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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
Commission file number 0-11933
LASERTECHNICS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 85-0294536
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3208 COMMANDER DRIVE, CARROLLTON, TEXAS 75006
(Address of Principal Executive Offices) (Zip Code)
(972) 407-6080
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
The Company's Common Stock is currently traded over-the-counter on the Nasdaq
SmallCap Market.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1996 were $ 17,581,440.
The aggregate market value of the voting stock held by non-affiliates on March
19, 1997, was $26,819,009, calculated based on the last transaction price on
the Nasdaq SmallCap Market of $.96875 per share of Common Stock.*
The number of shares of the Company's Common Stock outstanding as of March 19,
1997 was 39,939,403.
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ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
At March 19, 1997, there were 39,939,403 shares of voting Common Stock and
2,249,842 shares of non-voting Common Stock of the Company outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement (the "Proxy
Statement") to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to Regulation 14A in connection with the 1997 Annual
Meeting are incorporated herein by reference into Part III of this Report. The
Proxy Statement will be filed with the Commission not later than 120 days after
the Registrant's fiscal year ended December 31, 1996.
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* Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at March
19, 1997. Exclusion of such shares should not be construed to indicate that any
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant or that such person is
controlled by or under common control with the Registrant.
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1996 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS...........................................5
ITEM 2. PROPERTIES........................................17
ITEM 3. LEGAL PROCEEDINGS.................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...........................................18
PART II
ITEM 5. MARKET FOR LASERTECHNICS COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS............18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....20
ITEM 7. FINANCIAL STATEMENTS..............................29
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............29
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT...............................29
ITEM 10. EXECUTIVE COMPENSATION............................29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....30
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8K.............30
SIGNATURES.......................................................33
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PART I
ITEM 1. BUSINESS
Introduction
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Annual Report on Form 10-KSB. See "Cautionary
Statements" for a discussion of certain information that should be considered by
all stockholders.
THE COMPANY
Lasertechnics, Inc., a Delaware corporation ("Lasertechnics" or the "Company"),
was formed in October 1981. In early 1995, the Company became a holding company
with two separate operating units, Sandia Imaging Systems Corporation
("Sandia") and Lasertechnics Marking Corporation ("LMC"), both Delaware
corporations. Each of Sandia and LMC is run by its own management team,
produces different products and serves different markets. Lasertechnics'
wholly-owned inactive subsidiary, Quantrad Corporation, is in the process of
dissolution. References to Lasertechnics or the Company mean the Company and
its subsidiaries taken as a whole, unless the context requires otherwise.
Sandia, formed in August 1993 and based in Carrollton, Texas, manufactures,
distributes, integrates and sells multi-station and mono-station card printers
and computer software systems to print and secure plastic identification cards
(the "Imaging" Business). Sandia has awarded options to directors and
employees, that, if and when vested and exercised, will reduce the Company's
ownership to approximately 85%. The Company believes this employee ownership
will further strengthen the business focus of the Sandia management team.
Sandia has a wholly owned French subsidiary, Sandia Imaging Systems Europe, S.A.
("Sandia Europe"). Printis S.A.R.L., a wholly owned subsidiary of Sandia
Europe, was merged into Sandia Europe in June 1995.
LMC, which is based in Albuquerque, New Mexico and is comprised of the Company's
original laser marking business, designs, manufactures and sells laser marking
systems for use in marking a variety of consumer and industrial products and
containers (the "Marking" Business). Through its stock option incentive plan,
the Company provides for management to obtain stock ownership in LMC. The
Company believes employee ownership will further strengthen the business focus
of the LMC management team.
The Company's principal offices are located at 3208 Commander Drive, Carrollton,
Texas 75006, and its telephone number is (972) 407-6080.
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PRODUCT LINES AND SERVICES
IMAGING BUSINESS
The Company believes that demand for Sandia's products and services will
continue to grow due to increasing worldwide demand from both the business and
government sectors to verify access to and receipt of goods and services and to
control border crossings. Sandia's printer, consumables and related service
sales accounted for 47% of the Company's 1996 consolidated sales, up from 23% in
1995.
Photo Quality Plastic Card Printers. Sandia designs, develops and
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internationally markets a family of high speed, dye sublimation process plastic
card printers and related computer software systems that can instantly generate
or batch process photographically-customized identification and/or security
cards. Sandia's systems can support the printing and data encoding requirements
of any card-mounted, digitized security technology, positioning Sandia to grow
rapidly in the secure card industry. Sales of plastic card printing products
and related services accounted for approximately 100% and 80% of Sandia's sales
in 1996 and 1995, respectively.
