157 ---- $859 ====
6. COMMITMENTS The Company leases its principal facilities under an operating lease arrangement. The future minimum annual rental payments are as follows for the years ended December 31 (in thousands): 1996........................................................................ $ 585 1997........................................................................ 589 1998........................................................................ 589 1999........................................................................ 541 2000........................................................................ 548 Thereafter.................................................................. 548 ------ $3,400 ======
Rent expense for the fiscal years ended 1993, 1994, and 1995 was approximately $317,000, $358,000, and $507,000, respectively, and approximately $243,000 and $286,000, respectively, for the six months ended June 30, 1995 and 1996, respectively. The Company has a purchase commitment of approximately $1,000,000 to a supplier over the next year in connection with research and development activities. F-13 74 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 7. STOCKHOLDERS' EQUITY Convertible Preferred Stock Each share of Series A, B, and C preferred stock may be converted at the option of the holder into shares of common stock on a one-for-one basis, subject to adjustment for certain antidilution provisions. The preferred stock automatically converts into common stock upon the consummation of an underwritten public offering for the Company's common stock at not less than $7.50 per share and the gross aggregate offering price is not less than $10,000,000. The holders of preferred shares are entitled to one vote for each share of common stock into which the preferred stock is convertible. The holders of Series C preferred stock are entitled to receive dividends, when and as declared by the Board of Directors, at a rate of $0.15 per share, per annum. After the payment of dividends to the Series C preferred stockholders, the holders of Series A and B preferred stock are entitled to receive dividends, when and as declared by the Board of Directors, at a rate of $0.20 per share, per annum. Dividends are noncumulative, and to date, no dividends have been declared or paid by the Company. The Series C preferred stock has a liquidation preference of $2.50 per share, plus all declared and unpaid dividends, and is payable prior and in preference to any distribution to the holders of Series A and B preferred stock and common stock. After the Series C stockholders receive their liquidation preference, the holders of Series A and B preferred stock will be entitled to receive an amount per share equal to $560,000 and $2,800,000 divided by the number of outstanding Series A and B shares, respectively, plus all declared and unpaid dividends. After full preferential payments have been made to Series A, B, and C stockholders, the holders of Series A, B, and C preferred stock are entitled to receive up to an additional $6,750,000. After the Series A, B, and C preferred stockholders receive their full liquidation preferences, the holders of common and preferred stock will be entitled to share in the remaining proceeds based on the number of shares held. Stock Option Plan The Company has a stock option plan (the Plan) under which consultants and key employees may be granted incentive or nonstatutory stock options for the purchase of common stock. There are 1,460,000 shares authorized under the Plan. Under the Plan, incentive and nonstatutory options may be granted at an exercise price of not less than 100% and 85%, respectively, of the fair value as determined by the Board of Directors. The options are exercisable at the discretion of the Board of Directors and generally vest at the rate of 12.5% of the original grant, commencing six months after the date of grant or employment, and in monthly increments of approximately 2% of the total grant thereafter. Expiration dates are determined by the Board of Directors, but in no event will they F-14 75 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) exceed ten years from the date of grant. Unexercised options are cancelable thirty days after the date of termination of employment. A summary of activity in this plan is as follows:
NUMBER PRICE OF SHARES PER SHARE --------- -------------- Options outstanding at December 25, 1992......................... 207,720 $0.25 - $1.50 Granted........................................................ 688,170 $0.50 Exercised...................................................... (10,533) $0.50 - $1.50 Canceled....................................................... (204,587) $0.25 - $1.50 ---------- Options outstanding at December 31, 1993......................... 680,770 $0.25 - $1.50 Granted........................................................ 160,100 $0.50 Exercised...................................................... (1,902) $0.50 Canceled....................................................... (215,198) $1.50 ---------- Options outstanding at December 30, 1994......................... 623,770 $0.25 - $0.50 Granted........................................................ 513,280 $0.025 - $1.50 Exercised...................................................... (19,787) $0.50 Canceled....................................................... (4,913) $0.50 ---------- Options outstanding at December 31, 1995......................... 1,112,350 $0.025 - $1.50 Granted........................................................ 394,239 $1.50 - $8.00 Exercised...................................................... (101,611) $0.25 - $0.80 Canceled....................................................... (49,326) $0.50 - $6.00 ---------- Options outstanding at June 30, 1996............................. 1,355,652 $0.025 - $8.00 ==========
At December 31, 1995, there were 709,411 options exercisable under the Plan at $0.025 -- $1.50 per share, and options for 284,113 shares of common stock were available for grant. In July 1993, 175,670 options were repriced. Options originally granted at $1.50 per share were canceled and new options were issued at $0.50 per share. Deferred Compensation The Company recorded aggregate compensation of $418,000 during the six months ended June 30, 1996. The amount recorded represents the difference between the grant price and the deemed fair value of the Company's common stock for shares subject to options granted during the first six months of 1996. The amortization of deferred compensation will be charged to operations and will be amortized over the vesting period of the options, which is typically four years. Stock Purchase Plan In 1988, the Company adopted a stock purchase plan for consultants and key employees of the Company. There are 90,000 shares authorized for issuance under the plan. Under the plan, consultants and key employees may be granted the right to purchase shares of the Company's common stock at not less than 100% of the fair value on the date of grant as determined by the Board of Directors. As of December 30, 1994, December 31, 1995 and June 30, 1996, 24,000 shares have been issued under the Plan and 66,000 shares are reserved for issuance. F-15 76 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Warrants The Company has issued the following warrants: (a) Warrants were issued in November 1988 to certain Series B investors to purchase 124,444 shares of common stock at $1.50 per share, subject to adjustment for dilution. These warrants were exercised in 1995. (b) During 1989, the Company entered into an equipment lease line with a financing institution. In conjunction with the lease line, the Company issued warrants to purchase 10,400 shares of Series B preferred stock at $12.50 per share. The warrants expire in 1998 and are currently exercisable. (c) Warrants were issued in December 1989 in connection with the issuance of Series B preferred stock. Investors received warrants to purchase 124,257 shares of common stock at $1.50 per share, subject to adjustment for dilution. These warrants expire in December 1996, or upon the occurrence of an initial public offering of common stock of not less than $10,000,000 and at least $25.00 per share, or upon the sale of substantially all of the Company's assets. The warrants are currently exercisable. (d) In conjunction with the issuance of Series B preferred stock and additions to the Company's lease line, warrants were issued in March 1990 to various stockholders to purchase 38,227 shares of common stock at $1.50 per share, subject to adjustment for dilution. During 1994, warrants were exercised to purchase 1,183 shares of common stock leaving warrants to purchase 37,044 shares of common stock outstanding at December 30, 1994. In March 1995, 1,546 warrants expired leaving warrants to purchase 35,498 shares of common stock outstanding at December 31, 1995. In the six months ended June 30, 1996, 2,366 warrants were exercised leaving warrants to purchase 33,132 shares of common stock outstanding at June 30, 1996. Common Stock Reserved The Company has reserved shares of common stock for future issuance as follows:
DECEMBER 31, JUNE 30, 1995 1996 ------------ ---------- Series A convertible preferred stock....................... 320,000 320,000 Series B convertible preferred stock (including warrants)................................................ 1,034,398 1,034,398 Conversion of warrants..................................... 159,755 157,389 Series C convertible preferred stock....................... 4,548,718 4,548,718 Stock Option Plan.......................................... 1,396,433 1,394,851 Stock Purchase Plan........................................ 66,000 66,000 ---------- ---------- 6,412,984 7,521,356 ========== ==========
Notes Receivable From Stockholders The Company had accepted long-term promissory notes for the issuance of common stock to employees and certain consultants. These notes incurred interest between 6% and 9.4% per annum F-16 77 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) with principal and interest payable on demand. In 1994, the notes and related interest were forgiven in exchange for the return of the common stock. On February 28, 1996, the Company issued a note receivable for $20,000 to a consultant. The note incurs interest at a rate of 5.25% per annum and is payable in full on January 31, 1998. The borrower pledged 200,000 shares of common stock in the Company as security against nonpayment of the loan. 8. TAXES ON INCOME The tax provision consists of the following (in thousands):
DECEMBER 31, DECEMBER 31, 1993 1995 ------------ ------------ Current: Federal..................................................... $ 5 $ 40 State....................................................... -- 28 Foreign..................................................... -- 15 --- --- $ 5 $ 83 === ===
There was no provision for income taxes for 1994 due to the net loss. The difference between the tax provision and the amount computed by applying the federal statutory income tax rate to income before the provision for income taxes is explained below (in thousands):
DECEMBER 31, DECEMBER 30, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ Expected provision (benefit) at statutory rate......................................... $ 16 $ (745) $ 56 State taxes.................................... -- -- 28 Federal alternative minimum tax................ 5 -- 40 Net operating losses (utilized) not utilized... (16) 745 (103) Foreign income taxes at a rate greater than the federal statutory rate................... -- -- 2 Unbenefited foreign loss....................... -- -- 60 ---- ----- ----- Provision for income taxes..................... $ 5 $ -- $ 83 ==== ===== =====
Pretax loss from foreign operations was $135,000 in 1995. There were no foreign operations in 1993 or 1994. For the six-month periods ended June 30, 1995 and 1996, income taxes have been provided based upon estimated annualized effective tax rates of 51.9% and 9.4%, respectively, applied to the earnings for the period. The provision for income taxes for the six months ended June 30, 1995 reflects unbenefited foreign losses and the tax benefits of utilizing net operating loss carryforwards. The provision for the six months ended June 30, 1996 reflects the tax benefits of utilizing net operating loss carryforwards. F-17 78 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of deferred tax assets for federal and state income taxes are as follows (in thousands):
DECEMBER 30, DECEMBER 31, 1994 1995 ------------ ------------ Net operating loss carryforwards............................ $ 5,647 $ 4,757 Tax credits................................................. 731 1,015 Inventory reserve........................................... 466 552 Other accruals and reserves not deductible for tax purposes.................................................. 415 688 Other, net.................................................. 335 282 ------- ------- Total deferred tax assets................................... 7,594 7,294 Valuation allowance for deferred tax assets................. (7,594) (7,294) ------- ------- Net deferred tax assets..................................... $ -- $ -- ======= =======
Under FAS 109, deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Based on the weight of available evidence, which includes the Company's historical operating performance, the reported loss in 1994, only marginal profitability in 1993 and 1995, and the uncertainties regarding future results of operations, the Company has provided a full valuation allowance against its net deferred tax assets as it is more likely than not that the deferred tax assets will not be realized. The valuation allowance established upon adoption of FAS 109 in 1993 was $6,406,000 and was increased by $1,188,000 in 1994 and decreased by $300,000 during 1995. As of December 31, 1995, the Company had federal and state net operating loss carryforwards of approximately $13,200,000 and $4,400,000, respectively. The Company also has federal and California research and development tax credit carryforwards of approximately $753,000 and $325,000, respectively. The net operating loss and credit carryforwards will expire at various dates beginning in 1996 through 2010, if not utilized. Utilization of the net operating losses and credits will be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 (the Code) and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. F-18 79 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 9. EXPORT AND INTERNATIONAL SALES Total export sales by geographic region are as follows (in thousands):
YEARS ENDED SIX MONTHS ENDED ------------------------------------------ JUNE 30, DECEMBER 31, DECEMBER 30, DECEMBER 31, --------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ --------- --------- Europe............................... $4,615 $5,221 $ 7,252 $ 3,583 $ 4,470 Far East............................. 1,884 1,041 3,184 1,448 2,101 Other................................ 586 1,141 2,358 1,451 1,893 ------ ------ ------- ------ ------ $7,085 $7,403 $ 12,794 $ 6,482 $ 8,464 ====== ====== ======= ====== ======
International sales, including sales of the Company's UK and German subsidiaries, were $13,372,000 and $9,863,000 for 1995 and the six months ended June 30, 1996, respectively. These subsidiaries had no sales prior to 1995. 10. RELATED PARTY TRANSACTIONS In December 1989, the Company entered into a distribution agreement with a stockholder of the Company. As partial consideration for the distribution rights, the distributor/stockholder paid a distribution fee of $1,050,000. The distribution fee was nonrefundable except upon termination in accordance with the distribution agreement. In September 1990, the Company began recognizing the distribution fee on a monthly basis over a five-year period. The Company recognized $139,000 and $210,000 of distribution revenue during fiscal 1995 and 1994, respectively, and $52,500 in the six months ended June 30, 1995. At December 30, 1994, the Company has $140,000 in deferred revenue from the related party (none at December 31, 1995 and June 30, 1996). In 1993, sales of $6,206,000 were made to two companies that had made loans to the Company. Gross margins on these sales were not materially different from the gross margins realized on similar sales to unaffiliated customers. Both loans were repaid in full in 1993. 11. EMPLOYEE BENEFIT PLAN The Company has adopted a salary deferral plan (the Plan) covering substantially all employees. The Company has made no contributions to the Plan as of December 31, 1995 or June 30, 1996. 12. SUBSEQUENT EVENTS In May 1996, the Board of Directors approved, subject to stockholder approval, an increase in the number of shares reserved for issuance under the Company's 1988 Stock Option Plan by 100,000 to 1,560,000 shares. In June 1996, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. Upon completion of the offering, the Board of Directors will be authorized to issue 2,000,000 shares of undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. F-19 80 RASTER GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) The Company's 1996 Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors in June 1996, subject to stockholder approval. A total of 400,000 shares of common stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by a series of twelve month offering periods other than the first offering period commencing on or about January 1 and July 1 of each year. The first such offering period is expected to commence on the date of this offering. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board of Directors. Employees (including officers and employee directors) of the Company, or of any majority owned subsidiary designated by the Board of Directors, are eligible to participate in the Purchase Plan if they are employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee's compensation at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the offering period. The Company's 1996 Stock Plan (the 1996 Stock Plan) was adopted by the Board of Directors in June 1996, subject to stockholder approval. An aggregate of 800,000 shares of the Company's common stock are reserved for issuance under the 1996 Stock Plan. Upon adoption of the 1996 Stock Plan, the Company's Board of Directors determined to make no further grants under the 1988 Option Plan. The 1996 Stock Plan provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Code, for the granting to employees and consultants of nonstatutory stock options and for the granting to employees of stock purchase rights. The 1996 Stock Plan may be administered by the Board of Directors or a committee of the Board (the 1996 Administrator). The 1996 Administrator determines the terms of options and stock purchase rights granted under the 1996 Stock Plan, including the number of shares subject to the option or right, exercise price, term and exercisability. The 1996 Directors' Stock Option Plan (the Directors' Plan) was adopted by the Board of Directors on June 1996, subject to stockholder approval. A total of 150,000 shares of common stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan is designed to work automatically without administration; however, to the extent administration is necessary, it will be performed by the Board of Directors. To the extent they arise, it is expected that conflicts of interest will be addressed by abstention of the interested director from both deliberations and voting regarding matters in which he or she has a personal interest. The Directors' Plan provides that each person who is or becomes a nonemployee director of the Company shall be granted a nonstatutory stock option to purchase 10,000 shares of common stock on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on the first calendar day of the Company's fiscal year commencing in 1997, each nonemployee director shall be granted an additional option to purchase 5,000 shares of common stock if, on such date, he or she shall have served on the Company's Board of Directors for at least six months. In June 1996, the Board of Directors approved, subject to stockholder approval, a one-for-five reverse split of the Company's common and preferred stock and reincorporation of the Company into the State of Delaware. All share and per share amounts in the accompanying consolidated financial statements have been adjusted retroactively. In June 1996, the Board of Directors approved, subject to stockholder approval, an increase in the number of authorized Common Shares from 8,000,000 to 50,000,000. F-20 81 RASTER GRAPHICS UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION On August 10, 1995, Raster Graphics, Inc. (the Company) acquired Onyx Graphics Corporation (Onyx) in a transaction being accounted for as a purchase. The total purchase price of approximately $1.5 million included the issuance of 443,360 shares of Series C preferred stock of the Company, options to purchase 220,120 shares of Company stock, cancelation of a $259,000 note receivable and related acquisition costs of $70,000. The net assets acquired included tangible assets valued at $866,000, developed technology and other intangible assets totaling $454,000 and $750,000 for acquired in-process research and development less assumed liabilities of $570,000. The accompanying unaudited pro forma condensed combined statement of operations gives effect to the transaction as if it occurred on January 1, 1995, the beginning of the Company's most recently completed fiscal year. The Company's year ended December 31, 1995 consolidated statement of operations include Onyx's results of operations for the period from August 10, 1995 to December 31, 1995. The pro forma condensed combined statement of operations for the year ended December 31, 1995 combines the Company's consolidated statement of operations for the year ended December 31, 1995 with Onyx's results of operations for the period from January 1, 1995 to August 9, 1995. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been completed at the beginning of the period indicated nor is it necessarily indicative of future operating results. F-21 82 RASTER GRAPHICS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL ------------------------------ ONYX RASTER GRAPHICS GRAPHICS CORPORATION INC. --------------- ------------ PERIOD FROM PRO FORMA YEAR ENDED JANUARY 1, 1995 YEAR ENDED DECEMBER 31, TO AUGUST 9, PRO FORMA DECEMBER 31, 1995 1995 ADJUSTMENTS 1995 ------------ --------------- ----------- ------------ Net revenues........................ $ 26,045 $ 2,004 $(340)(A) $ 27,709 Cost of revenues.................... 16,598 401 (229)(A)(B) 16,770 --------- ----- ---------- Gross margin........................ 9,447 1,603 (111) 10,939 Operating expenses: Research and development.......... 3,373 282 4(B)(C) 3,659 Sales and marketing............... 3,640 695 8(B) 4,343 General and administration........ 1,434 139 -- 1,573 Charge for acquired in-process research and development....... 889 -- (889)(C)(D) -- --------- ----- ---------- Total operating expenses................ 9,336 1,116 (877) 9,575 --------- ----- ---------- Income from operations.............. 111 487 766 1,364 Other income (expense).............. 49 (140) 20(E) (71) --------- ----- ---------- Income from operations.............. 160 347 786 1,293 Provision for income taxes.......... 83 40 -- 123 --------- ----- ---------- Net income.......................... $ 77 $ 307 $ 786 $ 1,170 ========= ===== ========== Net income per share...... $ 0.01 $ 0.22 $ 0.16 ========= ========== Shares used in computing net income per share......................... 7,187,423 1,364,983 7,187,423(F) ========= ==========
F-22 83 RASTER GRAPHICS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS 1. BASIS OF PRESENTATION The pro forma information presented is theoretical in nature and not necessarily indicative of the future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company purchased Onyx Graphics Corporation (Onyx) during the period presented. The pro forma condensed combined statement of operations reflects the effects of the acquisition, assuming the acquisition and related events occurred as of January 1, 1995. 2. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENT ADJUSTMENTS (A) To eliminate sales from Onyx to the Company prior to the acquisition. (B) Amortization of acquired workforce, trademarks, developed technology, and distribution networks being amortized over their estimated useful lives ranging from eight months to five years. (C) The pro forma statement of operations excludes charges of $151,000 related to software licenses and product support, including $139,000 of redundant Post Script licenses that the Company had purchased for the Company's development of a similar image processing software product. (D) The pro forma statement of operations excludes the charge of $750,000 for purchased in-process research and development which arose from the acquisition as it represents a nonrecurring item directly related to the transaction. The purchase price was allocated to the tangible and intangible assets of Onyx based on the fair market value of those assets using a risk adjusted discounted cash flows approach. The evaluation of the underlying technology acquired considered the inherent difficulties and the uncertainties in completing the development, thereby achieving technological feasibility, and the risks related to the viability of and potential changes in future target markets. The underlying technology and patent rights had no alternative use (in other research and development projects or otherwise). (E) To reverse Onyx's interest expense to third parties satisfied in the acquisition. (F) The preferred stock and options issued as part of the Onyx acquisition are included in the historical weighted average number of shares for all periods as they relate to SAB Nos. 55, 64 and 83. As a result, there is no pro forma effect upon the weighted average number of shares. F-23 84 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Onyx Graphics Corporation: We have audited the accompanying statements of operations and cash flows of Onyx Graphics Corporation for the year ended September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Onyx Graphics Corporation for the year ended September 30, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Salt Lake City, Utah November 11, 1994 F-24 85 ONYX GRAPHICS CORPORATION STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1994 Revenues: Software sales................................................................. $1,621,170 Hardware sales................................................................. 677,713 Other revenues................................................................. 294,992 ---------- Total revenues......................................................... 2,593,875 Cost of sales.................................................................... 856,301 ---------- Gross profit........................................................... 1,737,574 Operating expenses: Research and development....................................................... 347,368 General and administrative..................................................... 424,183 Sales and marketing............................................................ 793,937 ---------- Total operating expenses............................................... 1,565,488 Income from operations................................................. 172,086 Other income (expense): Interest expense............................................................... (95,528) Other income................................................................... 26,141 ---------- Total other expense.................................................... (69,387) ---------- Income before income taxes....................................................... 102,699 Income tax expense (note 7)...................................................... 1,939 ---------- Net income............................................................. $ 100,760 ========== Earnings per share............................................................... $ .06 ==========
See accompanying notes to financial statements. F-25 86 ONYX GRAPHICS CORPORATION STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1994 Cash flows from operating activities: Net income...................................................................... $100,760 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................................. 52,312 Amortization................................................................. 25,354 Provision for loss on accounts receivable.................................... 2,000 Decrease (increase) in operating assets: Trade accounts receivable.................................................. (44,227) Inventories................................................................ 19,614 Prepaid expenses........................................................... (13,080) Other assets............................................................... 4,116 Increase (decrease) in operating liabilities: Accounts payable........................................................... (30,426) Accrued expenses........................................................... 9,663 Deferred revenue........................................................... (24,047) ------ Net cash provided by operating activities............................... 102,039 ------ Cash flows from investing activities: Purchase of equipment........................................................... (17,627) Purchase of software............................................................ (87,295) ------ Net cash used in investing activities........................................ (104,922) ------ Cash flows from financing activities: Proceeds from notes payable and long-term debt.................................. 71,121 Repayment of notes payable and long-term debt................................... (83,545) Principal repayments of capital lease obligations............................... (7,990) ------ Net cash used in financing activities........................................ (20,414) ------ Net decrease in cash.............................................................. (23,297) Cash at beginning of year......................................................... 33,879 ------ Cash at end of year............................................................... $ 10,582 ====== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest........................................................................ $ 89,551 Income taxes.................................................................... 1,939