Sandia's printer systems help businesses and government agencies implement new
technological solutions to detect and deter plastic card fraud, which costs
companies and consumers billions of dollars per year. Over the past two years,
Sandia has sold goods and services in over 18 countries to organizations such as
national and local government agencies, health care providers, banks and credit
card companies. To meet the varying needs of these different organizations,
Sandia's plastic card printers accommodate any type of PVC-based card meeting
the International Standards Organization ("ISO") plastic card standard,
including plain, magnetic-striped, "smart" (i.e., with on-card microprocessors)
and optical storage cards. These assorted plastic cards are used to issue, among
other things, drivers' licenses, border crossing cards, identification cards,
health care cards, and bank credit and debit cards.
DataGlyphs/TM/. Sandia's newest product offering is DataGlyphs/TM/, a portable
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database symbology developed by Xerox Corporation ("Xerox"). In 1995, Xerox
granted Sandia the sole worldwide right to sell DataGlyphs/TM/ for use on
security and identification media such as passports, visas, drivers' licenses,
national identification media and border crossing media. A plastic card
utilizing DataGlyphs/TM/ costs no more than a magnetic-striped card but offers
40 times more data storage (which is storage comparable to a computer chip
card). Sandia has also developed GlyphScan/TM/, a customized DataGlyphs/TM/
reader, to serve as the scanning device for DataGlyphs/TM/ applications. In
1996, Sandia made significant progress in the development of its DataGlyphs/TM/
products. By the end of 1996 Glyphit/TM/ software (which incorporates
DataGlyphs/TM/ software for the encryption and encoding of biometric
information), along with the GlyphScan/TM/ reader, were placed at several pilot
projects related to major bids around the world. Glyphit/TM software and
GlyphScan/TM/ readers are expected to be into production and ready for shipment
in the second quarter of 1997.
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The Chipless Smart Card/TM/ Verification System. Sandia has paired Glyphit/TM/
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software and GlyphScan/TM/ readers with third party biometric verification
software systems, to develop a total card security system for use in a variety
of applications such as visas, passports, drivers' licenses, banks, immigration,
customs, government entitlement and health care provider identification
documents. Sandia has begun marketing these systems directly to end-users and
through re-seller arrangements under the name The Chipless Smart Card/TM/
verification system and expects to achieve its initial sales of the product in
the second quarter of 1997. The combination of The Chipless Smart Card/TM/
verification system and Sandia's plastic card printer family offers a unique
total solution for the printing, encoding, securing and verifying needs of
numerous plastic card identification applications.
Product Development. In addition to the continued development of DataGlyphs/TM/
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products, Sandia continued to make several technological enhancements to its
family of plastic card printers that have significantly increased the printers'
functionality and speed, as well as reduced manufacturing costs. The new
printers were put into production in late 1996 and will be ready for shipment in
the first quarter of 1997.
Discontinued Product Lines.
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Digital Image Recorder ("DIR"). During 1994 and 1995 the markets for DIR were
not materializing as Sandia expected. As a result, sales of DIR printers
decreased substantially from approximately $825,000 in 1993 to $194,000 in 1994.
There were no significant DIR printer sales in 1995. In November 1995 Sandia
sold the DIR line of printers for $325,000 and a 10% royalty for two years. The
10% revenue-based royalty will extend an additional year if the total royalty
received during the two-year period is less than $200,000. As of December 31,
1996, Sandia had received royalty payments totaling $51,188.
SnapShot. SnapShot is a multi-function software package for IBM PC's which
supports reception, transmission, storage and manipulation of photographic-
quality images. During 1994 the market for SnapShot did not materialize as
Sandia expected. In 1995 there were no sales for this product line and, as a
result, Sandia informed all of its customers in the fourth quarter of 1995 that
it would no longer support the SnapShot product line.
MARKING BUSINESS
The Company believes that demand for LMC's laser marking systems and services
will continue to grow due to increasing worldwide manufacturer and consumer
awareness and the need for batch and expiration codes on a variety of consumer
and industrial product packages and containers. LMC believes that a worldwide
move by packagers to laser marking places it in a unique position to leverage
its position as the largest U.S.-based manufacturer of high speed, laser-based
product coding equipment. LMC continues to receive repeat orders from customers
who purchase its products and services to meet package marking requirements.
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Laser Markers. LMC designs, manufactures and markets laser marking systems
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which are used by manufacturers for the in-plant placement of lot numbers,
freshness dates and other information on diverse consumer and industrial
products and packaging materials. Since inception, LMC has provided CO//2//
(carbon dioxide) gas laser markers that are easily integrated into a wide range
of sophisticated and demanding high-speed product packaging facilities. To that
end, LMC has created the Blazer 6000CE/TM/, a water-cooled, CO//2// pulsed, gas
laser system used in the on-line marking of industrial and consumer products. In
the last quarter of 1995, after more than one year of development, LMC
introduced an alpha version of its BlazerJet/TM/ dot-matrix coder at a major
packaging industry show. See "LMC Product Development" below. As compared to the
Blazer 6000CE/TM/, the BlazerJet/TM/ product offers a higher degree of
programmability to meet a greater number of packaging needs and allows a larger
number of codes to be stored and called up for use with a few simple keystrokes.
The BlazerJet/TM/ system is transportable among packaging lines, allows for
maximum flexibility and provides marking quality and operating performance
superior to inkjet markers of similar capacity. BlazerJet/TM/ beta testing units
were shipped throughout 1996. LMC expects to make shipments of the fully
functional BlazerJet/TM/ system in the second half of 1997.
LMC's marking systems typically solve problems related to four main product
identification needs:
Perishables. Perishables such as beverage, food and dairy products require a
variety of date information to provide accurate product freshness information.
These products are manufactured in facilities that demand impeccable cleanliness
and are characterized by extremes in temperature and stringent wash-down
requirements. LMC's products can tolerate a wide range of temperature
conditions. Further, they are enclosed in a rugged stainless steel enclosure
with smooth, easily-cleaned surfaces, allowing them to handle the harshest
demands of wash-down routines. Date information is dependably marked using
either the Blazer 6000CE/TM/ or the BlazerJet/TM/.
Traceability. Product traceability concerns, especially in the medical and
pharmaceutical industries, require variable batch information to meet ever-
increasing government regulations and enhance a manufacturer's ability to
limit and defend against liability in consumer product liability claims. In
such packaging environments, reliability of the marker products is especially
important. Product identification marking in the form of batch numbers,
serialized part numbers, logos or corporate names are easily handled by LMC's
products. In addition, laser marks are permanent because they burn the mark
into a thin surface layer of the product or package.
High Throughput. High speed packaging lines cannot use the slower contact
methods for identifying products. LMC's Blazer 6000CE/TM/ can operate at speeds
exceeding 1,800 marks per minute and easily provide legible information on
fragile and/or thin materials with irregular surfaces or limited space. The
Blazer 6000CE/TM/ marks so quickly (about one-millionth of a second per mark)
that it has proved possible to mark at the highest speeds required by packaging
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equipment manufacturers with whom LMC has integrated the Blazer system. High
speed packaging lines are accommodated by the simple computer-based controller
of the Blazer 6000CE/TM/ that interfaces easily with the most modern packaging
line control equipment. While current models of the BlazerJet/TM/ are better
suited for more moderate speed production lines, the new BlazerJet/TM/ marker
system is expected to operate at even higher speeds than the Blazer 6000CE/TM/
marker.
Environmental Concerns. Packagers seeking a product identification system that
must eliminate the problems inherent in the use of expensive and hazardous inks
and solvents are increasingly using lasers. The solvents used in many industrial
inkjet coders are potentially harmful to the environment, as well as to the
health of personnel who handle them. In addition, many inks used in marking
contain solvents which are classified as hazardous substances by the
Environmental Protection Agency (the "EPA") and, as such, are becoming more and
more expensive to handle as government regulations become more stringent. LMC's
products do not use hazardous substances as they consume only electricity,
water and non-toxic CO//2// laser gas. Thus the Blazer 6000CE/TM/ and
BlazerJet/TM/ offer a safe, environmentally clean and highly reliable product
marking alternative to inkjet marking.
Dependence on Sales to Major Customer. In 1994, LMC sold $7,296,000 of Blazer
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products and services to Anheuser-Busch. LMC continues to provide system
upgrades, spare parts and training to Anheuser-Busch and has recorded sales of
$3,153,000 and $2,171,000 in 1996 and 1995, respectively. Anheuser-Busch
continues to be a significant customer of LMC, comprising 34% of total LMC sales
in 1996 compared to 21% in 1995, while LMC's customer base continues to expand.
Product Development. In October 1993, the Company's distribution agreement with
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Lumonics Hull terminated. Under the terms of the contract, LMC was free to
develop products that might replace those formerly purchased from Lumonics Hull.
Since such time, LMC has been developing the BlazerJet/TM/ to replace the Xymark
laser marking system. In November 1994, LMC introduced a prototype of its new
BlazerJet/TM/ marking system utilizing technology which was previously licensed
from United Technology Optical Systems and is currently licensed from DeMaria
ElectroOptic Systems. The Company's new laser marker emulates the action of an
inkjet system by forming dot matrix characters to mark a moving product, such as
a consumer good moving along a production line, and is the first single-laser
system of this type to bring the laser tube to the mark point. LMC shipped beta
test versions of the BlazerJet/TM/ system to select customers throughout 1996.
Shipment of fully functional production BlazerJets has been delayed due to
optical and software problems detected during the beta testing. LMC expects to
have fully functional production BlazerJets ready for shipment in the second
half of 1997.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures were $2,848,767, $3,040,830 and $3,577,209
for the years 1996, 1995 and 1994, respectively.