See accompanying notes to financial statements. F-26 87 ONYX GRAPHICS CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business ONYX Graphics Corporation (the Company) is primarily involved in the business of developing and marketing software products that produce large format high-quality color images. The Company also sells hardware products related to its software. The Company's headquarters are in Salt Lake City, Utah. (b) Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments with original maturities to the Company of three months or less to be cash equivalents. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (d) Equipment Equipment is stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Depreciation on equipment is calculated on the straight-line method over their estimated useful lives of three to five years. Equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (e) Revenue Recognition The Company recognizes revenue from software licenses at the time the software is delivered. Revenue from software license agreements with original equipment manufacturers (OEM) for redistribution to end-user customers is recognized when the equipment incorporating the Company's software is delivered to the end-user. Revenue received from software maintenance contracts is deferred and recognized ratably over the term of the maintenance contract, which is typically 90 days. (f) Research and Development Costs Research and development costs are expensed as incurred. (g) Capitalization of Software Under the criteria set forth in Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the Company capitalizes software development costs upon the establishment of technological feasibility for the product and the cost of software purchased for subsequent resale, leasing, or otherwise marketed. The gross amount of software capitalized totaled $104,831 as of September 30, 1994. The Company is amortizing these costs on the straight-line method over a period of three years. Related amortization was $25,354 for the year ended September 30, 1994. (h) Income Taxes Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective F-27 88 ONYX GRAPHICS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1994 tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) Earnings Per Share Earnings per share of common shares are computed on the basis of the weighted average shares outstanding plus any common stock equivalents which would arise from the exercise of stock options. The weighted average number of shares used in computing earnings per share for 1994 was 1,829,000. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the preparation of these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) LIQUIDITY As indicated in the accompanying financial statements, the Company recognized net income of $100,760 in 1994, and generated cash from operating activities. However, due to prior operating losses, the Company's net stockholders' deficit is $296,465 and current liabilities exceed current assets by $223,910. This has resulted in the Company having cash shortages and delayed payment of certain obligations when they became due. The Company is in the process of renegotiating the timing of certain debt payments. Management believes that cash generated from product sales will provide adequate cash to meet the Company's debt and operating requirements. The Company is subject to uncertainties and competitive pressures, any of which could adversely affect the Company's operating cash flow and create liquidity problems for the Company. (3) LEASES The Company is obligated under capital leases for equipment that expire over the next three years. Amortization of assets held under capital leases is included with depreciation expense. The Company has a five year, noncancelable operating lease for its office building. Rent expense for operating leases was $83,931 for the year ended September 30, 1994. F-28 89 ONYX GRAPHICS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1994 Future noncancelable, minimum lease payments as of September 30, 1994 are:
CAPITAL OPERATING LEASES LEASES ------- --------- Year ending September 30: 1995................................................................ $12,026 $ 69,024 1996................................................................ 12,026 72,160 1997................................................................ 8,638 73,416 1998................................................................ -- 24,612 ----- ------ Total minimum lease payments..................................... 32,690 $239,212 ====== Less amount representing interest (15.1%)............................. 7,363 ----- Present value of minimum lease payments.......................... 25,327 Less current installments of obligations under capital leases......... 8,041 ----- Obligations under capital leases, excluding current installments.................................................... $17,286 =====
(4) INCOME TAXES Income tax expense for the year ended September 30, 1994 amounted to $1,939, all of which is current and represents state minimum taxes. There is no federal income tax expense or federal income tax payable in 1994 principally due to utilization of net operating loss carryforwards. The actual tax expense related to income from continuing operations differs from the "expected" tax expense (computed by applying the U.S. corporate tax rate of 34 percent) as follows: Computed "expected" tax expense............................................ $34,918 Change in the beginning of the year balance of the valuation allowance for deferred tax assets...................................................... (36,728) Meals and entertainment.................................................... 1,810 State taxes, net of federal income tax benefit............................. 1,939 -------- $ 1,939 ========
At September 30, 1994, the Company has net operating loss carryforwards for federal income tax purposes of approximately $600,000, which are available to offset future federal taxable income through 2009. Under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50 percent change of ownership. Consequently, use of substantially all of the Company's net operating loss carryforwards against future taxable income in any one year will be limited. The maximum amount of net operating loss carryforwards available in a given year is limited to the product of the Company's value on the date of ownership change and the federal long-term tax-exempt bond rate, plus any limited carryforwards not utilized in prior years. Subsequently, recognized tax benefits relating to the valuation allowance for deferred tax assets as of September 30, 1994, will be allocated as an income tax benefit to be reported in the statement of operations. F-29 90 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICATION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ----- Summary.................................... 3 Risk Factors............................... 5 The Company................................ 13 Use of Proceeds............................ 13 Dividend Policy............................ 13 Capitalization............................. 14 Dilution................................... 15 Selected Consolidated Financial Data....... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 17 Business................................... 25 Management................................. 41 Certain Transactions....................... 47 Principal and Selling Stockholders......... 48 Description of Capital Stock............... 51 Shares Eligible for Future Sale............ 54 Underwriting............................... 56 Legal Matters.............................. 57 Experts.................................... 57 Additional Information..................... 58 Index to Financial Statements.............. F-1 - ------------------
UNTIL , 1996 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 3,000,000 SHARES LOGO COMMON STOCK --------------------------- PROSPECTUS --------------------------- HAMBRECHT & QUIST PRUDENTIAL SECURITIES INCORPORATED AUGUST , 1996 - ------------------------------------------------------------ - ------------------------------------------------------------ 91 APPENDIX -- DESCRIPTION OF GRAPHICS OUTSIDE FLAP OF CENTERFOLD Heading: Raster Graphics is dedicated to providing large-format, on-demand, short-run printing systems. Top left of page has the Rastergraphics logo. Top right of page has a photo of a DCS printer. Caption: DCS Digital Press Center of page has photo of a computer. Caption: PosterShop Image Processing Software Middle left of page has a photo of ink bottles. Bottom of page has five symbols depicting awards earned by the Company. Captions: Editors' Choice Award, Modern Reprographics Top 10 of 1994, DPI Product of the Year 1994, Hot Product 1994 in Electronic Publishing, and IEEE Computer Society's 1994 CG&A Excellence Award INSIDE FLAP OF GATEFOLD FRONT COVER Heading: The Raster Graphics Solution Subheadings: Fast Turnaround, Low Cost for Short Runs, Customized Graphics, High Print Quality and Flexibility Page contains two (2) photos: Center photo is of a stage display. Bottom left photo is of a banner above a conference facility. Captions: Innovative uses for large-format digital printing are emerging as desk-top publishing users become aware of its cost-effectiveness and high impact; Key Applications: Point-of-Purchase Displays, Vinyl and Cloth Banners, Corporate Indentity Graphics, Mall Graphics, Exhibit/Trade Show Graphics, Billboards, Sports/Concert/Event Graphics; and Key Customer Segments: Color Photo Labs, Reprographic Houses, Graphic Arts Service Bureaus, Exhibit Builders, Digital Color Printers, Screen Printers, In-House Print Shops INSIDE FRONT COVER Heading: Key Applications Page contains three (3) photos. Upper right photo is of a point of purchase display. Bottom left is of a bus stand poster. Bottom right is of a banner and exhibit in the lobby of a building. Caption: Point of purchase; posters; exhibits. PROSPECTUS COVER Page contains logo of Rastergraphics on center top of page. PAGE 26 Bottom center of page contains graph with Print Quantity on the x-axis and Image Quality on the y-axis. The graph includes four rectangular boxes which depict the range of print quantities over which Photographic, LFDP, Screen and offset printing is cost effective and the corresponding level of image quality. 92 Caption: Printing Technologies' Cost Effective Range PAGE 27 Center top of page contains chart with four columns. Column Titles: Image Quality, On-Demand, Short Run, Outdoor Applications Row Titles: LFDP, Photograph, Screen, Offset. Check marks depict each printing technology's capabilities. Caption: Printing Technologies' Capabilities PAGE 30 Center top of page contains two drawings of print heads pointing to the media, writing nibs, data source and print head segments. Captions: Raster Graphics Non-Multiplexed Writing Print Head; Multiplexed Writing Print Head. PAGE 31 Center of page contains drawing of six computers, two inkjet printers and a DCS5442 printer. Lines between the computers and printers depict the architecture of the client/server system. Caption: Postershop Client/Server Architecture; Client; Server; DCS5442 PAGE 33 Center top of page contains a graph which has two vertical bars which show the total size of the LFDP market in 1995 and 1998 and the split between consumables and printers. Caption: LFDP Market; Consumables; Printers PAGE 35 Center top of page contains a depiction of the Printer paper transport system showing the ink bottle, inking station, silicon imaging bar print head, paper roll, transport, supply motor, takeup motor and paper roll. Caption: Raster Graphics' Paper Transport System PAGE 36 Center top of page contains a depiction of the printer inking system showing the ink containers, color concentrate, color control unit, inking stations and ink tray. Caption: Raster Graphics' Inking System BACK INSIDE COVER Heading: Raster Graphics Products Page contains three graphics: Top right of page has a photo of a printer. Middle left of page has a drawing of (copy from page 31 description). Bottom left has a photo of ink bottles. Captions: INNOVATIVE FEATURES OF DCS PRINTERS - HIGH PERFORMANCE USING NON-MULTIPLEXED WRITING Print at high speeds -- up to 1,000 square feet per hour -- using the patented print head, the Silicon Imaging Bar. - FIVE-COLOR CAPABILITY 93 Print special spot colors or apply varnish finish using the fifth color station. - DUAL RESOLUTION PRINTING MODE Select appropriate 200 x 200 dpi or 200 x 400 dpi mode to match application and performance needs. - INTEGRATED PRINTER AND SERVER Improve work flow with real-time interaction between the printer and server. ADVANCED IMAGE-PROCESSING SOFTWARE DCS SYSTEM SOFTWARE PosterShop(TM) image-processing software, a true client/server architecture, allows clients anywhere on the network to prepare and preview jobs. High-performance server manages printer(s) queues and RIPs files. PosterShop tools include: - IMAGE SIZE AND PREVIEW Size and preview the large-format digital image before printing. - COLOR ADJUSTMENT Review and adjust colors on the screen and printer. - COLOR CALIBRATION Provide device-independent color when changing media, ink or dot pattern. - FULL SUPPORT FOR POSTSCRIPT LEVEL-2 RIP Screen multiple dot patterns with high speed RIP. CONSUMABLES Raster Graphics' product offering also includes a range of consumables, including specialized process color inks, spot-color inks, varnish, specialized indoor and outdoor papers and vinyls. Most of these consumable products are manufactured specifically for DCS systems, resulting in high-quality printed images. 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID --------- SEC registration fee.............................................. $ 14,276 NASD filing fee................................................... 4,640 Nasdaq National Market listing fee................................ 45,444 Printing and engraving expenses................................... 150,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 250,000 Blue Sky qualification fees and expenses.......................... 10,000 Transfer Agent and Registrar fees................................. 5,000 Miscellaneous fees and expenses................................... 70,640 ------- Total................................................... $850,000 =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements with its directors containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware Law. The indemnification agreements may require the Company, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance, if available on reasonable terms. The Registrant's Amended and Restated Certificate of Incorporation provides for indemnification of its directors and officers to the maximum extent permitted by the Delaware Law, and the Registrant's Bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, the Registrant has entered into Indemnification Agreements with its directors and officers. Reference is also made to the Underwriting Agreement indemnifying officers and directors of the Registrant against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since May 31, 1993, the Company has issued and sold the following securities: 1. In February 1995, the Company issued and sold, pursuant to a Series C Preferred Stock Purchase Agreement, an aggregate of 595,363 shares of Series C Preferred Stock at a purchase price of $2.50 per share for an aggregate offering price of $1,488,408. II-1 95 2. From May 31, 1993 through May 31, 1996, the Company granted options under the 1988 Stock Option Plan to purchase an aggregate of 1,704,190 shares of Common Stock at exercise prices ranging from $0.25 to $7.00 per share to 89 employees, directors and consultants. 3. From May 31, 1993 through May 31, 1996, the Company issued and sold, pursuant to the exercise of options granted under the 1988 Stock Plan, 133,302 shares of Common Stock to 18 employees and consultants for an aggregate purchase price of $60,251.00 in cash. 4. In August 1995, the Company issued and sold, pursuant to an Agreement and Plan of Reorganization, an aggregate of 443,360 shares of Series C Preferred Stock in exchange for an aggregate of 1,108,400 shares of capital stock of Onyx Graphics, Inc., a Delaware Corporation. 5. In January 1996 the Company amended the Agreement and Plan of Reorganization dated August 1995 to allow for early release from escrow of 133,008 shares. The issuances of the securities in Item 1 above was deemed to be exempt from registration under the Act in reliance on Section 4(2) of such Act as a transaction by an issuer not involving any public offering. The issuances described in Items 2 and 3 above were deemed exempt from Registration under the Act in reliance upon Rule 701 promulgated under the Act. In addition, the issuances described in Item 4 above were deemed exempt from registration under the Act in reliance on Section 3(a)(10) of the Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates, options and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION ------- --------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 2.1* Agreement and Plan of Reorganization dated as of June 12, 1995 among Registrant, Onyx Graphics Corporation and Bank of America N.T.S.A., and Amendment dated as of December 31, 1995. 2.2 Form of Agreement and Plan of Merger between Registrant and Raster Graphics, Inc. (a California Corporation) 3.1* Amended and Restated Articles of Incorporation of Registrant (California) 3.2 Amended and Restated Articles of Incorporation of Registrant (California) 3.3 Certificate of Incorporation of Registrant (Delaware) 3.4 Amended and Restated Certificate of Incorporation of Registrant (Delaware) 3.5* Bylaws of Registrant (California) 3.6 Bylaws of Registrant (Delaware) 4.1** Specimen Common Stock Certificate 4.2 Form of Warrant of Registrant for Common Stock 4.3 Form of Warrant for Series B Preferred Stock 5.1 Opinion of Venture Law Group, A Professional Corporation 10.1* 1988 Stock Option Plan 10.2 1996 Stock Plan 10.3* 1996 Directors' Stock Option Plan 10.4* 1996 Employee Stock Purchase Plan 10.5* Form of Indemnification Agreement (California) 10.6 Form of Indemnification Agreement (Delaware) 10.7* Amended and Restated Registration Rights Agreement dated as of August 4, 1995 between Registrant and holders of its Preferred Stock and warrant holders
II-2 96
NUMBER DESCRIPTION ------- --------------------------------------------------------------------------- 10.8* Amended and Restated Product Agreement by and between Registrant, Inc. and Oce Graphics France S.A. dated October 1, 1990 and Amendments July 17, 1991, April 29, 1992, January 13, and September 1, 1994 10.9* Purchase Agreement by and between ENCAD, Inc. and Onyx Graphics Corporation dated March 9, 1996 10.10* Lease Agreement by and between Raster Graphics, Inc. and Principal Mutual Life Insurance Company for facility on 3025 Orchard Parkway, San Jose, CA 10.11*+ Development and Purchase Agreement dated March 16, 1996 11.1 Statement of Computation of Income (Loss) Per Share 21.1* Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of KPMG, Independent Auditors 23.3 Consent of Counsel (included in Exhibit 5.1) 24.1* Power of Attorney 27* Financial Data Schedule
- --------------- * Previously filed. ** To be filed by amendment. + Confidential treatment requested. (b) Financial Statement Schedules II Valuation and qualifying accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on this 12th day of July, 1996. RASTER GRAPHICS, INC. By: /s/ RAKESH KUMAR Rakesh Kumar, President and Chief Executive Officer
SIGNATURE TITLE DATE - ---------------------------------------- -------------------------------------- -------------- /s/ RAKESH KUMAR President, Chief Executive Officer and July 12, 1996 (Rakesh Kumar) Chairman of the Board of Directors (Principal Executive Officer) DENNIS R. Vice President and Chief Financial July 12, 1996 MAHONEY* Officer (Principal Financial and (Dennis R. Mahoney) Accounting Officer) FRANK J. Director July 12, 1996 CAUFIELD* (Frank J. Caufield) CHUCK President, Onyx Graphics and Director July 12, 1996 EDWARDS* (Chuck Edwards) PROMOD HAQUE* Director July 12, 1996 (Promod Haque) LUCIO L. Director July 12, 1996 LANZA* (Lucio L. Lanza) W. JEFFERS Director July 12, 1996 PICKARD* (W. Jeffers Pickard) DELBERT W. YOCAM* Director July 12, 1996 (Delbert W. Yocam) *By /s/ RAKESH KUMAR (Rakesh Kumar, Attorney-in-Fact)
II-4 98 INDEX TO EXHIBITS
NUMBER DESCRIPTION ------- -------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 2.1* Agreement and Plan of Reorganization dated as of June 12, 1995 among Registrant, Onyx Graphics Corporation and Bank of America N.T.S.A., and Amendment dated as of December 31, 1995. 2.2 Form of Agreement and Plan of Merger between Registrant and Raster Graphics, Inc. (a California Corporation) 3.1* Amended and Restated Articles of Incorporation of Registrant (California) 3.2 Amended and Restated Articles of Incorporation of Registrant (California) 3.3 Certificate of Incorporation of Registrant (Delaware) 3.4 Amended and Restated Certificate of Incorporation of Registrant (Delaware) 3.5* Bylaws of Registrant (California) 3.6 Bylaws of Registrant (Delaware) 4.1** Specimen Common Stock Certificate 4.2 Form of Warrant of Registrant for Common Stock 4.3 Form of Warrant for Series B Preferred Stock 5.1 Opinion of Venture Law Group, A Professional Corporation 10.1* 1988 Stock Option Plan 10.2 1996 Stock Plan 10.3* 1996 Directors' Stock Option Plan 10.4* 1996 Employee Stock Purchase Plan 10.5* Form of Indemnification Agreement (California) 10.6 Form of Indemnification Agreement (Delaware) 10.7* Amended and Restated Registration Rights Agreement dated as of August 4, 1995 between Registrant and holders of its Preferred Stock and warrant holders 10.8* Amended and Restated Product Agreement by and between Registrant, Inc. and Oce Graphics France S.A. dated October 1, 1990 and Amendments July 17, 1991, April 29, 1992, January 13, and September 1, 1994 10.9* Purchase Agreement by and between ENCAD, Inc. and Onyx Graphics Corporation dated March 9, 1996 10.10* Lease Agreement by and between Raster Graphics, Inc. and Principal Mutual Life Insurance Company for facility on 3025 Orchard Parkway, San Jose, CA 10.11*+ Development and Purchase Agreement dated March 16, 1996 11.1 Statement of Computation of Income (Loss) Per Share 21.1* Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of KPMG, Independent Auditors 23.3 Consent of Counsel (included in Exhibit 5.1) 24.1* Power of Attorney 27* Financial Data Schedule
- --------------- * Previously filed. ** To be filed by amendment. + Confidential treatment requested. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 RASTER GRAPHICS, INC. 3,000,000 Shares(1) Common Stock UNDERWRITING AGREEMENT _________, 1996 HAMBRECHT & QUIST LLC Prudential Securities Incorporated As Representatives of the Several Underwriters c/o Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Raster Graphics, Inc., a Delaware corporation (herein called the "Company"), proposes to issue and sell 2,000,000 shares of its authorized but unissued Common Stock, $0.001 par value (herein called the "Common Stock"), and the stockholders of the Company named in Schedule II hereto (herein collectively called the "Selling Stockholders") propose to sell an aggregate of 1,000,000 shares of Common Stock of the Company, 0.001 par value (said 3,000,000 shares of Common Stock being herein called the "Underwritten Stock"). The Company proposes to grant to the "Underwriters" (as hereinafter defined) an option to purchase up to 450,000 additional shares of Common Stock (herein called the "Option Stock" and with the Underwritten Stock herein collectively called the "Stock"). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Stockholders severally hereby confirm the agreements made with respect to the purchase of the Stock by the several underwriters named in Schedule I hereto (herein collectively called the "Underwriters"), which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof, for whom you are acting as representatives (herein collectively "you" or the "Representatives"). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the "Commission") a registration statement on Form S-1 (No. 333-06617), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the "Securities Act"), of the Stock. Copies of - ------------------------- (1) Plus an option to purchase from the Company up to 450,000 additional shares to cover over-allotments. 2 such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this Agreement shall mean such registration statement, including all documents incorporated by reference therein and all exhibits and financial statements and all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(B) of the rules and regulations of the Commission with respect to the Stock (herein called a Rule 462(B) registration statement), and in the event of any amendment thereto after the effective date of such registration statement (herein called the "Effective Date"), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(B) registration statement). The term "Prospectus" as used in this Agreement shall mean the prospectus, including the documents incorporated by reference therein, relating to the Stock first filed with the Commission pursuant to Rule 424(B) and Rule 430A (or, if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term "Preliminary Prospectus" as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company hereby represents and warrants as follows: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole (a "Material Adverse Effect")). 2 3 (ii) The Company owns all of the shares of capital stock of each subsidiary of the Company, and each of the Company's subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect. (iii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations or prospects of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iv) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Stock nor instituted or, to the best knowledge of the Company, after due inquiry, threatened instituting proceedings for that purpose. The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (herein called the "Exchange Act"), and the rules and regulations of the Commission thereunder. On the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iv) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (v) The Stock is duly and validly authorized, is (or, in the case of shares of the Stock to be sold by the Company, will be, when issued and sold to the Underwriters as provided herein) duly and validly issued, fully paid and nonassessable and conforms to the description thereof in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Stock as contemplated herein. The authorized capital stock of the Company conforms as to legal matters 3 4 to the description thereof contained in the Prospectus. The shares of Common Stock outstanding prior to the issuance of the Underwritten Stock and, if any, the Option Stock have been duly authorized and are validly issued, fully paid and non-assessable. (vi) Prior to the Closing Date, the Stock to be issued and sold by the Company will be authorized for listing on the Nasdaq National Market (herein called "NNM") upon official notice of issuance. (vii) Except as specifically disclosed in the Registration Statement, the Company does not have outstanding any options to purchase, or any preemptive rights, or other rights to subscribe or to purchase or rights of co-sale, any securities or obligations convertible into, or any contracts or commitments to issue or sell or register for sale, shares of its capital stock or any such options, rights, convertible securities or obligations. (viii) The consolidated financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement ("Financial Statements"), present fairly the financial position and the results of operations of the Company and its subsidiaries, taken as a whole, at the indicated dates and for the indicated periods. The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied through the period involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The selected and summary financial data and the tables set forth under "Results of Operations" and "Quarterly Results of Operations" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section, included in the Registration Statement, present fairly the information shown therein and have been compiled on a basis consistent with the Financial Statements presented in the Registration Statement. (ix) Neither the Company nor any of its subsidiaries is in violation or default under any provision of its charter documents or bylaws, as currently in effect, or any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to which such corporation is a party or by which such corporation or any of its properties is bound or may be affected, except where such violation or default would not have a Material Adverse Effect. (x) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by applicable laws and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, or by general equitable principles. The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not: (i) conflict with, or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any indenture, license, mortgage, lease, franchise, permit, deed of trust or 4 5 other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any such corporation or any of its properties is bound or may be affected, except where such breach, violation or default would not have a Material Adverse Effect, (ii) violate any of the provisions of the charter documents or bylaws of any such corporation, except where such violation would not have a Material Adverse Effect, or (iii) violate any material order, judgment, statute, rule or regulation applicable to any such corporation or of any regulatory, administrative or governmental body or agency having jurisdiction over any such corporation or any of its properties, except where such violation would not have a Material Adverse Effect. (xi) Except as disclosed in the Prospectus, there is not any pending or, to the Company's knowledge, threatened action, suit, claim or proceeding against the Company or any of its subsidiaries or any of their respective officers or any of their properties, assets or rights before any court or governmental agency or body or otherwise which (i) might have a Material Adverse Effect, or (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement; and there are no contracts or documents of the Company or any of its subsidiaries that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been fairly and accurately described in all material respects in the Prospectus and filed as exhibits to the Registration Statement. The contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries nor, to the Company's knowledge any other party, is in breach of or default under any of such contracts. (xii) Except as disclosed in the Prospectus, the Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights described or referred to in the Prospectus as owned or used by it or which are necessary for the conduct of its businesses as described in the Prospectus; the Company has not received any notice of, and the Company has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, might reasonably have a Material Adverse Effect. (xiii) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Stock. (b) Each of the Selling Stockholders hereby represents and warrants as follows: (i) Such Selling Stockholder has good and marketable title to all the shares of Stock to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever, with full right and authority to deliver the same hereunder, subject, in the case of each Selling Stockholder, to the rights of U.S. Stock Transfer Corporation as Custodian (herein called the "Custodian"), and that upon the delivery of and payment for such shares of the Stock hereunder, the several Underwriters will 5 6 receive good and marketable title thereto, free and clear of all liens, encumbrances, equities, security interests and claims whatsoever. (ii) Certificates in negotiable form for the shares of the Stock to be sold by such Selling Stockholder have been placed in custody under a Custody Agreement for delivery under this Agreement with the Custodian; such Selling Stockholder specifically agrees that the shares of the Stock represented by the certificates so held in custody for such Selling Stockholder are subject to the interests of the several Underwriters and the Company, that the arrangements made by such Selling Stockholder for such custody, including the Power of Attorney provided for in such Custody Agreement, are to that extent irrevocable, and that the obligations of such Selling Stockholder shall not be terminated by any act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder (or, in the case of a Selling Stockholder that is not an individual, the dissolution or liquidation of such Selling Stockholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such shares of the Stock hereunder, certificates for such shares of the Stock shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (iii) Each Selling Stockholder beneficially owning in excess of 100,000 shares of Common Stock on the date hereof (as indicated in the Prospectus under "Principal and Selling Stockholders"), has reviewed the Registration Statement and Prospectus and, although such Selling Stockholder has not independently verified the accuracy or completeness of all the information contained therein, nothing has come to the attention of such Selling Stockholder that would lead such Selling Stockholder to believe that (A) on the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, and (B) on the Effective Date the Prospectus contained and, on the Closing Date, contains any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iv) Each Selling Stockholder except those making the representations in paragraph (b)(iii) of this Section 2, represents and warrants to and agrees with each of the several Underwriters that to the extent that any statements or omissions are made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder specifically for use therein, such Preliminary Prospectus did, and the Registration Statement and the Prospectus and any amendments or supplements thereto, when they become effective or are filed with the Commission, as the case may be, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. Such Selling Stockholder has reviewed the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the Registration Statement, and the information regarding such Selling Stockholder set forth therein under the caption "Principal and Selling Stockholders" is complete and accurate. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell 2,000,000 shares of the Underwritten Stock to the several Underwriters, each Selling Stockholder agrees to sell to the several Underwriters the number of shares of Underwritten Stock set forth in Schedule II opposite the name of such Selling Stockholder, and each of the Underwriters agrees to purchase from the Company the respective aggregate number of shares of Stock set forth opposite its name in Schedule I. The price at which such shares of Underwritten Stock shall be sold by the Company and purchased by the several Underwriters shall be $_____ per share. The obligation of each Underwriter to the Company and each of the Selling Stockholders shall be to purchase from the Company and the Selling Stockholders that number of shares of the Underwritten Stock which represents the same proportion of the total number of shares of the Underwritten Stock to 6 7 be sold by each of the Company and the Selling Stockholders pursuant to this Agreement as the number of shares of the Underwritten Stock set forth opposite the name of such Underwriter in Schedule I hereto represents of the total number of shares of the Underwritten Stock to be purchased by all Underwriters pursuant to this Agreement, as adjusted by you in such manner as you deem advisable to avoid fractional shares. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Sections 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company or the Selling Stockholders shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such shares, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company and the Selling Stockholders shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company and the Selling Stockholders shall make arrangements within the 24 hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company or the Selling Stockholders to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company or the Selling Stockholders. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 7 8 (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to 450,000 shares of Option Stock from the Company at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock and payment therefor shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page of any Preliminary Prospectus and the Prospectus and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock filed by the Company (insofar as such information relates to the Underwriters or the terms and conditions upon which they will sell the Stock) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 7:00 A.M., California time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (GDSVF&H), at 7:00 A.M., California time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 7:00 A.M., California time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of 8 9 GDSVF&H, at 7:00 A.M., California time, on the third business day after the exercise of such option. (c) Payment for the stock purchased from the Company shall be made to the Company or its order and payment for the Stock purchased from the Selling Stockholders shall be made to the custodian, for the account of the Selling Stockholders, in each case by one or more certified or official bank check or checks in next day funds (and the Company and the Selling Stockholders agree not to deposit any such check in the bank on which drawn until the day following the date of its delivery to the Company or the Custodian, as the case may be). Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least two business days before the Closing Date, in the case of Underwritten Stock, and at least two business days prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York, 10004 not less than one full business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 P.M., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on the behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company or the Selling Stockholders for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or on any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each of the Company and the Selling Stockholders respectively covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(B) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify the Representatives in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the 9 10 qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company and the Selling Stockholders will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. 10 11 (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended Prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission (including the report on Form SR required by Rule 463 of the Commission under the Securities Act or the Exchange Act. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(A) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. The Selling Stockholders will pay any transfer taxes incident to the transfer to the Underwriters of the shares of Stock being sold by the Selling Stockholders. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the NASD. 11 12 (k) [Intentionally Left Blank] (l) The Company hereby agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, it will not, during the period ending one hundred eighty (180) days after the date of the final Prospectus for the public offering, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise; provided, however, that the foregoing provisions of this paragraph (l) shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued under the stock option and stock purchase plans of the Company (the "Stock Plans"), including Common Stock issued upon the exercise of options granted under the Stock Plans, all as described in footnote (1) to the table under the caption "Capitalization" and under the caption "Stock Option and Incentive Plans" in the Preliminary Prospectus, provided that any such Common Stock is not transferable until after the expiration of such 180-day period. For purposes of this paragraph (l), a sale, offer, or other disposition shall be deemed to include any sale to an institution which can, following such sale, sell Common Stock to the public in reliance on Rule 144A. The Company agrees that it shall not release any shares from any lock-up agreements with stockholders of the Company without the prior written consent of Hambrecht & Quist LLC. (m) Each of the Selling Stockholders agrees that, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, it will not, during the period ending one-hundred eighty (180) days after the date of the final Prospectus for the Public Offering, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, and whether any such transaction relates to Common Stock now owned or hereafter acquired by the undersigned. (n) [Intentionally Left Blank] (o) If at any time during the 25-day period after the Registration Statement becomes effective any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price for the Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you 12 13 concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company and the Selling Stockholders jointly and severally agree to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise, and subject to the provisions of paragraph (f) of this Section 7, the Company and the Selling Stockholders jointly and severally agree to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) as incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(B) registration statement) or any post-effective amendment thereto (including any Rule 462(B) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (A) the indemnity agreements of the Company and the Selling Stockholders contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, (B) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with this Agreement and (C) each Selling Stockholder shall only be liable under this paragraph with respect to (1) information pertaining to 13 14 such Selling Stockholder furnished by or on behalf of such Selling Stockholder expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) facts that would constitute a breach of any representation or warranty of such Selling Stockholder set forth in Section 2(b) hereof. The indemnity agreements of the Company and the Selling Stockholders are contained in this paragraph (a) and the representations and warranties of the Company and the Selling Stockholders contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, and the Selling Stockholders from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(B) registration statement) or any post-effective amendment thereto (including any Rule 462(B) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter expressly for use in the Registration Statement or in any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provisions of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, 14 15 it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then one counsel for the indemnified party or parties shall be entitled to conduct the defense of the indemnified party or parties to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraphs (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraphs (a) or (b) of this Section 7 (i) in such proportion as is 15 16 appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) Neither the Company nor the Selling Stockholders will, without the prior written consent of the Representatives, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not an Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 16 17 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each Underwriter and each controlling person from all liability arising out of such claim, action, suit or proceeding. (f) The liability of each Selling Stockholder under the indemnity and reimbursement agreements contained in the provisions of this Section 7 and Section 11 hereof shall be limited to an amount equal to the net proceeds received by such Selling Stockholder from the public offering price of the Stock sold by such Selling Stockholder hereunder. In addition, no Selling Stockholder shall be liable under the expense, indemnity and contribution agreements of Section 6 and 7 hereof unless and until the Underwriters have made written demand on the Company for payment under such Sections which shall not have been paid by the Company within 45 days after receipt of such demand. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible, including, without limitation, allocating between the Company and the Selling Stockholders the liability resulting in a breach of the representations and warranties of the Company and the Selling Stockholders hereunder. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company and the Selling Stockholders if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or emergency or change in economic or political conditions if the effect of such outbreak, calamity or emergency would, in the Underwriter's reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, the NASD Automated Quotation System ("Nasdaq") or the NNM, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the occurrence of any change in the business or properties of the Company which in the Underwriter's reasonable opinion materially and adversely impairs the investment quality of the securities, (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (vi) declaration of a banking moratorium by either federal or New York State authorities or (vii) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company or the Selling Stockholder to the Underwriters and no liability of the Underwriters to the Company or the Selling Stockholders; provided, however, that in the event of any such termination the Company and the Selling Stockholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the 17 18 Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company and the Selling Stockholders of its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by GDSVF&H. (c) You shall have received from Venture Law Group, A Professional Corporation, counsel for the Company, and from Wilson Sonsini Goodrich & Rosati, patent counsel for the Company, opinions, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in Annex A and Annex B hereto, respectively, and if Option Stock is purchased at any date after the Closing Date, additional opinions from each such counsel addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which was required by law to have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition, results of operations or prospects of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) the Company and its subsidiaries, taken as a whole, do not have any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or 18 19 known threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which property of the Company of any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company and the Selling Stockholders herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable, in your reasonable judgment, to make a public offering of the Stock or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, on behalf of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vi) of paragraph (d) of this Section 9 are true and correct, and the statements included in clause (vii) of paragraph (d) of this Section 9 are true and correct with respect to the representations and warranties of the Company. (f) You shall have received from Ernst & Young LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or its subsidiaries which, in your reasonable judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Ernst & Young LLP a letter stating that their review of the Company's and its subsidiaries' systems of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's 19 20 financial statements as of _________________, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic Form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been duly authorized for listing by the NNM upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors, officers and beneficial holders of more than 1% of the outstanding Common Stock agreements in a form reasonably satisfactory to the Representatives that such stockholders will not, without the prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters, during the period ending 180 days after the date of the final Prospectus for the public offering, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clauses (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, and whether any such transaction relates to Common Stock then owned or thereafter acquired by such holder. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if GDSVF&H, counsel for the Underwriters, shall be reasonably satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and the Selling Stockholders. Any such termination shall be without liability of the Company or the Selling Stockholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Stockholders; provided, however, that (i) in the event of such termination, the Company and the Selling Stockholders agree to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company and the Selling Stockholders will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with transactions contemplated hereby. 20 21 10. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 7 of this Agreement, the Company and the Selling Stockholders hereby agree to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwith-standing the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 10 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Stockholders and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company, the Selling Stockholders and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 12. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed, copied or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104, Attention: Daniel H. Case, III (with a copy to the General Counsel); and if to the Company, shall be mailed, telegraphed or delivered to it at its office, Attention: Rakesh Kumar (with a copy to The Venture Law Group, A Professional Corporation, Attention: Michael W. Hall, Esq.). All notices given by telegraph shall be promptly confirmed by letter. 13. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or the Selling Stockholders or their respective directors or officers, and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraphs (e) and (m) of Section 6 hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. 21 22 Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, RASTER GRAPHICS, INC. By: -------------------------------------- President and Chief Executive Officer SELLING STOCKHOLDERS: By: -------------------------------------, Attorney-in-Fact The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC Prudential Securities Incorporated By Hambrecht & Quist LLC By: ------------------------------- Gregory J. Ingram Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 23 SCHEDULE I UNDERWRITERS
Underwriters Number of Shares ------------ to be Purchased --------------- Hambrecht & Quist LLC ----------- Prudential Securities Incorporated ----------- Total............................................... ===========
24 SCHEDULE II SELLING STOCKHOLDERS
Selling Stockholders Number of Shares to be Sold ---------- TOTAL ===========
25 ANNEX A Matters to be Covered in the Opinion of Venture Law Group, A Professional Corporation Counsel for the Company (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation and in good standing in ___________, ____________, and _____________, and is so qualified and in good standing in each jurisdiction in which, to its knowledge, the ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; (ii) The Company owns of record, and to our knowledge owns beneficially all of the outstanding shares of capital stock of each subsidiary of the Company, and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (iii) The authorized capital stock of the Company consists of __________ shares of Preferred Stock, $__ par value, none of which are issued and outstanding, and ___________ shares of Common Stock, $__ par value, of which there are issued and outstanding of record __________ shares (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof); proper corporate proceedings have been taken validly to authorize such authorized capital stock; all of the outstanding shares of such capital stock (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof) have been duly and validly issued and are fully paid and nonassessable; any Option Stock purchased on or after the Closing Date, when issued and delivered to and paid for by the Underwriters as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassessable; no preemptive rights or rights of refusal exist with respect to the Stock, or the issue and sale thereof, pursuant to the Restated Certificate of Incorporation or Bylaws of the Company; and, to the best of such counsel's knowledge, there are no contractual preemptive rights, rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Stock by the Company or the sale of Stock by the Selling Stockholders that have not been waived. Except as disclosed in the Registration Statement, to the best of such counsel's knowledge the Company does not have outstanding any options to purchase, or any other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, rights, convertible securities or obligations; (iv) The Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge after due inquiry, no stop order 26 suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner within the time period required by such Rule 424(b). (v) The Registration Statement at the Effective Date and the Prospectus and each amendment and supplement thereto (except as to the financial statements and schedules and other financial data contained therein and matters related to patents, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the Securities Act, the Exchange Act and with the rules and regulations of the Commission thereunder; (vi) The information required to be set forth in the Registration Statement in answer to Items 9 and 10 (insofar as Item 10 relates to the beneficial ownership of shares of Common Stock of the Company by partners of such counsel) and 11(c) of Form S-1 is, to the best of such counsel's knowledge, accurately and adequately set forth therein in all material respects or no response is required with respect to such Items; and to such counsel's knowledge, the description of the Company's stock option plans and the options granted and which may be granted thereunder set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the rules and regulations of the Commission thereunder; (vii) To the best of such counsel's knowledge, there are no franchises, contracts, leases, documents or legal proceedings, pending or threatened, which in the opinion of such counsel are of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described and filed as required; such franchises, contracts, leases, documents and legal proceedings as are summarized in the Registration Statement or the Prospectus fairly and correctly present the information disclosed with respect thereto in all material aspects; (viii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company; (ix) The Underwriting Agreement has been duly executed and delivered by or on behalf of the Selling Stockholders; and the Custody Agreement between the Selling Stockholders and ______________, as Custodian, and the Power of Attorney referred to in such Custody Agreement have been duly executed and delivered by or on behalf of each of the Selling Stockholders; (x) The issue and sale by the Company of the shares of Stock sold by the Company as contemplated by the Underwriting Agreement will not conflict with, or result in a breach of, the Restated Certificate of Incorporation or Bylaws of the Company or any material agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their assets are bound or any applicable law or regulation, or so far as is known to such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their assets are bound; 27 (xi) To such counsel's knowledge, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company are set forth in the Prospectus under the heading "Principal and Selling Stockholders" or have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; (xii) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws or under the rules of the National Association of Securities Dealers, Inc. in connection with the purchase and distribution of the Stock by the Underwriters. (xiii) The Stock to be sold under the Agreement to the Underwriters is duly authorized for quotation on the Nasdaq National Market. (xiv) Good and marketable title to the shares of Stock sold by the Selling Stockholders under the Underwriting Agreement, free and clear of all liens, encumbrances, equities, security interest and claims, has been transferred to the Underwriters who have severally purchased such shares of Stock under the Underwriting Agreement, assuming for the purpose of this opinion that the Underwriters purchased the same in good faith without notice of any adverse claims; and (xv) Based insofar as factual matters with respect to the Stock to be sold by the Selling Stockholders are concerned solely upon representations of the Selling Stockholders, the accuracy of which such counsel have no reason to question, no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of Delaware, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel. In addition to the matters set forth above, counsel rendering the foregoing opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads them to believe that the Registration Statement (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances as under which they were made, not misleading. 