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COMPETITION
Imaging. Sandia believes that sales of plastic card printers and related
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products and services have increased as a result of the need for government
agencies and businesses to secure plastic card use and deter fraud. The plastic
cards are also rapidly becoming media on which a database can be stored and used
in a variety of applications, such as visas, passports, drivers' licenses, bank
cards, immigration and health care. Sandia believes that as higher performance
plastic card printers become available at lower prices, the market for these
products will continue to grow. In addition, Sandia believes that encryption
technologies combined with plastic cards will be used to secure plastic card use
and deter fraud. Sandia's core business focus is designing, producing, and
marketing printing systems for use in the production of highly secure cards that
help issuers minimize the cost of plastic card fraud. Biometrics, the technology
of capturing and digitizing a unique physical attribute, such as a fingerprint,
storing it on a card, and then matching it to the card holder at the point of
transaction, is expected to be the principal technology used to deter fraud.
Sandia competes with a variety of manufacturers and resellers of plastic card
printers that incorporate a non-proprietary dye sublimation process as well as
with hardware and software companies that have similar printer and software
technologies. DataGlyphs/TM/ products compete with alternative data encryption
technologies used with plastic cards, such as bar codes, magnetic stripes,
optical data and smart chips. Sandia competes in the data encryption and
plastic card printer market through the development of relationships with a
large number of major corporations that are active prime contractors and
technology providers in the plastic card printing and secure card markets.
Laser Marking. The Company's Marking business faces competition not only
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from other laser marking companies, but from companies using other marking
technologies in widespread use such as inkjet (currently the dominant technology
in the packaging industry), embossing and hot stamping. LMC competes in the
product marking market through full service distributors and by marketing
directly to end users.
The imaging and laser marking industries are highly competitive in all aspects,
including research and development and marketing, and competition is expected to
intensify in both industries as technological advances are made and become more
widely known. The Company believes that the major competitive advantages in
both of its businesses include customer service, price, technical support, speed
and reliability. Moreover, Sandia believes it possesses a competitive advantage
over other plastic card printer providers because its printers' modular designs
allow for easy expansion as customers' needs grow. In addition, Sandia's
printers can print with several different data storage technologies, such as bar
codes, magnetic stripes, optical data and smart chips. However, because of the
increase in competition, no assurance can be given that the Company will
continue to compete successfully with respect to the factors discussed above.
Also, the Company would be adversely affected if its competitors were to offer
their products and systems at significantly lower prices. Many of the Company's
competitors
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have considerably greater financial, technical and marketing resources than the
Company.
MANUFACTURING AND SUPPLIERS
Approximately one-half of LMC's employees are engaged in manufacturing
activities. Sandia out-sources its manufacturing and does not have any
manufacturing employees.
Both companies depend upon a number of outside suppliers for components for
their products. Sandia arranges for the manufacture of all its plastic card
printers by a single source. Although to date the Company has generally been
able to obtain adequate supplies of these products, the inability of the Company
in the future to obtain sufficient sole or limited source products, or to
develop alternative sources, could result in delays in product introductions or
shipments and could have material adverse effects on the Company's results of
operations.
During 1994 and 1995, the Company was party to an agreement with Singapore
Precision Industries ("SPI"), a unit of Singapore Technology Industrial
Corporation, the technology manufacturing arm of the Singapore government, for
the manufacturing of plastic card printers for the Imaging business. Various
matters under the agreement were in dispute for approximately one year. In
settlement of all outstanding claims under this agreement, the Company agreed to
pay $1,525,000 to SPI and received plastic card printers and parts having an
estimated net realizable value of $525,000. As a result, the Company recorded an
expense of $1,000,000 in the second quarter of 1996 as a cost of settling the
dispute. In addition, the Company was granted the option to distribute two new
plastic card printer lines in North and South America and Western Europe.
MARKETING
Imaging. Sandia markets its plastic card printer systems and software to
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businesses and government agencies on a worldwide basis. Marketing and sales and
service functions of the Imaging business are performed directly by Sandia as
well as through the use of Original Equipment Manufacturers ("OEMs"), Value
Added Resellers ("VARs") and systems integrators. Sandia has created strategic
product marketing alliances with several leading system integrators and
technology companies in the secure card market. Because Sandia's high speed
printer systems can support edge-to-edge color printing and data encoding
requirements of any card-mounted, digitized security technology, the Company
believes Sandia's products represent the most complete and cost-effective
alternative in the high volume plastic card printing market.
Laser Marking. LMC derives the major portion of its revenues from the sale of
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laser marking systems and related spare parts. LMC currently markets and sells
its products in the Americas, Western Europe, and the Pacific Rim countries
through independent sales representatives who are paid on a commission basis and
through distributors who have OEM pricing arrangements. LMC uses demonstrations
at trade shows and conventions, direct mailings of sales brochures and
advertisements in trade journals to advertise its products.
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EXPORT SALES
Refer to Note 17 of the Notes to the Consolidated Financial Statements for the
years ended December 31, 1996, 1995, and 1994.
BACKLOG
The Company had a backlog of firm orders totaling $3,595,000, $3,442,000, and
$3,886,000 as of December 31, 1996, 1995, and 1994, respectively. The booked
backlog for the year ended December 31, 1996 will be liquidated during 1997.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company is licensed under certain patents related to the lasers used
in its markers. The Company owns three Eximer patents, which have a broad range
of medical and industrial laser marking applications. These patents expire at
various dates through 2005. The Company also owns and has the worldwide
distribution rights to three French patents covering the mechanical parts and
assembly of Sandia's plastic card printer family of dye sublimation,
photographically-customized identification/security card printers. The
Company's rights under such patents do not preclude the manufacture of
competitive products by others. However, pursuant to its license agreement with
Xerox, the Company does have sole rights to the DataGlyphs/TM/
technology for use with security and identification media.
The Company has registered or is in the process of registering the following
trade and service marks: "The Chipless Smart Card"/TM/, "GlyphScan"/TM/, "The
Clean Ones"/TM/, "Inkless Inkjet"/TM/, "Blazer 6000CE"/TM/ and "BlazerJet"/TM/.
EMPLOYEES
As of December 31, 1996, the Company employed 103 people. Of this total, Sandia
employed 33, Sandia-Europe employed 11, LMC employed 57 and the holding company
employed 2. For information with respect to the executive officers and
directors of the Company, reference is made to the Proxy Statement.
GOVERNMENT REGULATION
All laser manufacturers in the United States, including LMC are subject to the
Laser Radiation Safety Regulations of the Center for Devices and Radiological
Health ("CDRH") of the United States Food and Drug Administration.
As a company with international sales, Lasertechnics is subject to the federal
Export Administrative Regulations, which govern exports from the United States
of non-military goods, technology, software and technical services. The
regulations prohibit, or require prior approval for, exports of certain items
depending upon the characteristics of the item to be exported, the country of
destination, the ultimate end-use and ultimate end-user of the export.
Lasertechnics' products are not currently considered sensitive for export
control purposes and may be exported to almost all locations without prior
government approval. It should be noted, however, that the export controls
applicable to a particular item can be changed without prior notice, subject
only to public notification in the Federal Register. In recent years,
Lasertechnics' products have been subjected to several such changes.
These regulations have not had, nor are they expected to have, a material effect
on the Company's financial condition, results of operations or competitive
position.
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ENVIRONMENTAL FACTORS
There has been, and it is anticipated that there will continue to be, no
material effect upon the capital expenditures, earnings, or competitive position
of Sandia or LMC due to compliance with existing provisions of federal, state
and local laws regulating the discharge of material into, or otherwise relating
to the protection of, the environment.
CAUTIONARY STATEMENTS
Except for the historical information contained herein, this Report includes
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although the
Company believes that the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Certain important factors that could cause actual results
to differ materially from the Company's expectations ("Cautionary Statements")
are disclosed below and qualify the forward looking statements included in this
Report. All subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
ACCUMULATED LOSSES
From its incorporation in 1981 through December 31, 1996, the Company has an
accumulated loss of approximately $50,000,000 and has been profitable in only
one fiscal year during that time. There can be no assurance that the Company
will generate sufficient revenues to achieve profitability in the future.
AUDITORS' REPORT
The Company's auditors have included an explanatory paragraph in their audit
opinion with respect to the Company's consolidated financial statements related
to a significant uncertainty with respect to the Company's financial position at
December 31, 1996, which states that the Company's recurring losses from
operations and resulting continued dependence on access to external financing
raise substantial doubts about its ability to continue as a going concern. In
October 1995 and March 1996, the Company arranged an aggregate of $12,500,000 in
additional financing. In addition, in July 1996 the Company completed a private
placement of convertible preferred stock for $8,350,000. Although there can be
no assurance that the Company will achieve profitability in the future, the
Company believes that such financing will be sufficient to satisfy its working
capital requirements through 1997. However, if the Company does not meet or
exceed its 1997 operating plan, additional funds may be required in the future.
As a result, there can be no assurance that the Company's future financial
statements will not include a
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similar explanatory paragraph if the Company is unable to raise sufficient funds
either through financing or from operations to cover the cost of its operations.
The factors leading to and the existence of the explanatory paragraph may
adversely affect the Company's relationship with customers and suppliers and
have an adverse effect on its ability to obtain financing.
LIQUIDITY AND CAPITAL REQUIREMENTS
The Company's future working capital requirements will depend upon many factors,
including the extent and timing of the Company's product sales, the Company's
operating results and the status of competitive products. The Company
anticipates that its existing working capital resources and revenues from
operations, together with the additional financing in the aggregate amount of
$13,850,000 arranged in March and July 1996, will be adequate to satisfy its
working capital requirements through 1997. The Company's actual working capital
needs will depend upon numerous factors, however, including actual expenditures
and revenues generated from its operations as compared to its business plan,
none of which can be predicted with certainty, and there can be no assurance
that the Company will not require additional funding prior to 1998. If the
Company's losses continue, the Company may have to obtain either funds to meet
its cash requirements through strategic or financial transactions with
compatible entities having the resources to support its programs, the sale of
assets or securities or other financing arrangements, or it will be required to
curtail its programs or seek a merger partner. Any additional funding may be on
terms which are unfavorable to the Company or disadvantageous to existing
stockholders. In addition, no assurance may be given that the Company will be
successful in raising additional funds or entering into business alliances.