28 ANNEX B Matters to be Covered in the Opinion of Wilson Sonsini Goodrich & Rosati Patent Counsel for the Company Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, or other proprietary information or materials and: (i) The statements in the Registration Statement and the Prospectus under the captions "Risk Factors-Risks Associated with Intellectual Property" and "Business-Intellectual Property," to the best of such counsel's knowledge and belief, are accurate and complete statements or summaries of the matters therein set forth and nothing has come to such counsel's attention that causes such counsel to believe that the above-described portions of the Registration Statement and the Prospectus contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) To the best of such counsel's knowledge and except as referred to in the Prospectus under the captions and disclosures referred to in paragraph (i) above, there are no legal or governmental proceedings pending relating to patent rights that could materially affect the Company's business and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or others; (iii) To the best of such counsel's knowledge, the Company is not infringing or otherwise violating any patents, trade secrets, trademarks, service marks or other proprietary information or materials of others, which in the judgment of such counsel could affect materially the Company's business, and to the best of such counsel's knowledge there are no infringements by others of any of the Company's patents, trade secrets or other proprietary information or materials which in the judgment of such counsel could affect materially the use thereof by the Company; and (iv) To the best of such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to use all patents, trade secrets, or other proprietary information or materials necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. EX-2.2 3 FORM OF AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.2 [NOTE: THE SHARE NUMBERS REFLECT COMPLETION OF A PROPOSED 5-FOR-1 REVERSE STOCK SPLIT] AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER dated as of July , 1996 (the "AGREEMENT") is between Raster Graphics, Inc., a California corporation ("RASTER GRAPHICS CALIFORNIA"), and Raster Graphics, Inc., a Delaware corporation and a wholly-owned subsidiary of Raster Graphics California ("RASTER GRAPHICS DELAWARE"). Raster Graphics Delaware and Raster Graphics California are sometimes referred to herein as the "CONSTITUENT CORPORATIONS." RECITALS A. Raster Graphics Delaware is a corporation duly organized and existing under the laws of the State of Delaware and has an authorized capital of 14,030,000, $0.001 par value, 8,000,000 of which are designated "Common Stock" and 6,030,000 of which are designated "Preferred Stock." Of such authorized shares of Preferred Stock, 320,000 shares are designated "Series A Preferred Stock," 1,050,000 shares are designated "Series B Preferred Stock" and 4,660,000 shares are designated "Series C Preferred Stock." As of the date hereof, 1,000 shares of Raster Graphics Delaware Common Stock were issued and outstanding, all of which are held by Raster Graphics California, and no shares of Raster Graphics Delaware Preferred Stock were issued and outstanding. B. Raster Graphics California is a corporation duly organized and existing under the laws of the State of California and has an authorized capital of 14,030,000, none of which has any par value. Of such authorized capital, 8,000,000 shares are designated "'Common Stock" and 6,030,000 shares are designated "Preferred Stock." Of such authorized shares of Preferred Stock, 320,000 shares are designated "Series A Preferred Stock," 1,050,000 shares are designated "Series B Preferred Stock" and 4,660,000 shares are designated "Series C Preferred Stock." As of the date hereof, 446,277 shares of Common Stock, 320,000 shares of Series A Preferred Stock, 1,024,000 shares of Series B Preferred Stock and 4,548,731 shares of Series C Preferred Stock were issued and outstanding. C. The Board of Directors of Raster Graphics California has determined that, for the purpose of effecting the reincorporation of Raster Graphics California in the State of Delaware, it is advisable and in the best interests of Raster Graphics California and its shareholders that Raster Graphics California merge with and into Raster Graphics Delaware upon the terms and conditions herein provided. D. The respective Boards of Directors of Raster Graphics Delaware and Raster Graphics California, the shareholders of Raster Graphics California and the sole -1- 2 shareholder of Raster Graphics Delaware have approved this Agreement and have directed that this Agreement be executed by the undersigned officers. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, Raster Graphics Delaware and Raster Graphics California hereby agree, subject to the terms and conditions hereinafter set forth, as follows: I. MERGER 1.1 Merger. In accordance with the provisions of this Agreement, the Delaware General Corporation Law and the California General Corporation Law, Raster Graphics California shall be merged with and into Raster Graphics Delaware (the "MERGER"), the separate existence of Raster Graphics California shall cease and Raster Graphics Delaware shall be, and is herein sometimes referred to as, the "SURVIVING CORPORATION," and the name of the Surviving Corporation shall be "Raster Graphics, Inc." 1.2 Filing and Effectiveness. The Merger shall become effective when the following actions shall have been completed: (a) This Agreement and the Merger shall have been adopted and approved by the shareholders of each Constituent Corporation in accordance with the requirements of the Delaware General Corporation Law and the California General Corporation Law; (b) All of the conditions precedent to the consummation of the Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof; (c) An executed Agreement of Merger or an executed counterpart of this Agreement and related required certificates meeting the requirements of the Delaware General Corporation Law shall have been filed with the Secretary of State of the State of Delaware; and (d) An executed Agreement of Merger or an executed counterpart of this Agreement and related required certificates meeting the requirements of the California General Corporation Law shall have been filed with the Secretary of State of the State of California. The date and time when the Merger shall become effective, as aforesaid, is herein called the "EFFECTIVE DATE OF THE MERGER." 1.3 Effect of the Merger. Upon the Effective Date of the Merger, the separate existence of Raster Graphics California shall cease and Raster Graphics Delaware, as the Surviving Corporation, (a) shall continue to possess all of its assets, rights, powers and property as constituted immediately prior to the Effective Date of the Merger, (b) shall be subject to all actions previously taken by its and Raster Graphics California's Boards of Directors, (c) shall succeed, without other transfer, to all of the assets, rights, powers and -2- 3 property of Raster Graphics California in the manner as more fully set forth in Section 259 of the Delaware General Corporation Law, (d) shall continue to be subject to all of its debts, liabilities and obligations as constituted immediately prior to the Effective Date of the Merger, and (e) shall succeed, without other transfer, to all of the debts, liabilities and obligations of Raster Graphics California in the same manner as if Raster Graphics Delaware had itself incurred them, all as more fully provided under the applicable provisions of the Delaware General Corporation Law and the California General Corporation Law. II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2.1 Certificate of Incorporation. The Certificate of Incorporation of Raster Graphics Delaware shall be the Certificate of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.2 Bylaws. The Bylaws of Raster Graphics Delaware as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.3 Directors and Officers. The directors and officers of Raster Graphics Delaware immediately prior to the Effective Date of the Merger shall be the directors and officers of the Surviving Corporation until their successors shall have been duly elected and qualified or until as otherwise provided by law, the Certificate of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. III. MANNER OF CONVERSION OF STOCK 3.1 Raster Graphics California Common Stock. Upon the Effective Date of the Merger, each one share of Raster Graphics California Common Stock issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by the Constituent Corporations, the holder of such share or any other person, be converted into and exchanged for one fully paid and nonassessable share of Common Stock, $0.001 par value, of Raster Graphics Delaware. 3.2 Raster Graphics California Preferred Stock. Upon the Effective Date of the Merger, each one share of Raster Graphics California Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, be converted into and exchanged for one fully paid and nonassessable share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of Raster Graphics Delaware, $0.001 par value, respectively, having such rights, preferences and privileges as set forth in the Certificate of Incorporation of Raster Graphics Delaware, which shares of Preferred Stock shall be convertible into shares of Raster Graphics Delaware's Common Stock, -3- 4 $.001 par value, according to the terms of the Certificate of Incorporation of Raster Graphics Delaware. 3.3 Raster Graphics California Options, Stock Purchase Rights, Convertible Securities and Warrants. Upon the Effective Date of the Merger, Raster Graphics Delaware shall assume the obligations of Raster Graphics California under Raster Graphics California's 1988 Stock Option Plan, 1988 Stock Purchase Plan and all other employee benefit plans of Raster Graphics California, including outstanding stock options of Raster Graphics California. Each outstanding and unexercised option, other right to purchase or security convertible into Raster Graphics California Common Stock or Preferred Stock or warrant to purchase Raster Graphics California Common Stock or Preferred Stock shall become an option, right to purchase, security convertible into or warrant to purchase Raster Graphics Delaware's Common Stock or Preferred Stock, respectively, on the basis of one share of Raster Graphics Delaware's Common Stock or Preferred Stock, for each one share of Raster Graphics California Common Stock or Preferred Stock, respectively, issuable pursuant to any such option, stock purchase right, convertible security or warrant, on the same terms and conditions and at an aggregate exercise price equal to the exercise price applicable to any such Raster Graphics California option, stock purchase right, other convertible security or warrant at the Effective Date of the Merger. A number of shares of Raster Graphics Delaware's Common Stock and Preferred Stock shall be reserved for issuance upon the exercise of options, stock purchase rights, convertible securities and warrants (including Preferred Stock) on the basis of one share of Raster Graphics Delaware Common Stock and Preferred Stock for one share of Raster Graphics California Common Stock and Preferred Stock so reserved immediately prior to the Effective Date of the Merger. 3.4 Raster Graphics Delaware Common Stock. Upon the Effective Date of the Merger, each share of Common Stock, $0.001 par value, of Raster Graphics Delaware issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by Raster Graphics Delaware, the holder of such shares or any other person, be canceled and returned to the status of authorized but unissued shares. 3.5 Exchange of Certificates. After the Effective Date of the Merger, each holder of an outstanding certificate representing shares of Raster Graphics California Common Stock or Preferred Stock may, at such shareholder's option, surrender the same for cancellation to the transfer agent and registrar for the Common Stock of Raster Graphics Delaware, as exchange agent (the "EXCHANGE AGENT"), and each such holder shall be entitled to receive in exchange therefor a certificate or certificates representing the number of shares of the appropriate class and series of Raster Graphics Delaware's capital stock into which the surrendered shares were converted as herein provided. Until so surrendered, each outstanding certificate theretofore representing shares of Raster Graphics California capital stock shall be deemed for all purposes to represent the number of whole shares of the appropriate class and series of Raster Graphics Delaware's capital -4- 5 stock into which such shares of Raster Graphics California capital stock were converted in the Merger. The registered owner on the books and records of Raster Graphics Delaware or the Exchange Agent of any such outstanding certificate shall, until such certificate shall have been surrendered for transfer or conversion or otherwise accounted for to Raster Graphics Delaware or the Exchange Agent, have and be entitled to exercise any voting and other rights with respect to and to receive dividends and other distributions upon the shares of capital stock of Raster Graphics Delaware represented by such outstanding certificate as provided above. Each certificate representing capital stock of Raster Graphics Delaware so issued in the Merger shall bear the same legends, if any, with respect to the restrictions on transferability as the certificates of Raster Graphics California so converted and given in exchange therefor, unless otherwise determined by the Board of Directors of Raster Graphics Delaware in compliance with applicable laws. If any certificate for shares of Raster Graphics Delaware stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer, that such transfer otherwise be proper and that the person requesting such transfer pay to the Exchange Agent any transfer or other taxes payable by reason of the issuance of such new certificate in a name other than that of the registered holder of the certificate surrendered or establish to the satisfaction of Raster Graphics Delaware that such tax has been paid or is not payable. IV. GENERAL 4.1 Covenants of Raster Graphics Delaware. Raster Graphics Delaware covenants and agrees that it will, on or before the Effective Date of the Merger: (a) File any and all documents with the California Franchise Tax Board necessary for the assumption by Raster Graphics Delaware of all of the franchise tax liabilities of Raster Graphics California; and (b) Take such other actions as may be required by the California General Corporation Law. 4.2 Further Assurances. From time to time, as and when required by Raster Graphics Delaware or by its successors or assigns, there shall be executed and delivered on behalf of Raster Graphics California such deeds and other instruments, and there shall be taken or caused to be taken by Raster Graphics Delaware and Raster Graphics California such further and other actions as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by Raster Graphics Delaware the title to and possession of all the property, interests, assets, rights, privileges, immunities, -5- 6 powers, franchises and authority of Raster Graphics California and otherwise to carry out the purposes of this Agreement, and the officers and directors of Raster Graphics Delaware are fully authorized in the name and on behalf of Raster Graphics California or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 4.3 Abandonment. At any time before the Effective Date of the Merger, this Agreement may be terminated and the Merger may be abandoned for any reason whatsoever by the Board of Directors of either Raster Graphics California or Raster Graphics Delaware, or both, notwithstanding the approval of this Agreement by the shareholders of Raster Graphics California or by the sole shareholder of Raster Graphics Delaware, or by both. 4.4 Amendment. The Boards of Directors of the Constituent Corporations may amend this Agreement at any time prior to the filing of this Agreement (or certificate in lieu thereof) with the Secretaries of State of the States of California and Delaware, provided that an amendment made subsequent to the adoption of this Agreement by the shareholders of either Constituent Corporation shall not: (a) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Corporation, (b) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (c) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class of shares or series of capital stock of such Constituent Corporation. 4.5 Registered Office. The registered office of the Surviving Corporation in the State of Delaware is located at The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, Delaware 19801, County of New Castle, and The Corporation Trust Company is the registered agent of the Surviving Corporation at such address. 4.6 FIRPTA Notification. (a) On or before the Effective Date of the Merger, Raster Graphics California shall deliver to Raster Graphics Delaware, as agent for the shareholders of Raster Graphics California, a properly executed statement in such form as reasonably requested by counsel for Raster Graphics California and conforming to the requirements of Treasury Regulation Section 1.897-2(h)(1)(i) (the "STATEMENT"). Raster Graphics Delaware shall, upon request, provide a copy thereof to any person that was a shareholder of Raster Graphics California immediately prior to the Merger. In consequence of the approval of the Merger by the shareholders of Raster Graphics California, as provided in Recital D hereof, (i) such shareholders shall be considered to have requested that the Statement be delivered to Raster Graphics Delaware as their agent and (ii) Raster Graphics Delaware shall be considered to have received a copy of the Statement at the request of the Raster Graphics California shareholders for purposes of satisfying Raster Graphics Delaware's obligations under Treasury Regulation Section 1.1445-2(c)(3). -6- 7 (b) Raster Graphics California shall deliver to the Internal Revenue Service a notice regarding the Statement in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2). 4.7 Expenses. Each party to the transactions contemplated by this Agreement (including, without limitation, Raster Graphics California, Raster Graphics Delaware and their respective shareholders) shall pay its own expenses, if any, incurred in connection with such transactions. 4.8 Tax Opinion a Condition Precedent. The Merger shall not be consummated unless, on or prior to the Effective Date of the Merger, Raster Graphics California receives from Venture Law Group, A Professional Corporation ("VLG"), a written opinion that the Merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. Such opinion shall be contingent on receipt by VLG of (a) certain representations from Raster Graphics California and Raster Graphics Delaware requested by VLG and (b) delivery by Raster Graphics California's shareholders as shall be designated by VLG of "Shareholder Continuity of Interest Certificates" in such form as requested by VLG. 4.9 Agreement. Executed copies of this Agreement will be on file at the principal place of business of the Surviving Corporation at 3025 Orchard Parkway, San Jose, California 95134, and copies thereof will be furnished to any shareholder of either Constituent Corporation, upon request and without cost. 4.10 Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware and, so far as applicable, the merger provisions of the California General Corporation Law. 4.11 Counterparts. In order to facilitate the filing and recording of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. -7- 8 IN WITNESS WHEREOF, this Agreement, having first been approved by resolutions of the Boards of Directors of Raster Graphics Delaware and Raster Graphics California, is hereby executed on behalf of each of such two corporations and attested by their respective officers thereunto duly authorized. RASTER GRAPHICS, INC., a Delaware corporation By:_______________________________ Name:_____________________________ Title:____________________________ ATTEST: ___________________________ Michael W. Hall, Secretary RASTER GRAPHICS, INC., a California corporation By:_______________________________ Name:_____________________________ Title:____________________________ ATTEST: ___________________________ Michael W. Hall, Secretary -8- 9 RASTER GRAPHICS, INC. (Disappearing Corporation) OFFICERS' CERTIFICATE Rakesh Kumar and Michael W. Hall certify that: 1. They are the President and Chief Executive Officer and the Secretary, respectively, of Raster Graphics, Inc., a corporation organized under the laws of the State of California. 2. The corporation has authorized two classes of stock, designated "Common Stock" and "Preferred Stock." Three series of Preferred Stock have been authorized, designated "Series A Preferred," "Series B Preferred" and "Series C Preferred Stock." 3. There were 446,277 shares of Common Stock, 320,000 shares of Series A Preferred Stock, 1,024,000 shares of Series B Preferred Stock and 4,548,731 shares of Series C Preferred Stock, outstanding as of the record date (the "Record Date") of the shareholders' meeting at which the Agreement and Plan of Merger attached hereto (the "Merger Agreement") was approved. 4. The principal terms of the Merger Agreement were approved by the Board of Directors and by the vote of a number of shares of each class and series of stock which equaled or exceeded the vote required. 5. The number of shares voting in favor of the amendment equaled or exceeded the vote required, such required vote being (i) a majority of the outstanding shares of Common Stock and (ii) a majority of the outstanding shares of Series A, Series B and Series C Preferred Stock, voting together as a separate class. Rakesh Kumar and Michael W. Hall further declare under penalty of perjury under the laws of the State of California that each has read the foregoing certificate and knows the contents thereof and that the same is true of their own knowledge. Executed in San Jose, California on ___________________________ , 1996. _________________________________________ Rakesh Kumar, President and Chief Executive Officer _________________________________________ Michael W. Hall, Secretary -9- 10 RASTER GRAPHICS, INC. (Surviving Corporation) OFFICERS' CERTIFICATE Rakesh Kumar and Michael W. Hall certify that: 1. They are the President and Chief Executive Officer and the Secretary, respectively, of Raster Graphics, Inc., a corporation organized under the laws of the State of Delaware. 2. The corporation has authorized two classes of stock, designated "Common Stock" and "Preferred Stock." 3. There are 1,000 shares of Common Stock outstanding and entitled to vote on the Agreement and Plan of Merger attached hereto (the "Merger Agreement"). There are no shares of Preferred Stock outstanding. 4. The principal terms of the Merger Agreement were approved by the Board of Directors and by the vote of a number of shares of each class and series of stock which equaled or exceeded the vote required. 5. The percentage vote required was more than 50% of the votes entitled to be cast by holders of outstanding shares of Common Stock. Rakesh Kumar and Michael W. Hall further declare under penalty of perjury under the laws of the State of Delaware that each has read the foregoing certificate and knows the contents thereof and that the same is true of their own knowledge. Executed in San Jose, California on , 1996. ________________________________________ Rakesh Kumar, President and Chief Executive Officer ________________________________________ Michael W. Hall, Secretary -10- EX-3.2 4 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF RASTER GRAPHICS, INC. RAKESH KUMAR and MICHAEL W. HALL certify that: 1. They are the President and Secretary, respectively, of RASTER GRAPHICS, INC., a California corporation. 2. The Articles of Incorporation of this corporation are amended and restated to read in their entirety as follows: "I. The name of this corporation is Raster Graphics, Inc. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. Upon the effective date of the filing of the Amended and Restated Articles of Incorporation, every five (5) shares of this corporation's outstanding Common Stock and Preferred Stock shall be converted and reconstituted into one (1) share of the like class and series of the corporation's capital stock from which such shares were converted (the "STOCK SPLIT"). In lieu of the issuance of fractional shares, the corporation shall pay to the holder thereof in cash an amount equal to the fraction of a share to which such holder is entitled multipled by the fair market value of such share, as determined by the corporation's Board of Directors. All share amounts and amounts per share set forth in the Amended and Restated Articles of Incorporation have been appropriately adjusted to reflect the Stock Split. (a) Classes of Stock. This corporation is authorized to issue two classes of shares, designated "Preferred Stock" and "Common Stock," respectively. The total number of shares which this corporation shall have authority to issue is Fourteen Million Thirty Thousand (14,030,000), none of which has any par value. The number of shares of Preferred Stock authorized to be issued is Six Million Thirty Thousand (6,030,000), and the number of shares of Common Stock authorized to be issued is Eight Million (8,000,000). The Preferred Stock shall 2 be issued in three series. The first series of Preferred Stock shall be designated Series A Preferred Stock (the "Series A Preferred") and shall consist of Three Hundred Twenty Thousand (320,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. The second series of Preferred Stock shall be designated Series B Preferred Stock (the "Series B Preferred") and shall consist of One Million Fifty Thousand (1,050,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. The third series of Preferred Stock shall be designated Series C Preferred Stock (the "Series C Preferred") and shall consist of Four Million Six Hundred-Sixty Thousand (4,660,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. (b) Rights, Preferences, Privileges and Restrictions of Preferred Stock. A statement of the rights, preferences, privileges and restrictions granted to or imposed on the Series A Preferred, Series B Preferred and Series C Preferred and the holders thereof is as follows: (1) Dividends. (aa)(i) The holders of outstanding Series C Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.15 per share of Series C Preferred, per annum, before any cash dividend is paid on Series A Preferred, Series B Preferred or Common Stock. After payment to the holders of Series C Preferred of the amounts as aforesaid, the holders of outstanding Series A and Series B Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.20 and $0.20 per share of Series A and Series B Preferred, respectively, per annum, before any cash dividend is paid on Common Stock. Such dividend or distribution may be payable annually or otherwise as the Board of Directors may from time to time determine. Dividends or distributions may be declared and paid upon shares of Series A Preferred or Series B Preferred in any fiscal year of the corporation only if dividends shall have been paid on or declared and set apart upon all shares of Series C Preferred at the annual rate as aforesaid. Dividends or distributions may be declared and paid upon shares of Series A Preferred or Series B Preferred in any fiscal year of the corporation only if dividends shall have been paid on or declared and set apart upon all shares of Preferred Stock at such annual rates. The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (ii) In the event this corporation shall determine, after payment of dividends to holders of Preferred Stock at the annual rates set forth above, to pay cash dividends to the holders of Common Stock, such dividends may be paid to holders of Common Stock only if equal dividends are also paid to holders of Preferred Stock (based upon the number of shares of Common Stock into which such shares of Preferred Stock are then convertible) at the same time. The right to such dividends on shares of Common Stock and Preferred Stock shall not be cumulative and no rights shall accrue to holders of shares of Common Stock and Preferred 2 3 Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividends bear or accrue interest. (bb) In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though the holders of the Preferred Stock were the holders of the number of shares of Common Stock of the corporation into which their respective shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (2) Voting Rights. (aa) Each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation and, except as provided in paragraph (bb) below, shall vote with holders of the Common Stock upon any matter submitted to a vote of shareholders, except those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number. (bb) The holders of shares of Series C Preferred shall be entitled, voting as a separate class, to elect two members of the Board of Directors of this corporation. The holders of shares of Series A Preferred and Series B Preferred shall be entitled, voting as a single class, to elect two members of the Board of Directors of this corporation. The holders of shares of Common Stock shall be entitled, voting as a separate class, to elect two members of the Board of Directors of this corporation. The holders of shares of Preferred Stock and Common Stock shall be entitled, voting as a single class, to elect the remaining directors of this corporation. In the case of any vacancy in the office of a director elected by the holders of a particular class or series of stock, the vacancy may be filled only by the vote of the holders of such class or series of stock. Any director who shall have been elected by the holders of a particular class or series of stock may be removed without cause by, and only by, the applicable vote of the holders of shares of such class or series of stock. The provisions of this paragraph (2)(bb) shall expire and be of no further force or effect immediately upon conversion of the outstanding shares of Preferred Stock pursuant to the provisions of paragraph (3)(aa)(ii) below. (3) Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (aa) Right to Convert. 