SMALL TRADING VOLUME AND VOLATILITY OF STOCK PRICE
The weekly trading volume of the Company's Common Stock in the over-the-counter
market has varied from several thousand shares to 3 and 4 million shares, which
may tend to increase the volatility of the price. Since January 1992, the
closing bid price of Common Stock in the over-the-counter market has varied from
a low of $.70 to a high of $4.07 per share. There can be no assurance that the
price volatility will not continue in the future.
PROPRIETARY TECHNOLOGY
The Company relies on a combination of patents, technology licenses, trade
secrets and other intellectual property rights, nondisclosure agreements and
other protective measures to preserve its rights pertaining to its products.
Much of the Company's ability to compete in the laser marking and imaging
industries depends on trade secrets, know-how and proprietary technical
knowledge that is unprotected by patents. Although the Company continues to
implement protective measures and intends to defend its proprietary rights
vigorously, there can be no assurance that these efforts will be successful.
Such protections may not preclude competitors from developing products similar
to the Company's. In addition, the laws of certain foreign countries do not
protect intellectual property rights to the same extent as do the laws of the
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<PAGE>
United States.
There can also be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Any such infringement claim
could result in protracted and costly litigation and could have a material
adverse effect on the Company's results of operations regardless of its outcome.
TECHNOLOGICAL OBSOLESCENCE
The imaging and laser industries are undergoing, and are expected to continue to
undergo, rapid and significant technological change. There can be no assurance
that the Company's research and development programs will enable it to compete
effectively in the future. The development by others of new or improved
processes or products may make the Company's research and its products obsolete.
COMPETITION
The imaging and laser marking industries are highly competitive in all aspects,
including research and development and marketing. Many of the Company's
competitors have considerably greater financial, technical and marketing
resources than Lasertechnics. The Company's Marking business faces competition
not only from other laser marking companies, but from companies using several
other marking technologies in widespread use such as inkjet (currently the
dominant technology in the packaging industry), embossing and hot stamping. The
Company's Imaging business faces competition from other plastic card printing
companies as well as from companies using other technologies that produce
plastic cards for the same industries.
DEPENDENCE ON KEY EMPLOYEES AND CONSULTANTS
Because of the specialized nature of its businesses, the Company is dependent
upon the efforts of its current officers, consultants, and engineers and upon
its ability to attract and retain technologically qualified personnel,
particularly engineers and software designers highly qualified in the areas of
imaging and laser technology. There is intense competition for qualified
personnel in the imaging and marking industries, including competition from
companies with substantially greater resources than Lasertechnics. Although the
Company has been successful to date in recruiting adequate numbers of qualified
personnel, there is no assurance that it will be successful in the future in
recruiting or retaining personnel of the requisite scientific caliber or in the
requisite numbers to enable the Company to compete effectively.
DEPENDENCE ON SUPPLIER
The Company acquires all of its plastic card printers from a single source.
Although to date the Company has generally been able to obtain adequate supplies
of these products, the inability of the Company in the future to obtain
sufficient sole or limited source products, or to develop
15
<PAGE>
alternative sources, could result in delays in product introductions or
shipments and could have a material adverse effect on the Company's results of
operations.
DEPENDENCE ON CUSTOMERS
A substantial portion of the revenues in 1997 for the Company's Imaging unit
will be derived from a small number of significant contracts. The loss of any
of these contracts could have a material adverse effect on the Company's results
of operations.
NASDAQ LISTING
The Company's Common Stock is listed on the Nasdaq SmallCap Market, which
requires a minimum stockholders' equity of $1,000,000 and tangible assets of
$2,000,000 for continued listing. Because the Company's stockholders' equity
fell below this limit at September 30, 1995, Nasdaq temporarily put the
Company's Common Stock on a conditional listing until a new minimum of
$2,450,000 in equity was met on December 30, 1995. This was accomplished through
the conversion of an aggregate of $1,045,342 of convertible subordinated
debentures of the Company and the issuance of Series C Convertible Preferred
Stock. On January 2, 1996, Nasdaq removed the conditional listing and lowered
the stockholders' equity requirement to $1,000,000. While management believes
that in the event of future losses the Company will be able to obtain additional
equity financing to preserve such listing, there can be no assurance that the
Company will be able to do so.
In the event the Common Stock were delisted by Nasdaq, trading, if any, would be
conducted in the over-the-counter market on the NASD's electronic bulletin
board, in what are commonly referred to as the pink sheets. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of the Company's securities. In addition, the Common
Stock would be subject to rules promulgated under the Exchange Act applicable to
penny stocks. The Commission has adopted regulations that generally define a
"penny stock" to be an equity security that has a market price (as defined) or
exercise price of less than $5.00 per share, subject to certain exceptions. By
virtue of being listed on the Nasdaq SmallCap Market, the Company's Common Stock
will be exempt from the definition of "penny stock." If, however, the Common
Stock is removed from Nasdaq, the Company's securities may become subject to the
penny stock rules that impose additional sales practice requirements on broker-
dealers who sell penny stocks to persons other than established customers and
accredited investors. Consequently, the penny stock rules may affect the
ability of broker-dealers to sell the Company's securities and may affect the
ability of the Company's stockholders to sell their securities in the secondary
market.
SHARES ELIGIBLE FOR FUTURE SALE; CONVERTIBLE SECURITIES AND WARRANTS
Future sales of Common Stock in the public market by existing stockholders,
warrant holders and holders of convertible securities could adversely affect the
market price of the Company's
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<PAGE>
Common Stock. At December 31, 1996, an aggregate of 25,907,644 shares of Common
Stock were outstanding and freely tradable without restriction under the
Securities Act. In addition, up to 11,225,870 shares were eligible for resale in
accordance with the manner of sale and volume limitations of Rule 144
promulgated under the Securities Act.
The Company has reserved approximately 6,600,000 shares of Common Stock for
issuance upon the exercise of outstanding convertible securities and warrants.
The Company has also reserved 1,150,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
benefit plans. The Company's 10% Subordinated Convertible Debentures due March
1, 1999 (the "1996 Debentures"), in principal amount of $5,500,000 million, and
the Company's Series D Convertible Preferred Stock (the "Series D Preferred
Stock"), in the amount of $8,350,000, became or will become convertible into
Common Stock at various times during 1996 and 1997. Subject to certain
exceptions, the conversion price for the 1996 Debentures is equal to the lesser
of (i) $2.00 or (ii) a variable conversion rate equal to 85% of the average
closing bid price for the Common Stock for the five trading days prior to
conversion. The conversion price for the Series D Preferred Stock is equal to
the lesser of (i) $2.1406 or (ii) as little as 85% of the average closing bid
price of the Common Stock for the ten trading days prior to the conversion date.
These variable conversion rates for the 1996 Debentures and the Series D
Preferred Stock could result in substantial dilution to the existing
stockholders of the Company if the trading price of the Company's Common Stock
declines. This potential dilution may also adversely affect the Company's
ability to raise additional financing on favorable terms in the future. In
addition, because the conversion prices are variable, the Company is unable to
determine whether the number of shares it has reserved or its remaining
authorized but unissued shares of Common Stock will be sufficient to satisfy all
future requirements for the issuance of Common Stock upon conversion of the
1996 Debentures and Series D Preferred Stock. The governing instruments for both
the Series D Preferred Stock and the 1996 Debentures include substantial
penalties in the event that the Company has insufficient authorized or reserved
shares to satisfy the conversion requirements of the Series D Preferred Stock
and the 1996 Debentures.
ITEM 2. PROPERTIES
IMAGING BUSINESS
Sandia leases a 14,508 square foot facility in Carrollton, Texas used for
administrative, engineering and sales offices. This facility is rented under a
three year agreement that terminates in November 1997. In addition, Sandia is
the lessor under each of a two and three year lease, respectively, for two
facilities in Paris, France comprising approximately 2,700 square feet in the
aggregate, which are used to house the administrative, engineering and sales
functions of Sandia Europe. The Company's Singapore and Oxford, England sales
offices were closed in the first quarter of 1996. The Singapore operations are
handled by Sandia's consulting partner, Technology Interests Pty. Ltd in Sydney,
Australia, and the England operations are handled by Sandia's Paris, France
office.
17
<PAGE>
MARKING BUSINESS
LMC manufactures laser markers in a 20,000 square foot facility in Albuquerque,
New Mexico, which it occupies under a long-term capital-lease agreement. For
further information with respect to commitments on the properties of the
Company, reference is made to Notes 4 and 5 of the Notes to the Consolidated
Financial Statements for the years ended December 31, 1996, 1995, and 1994.
ITEM 3. LEGAL PROCEEDINGS
On February 28, 1996, an investor group filed suit against the Company in the
United States District Court for the Southern District of New York. The lawsuit
arises out of the Company's refusal to recognize the investor group's attempt to
exercise an option to purchase 1,400,000 shares of the Company's Common Stock at
$.495 per share. The option had been granted to the Company's former President
and CEO who attempted to transfer his option to the investor group on the last
day of the option term in September 1995. On that same day, the investor group
attempted to exercise the option. The Company refused to recognize the
attempted transfer of the option to the investor group on the primary ground
that the option was granted personally to the Company's former President and CEO
and was not transferable to third parties. The lawsuit seeks issuance and
registration of the 1,400,000 shares of Common Stock upon payment of the
exercise price of $693,000, or in the alternative, monetary damages which the
investor group alleges to be not less than $2,800,000. On May 1, 1996, the
Company moved to dismiss the complaint on the grounds that the court in New York
lacks personal jurisdiction over the Company. A decision on that motion is
still pending. The Company believes the claim is without merit and will
vigorously oppose it. In addition, the Company believes resolution of this
matter will not materially and adversely affect its financial position or
results of operations.