3 4 (i) Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for the Preferred Stock, into that number of fully-paid and non-assessable shares of Common Stock that is equal, in the case of Series A Preferred, to $2.50 divided by the Conversion Price for such series (as hereinafter defined) , in the case of Series B Preferred, to $2.50 divided by the Conversion Price for such series (as hereinafter defined) and, in the case of Series C Preferred, to $2.50 divided by the Conversion Price for such series (as hereinafter defined). The Conversion Prices for the Series A, Series B and Series C Preferred shall initially be $2.50, $2.50 and $2.50, respectively, subject to adjustment as provided herein. (The number of shares of Common Stock into which each share of Series A, Series B or Series C Preferred may be converted is hereinafter referred to as the "Conversion Rate" for each such series.) Upon any decrease or increase in the Conversion Price or the Conversion Rate for a series, as described in this Section (b)(3), the Conversion Rate or Conversion Price for such series, as the case may be, shall be appropriately increased or decreased. (ii) Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate for such share immediately upon the consummation of the corporation's sale of Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, pursuant to an underwritten firm commitment public offering, provided that the price per share is not less than $7.50 (net of underwriter commissions and expenses and subject to appropriate adjustment for all stock splits, dividends, subdivisions, combinations, recapitalizations and the like) and the gross aggregate offering price is not less than $10,000,000. (bb) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the then fair market value of such fractional shares as determined by the Board of Directors of the corporation. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to paragraph (b)(3)(aa)(ii) above, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent; provided further, however, that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless either the certificates evidencing such shares of Preferred Stock are delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. 4 5 The corporation shall, as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock, plus any declared and unpaid dividends on the converted Preferred Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date; provided, however, that if the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of the sale of such securities. (cc) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this paragraph (3)(cc), the following definitions shall apply: (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean, with respect to a particular series of Preferred Stock, the first date on which the first share of such series of Preferred Stock was first issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities (other than the shares of Preferred Stock) convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common" shall mean all shares of Common Stock issued (or, pursuant to paragraph (3)(cc)(iii), deemed to be issued) by the corporation after the Original Issue Date of a particular series of Preferred Stock, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of Preferred Stock; (B) to officers, directors and employees of, or consultants to, the corporation pursuant to stock grants, option plans, purchase plans or other employee stock incentive programs or arrangements approved by the Board of Directors or upon exercise of options or warrants granted to such parties pursuant to any such plan or arrangement; 5 6 (C) as a dividend or distribution on Preferred Stock or pursuant to any event for which adjustment is made pursuant to paragraph (3)(cc)(vi), (vii) or (viii) hereof; (D) to lenders in connection with any loan or lease financing transaction pursuant to arrangements approved by the Board of Directors or upon exercise of options or warrants granted to such parties pursuant to any such arrangement; (E) upon exercise of warrants for the purchase of an aggregate of 124,444 shares of Common Stock at an exercise price of $1.50 per share issued by the corporation on November 28, 1988 and March 30, 1989 in connection with consulting services provided to the corporation by the holders of such warrants; (F) upon exercise of warrants for the purchase of up to an aggregate of 161,309 shares of Common Stock at an exercise price of $1.50 per share issued by the corporation on December 19, 1989 and March 6, 1990 in connection with the sale and issuance of the corporation's Series B Preferred to certain investors; and (G) to persons or entities in connection with any corporate partnership or reorganizations approved by the Board of Directors, or upon exercise of options or warrants granted to such parties pursuant to any such transaction. (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular share of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common unless the consideration per share for an Additional Share of Common issued or deemed to be issued by the corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue, for such share of Preferred Stock. (iii) Deemed Issue of Additional Shares of Common. (1) Options and Convertible Securities. In the event the corporation at any time or from time to time after the Original Issue Date of a particular series of Preferred Stock shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities or exercise of such Options, shall be deemed to be Additional Shares of Common issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common shall not be deemed to have been issued unless the consideration per share (determined pursuant to paragraph (3)(cc)(v) hereof) of such Additional Shares of Common would be less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue, or 6 7 such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common are deemed to be issued: (A) no further adjustment in the Conversion Price of such series of Preferred Stock shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price of such series of Preferred Stock computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) no readjustment pursuant to clause (B) above shall have the effect of increasing the Conversion Price of such series of Preferred Stock to an amount which exceeds the lower of (i) the Conversion Price of such series of Preferred Stock on the original adjustment date, or (ii) the Conversion Price of such series of Preferred Stock that would have resulted from any issuance of Additional Shares of Common between the original adjustment date and such readjustment date; (D) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Prices computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon such expiration, be recomputed as if: (a) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the corporation for the issue of such exercised Options plus the consideration actually received by the corporation upon such exercise or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the corporation upon such conversion or exchange, and (b) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the corporation for the Additional Shares of Common deemed to have been then issued was the consideration actually received by the corporation for the issue of such exercised Options, plus the consideration deemed to have been received by the corporation (determined pursuant to paragraph (3)(cc)(v)) 7 8 upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Conversion Prices shall be made until the expiration or exercise of all such Options issued on the same date, whereupon such adjustment shall be made in the same manner provided in clause (C) above; and (F) if such record date shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Conversion Prices which became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Conversion Prices shall be adjusted pursuant to this paragraph (3)(cc)(iii) as of the actual date of their issuance. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common. In the event this corporation shall issue Additional Shares of Common (including Additional Shares of Common deemed to be issued pursuant to paragraph (3)(cc)(iii)) without consideration or for a consideration per share less than the Conversion Price for a particular series of Preferred Stock in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the corporation for the total number of Additional Shares of Common so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common so issued; and provided further that, for the purposes of this paragraph (3)(cc)(iv), all shares of Common Stock issuable upon exercise, conversion or exchange of outstanding Options or Convertible Securities, as the case may be, shall be deemed to be outstanding, and immediately after any Additional Shares of Common are deemed issued pursuant to paragraph (3)(cc)(iii), such Additional Shares of Common shall be deemed to be outstanding. (v) Determination of Consideration. For purposes of this subsection (b)(3)(cc), the consideration received by the corporation for the issue of any Additional Shares of Common shall be computed as follows: (1) Cash and Property. Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and 8 9 (C) in the event Additional Shares of Common are issued together with other shares or securities or other assets of the corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (2) Options and Convertible Securities. The consideration per share received by the corporation for Additional Shares of Common deemed to have been issued pursuant to paragraph (3)(cc)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustments for Stock Dividends and for Subdivisions or Combinations of Common. In the event that this corporation at any time or from time to time after the Original Issue Date of a particular series of Preferred Stock shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or if the outstanding shares of Common Stock shall be subdivided (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock) into a greater number of shares of Common Stock, the Conversion Prices in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated (by reclassification or otherwise) into a lesser number of shares of Common Stock, the Conversion Prices in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately increased. (vii) Adjustments for Other Distributions. In the event the corporation at any time or from time to time makes or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not otherwise referred to in subsection (b)(3)(cc)(vi), then and in each such event provision shall be made so that the holders of Preferred Stock shall be 9 10 entitled to receive a proportionate share of any such distribution as though they were holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. (viii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Prices then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before that change. (dd) No Impairment. The corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section (b)(3) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (ee) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section (b)(3), the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (ff) Notices of Record Date. In the event that this corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; 10 11 (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of this corporation. (gg) Reservation of Stock Issuable Upon Conversion. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (4) Liquidation Preference. In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, distributions to the shareholders of the corporation shall be made in the following manner: (aa) The holders of the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred, Series B Preferred or Common Stock by reason of their ownership of such stock, the amount of $2.50 per share for each share of Series C Preferred then held by them (appropriately adjusted in each case for any combinations, or stock distributions or dividends with respect to such shares) plus, in addition, an amount equal to all declared but unpaid dividends, if any, on the shares of Series C Preferred then held by them. If, upon the occurrence of such event, the assets and property legally available to be distributed among the 11 12 holders of the Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount aforesaid, then the entire assets and property of the corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock pro rata based on the number of shares of Series C Preferred then held. (bb) After payment has been made to the holders of the Series C Preferred of the full preferential amounts to which they shall be entitled, if any, as aforesaid, the holders of the Series A Preferred and Series B Preferred shall be entitled to receive, out of the remaining assets (up to a maximum of $3,360,000), prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership of such stock: (i) for each share of Series A Preferred then held by them the amount per share equal to $560,000 divided by the number of shares of Series A Preferred then outstanding; and (ii) for each share of Series B Preferred then held by them the amount per share equal to $2,800,000 divided by the number of shares of Series B Preferred then outstanding, plus, in addition, an amount equal to all declared but unpaid dividends, if any, on the respective shares of Series A Preferred and Series B Preferred then held by them. If, upon the occurrence of such event, the assets and property legally available to be distributed among the holders of the Series A Preferred and Series B Preferred shall be insufficient to permit the payment to such holders of the full preferential amount aforesaid, then the entire remaining assets and property of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred and Series B Preferred as follows: (1) as among the series of Series A Preferred and Series B Preferred, one-sixth (1/6) of the remaining assets and property of the corporation legally available for distribution shall be distributed to holders of Series A Preferred and five-sixths (5/6) of the remaining assets and property of the corporation legally available for distribution shall be distributed to holders of Series B Preferred, and (2) as among the holders of Series A Preferred and Series B Preferred Stock of any one series, the aggregate amount of assets and property available for distribution to such holders in accordance with subparagraph (1) herein shall be distributed among such holders pro rata based on the number of shares then held; and, no amount shall be paid or set apart for payment on any series of Series A Preferred or Series B Preferred unless, at the same time, amounts in proportion to the respective preferential amounts to which the other series of Preferred Stock are entitled (in accordance with subparagraph (1) herein) shall be paid or set apart for payment. (cc) After payment has been made to the holders of the Series A Preferred, Series B Preferred and Series C Preferred of the full preferential amounts to which they shall be entitled, if any, as aforesaid, the holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be entitled to receive, out of the remaining assets (up to a maximum of $6,750,000), prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership of such stock: 12 13 (i) For each share of Series C Preferred then held by them the amount per share equal to the Series C Incremental Amount (as hereinafter defined) divided by the number of shares of Series C Preferred then outstanding. For purposes of Section (b)(4), the "Series C Incremental Amount" shall equal $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock issuable upon conversion of the then outstanding Series C Preferred and the denominator of which shall be the sum of the number of shares of Common Stock then outstanding plus the number of shares of Common Stock issuable upon conversion of the then outstanding Preferred Stock; (ii) For each share of Series A Preferred then held by them the amount per share equal to $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) less the Series C Incremental Amount, with such result multiplied by a fraction of one-sixth (1/6) (such product hereinafter referred to as the "Series A Residual Amount"), and then divided by the number of shares of Series A Preferred then outstanding; provided, that the maximum Series A Residual Amount distributable to the holders of Series A Preferred Stock pursuant to this paragraph shall not exceed $2.50 multiplied by the number of shares of Series A Preferred then held and any Series A Residual Amount in excess of such maximum (the "Series A Excess Amount") shall be distributed to holders of Series B Preferred as provided in, and subject to the conditions of, paragraph (4)(cc)(iii); and (iii) For each share of Series B Preferred then held by them the amount per share equal to $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) less the Series C Incremental Amount, with such result multiplied by a fraction of five-sixths (5/6), with the resulting product added to the Series A Excess Amount (if any) and such sum then divided by the number of shares of Series B Preferred then outstanding; provided, that the maximum amount distributable to the holders of Series B Preferred Stock pursuant to this paragraph shall not exceed $12.50 multiplied by the number of shares of Series B Preferred then held; and no amount shall be paid or set apart for payment on any series of Series A Preferred, Series B Preferred or Series C Preferred unless, at the same time, amounts in proportion to the respective preferential amounts to which the other series of Preferred Stock are entitled as aforesaid shall be paid or set apart for payment. (dd) After payment has been made to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled, if any, as aforesaid, any remaining proceeds shall be distributed ratably to the holders of the Common Stock and Preferred Stock based upon the number of shares of Common Stock then held (with each share of Preferred Stock being treated as that number of shares of Common Stock into which such share of Preferred Stock is at that time convertible). 13 14 (ee) For purposes of this Section (b)(4), a merger of the corporation with or into any other corporation or corporations (except for a reincorporation of the Company into another jurisdiction by means of a merger), or the merger of any other corporation or corporations into the corporation, in which merger the shareholders of the corporation receive distributions in cash or securities of another corporation or corporations as a result of such merger (unless the shareholders of this corporation hold more than a majority of the voting equity securities of the surviving corporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation shall be treated as a liquidation, dissolution or winding up of the corporation. (ff) Notwithstanding Sections 4(aa), 4(bb), 4(cc), and 4(dd), as authorized by Section 402.5(c) of the California Corporations Code, the provisions of Sections 502 and 503 of the California Corporations Code shall not apply with respect to repurchases by the corporation of shares of Common issued to or held by employees, directors or consultants of the corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of such repurchase between the corporation and such persons. (5) Covenants. (aa) In addition to any other rights provided by law, so long as any Series A Preferred or Series B Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority (determined on the basis of assumed conversion of all Preferred Stock into Common Stock) of the outstanding shares of Series A Preferred and Series B Preferred, voting as a class: (i) amend or repeal any provision of, or add any provision to, this corporation's Articles of Incorporation or Bylaws if such action would materially and adversely alter or change the rights, preferences, privileges or restrictions of any outstanding Series A Preferred or Series B Preferred; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred; (iii) reclassify any shares of Common Stock into shares having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred; 14 15 (iv) pay or declare any dividend on any shares of Common Stock (except dividends payable solely in shares of Common Stock) while any Series A Preferred or Series B Preferred remains outstanding or apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of Common Stock, except from officers, directors, employees or consultants of the corporation upon termination of the employment or consulting relationship between the corporation and such persons pursuant to the terms of restrictive stock agreements providing for such repurchase of such shares of Common Stock between the corporation and such persons; (v) merge with or into any other corporation (other than a wholly-owned subsidiary of this corporation) resulting in the exchange of 50% of the outstanding shares of this corporation for securities issued, or caused to be issued, by the acquiring corporation or its subsidiary, or sell or otherwise transfer in a single transaction or a series of related transactions all or substantially all assets of this corporation; or (vi) increase the authorized number of shares of Series A Preferred or Series B Preferred. (bb) In addition to any other rights provided by law, so long as any Series C Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of Series C Preferred, voting separately as a class: (i) amend or repeal any provision of, or add any provision to, this corporation's Articles of Incorporation or Bylaws if such action would materially and adversely alter or change the rights, preferences, privileges or restrictions of any outstanding Series C Preferred; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred; (iii) reclassify any shares of Common Stock into shares having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred; (iv) pay or declare any dividend on any shares of Common Stock (except dividends payable solely in shares of Common Stock) while any Series C Preferred remains outstanding or apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of Common Stock, except from officers, directors, employees or consultants of the corporation upon 15 16 termination of the employment or consulting relationship between the corporation and such persons pursuant to the terms of restrictive stock agreements providing for such repurchase of such shares of Common Stock between the corporation and such persons; (v) merge with or into any other corporation (other than a wholly-owned subsidiary of this corporation) resulting in the exchange of 50% of the outstanding shares of this corporation for securities issued, or caused to be issued, by the acquiring corporation or its subsidiary, or sell or otherwise transfer in a single transaction or a series of related transactions all or substantially all assets of this corporation; (vi) increase the authorized number of shares of Series C Preferred; (vii) do any act or thing which would result in taxation of the holders of shares of Series C Preferred under Section 305 of the Internal Revenue Code of 1986, as amended (or any successor provision); or (viii) amend the Bylaws of the corporation to increase the number of authorized number of directors to more than seven (7). (6) Residual Rights. All rights accruing to the outstanding shares of this corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. IV. (a) Limitation of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be limited to the fullest extent permissible under California law. (b) Indemnification of Directors and Officers. This corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under California law. (c) Repeal or Modification. Any repeal of modification of the foregoing provisions of this Article IV shall not adversely affect any right of indemnification or limitation of liability of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification." 3. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of 16 17 the Corporations Code. The total number of outstanding shares of each class of stock entitled to vote with respect to the foregoing amendment was 2,231,385 shares of Common Stock, 1,600,000 shares of Series A Preferred Stock, 5,120,000 shares of Series B Preferred Stock, and 22,743,656 shares of Series C Preferred Stock. The number of shares voting in favor of the amendment and restatement equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common and Preferred Stock voting together. IN WITNESS WHEREOF, the undersigned have executed this certificate this ___ day of July, 1996. -------------------------- RAKESH KUMAR, President -------------------------- MICHAEL W. HALL, Secretary The undersigned declare under penalty or perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at San Jose, California on July __, 1996. -------------------------- RAKESH KUMAR, President -------------------------- MICHAEL W. HALL, Secretary 17 EX-3.3 5 CERTIFICATE OF INCORPORATION OF REGISTRANT 1 EXHIBIT 3.3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF RASTER GRAPHICS, INC. ARTICLE I The name of the corporation is Raster Graphics, Inc. (the "CORPORATION"). ARTICLE II The address of the corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (a) Classes of Stock. This corporation is authorized to issue two classes of shares, designated "Preferred Stock" and "Common Stock," respectively. The total number of shares which this corporation shall have authority to issue is Seventy Million One Hundred-Fifty Thousand (70,150,000) shares. The number of shares of Preferred Stock authorized to be issued is Thirty Million One Hundred-Fifty Thousand (30,150,000), par value $.001 per share, and the number of shares of Common Stock authorized to be issued is Forty Million (40,000,000), par value $.001 per share. The Preferred Stock shall be issued in three series. The first series of Preferred Stock shall be designated Series A Preferred Stock (the "Series A Preferred") and shall consist of One Million Six Hundred Thousand (1,600,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. The second series of Preferred Stock shall be designated Series B Preferred Stock (the "Series B Preferred") and shall consist of Five Million Two Hundred-Fifty Thousand (5,250,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. The third series of Preferred Stock shall be designated Series C Preferred Stock (the "Series C Preferred") and shall consist of Twenty-Three Million Three Hundred Thousand (23,300,000) shares with the rights, preferences, privileges and restrictions set forth in paragraph (b) below. 2 (b) Rights, Preferences and Restrictions of Preferred Stock. A statement of the rights, preferences, privileges and restrictions granted to or imposed on the Series A Preferred, Series B Preferred and Series C Preferred and the holders thereof is as follows: (1) Dividends. (aa)(i) The holders of outstanding Series C Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.03 per share of Series C Preferred, per annum, before any cash dividend is paid on Series A Preferred, Series B Preferred or Common Stock. After payment to the holders of Series C Preferred of the amounts as aforesaid, the holders of outstanding Series A and Series B Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.04 and $0.04 per share of Series A and Series B Preferred, respectively, per annum, before any cash dividend is paid on Common Stock. Such dividend or distribution may be payable annually or otherwise as the Board of Directors may from time to time determine. Dividends or distributions may be declared and paid upon shares of Series A Preferred or Series B Preferred in any fiscal year of the corporation only if dividends shall have been paid on or declared and set apart upon all shares of Series C Preferred at the annual rate as aforesaid. Dividends or distributions may be declared and paid upon shares of Series A Preferred or Series B Preferred in any fiscal year of the corporation only if dividends shall have been paid on or declared and set apart upon all shares of Preferred Stock at such annual rates. The right to such dividends on shares of Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (ii) In the event this corporation shall determine, after payment of dividends to holders of Preferred Stock at the annual rates set forth above, to pay cash dividends to the holders of Common Stock, such dividends may be paid to holders of Common Stock only if equal dividends are also paid to holders of Preferred Stock (based upon the number of shares of Common Stock into which such shares of Preferred Stock are then convertible) at the same time. The right to such dividends on shares of Common Stock and Preferred Stock shall not be cumulative and no rights shall accrue to holders of shares of Common Stock and Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividends bear or accrue interest. (bb) In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though the holders of the Preferred Stock were the holders of the number of shares of -2- 3 Common Stock of the corporation into which their respective shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (2) Voting Rights. (aa) Each holder of shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted on the record date for the vote or consent of shareholders and shall have voting rights and powers equal to the voting rights and powers of the Common Stock. The holder of each share of Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation and, except as provided in paragraph (bb) below, shall vote with holders of the Common Stock upon any matter submitted to a vote of shareholders, except those matters required by law to be submitted to a class vote. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number. (bb) The holders of shares of Series C Preferred shall be entitled, voting as a separate class, to elect two members of the Board of Directors of this corporation. The holders of shares of Series A Preferred and Series B Preferred shall be entitled, voting as a single class, to elect two members of the Board of Directors of this corporation. The holders of shares of Common Stock shall be entitled, voting as a separate class, to elect two members of the Board of Directors of this corporation. The holders of shares of Preferred Stock and Common Stock shall be entitled, voting as a single class, to elect the remaining directors of this corporation. In the case of any vacancy in the office of a director elected by the holders of a particular class or series of stock, the vacancy may be filled only by the vote of the holders of such class or series of stock. Any director who shall have been elected by the holders of a particular class or series of stock may be removed without cause by, and only by, the applicable vote of the holders of shares of such class or series of stock. The provisions of this paragraph (2)(bb) shall expire and be of no further force or effect immediately upon conversion of the outstanding shares of Preferred Stock pursuant to the provisions of paragraph (3)(aa)(ii) below. (3) Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (aa) Right to Convert. (i) Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the corporation or any transfer agent for the Preferred Stock, into that number of fully-paid and non-assessable shares of Common Stock that is equal, in the case -3- 4 of Series A Preferred, to $0.50 divided by the Conversion Price for such series (as hereinafter defined) , in the case of Series B Preferred, to $0.50 divided by the Conversion Price for such series (as hereinafter defined) and, in the case of Series C Preferred, to $0.50 divided by the Conversion Price for such series (as hereinafter defined). The Conversion Prices for the Series A, Series B and Series C Preferred shall initially be $0.50, $0.50 and $0.50, respectively, subject to adjustment as provided herein. (The number of shares of Common Stock into which each share of Series A, Series B or Series C Preferred may be converted is hereinafter referred to as the "Conversion Rate" for each such series.) Upon any decrease or increase in the Conversion Price or the Conversion Rate for a series, as described in this Section (b)(3), the Conversion Rate or Conversion Price for such series, as the case may be, shall be appropriately increased or decreased. (ii) Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate for such share immediately upon the consummation of the corporation's sale of Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, pursuant to an underwritten firm commitment public offering, provided that the price per share is not less than $1.50 (net of underwriter commissions and expenses and subject to appropriate adjustment for all stock splits, dividends, subdivisions, combinations, recapitalizations and the like) and the gross aggregate offering price is not less than $10,000,000. (bb) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the then fair market value of such fractional shares as determined by the Board of Directors of the corporation. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to paragraph (b)(3)(aa)(ii) above, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent; provided further, however, that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless either the certificates evidencing such shares of Preferred Stock are delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates. The corporation shall, as soon as practicable after such delivery, or after such agreement and indemnification, issue and deliver at such office to such holder of Preferred -4- 5 Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock, plus any declared and unpaid dividends on the converted Preferred Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date; provided, however, that if the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of the sale of such securities. (cc) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this paragraph (3)(cc), the following definitions shall apply: (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean, with respect to a particular series of Preferred Stock, the first date on which the first share of such series of Preferred Stock was first issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities (other than the shares of Preferred Stock) convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common" shall mean all shares of Common Stock issued (or, pursuant to paragraph (3)(cc)(iii), deemed to be issued) by the corporation after the Original Issue Date of a particular series of Preferred Stock, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of Preferred Stock; (B) to officers, directors and employees of, or consultants to, the corporation pursuant to stock grants, option plans, purchase plans or other employee stock incentive programs or arrangements approved by the Board -5- 6 of Directors or upon exercise of options or warrants granted to such parties pursuant to any such plan or arrangement; (C) as a dividend or distribution on Preferred Stock or pursuant to any event for which adjustment is made pursuant to paragraph (3)(cc)(vi), (vii) or (viii) hereof; (D) to lenders in connection with any loan or lease financing transaction pursuant to arrangements approved by the Board of Directors or upon exercise of options or warrants granted to such parties pursuant to any such arrangement; (E) upon exercise of warrants for the purchase of an aggregate of 622,220 shares of Common Stock at an exercise price of $0.30 per share issued by the corporation on November 28, 1988 and March 30, 1989 in connection with consulting services provided to the corporation by the holders of such warrants; (F) upon exercise of warrants for the purchase of up to an aggregate of 806,547 shares of Common Stock at an exercise price of $0.30 per share issued by the corporation on December 19, 1989 and March 6, 1990 in connection with the sale and issuance of the corporation's Series B Preferred to certain investors; and (G) to persons or entities in connection with any corporate partnership or reorganizations approved by the Board of Directors, or upon exercise of options or warrants granted to such parties pursuant to any such transaction. (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular share of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common unless the consideration per share for an Additional Share of Common issued or deemed to be issued by the corporation is less than the Conversion Price in effect on the date of, and immediately prior to such issue, for such share of Preferred Stock. (iii) Deemed Issue of Additional Shares of Common. (1) Options and Convertible Securities. In the event the corporation at any time or from time to time after the Original Issue Date of a particular series of Preferred Stock shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the -6- 7 exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities or exercise of such Options, shall be deemed to be Additional Shares of Common issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common shall not be deemed to have been issued unless the consideration per share (determined pursuant to paragraph (3)(cc)(v) hereof) of such Additional Shares of Common would be less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common are deemed to be issued: (A) no further adjustment in the Conversion Price of such series of Preferred Stock shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price of such series of Preferred Stock computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) no readjustment pursuant to clause (B) above shall have the effect of increasing the Conversion Price of such series of Preferred Stock to an amount which exceeds the lower of (i) the Conversion Price of such series of Preferred Stock on the original adjustment date, or (ii) the Conversion Price of such series of Preferred Stock that would have resulted from any issuance of Additional Shares of Common between the original adjustment date and such readjustment date; (D) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Prices computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon such expiration, be recomputed as if: (a) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the corporation for the issue of such exercised Options plus the consideration actually received by the -7- 8 corporation upon such exercise or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the corporation upon such conversion or exchange, and (b) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the corporation for the Additional Shares of Common deemed to have been then issued was the consideration actually received by the corporation for the issue of such exercised Options, plus the consideration deemed to have been received by the corporation (determined pursuant to paragraph (3)(cc)(v)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (E) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Conversion Prices shall be made until the expiration or exercise of all such Options issued on the same date, whereupon such adjustment shall be made in the same manner provided in clause (C) above; and (F) if such record date shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Conversion Prices which became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Conversion Prices shall be adjusted pursuant to this paragraph (3)(cc)(iii) as of the actual date of their issuance. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common. In the event this corporation shall issue Additional Shares of Common (including Additional Shares of Common deemed to be issued pursuant to paragraph (3)(cc)(iii)) without consideration or for a consideration per share less than the Conversion Price for a particular series of Preferred Stock in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the corporation for the total number of Additional Shares of Common so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common so issued; and provided further that, for the purposes of this paragraph (3)(cc)(iv), all shares of Common Stock issuable upon exercise, conversion or exchange of outstanding Options or Convertible Securities, as the case may be, shall be deemed to be outstanding, and immediately after any Additional Shares of Common are deemed issued pursuant to paragraph (3)(cc)(iii), such Additional Shares of Common shall be deemed to be outstanding. -8- 9 (v) Determination of Consideration. For purposes of this subsection (b)(3)(cc), the consideration received by the corporation for the issue of any Additional Shares of Common shall be computed as follows: (1) Cash and Property. Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; and (C) in the event Additional Shares of Common are issued together with other shares or securities or other assets of the corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (2) Options and Convertible Securities. The consideration per share received by the corporation for Additional Shares of Common deemed to have been issued pursuant to paragraph (3)(cc)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustments for Stock Dividends and for Subdivisions or Combinations of Common. In the event that this corporation at any time or from time to time after the Original Issue Date of a particular series of Preferred Stock shall declare or pay, without consideration, any dividend on the Common Stock payable in -9- 10 Common Stock or in any right to acquire Common Stock for no consideration, or if the outstanding shares of Common Stock shall be subdivided (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock) into a greater number of shares of Common Stock, the Conversion Prices in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated (by reclassification or otherwise) into a lesser number of shares of Common Stock, the Conversion Prices in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately increased. (vii) Adjustments for Other Distributions. In the event the corporation at any time or from time to time makes or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not otherwise referred to in subsection (b)(3)(cc)(vi), then and in each such event provision shall be made so that the holders of Preferred Stock shall be entitled to receive a proportionate share of any such distribution as though they were holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. (viii) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Prices then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before that change. (dd) No Impairment. The corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section (b)(3) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. -10- 11 (ee) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section (b)(3), the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (ff) Notices of Record Date. In the event that this corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, this corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). -11- 12 Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of this corporation. (gg) Reservation of Stock Issuable Upon Conversion. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (4) Liquidation Preference. In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, distributions to the shareholders of the corporation shall be made in the following manner: (aa) The holders of the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred, Series B Preferred or Common Stock by reason of their ownership of such stock, the amount of Fifty Cents ($0.50) per share for each share of Series C Preferred then held by them (appropriately adjusted in each case for any combinations, or stock distributions or dividends with respect to such shares) plus, in addition, an amount equal to all declared but unpaid dividends, if any, on the shares of Series C Preferred then held by them. If, upon the occurrence of such event, the assets and property legally available to be distributed among the holders of the Series C Preferred shall be insufficient to permit the payment to such holders of the full preferential amount aforesaid, then the entire assets and property of the corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock pro rata based on the number of shares of Series C Preferred then held. (bb) After payment has been made to the holders of the Series C Preferred of the full preferential amounts to which they shall be entitled, if any, as aforesaid, the holders of the Series A Preferred and Series B Preferred shall be entitled to receive, out of the remaining assets (up to a maximum of $3,360,000), prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership of such stock: (i) for each share of Series A Preferred then held by them the amount per share equal to $560,000 divided by the number of shares of Series A Preferred then outstanding; and -12- 13 (ii) for each share of Series B Preferred then held by them the amount per share equal to $2,800,000 divided by the number of shares of Series B Preferred then outstanding, plus, in addition, an amount equal to all declared but unpaid dividends, if any, on the respective shares of Series A Preferred and Series B Preferred then held by them. If, upon the occurrence of such event, the assets and property legally available to be distributed among the holders of the Series A Preferred and Series B Preferred shall be insufficient to permit the payment to such holders of the full preferential amount aforesaid, then the entire remaining assets and property of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred and Series B Preferred as follows: (1) as among the series of Series A Preferred and Series B Preferred, one-sixth (1/6) of the remaining assets and property of the corporation legally available for distribution shall be distributed to holders of Series A Preferred and five-sixths (5/6) of the remaining assets and property of the corporation legally available for distribution shall be distributed to holders of Series B Preferred, and (2) as among the holders of Series A Preferred and Series B Preferred Stock of any one series, the aggregate amount of assets and property available for distribution to such holders in accordance with subparagraph (1) herein shall be distributed among such holders pro rata based on the number of shares then held; and, no amount shall be paid or set apart for payment on any series of Series A Preferred or Series B Preferred unless, at the same time, amounts in proportion to the respective preferential amounts to which the other series of Preferred Stock are entitled (in accordance with subparagraph (1) herein) shall be paid or set apart for payment. (cc) After payment has been made to the holders of the Series A Preferred, Series B Preferred and Series C Preferred of the full preferential amounts to which they shall be entitled, if any, as aforesaid, the holders of the Series A Preferred, Series B Preferred and Series C Preferred shall be entitled to receive, out of the remaining assets (up to a maximum of $6,750,000), prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership of such stock: (i) For each share of Series C Preferred then held by them the amount per share equal to the Series C Incremental Amount (as hereinafter defined) divided by the number of shares of Series C Preferred then outstanding. For purposes of Section (b)(4), the "Series C Incremental Amount" shall equal $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock issuable upon conversion of the then outstanding Series C Preferred and the denominator of which shall be the sum of the number of shares of Common Stock then outstanding plus the number of shares of Common Stock issuable upon conversion of the then outstanding Preferred Stock; -13- 14 (ii) For each share of Series A Preferred then held by them the amount per share equal to $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) less the Series C Incremental Amount , with such result multiplied by a fraction of one-sixth (1/6) (such product hereinafter referred to as the "Series A Residual Amount"), and then divided by the number of shares of Series A Preferred then outstanding; provided, that the maximum Series A Residual Amount distributable to the holders of Series A Preferred Stock pursuant to this paragraph shall not exceed $0.50 multiplied by the number of shares of Series A Preferred then held and any Series A Residual Amount in excess of such maximum (the "Series A Excess Amount") shall be distributed to holders of Series B Preferred as provided in, and subject to the conditions of, paragraph (4)(cc)(iii); and (iii) For each share of Series B Preferred then held by them the amount per share equal to $6,750,000 (or, if lesser, the entire remaining assets and property of the corporation legally available for distribution after giving effect to the provisions of paragraphs (b)(4)(aa) and (b)(4)(bb)) less the Series C Incremental Amount, with such result multiplied by a fraction of five-sixths (5/6), with the resulting product added to the Series A Excess Amount (if any) and such sum then divided by the number of shares of Series B Preferred then outstanding; provided, that the maximum amount distributable to the holders of Series B Preferred Stock pursuant to this paragraph shall not exceed $2.50 multiplied by the number of shares of Series B Preferred then held; and no amount shall be paid or set apart for payment on any series of Series A Preferred, Series B Preferred or Series C Preferred unless, at the same time, amounts in proportion to the respective preferential amounts to which the other series of Preferred Stock are entitled as aforesaid shall be paid or set apart for payment. (dd) After payment has been made to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled, if any, as aforesaid, any remaining proceeds shall be distributed ratably to the holders of the Common Stock and Preferred Stock based upon the number of shares of Common Stock then held (with each share of Preferred Stock being treated as that number of shares of Common Stock into which such share of Preferred Stock is at that time convertible). (ee) For purposes of this Section (b)(4), a merger of the corporation with or into any other corporation or corporations, or the merger of any other corporation or corporations into the corporation, in which merger the shareholders of the corporation receive distributions in cash or securities of another corporation or corporations as a result of such merger (unless the shareholders of this corporation hold more than a majority of the voting equity securities of the surviving corporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation shall be treated as a liquidation, dissolution or winding up of the corporation. -14- 15 (5) Covenants. (aa) In addition to any other rights provided by law, so long as any Series A Preferred or Series B Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority (determined on the basis of assumed conversion of all Preferred Stock into Common Stock) of the outstanding shares of Series A Preferred and Series B Preferred, voting as a class: (i) amend or repeal any provision of, or add any provision to, this corporation's Articles of Incorporation or Bylaws if such action would materially and adversely alter or change the rights, preferences, privileges or restrictions of any outstanding Series A Preferred or Series B Preferred; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred; (iii) reclassify any shares of Common Stock into shares having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series A Preferred or Series B Preferred; (iv) pay or declare any dividend on any shares of Common Stock (except dividends payable solely in shares of Common Stock) while any Series A Preferred or Series B Preferred remains outstanding or apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of Common Stock, except from officers, directors, employees or consultants of the corporation upon termination of the employment or consulting relationship between the corporation and such persons pursuant to the terms of restrictive stock agreements providing for such repurchase of such shares of Common Stock between the corporation and such persons; (v) merge with or into any other corporation (other than a wholly-owned subsidiary of this corporation) resulting in the exchange of 50% of the outstanding shares of this corporation for securities issued, or caused to be issued, by the acquiring corporation or its subsidiary, or sell or otherwise transfer in a single transaction or a series of related transactions all or substantially all assets of this corporation; or -15- 16 (vi) increase the authorized number of shares of Series A Preferred or Series B Preferred. (bb) In addition to any other rights provided by law, so long as any Series C Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of the outstanding shares of Series C Preferred, voting separately as a class: (i) amend or repeal any provision of, or add any provision to, this corporation's Articles of Incorporation or Bylaws if such action would materially and adversely alter or change the rights, preferences, privileges or restrictions of any outstanding Series C Preferred; (ii) authorize or issue shares of any class of stock having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of this corporation having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred; (iii) reclassify any shares of Common Stock into shares having any preference or priority as to dividends, voting rights, liquidation preferences or assets superior to or on a parity with any such preference or priority of the Series C Preferred; (iv) pay or declare any dividend on any shares of Common Stock (except dividends payable solely in shares of Common Stock) while any Series C Preferred remains outstanding or apply any of its assets to the redemption, retirement, purchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any shares of Common Stock, except from officers, directors, employees or consultants of the corporation upon termination of the employment or consulting relationship between the corporation and such persons pursuant to the terms of restrictive stock agreements providing for such repurchase of such shares of Common Stock between the corporation and such persons; (v) merge with or into any other corporation (other than a wholly-owned subsidiary of this corporation) resulting in the exchange of 50% of the outstanding shares of this corporation for securities issued, or caused to be issued, by the acquiring corporation or its subsidiary, or sell or otherwise transfer in a single transaction or a series of related transactions all or substantially all assets of this corporation; (vi) increase the authorized number of shares of Series C Preferred; -16- 17 (vii) do any act or thing which would result in taxation of the holders of shares of Series C Preferred under Section 305 of the Internal Revenue Code of 1986, as amended (or any successor provision); or (viii) amend the Bylaws of the corporation to increase the number of authorized number of directors to more than seven (7). (6) Residual Rights. All rights accruing to the outstanding shares of this corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. ARTICLE V The Board of Directors of the corporation is expressly authorized to make, alter or repeal Bylaws of the corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. ARTICLE VI Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the corporation. ARTICLE VII (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation, or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. (C) Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VIII The corporation is to have perpetual existence. -17- 18 ARTICLE IX The number of directors which will constitute the whole Board of Directors of the corporation shall be designated in the Bylaws of the corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to any statutory provision) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors in the Bylaws of the corporation. ARTICLE XI "Listing Event" as used in this Amended and Restated Certificate of Incorporation shall mean the Corporation becoming a "Listed Corporation" within the meaning of Section 301.5 of the California Corporations Code. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (i) The Board of Directors of the Corporation shall divide the directors into three classes, as nearly equal in number as reasonably possible with the term of office of the first class to expire at the 1997 annual meeting of stockholders or any special meeting in lieu thereof, the term of office of the second class to expire at the 1998 annual meeting of stockholders or any special meeting in lieu thereof and the term of office of the third class to expire at the 1999 annual meeting of stockholders or any special meeting in lieu thereof. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. (ii) Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term or his or her prior death, retirement, removal or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall -18- 19 if reasonably possible be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. Notwithstanding the foregoing provisions of this Article XI, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation, or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (iii) There shall be no right with respect to shares of stock of the corporation to cumulate votes in the election of directors. [SIGNATURE PAGE FOLLOWS] -19- 20 IN WITNESS WHEREOF, the undersigned have executed this certificate on July 3, 1996. _____________________________________ Edmund S. Ruffin, Jr., Incorporator -20- EX-3.4 6 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.4 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF RASTER GRAPHICS, INC. The following Amended and Restated Certificate of Incorporation of Raster Graphics, Inc. amends and restates the provisions of and supersedes the Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on July __, 1996 in its entirety. FIRST: The name of this corporation is Raster Graphics, Inc. (the "CORPORATION"). SECOND: The address of the corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: (A) This corporation is authorized to issue 52,000,000 shares of its capital stock, which shall be divided into two classes known as Common Stock and Preferred Stock, respectively. (B) The total number of shares of Common Stock which this corporation is authorized to issue is 50,000,000 with a par value of $0.001 per share. The total number of shares of Preferred Stock which this corporation is authorized to issue is 2,000,000 with a par value of $0.001 per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this corporation is hereby authorized, within the limitations and restrictions prescribed by law or stated in this Certificate of Incorporation, and by filing a certificate pursuant to applicable law of the State of Delaware, to provide for the issuance of Preferred Stock in series and (i) to establish from time to time the number of shares to be included in each such series; (ii) to fix the voting powers, designations, powers, preferences and relative, participating, optional or other rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including but not limited to, the fixing or alteration of the dividend rights, dividend rate, conversion rights, conversion rates, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Stock; and (iii) to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall 2 resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: In furtherance and not in limitation of powers conferred by statute, the Board of Directors of the corporation is expressly authorized to make, alter or repeal Bylaws of the corporation. SIXTH: No action shall be taken by the stockholders of the corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the corporation's Bylaws. SEVENTH: Elections of directors need not be by written ballot unless otherwise provided in the Bylaws of the corporation. EIGHTH: (A) To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation, or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. (C) Neither any amendment nor repeal of this Article EIGHTH, nor the adoption of any provision of this corporation's Certificate of Incorporation inconsistent with this Article EIGHTH shall eliminate or reduce the effect of this Article EIGHTH in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. NINTH: The corporation is to have perpetual existence. TENTH: The number of directors which will constitute the whole Board of Directors of the corporation shall be designated in the Bylaws of the corporation. ELEVENTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to any statutory provision) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors in the Bylaws of the corporation. TWELFTH: "LISTING EVENT" as used in this Amended and Restated Certificate of Incorporation shall mean the corporation becoming a "LISTED CORPORATION" within the meaning of Section 301.5 of the California Corporations Code. For the management of the business and -2- 3 for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, its directors and its stockholders or any class thereof, as the case may be, it is further provided that, effective upon the occurrence of the Listing Event: (A) The Board of Directors of the corporation shall divide the directors into three classes, as nearly equal in number as reasonably possible with the term of office of the first class to expire at the 1997 annual meeting of stockholders or any special meeting in lieu thereof, the term of office of the second class to expire at the 1998 annual meeting of stockholders or any special meeting in lieu thereof and the term of office of the third class to expire at the 1999 annual meeting of stockholders or any special meeting in lieu thereof. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. (B) Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term or his or her prior death, retirement, removal or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall if reasonably possible be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. Notwithstanding the foregoing provisions of this Article TWELFTH, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation, or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (C) There shall be no right with respect to shares of stock of the corporation to cumulate votes in the election of directors. The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by the stockholders of the corporation in accordance with the provisions of Sections 242 and 245 of the General Corporate Law of the State of Delaware, as amended. -3- 4 IN WITNESS WHEREOF, the undersigned have executed this certificate on July __, 1996. _________________________________ Rakesh Kumar, President _________________________________ Michael W. Hall, Secretary The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Certificate of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Jose, California on July __, 1996. _________________________________ Rakesh Kumar, President _________________________________ Michael W. Hall, Secretary -4- EX-3.6 7 BYLAWS OF REGISTRANT (DELAWARE) 1 EXHIBIT 3.6 BYLAWS OF RASTER GRAPHICS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING. The annual meeting of stockholders shall be held, on any date, time and place, either within or without the State of Delaware, as may be designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the stockholders may be called at any time by the Board of Directors or by the chairman of the board. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. -1- 2 The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder, (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or -2- 3 she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 ADVANCE NOTICE OF STOCKHOLDER BUSINESS. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before a meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the meeting: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 2.6. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 2.7 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. -3- 4 2.8 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.9 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.10 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. -4- 5 2.11 VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.14 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.12 NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required to be taken at an annual or special meeting of stockholders of the corporation, or any action that may be taken at an annual or special meeting of such stockholders, must be taken at an annual or special meeting of stockholders of the corporation, with prior notice and with a vote, and may not be taken by a consent in writing. 2.13 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. -5- 6 2.14 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.15 PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the General Corporation Law of Delaware. -6- 7 ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. The Board of Directors shall consist of seven persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before such director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. (a) The board of directors shall be divided into three classes, as nearly equal in number as possible. The term of office of the first class shall expire at the 1997 annual meeting of stockholders or any special meeting in lieu thereof, the term of office of the second class shall expire at the 1998 annual meeting of stockholders or any special meeting in lieu thereof and the term of office of the third class shall expire at the 1999 annual meeting of stockholders or any special meeting in lieu thereof. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. (b) Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term or his or her prior death, retirement, removal or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall if reasonably possible be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent -7- 8 reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. (c) The foregoing provisions shall become effective only when the corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. (d) Elections of directors need not be by written ballot. 3.4 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.5 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.6 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. -8- 9 Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.7 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.8 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. -9- 10 3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.10 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.11 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.12 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. -10- 11 No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.13 CHAIRMAN OF THE BOARD OF DIRECTORS. The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. -11- 12 4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.4 (place of meetings and meetings by telephone), Section 3.5 (regular meetings), Section 3.6 (special meetings and notice), Section 3.7 (quorum), Section 3.8 (waiver of notice), and Section 3.9 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. -12- 13 5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. -13- 14 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. -14- 15 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. -15- 16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation -16- 17 6.5 INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other -17- 18 books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. -18- 19 ARTICLE VIII GENERAL MATTERS 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. -19- 20 The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -20- 21 8.7 DIVIDENDS. The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 SEAL. The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. -21- 22 8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -22- 23 CERTIFICATE OF ADOPTION OF BYLAWS OF RASTER GRAPHICS, INC. ADOPTION BY INCORPORATOR The undersigned person appointed in the certificate of incorporation to act as the Incorporator of Raster Graphics, Inc. hereby adopts the foregoing bylaws as the Bylaws of the corporation. Executed this 3rd day of July 1996. Edmund S. Ruffin, Jr., Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting secretary OF Raster Graphics, Inc., and that the foregoing Bylaws were adopted as the Bylaws of the corporation on July 3, 1996, by the person appointed in the certificate of incorporation to act as the Incorporator of the corporation. Executed this 3rd day of July 1996. Edmund S. Ruffin, Jr., Secretary 24 BYLAWS OF RASTER GRAPHICS, INC. 25 TABLE OF CONTENTS
PAGE ---- ARTICLE I - CORPORATE OFFICES.................................................. 1 1.1 Registered Office............................................ 1 1.2 Other Offices................................................ 1 ARTICLE II - MEETINGS OF STOCKHOLDERS.......................................... 1 2.1 Place Of Meetings............................................ 1 2.2 Annual Meeting............................................... 1 2.3 Special Meeting.............................................. 1 2.4 Notice Of Stockholders' Meetings............................. 1 2.5 Advance Notice Of Stockholder Nominees....................... 2 2.6 Advance Notice Of Stockholder Business....................... 3 2.7 Manner Of Giving Notice; Affidavit Of Notice................. 3 2.8 Quorum....................................................... 4 2.9 Adjourned Meeting; Notice.................................... 4 2.10 Conduct Of Business.......................................... 4 2.11 Voting....................................................... 5 2.12 No Stockholder Action By Written Consent Without A Meeting... 5 2.13 Waiver Of Notice............................................. 5 2.14 Record Date For Stockholder Notice; Voting................... 6 2.15 Proxies...................................................... 6 ARTICLE III - DIRECTOR......................................................... 7 3.1 Powers....................................................... 7 3.2 Number Of Directors.......................................... 7 3.3 Election, Qualification And Term Of Office Of Directors...... 7 3.4 Place Of Meetings; Meetings By Telephone..................... 8 3.5 Regular Meetings............................................. 8 3.6 Special Meetings; Notice..................................... 8 3.7 Quorum....................................................... 9 3.8 Waiver Of Notice............................................. 10
-i- 26 Table OF CONTENTS (CONTINUED)
PAGE ---- 3.10 Fees And Compensation Of Directors........................... 10 3.11 Approval Of Loans To Officers................................ 10 3.12 Removal Of Directors......................................... 10 3.13 Chairman Of The Board Of Directors........................... 11 ARTICLE IV - COMMITTEES........................................................ 11 4.1 Committees Of Directors...................................... 11 4.2 Committee Minutes............................................ 12 4.3 Meetings And Action Of Committees............................ 12 ARTICLE V - OFFICERS........................................................... 12 5.1 Officers..................................................... 12 5.2 Appointment Of Officers...................................... 13 5.3 Subordinate Officers......................................... 13 5.4 Removal And Resignation Of Officers.......................... 13 5.5 Vacancies In Offices......................................... 13 5.6 Chief Executive Officer...................................... 13 5.7 President.................................................... 14 5.8 Vice Presidents.............................................. 14 5.9 Secretary.................................................... 14 5.10 Chief Financial Officer...................................... 15 5.11 Representation Of Shares Of Other Corporations............... 15 5.12 Authority And Duties Of Officers............................. 15 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS...................................................... 16 6.1 Indemnification Of Directors And Officers.................... 16 6.2 Indemnification Of Others.................................... 16 6.3 Payment Of Expenses In Advance............................... 16 6.4 Indemnity Not Exclusive...................................... 16 6.5 Insurance.................................................... 17
-ii- 27 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 6.6 Conflicts.................................................... 17 ARTICLE VII - RECORDS AND REPORTS.............................................. 17 7.1 Maintenance And Inspection Of Records........................ 17 7.2 Inspection By Directors...................................... 18 7.3 Annual Statement To Stockholders............................. 18 ARTICLE VIII - GENERAL MATTERS................................................. 19 8.1 Checks....................................................... 19 8.2 Execution Of Corporate Contracts And Instruments............. 19 8.3 Stock Certificates; Partly Paid Shares....................... 19 8.4 Special Designation On Certificates.......................... 20 8.5 Lost Certificates............................................ 20 8.6 Construction; Definitions.................................... 20 8.7 Dividends.................................................... 21 8.8 Fiscal Year.................................................. 21 8.9 Seal......................................................... 21 8.10 Transfer Of Stock............................................ 21 8.11 Stock Transfer Agreements.................................... 21 8.12 Registered Stockholders...................................... 22 ARTICLE IX - AMENDMENTS........................................................ 22
-iii- EX-4.2 8 FORM OF WARRANT OF REGISTRANT FOR COMMON STOCK 1 EXHIBIT 4.2 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL EXECUTIVE OFFICE. WA - Warrant Number RASTER GRAPHICS, INC. COMMON STOCK PURCHASE WARRANT 1. Number and Price of Shares Subject to Warrant. Subject to the terms and conditions herein set forth, Shareholder Name (the "PURCHASER"), is entitled to purchase from Raster Graphics, Inc., a California corporation (the "COMPANY"), at any time on or before the earliest to occur of the following: (i) Date, (ii) the closing of the Company's initial firm commitment underwritten public offering covering the offer and sale of Common Stock for the account of the Company to the public at an aggregate offering price of not less than $10,000,000 and at least at $5.00 per share (the "INITIAL PUBLIC OFFERING") or (iii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which shareholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition (the "ACQUISITION"), Number of Shares (which number of shares is subject to adjustment as described below) of fully paid and nonassessable Common Stock of the Company (the "SHARES") upon surrender hereof at the principal office of the Company, and upon payment of the purchase price at said office in cash, by check, by wire transfer or by cancellation of indebtedness. The Company shall give notice to the Purchaser of an Initial Public Offering or an Acquisition at least thirty (30) days prior to the closing of such Initial Public Offering or an Acquisition. Subject to adjustment as hereinafter provided, the exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) shall be $0.30. The exercise price for one share of Common Stock (or such securities as may be substituted for one share of Common Stock pursuant to the provisions hereinafter set forth) payable from time to time upon the exercise of this Warrant (whether such price be the price specified above or an adjusted price determined as hereinafter provided) is referred to herein as the "WARRANT PRICE". -1- 2 2. Adjustment of Warrant Price and Number of Shares. The number and kind of securities issuable upon the exercise of this Warrant shall be subject to adjustment from time to time and the Company agrees to provide notice upon the happening of certain events as follows: (a) Adjustment for Dividends in Stock. In case at any time or from time to time on or after the date hereof the holders of the Common Stock of the Company (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional securities or other property of the Company by way of dividend or distribution, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional securities or other property of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Common Stock on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional securities or other property receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by this paragraph (a) and paragraphs (b) and (c) of this paragraph 2. (b) Adjustment for Reclassification or Reorganization. In case of any reclassification or change of the outstanding securities of the Company or of any reorganization of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant) on or after the date hereof, then and in each such case the Company shall give the holder of this Warrant at least thirty (30) days notice of the proposed effective date of such transaction, and the holder of this Warrant, upon the exercise hereof at any time after the consummation of such reclassification, change or reorganization, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such holder would have been entitled upon such consummation if such holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in paragraphs (a) and (c). (c) Stock Splits and Reverse Stock Splits. If at any time on or after the date hereof the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Warrant Price in effect immediately prior to such subdivision shall thereby be proportionately reduced and the number of shares receivable upon exercise of the Warrant shall thereby be proportionately increased; and, conversely, if at any time on or after the date hereof the outstanding number of shares of Common Stock shall be combined into a smaller number of shares, the Warrant Price in effect immediately prior to such combination shall -2- 3 thereby be proportionately increased and the number of shares receivable upon exercise of this Warrant shall thereby be proportionately decreased. 3. No Fractional Shares. No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of Common Stock on the date of exercise, as determined in good faith by the Company's Board of Directors. 4. No Stockholder Rights. This Warrant as such shall not entitle its holder to any of the rights of a stockholder of the Company until the holder has exercised this Warrant in accordance with Section 6 hereof. 5. Reservation of Stock. The Company covenants that during the period this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 6. Exercise of Warrant. (a) This Warrant may be exercised by Purchaser by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the purchase price of the Shares purchased thereby, as described above. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares or other securities issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. 7. Right to Convert Warrant for Common Stock. (a) Right to Convert. In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion hereof (the "CONVERSION RIGHT") into shares of Common Stock as provided in this Section 7 immediately prior to its expiration after the Company has given the Purchaser notice pursuant to Section 1 of an Initial Public Offering or an Acquisition, subject to the restrictions set forth in subsection (c) hereof. Upon exercise of the Conversion Right with respect to a particular -3- 4 number of shares subject to this Warrant (the "CONVERTED WARRANT SHARES"), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the fair market value of one share of Common Stock on the Conversion Date (as herein defined). No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as herein defined). (b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant prior to its expiration and after the Company shall have given the Purchaser notice pursuant to Section 1 of an Initial Public Offering or an Acquisition, at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right immediately prior to the expiration of this Warrant and indicating the number of shares subject to this Warrant which are being surrendered (referred to in subsection (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective immediately prior to the expiration of this Warrant (the "CONVERSION DATE"). Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right (or any other securities deliverable in lieu thereof under Section 2 (b)) shall be issued as of the Conversion Date and shall be delivered to the Holder immediately following the Conversion Date. (c) Restrictions on Conversion Right. In the event that the Conversion Right contained herein would, at any time this Warrant remains outstanding, be deemed by the Company's independent certified public accountants to trigger a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon the Company's written notice to the Holder of such adverse accounting treatment. (d) Determination of Fair Market Value. For purposes of this Section 7, fair market value of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean: (i) In the case of an Initial Public Offering, the initial "Price to Public" specified in the final prospectus with respect to such offering. (ii) In the case of an Acquisition, the effective per share consideration to be received in an Acquisition by holders of the Common Stock, which price shall be as -4- 5 specified in the agreement entered into with respect to such Acquisition and determined assuming receipt of the aggregate exercise price of all outstanding warrants to purchase Common Stock (the "OUTSTANDING WARRANTS"), or if no such price is set forth in the agreement concerning the Acquisition, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors, including the aggregate exercise price of all Outstanding Warrants. 8. Certificate of Adjustment. Whenever the Warrant Price or number or type of securities issuable upon exercise of this Warrant is adjusted, as herein provided, the Company shall promptly deliver to the record holder of this Warrant a certificate of an officer of the Company setting forth the nature of such adjustment and a brief statement of the facts requiring such adjustment. 9. Notice of Proposed Transfers. Prior to any proposed transfer of this Warrant or the shares of Common Stock received on the exercise of this Warrant (the "SECURITIES"), unless there is in effect a registration statement under the Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the proposed transfer, the Holder thereof shall give written notice to the Company of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall, if the Company so requests, be accompanied (except in transactions in compliance with Rule 144) by either (i) an unqualified written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonable satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the Holder of the Securities shall be entitled to transfer the Securities in accordance with the terms of the notice delivered by the Holder to the Company; provided, however, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder to any affiliate of such Holder, or a transfer by a Holder which is a corporation to a shareholder of such corporation, or a transfer by a Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his spouse or lineal descendants or ancestors, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if such transferee were the original Holder hereunder. Each certificate evidencing the Securities transferred as above provided shall bear the appropriate restrictive legend set forth above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. 10. Miscellaneous. This Warrant shall be governed by the laws of the State of California. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the Company and the registered holder hereof. All notices and other communications from the Company to the holder of this Warrant shall be delivered personally or mailed by first class mail, postage prepaid, to the address furnished to the Company in writing by the last holder of this Warrant who shall have furnished an address to the Company in writing, and if mailed shall be deemed given three days after deposit in the U.S. Mail. 11. Taxes. The Company shall pay all taxes and other governmental charges that may be imposed in respect of the issuance or delivery of the Shares or any portion thereof. ISSUED this Day day of Month, Year. RASTER GRAPHICS, INC., a California corporation By:_____________________________________ Rak Kumar, President -5- EX-4.3 9 FORM OF WARRANT FOR SERIES B PREFERRED STOCK 1 EXHIBIT 4.3 NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. Shares Issuable Upon Exercise: _____ WARRANT TO PURCHASE SHARES OF SERIES B PREFERRED STOCK EXPIRES JANUARY 11, 1998 THIS CERTIFIES THAT, for value received, ___________, is entitled to subscribe for and purchase _______ shares (as adjusted pursuant to provisions hereof, the "Shares") of the fully paid and nonassessable Series B Preferred Stock of Raster Graphics, Inc., a California corporation (the "Company"), at a price per share of $2.50 (such price and such other price as shall result, from time to time, from adjustments specified herein is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Preferred Stock" shall mean the Company's presently authorized Series B Preferred Stock, and any stock into or for which such Series B Preferred Stock may hereafter be converted or exchanged pursuant to the Articles of Incorporation of the Company as from time to time amended as provided by law and in such Articles, and the term "Grant Date" shall mean January 11, 1989. 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from and after the Grant Date and prior to the earlier of the ninth annual anniversary date of the Grant Date or the fourth annual anniversary of the consummation of the Company's initial public offering of its Common Stock, the aggregate gross proceeds from which exceed $5,000,000. 2. Method of Exercise; Net Issue Exercise. 2.1 Method of Exercise; Payment; Issuance of New Warrant. The purchase right -1- 2 represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of the holder hereof, (a) the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Preferred Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days of receipt of such notice and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 2.2 Net Issue Exercise. (a) In lieu of exercising this Warrant, holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to Holder a number of shares of the Company's Preferred Stock computed using the following formula: X = Y (A - B) --------- A Where X - The number of shares of Preferred Stock to be issued to Holder. Y - the number of shares of Preferred Stock purchasable under this Warrant. -2- 3 A - the fair market value of one share of the Company's Preferred Stock. B - Warrant price (as adjusted to the date of such calculations). (b) For purposes of this Section, fair market value of the Company's Preferred Stock shall mean the average of the closing bid and asked prices of the Company's Preferred Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Preferred Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten trading days prior to the date of determination of fair market value. If the Preferred Stock is not traded Over-The-Counter or on an exchange, the fair market value shall be the price per share which the Company could obtain from a willing buyer for shares sold by the Company from authorized but unissued shares, as such price shall be agreed by the Company and the Holder. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant and Common Stock issuable upon conversion of the Preferred Stock will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Preferred Stock (and Common Stock issuable upon conversion thereof) to provide for the exercise of the right represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. (a) Adjustments. In the event that the Company, at any time or from time to time after the Grant Date, effects a subdivision or combination of the outstanding shares of Series B Preferred Stock into a greater or lessor number of shares, then, and in each such event, the Warrant Price shall be proportionately decreased or increased, as the case may be, and the number of Shares purchasable hereunder shall be proportionately increased or decreased, as the case may be. (b) No Impairment. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions -3- 4 of this Paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. (c) Notices of Record Date. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the holder of the Warrant, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 5. Notice of Adjustments. Whenever the Warrant Price, and number of Shares shall be adjusted pursuant to the provisions hereof, or whenever the Conversion Price for the Company's Series B Preferred Stock, as that term is defined in the Company's Amended and Restated Articles of Incorporation (the "Articles"), is adjusted pursuant to the provisions of the Articles, the Company shall within thirty (30) days of such adjustment deliver a certificate signed by its chief financial officer to the registered holder(s) hereof setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and number of shares, or Conversion Price, after giving effect to such adjustment. 6. Fractional Shares. No fractional shares of Preferred Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 7. Compliance with Securities Act; Disposition of Warrant or Shares of Preferred Stock. (a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, the shares of Preferred Stock to be issued upon exercise hereof and the Common Stock to be issued upon conversion of such Preferred Stock are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant or any shares of Preferred Stock to be issued upon exercise hereof (or Common Stock issued upon conversion of the Preferred Stock) except under circumstances which will not result in a -4- 5 violation of the Securities Act of 1933, as amended (the "Act"). This Warrant and all shares of Preferred Stock issued upon exercise of this Warrant or shares of Common Stock issued on conversion (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED." (b) Disposition of Warrant and Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Preferred Stock acquired pursuant the exercise of this Warrant (or Common Stock issued upon conversion of such Preferred Stock) prior to registration of such shares, the holder hereof and each subsequent holder of the Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such shares of Preferred Stock or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Preferred Stock or Common Stock to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Each certificate representing this Warrant or the shares of Preferred Stock or Common Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order insure compliance with the Act, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to insure compliance with the Act. Nothing herein shall restrict the transfer of this Warrant or any portion hereof by the initial holder hereof to any partnership affiliated with the initial holder, or to any partner of any such partnership provided such transfer may be made in compliance with applicable federal and state securities laws. The Company may issue stop transfer instructions to its transfer agent in connection with the foregoing restrictions. 8. Rights as Shareholders; Information. -5- 6 8.1 Shareholder Rights. No holder of the Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 8.2 Financial Statements and Information. The Company shall deliver to the registered holder hereof (i) within 120 days after the end of the fiscal year of the Company, a consolidated statement of income for such fiscal year, a consolidated balance sheet of the Company as of the end of such year and a consolidated statement of the sources and application of funds for such year, which year-end financial reports shall be in reasonable detail and certified by independent public accountants of nationally recognized standing selected by the Company, and (ii) within 45 days after the end of each fiscal quarter other than the last fiscal quarter, unaudited consolidated statements of income and sources and application of funds for such quarter and a consolidated balance sheet as of the end of such quarter. In addition, the Company shall deliver to the registered holder hereof any other information or data provided to the shareholders of the Company. 9. Registration Rights. The Company and the Warrantholder (which term shall mean any registered holder of this Warrant or any registered transferee thereof pursuant to Section 7 hereof) agree that concurrent with the execution of this Warrant, the Warrantholder, the Company, and the holders of at least the majority of the shares of the Company's Series A and Series B Preferred Stock outstanding shall have executed an Amended and Restated Registration Rights Agreement substantially in the form of Exhibit B attached hereto (the "Registration Rights Agreement") wherein the Warrantholder shall be entitled to registration rights with respect to any Common Stock issuable upon conversion of the Preferred Stock purchasable hereunder. 10. Additional Rights. 10.1 Secondary Sales. The Company agrees to assist the holder of this Warrant in obtaining liquidity if opportunities to make secondary sales of the Company's securities become available. To this end, the Company will promptly provide the holder of this Warrant with notice of any offer to acquire from the Company's security holders more than five percent (5%) -6- 7 of the total voting power of the Company and will allow holder, if it so chooses, to sell this Warrant to the person or persons making such offer. 10.2 Mergers. Unless the Company provides the holder of this Warrant with at least 30 days' notice of the terms and conditions of the proposed transaction, the Company will not (i) sell, lease, exchange, convey or otherwise dispose of all or substantially all of its property or business, or (ii) merge into or consolidate with any other corporation (other than a wholly-owned subsidiary of the Company), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. The Company will cooperate with the holder in arranging the sale of this Warrant in connection with any such transaction. 11. Representations and Warranties. This Warrant is issued and delivered on the basis of the following: (a) This Warrant has been duly authorized and executed by the Company and when delivered will be the valid and binding obligation of the Company enforceable in accordance with its terms; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the shares of Preferred Stock and the holders thereof are as set forth in the Company's Articles of Incorporation, as amended, a true and complete copy of which has been delivered to the original Warrantholder; (d) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved and, when issued in accordance with the terms of the Company's Articles of Incorporation, as amended, will be validly issued, fully paid and nonassessable; and (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Incorporation or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not contravene any provision of, or constitute a default under, any -7- 8 indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. 12. Amendment of Conversion Rights. During the term of this Warrant, the Company agrees that it shall not amend its Articles of Incorporation without the prior written consent of the holder or holders entitled to purchase a majority of the Shares upon exercise of this Warrant if as a result of such amendment any of the conversion rights, including without limitation the conversion price or antidilution protection privileges, of the Series B Preferred Stock issuable upon exercise of this Warrant would be affected adversely and differently from the effect on the Series B Preferred Stock. The company also agrees to give the holder of this Warrant prior notice of any amendments to the rights of the Series B Preferred Stock otherwise not included in this Section 12. 13. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 14. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefore on the signature page of this Warrant. 15. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Preferred Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable Securities) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. -8- 9 16. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 17. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 18. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. RASTER GRAPHICS By: Title: Address: Date: -9- 10 EXHIBIT A Notice of Exercise To: 1. The undersigned hereby elects to purchase ___________ shares of Series __ Preferred Stock of __________ Corporation pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: (Name) (Address) 3. The undersigned represents that the aforesaid shares being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distribution or reselling such shares. (Signature) (Date) -10- 11 EXHIBIT A-1 Notice of Exercise To: 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S-__, filed _________, 19___, the undersigned hereby elects to purchase ________ shares of Series ___ Preferred Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ____________ shares. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $___________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. (Signature) (Date) -11- EX-5.1 10 OPINION OF VENTURE LAW GROUP, A PROFESSIONAL CORP. 1 EXHIBIT 5.1 July 12, 1996 Raster Graphics, Inc. 3025 Orchard Parkway San Jose, California 95134 REGISTRATION STATEMENT ON FORM S-1; FILE NO. 333-06617 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (File No. 333-06617)(the "Registration Statement") filed by you, Raster Graphics, Inc., with the Securities and Exchange Commission on June 21, 1996 in connection with the registration under the Securities Act of 1933, as amended, of 3,450,000 shares of your Common Stock (the "Shares"). The Shares include an over-allotment option to purchase 450,000 shares granted to the Underwriters. As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Shares. It is our opinion that upon conclusion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Shares when issued and sold in the manner described in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and in any amendment thereto. Very truly yours, VENTURE LAW GROUP A Professional Corporation /s/ Venture Law Group EX-10.2 11 1996 STOCK PLAN 1 Exhibit 10.2 RASTER GRAPHICS, INC. 1996 STOCK PLAN AS AMENDED JUNE 21, 1996 1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business. Options granted hereunder may be either Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement. Stock purchase rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" shall mean the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "Affiliate" shall mean an entity in which the Company owns an equity interest. (c) "Applicable Laws" shall have the meaning set forth in Section 4(a) below. (d) "Board" shall mean the Board of Directors of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with Section 4(a) of the Plan, if one is appointed. (g) "Common Stock" shall mean the Common Stock of the Company. (h) "Company" shall mean Raster Graphics, Inc., a Delaware corporation. (i) "Consultant" shall mean any person who is engaged by the Company or any Parent, Subsidiary or Affiliate to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not. (j) "Continuous Status as an Employee or Consultant" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military 2 leave, or any other leave of absence approved by the Administrator; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. For purposes of this Plan, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute a termination of employment. (k) "Director" shall mean a member of the Board. (l) "Employee" shall mean any person, including Named Executives, Officers and Directors employed by the Company or any Parent, Subsidiary or Affiliate of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock as quoted on such system on the date of determination (if for a given day no sales were reported, the closing bid on that day shall be used), as such price is reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the bid and asked prices for the Common Stock or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable written option agreement. (p) "Named Executive" shall mean any individual who, on the last day of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four highest compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. -2- 3 (q) "Nonstatutory Stock Option" shall mean an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable written option agreement. (r) "Officer" shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" shall mean a stock option granted pursuant to the Plan. (t) "Optioned Stock" shall mean the Common Stock subject to an Option. (u) "Optionee" shall mean an Employee or Consultant who receives an Option. (v) "Parent" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "Plan" shall mean this 1996 Stock Plan. (x) "Restricted Stock" shall mean shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (y) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act as the same may be amended from time to time, or any successor provision. (z) "Share" shall mean a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan. (aa) "Stock Purchase Right" shall mean the right to purchase Common Stock pursuant to Section 11 below. (bb) "Subsidiary" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of shares that may be optioned and sold under the Plan is 800,000. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 4. Administration of the Plan. (a) Composition of Administrator. -3- 4 (i) Multiple Administrative Bodies. If permitted by Rule 16b-3, and by the legal requirements relating to the administration of incentive stock option plans, if any, of applicable securities laws and the Code (collectively, the "Applicable Laws"), the Plan may (but need not) be administered by different administrative bodies with respect to Directors, Officers who are not directors and Employees who are neither Directors nor Officers. (ii) Administration with respect to Directors and Officers. With respect to grants of Options or Stock Purchase Rights to Employees or Consultants who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan and Section 162(m) of the Code as it applies so as to qualify grants of Options to Named Executives as performance-based compensation, or (B) a Committee designated by the Board to administer the Plan, which Committee shall be constituted in such a manner as to permit the Plan to comply with Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, to qualify grants of Options to Named Executives as performance-based compensation under Section 162(m) of the Code and otherwise so as to satisfy the Applicable Laws. (iii) Administration with respect to Other Persons. With respect to grants of Options to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. (iv) General. If a Committee has been appointed pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under subsection (ii), to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary plan, and to the extent required under Section 162(m) of the Code to qualify grants of Options to Named Executives as performance-based compensation. (b) Powers of the Administrator. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the Employees and Consultants to whom Options may from time to time be granted hereunder; -4- 5 (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount, if any, of any deemed earnings on any deferred amount during any deferral period); and (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. Eligibility. (a) Recipients of Grants. Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees, provided, however, that Employees of an Affiliate shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options. (b) Type of Option. Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. -5- 6 (c) No Employment Rights. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 21 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 17 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that in the case of an Incentive Stock Option, the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Limitation on Grants to Employees. Subject to adjustment as provided in this Plan, the maximum number of Shares which may be subject to options or stock purchase rights granted to any one Employee under this Plan for any fiscal year of the Company shall be 500,000. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes -6- 7 of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant; (B) granted to a person who, at the time of the grant of such Option, is a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant; (iii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (b) Permissible Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) authorization from the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised, (6) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price, (7) delivery of an irrevocable subscription agreement for the Shares that irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (8) any combination of the foregoing methods of payment, or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exer- -7- 8 cised has been received by the Company. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 15 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Status as an Employee or Consultant. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant, such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the optionee does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (c) Disability of Optionee. Notwithstanding Section 10(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within six (6) months (or such other period of time, not exceeding six (6) months, as is determined by the Administrator, with such determination in the case of an Incentive Stock -8- 9 Option being made at the time of grant of the Option) following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant three (3) months (or such other period of time as is determined by the Administrator as provided above) after the date of death, subject to the limitation set forth in Section 5(b); or (ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee or Consultant, the Option or may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid (which price shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer), and the time within which such person must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right shall be referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the higher of either the original purchase price or the Fair Market Value on the date of the repurchase. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder -9- 10 when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 12. Withholding Taxes. As a condition to the exercise of Options and Stock Purchase Rights granted hereunder, the Optionee or Stock Purchase Right holder shall make such arrangements as the Administrator may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise, receipt or vesting of such Option or Stock Purchase Right. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. 13. Stock Withholding to Satisfy Withholding Tax Obligations. At the discretion of the Administrator, Optionees and Stock Purchase Right holders may satisfy withholding obligations as provided in this paragraph. When an Optionee or Stock Purchase Right holder incurs tax liability in connection with an Option or Stock Purchase Right which tax liability is subject to tax withholding under applicable tax laws, and the Optionee or Stock Purchase Right holder is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee or Stock Purchase Right holder may satisfy the withholding tax obligation by one or some combination of the following methods: (a) by cash payment, or (b) out of the Optionee's or the Stock Purchase Right holder's current compensation, (c) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Optionee or Stock Purchase Right holder for more than six months on the date of surrender, and (ii) have a fair market value on the date of surrender equal to or less than the Optionee's or the Stock Purchase Right holder's marginal tax rate times the ordinary income recognized, or (d) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). Any surrender by an Officer or Director of previously owned Shares to satisfy tax withholding obligations arising upon exercise of an Option or Stock Purchase Right must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -10- 11 All elections by an Optionee or Stock Purchase Right holder to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option or Stock Purchase Right as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Administrator; (d) if the Optionee or Stock Purchase Right holder is an Officer or Director, the election must comply with the applicable provisions of Rule 16b-3 and shall be subject to such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. In the event the election to have Shares withheld is made by an Optionee or Stock Purchase Right holder and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Optionee or Stock Purchase Right holder shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 14. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution. The designation of a beneficiary by an Optionee or Stock Purchase Right holder will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the Optionee or Stock Purchase Right holder only by the Optionee or Stock Purchase Right holder or a transferee permitted by this Section 14. -11- 12 15. Adjustments Upon Changes in Capitalization; Corporate Transactions. (a) Adjustment. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, the maximum number of shares of Common Stock for which Options or Stock Purchase Rights may be granted to any employee under Section 8 of the Plan, and the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Corporate Transactions. In the event of the proposed dissolution or liquidation of the Company, the Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option or Stock Purchase Right shall terminate as of a date fixed by the Administrator and give each Optionee or Stock Purchase Right holder the right to exercise his or her Option or Stock Purchase Right as to all or any part of the Optioned Stock or Restricted Stock, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option or Stock Purchase Right may be assumed or an equivalent option or stock purchase right substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event the Option or Stock Purchase Right is not assumed or substituted, the Optionee or Stock Purchase Right holder shall have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock or Restricted Stock, including Shares as to which the Option would not otherwise be exercisable, and any Restricted Stock held by a purchaser shall be released from the Company's repurchase option. 16. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. -12- 13 17. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 21 of the Plan: (i) any increase in the number of Shares subject to the Plan, other than an adjustment under Section 15 of the Plan; (ii) any change in the designation of the class of persons eligible to be granted Options or Stock Purchase Rights; (iii) any change in the limitation on grants to employees as described in Section 8 of the Plan or other changes which would require shareholder approval to qualify options or stock purchase rights granted hereunder as performance-based compensation under Section 162(m) of the Code; or (iv) any revision or amendment requiring shareholder approval in order to preserve the qualification of the Plan under Rule 16b-3. (b) Shareholder Approval. If any amendment requiring shareholder approval under Section 17(a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 21 of the Plan. (c) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options or Stock Purchase Rights already granted and such Options or Stock Purchase Rights shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee or Stock Purchase Right Holder and the Board, which agreement must be in writing and signed by the Optionee or Stock Purchase Right Holder and the Company. 18. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and -13- 14 without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 19. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 20. Agreements. Options and Stock Purchase Rights shall be evidenced by written agreements in such form as the Board shall approve. 21. Shareholder Approval. (a) Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law and the rules of any stock exchange upon which the Shares are listed. (b) In the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 21(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an Option or Stock Purchase Right hereunder to an officer or director after such registration, do the following: (i) furnish in writing to the holders entitled to vote for the Plan substantially the same information that would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and (ii) file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date on which such information is first sent or given to shareholders. 22. Information to Optionees and Purchasers. The Company shall provide to each Optionee and Stock Purchase Right holder, during the period for which such Optionee or holder -14- 15 has one or more Options or Stock Purchase Rights outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. -15- EX-10.6 12 FORM OF INDEMNIFICATION AGREEMENT (DELAWARE) 1 EXHIBIT 10.6 INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement") is made as of ____________, 199__. by and between Raster Graphics, Inc., a Delaware corporation (the "Company"), and ________________ (the "Indemnitee"). RECITALS The Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. AGREEMENT In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. 2 (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. EXPENSES; INDEMNIFICATION PROCEDURE. (a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. Any advances to be made under this Agreement shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. 3 (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received on the third business day after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) PROCEDURE. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in 4 effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in 5 another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in an such capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 6 8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any 7 constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. 11. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and 8 merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) NOTICES. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] 9 The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. Raster Graphics, Inc. By: Title: Address: 3025 Orchard Parkway San Jose, CA 95134 AGREED TO AND ACCEPTED: (Signature) Address: EX-11.1 13 STATEMENT OF COMPUTATION OF INCOME(LOSS) PER SHARE 1 EXHIBIT 11.1 RASTER GRAPHICS, INC. STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS (IN THOUSANDS)
YEARS ENDED ---------------------------------------------- DECEMBER 31, DECEMBER 30, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ Net income (loss).................................. $ 41 $ (2,128) $ 77 ======= ======= ======= Computations of weighted average common and weighted average common shares outstanding....... 354 330 220 Common equivalent shares from stock options, convertible preferred stock and warrants......... 4,025 -- 6,165 Shares related to SAB Nos. 55, 64, and 83.......... 802 802 802 ------- ------- ------- Shares used in computing net loss per share........ 5,181 1,132 7,187 ======= ======= ======= Net loss per share................................. $ 0.01 $ (1.88) $ 0.01 ======= ======= =======
EX-23.1 14 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated February 23, 1996, except as to Note 13, as to which the date is July , 1996, related to Raster Graphics, Inc., in the Registration Statement (Form S-1) and related Prospectus of Raster Graphics, Inc. for the registration of 3,450,000 shares of its common stock. Our audits also included the financial statement schedule of Raster Graphics, Inc. listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Jose, California July , 1996 ------------------------------------ The foregoing consent is in the form that will be signed upon the completion of reincorporation of the Company from California to Delaware and the reverse stock split. /s/ ERNST & YOUNG LLP San Jose, California July 11, 1996 EX-23.2 15 CONSENT OF KPMG, INDEPENDENT AUDITORS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Onyx Graphics Corporation: We consent to the use of our report dated November 11, 1994, on the statements of operations and cash flows of Onyx Graphics Corporation for the year ended September 30, 1994 included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Salt Lake City, Utah July 15, 1996 -----END PRIVACY-ENHANCED MESSAGE-----