The Department of Commerce (the "DOC") has informed Lasertechnics that it is
prepared to initiate administrative proceedings against the Company in
connection with alleged violations of the Export Administrative Regulations. The
allegations relate to 36 export shipments made by the Company, each of which
could give rise to three violations of the regulations. The Company is now
engaged in negotiating with the DOC regarding these allegations. Because the DOC
has not filed formal charges against the Company, and because the outcome of the
current negotiations cannot be predicted, the Company cannot at this time
determine the scope of its potential liability. However, the Company believes
that the ultimate resolution will not materially and adversely affect its
financial position or results of operations.
Reference is made to Note 13 of the Notes to the Consolidated Financial
Statements for the years ended December 31, 1996, 1995 and 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR LASERTECHNICS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol LASX. The table below sets forth high and
low last sale prices for the
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<PAGE>
Common Stock during each of the periods indicated, as reported by the Nasdaq.
Such price quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 LAST SALE PRICES 1996 LAST SALE PRICES
--------------------- ---------------------
CALENDAR PERIOD LOW HIGH LOW HIGH
--------------- --- ---- --- ----
<S> <C> <C> <C> <C>
First Quarter........ $ 1.00000 $ 1.62500 $ 1.90625 $ 2.06250
Second Quarter....... 1.12500 1.62500 2.59375 2.87500
Third Quarter........ 1.34375 2.37500 1.31250 1.37500
Fourth Quarter....... 1.03125 2.43750 1.00000 1.18750
</TABLE>
As of December 31, 1996, the Company had approximately 7,590 holders of record
of voting Common Stock and one holder of record of non-voting Common Stock.
The Company has not paid dividends on its Common Stock and does not anticipate
the payment of cash dividends in the foreseeable future as it contemplates
retaining all earnings to finance the continued growth of the Company's
business. In addition, certain covenants contained in the Company's financing
arrangements restrict the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 5 of the Notes to Consolidated Financial Statements
for the years ended December 31, 1996, 1995 and 1994.
RECENT SALE OF UNREGISTERED SECURITIES
In July 1996, the Company raised $8,350,000 in cash from the sale of 835 shares
of Series D Preferred Stock, par value $.01 per share, at a price of $10,000 per
share (the "Private Placement"). The Private Placement was effected pursuant to
an exemption from registration under Rule 506 of Regulation D ("Regulation D")
of the Commission, promulgated under the Securities Act by the Commission. The
Private Placement complied in all respects with Rules 501 and 502 of Regulation
D and the shares of Series D Preferred Stock were sold to no more than 35
accredited investors.
Shares of Series D Preferred Stock are convertible into Common Stock in
increments of up to 1/3 of Series D Preferred Stock purchased at a variable
conversion rate equal to the lesser of (i) $2.1406 per share and (ii) (A) the
average closing bid price of the Common Stock for the 10 trading days prior to
the conversion date multiplied by (B) a percentage which is 90% from October 1,
1996 to November 29, 1996, 87.5% from November 30, 1996 to January 28, 1997 and
85% thereafter. Prior to conversion, the Series D Preferred Stock is subject to
an 8% per annum accretion rate, which is payable in Common Stock. All shares of
Series D Preferred Stock outstanding on August 2, 1999 are subject to automatic
conversion at the conversion rate then in effect.
On October 23, 1996, the Commission declared effective the Company's
Registration Statement
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<PAGE>
on Form S-3 (Registration No. 333-10665), which registers the resale of shares
of Common Stock that are issued upon conversion of shares of Series D Preferred
Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Previously the Company announced that it would try to be in a position to
arrange for the initial public offering of its Imaging business segment. While
it is still the Company's intention to separate the two businesses, the form and
timing of such separation will be dictated by many factors, some of which are
stock market conditions and the operating and financial performance of the two
units. It is expected that in 1997 the Company will define a timetable for
implementing this goal. The summarized financial data for the two businesses
appears below.
BUSINESS SEGMENTS
The Company operates with its product groups organized into two business
segments: Marking and Imaging. Imaging operations involve the manufacture and
sale of plastic card printing systems and related consumable products to print
and encode fraud-resistant wallet-sized plastic cards for, among other things,
drivers' licenses, identification, border crossing, financial transactions and
health care services. Marking is involved in the manufacture and sale of laser
systems which mark consumer and commercial products with a "freshness date,"
serial number, logo or bar code.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth for each of the years 1996,
1995 and 1994 has been derived from the audited consolidated financial
statements, including the consolidated statements of operations for the years
ended December 31, 1996, 1995, and 1994 and the notes thereto appearing
elsewhere herein. General corporate assets and expenses are allocated to the
respective business segments.
20
<PAGE>
<TABLE>
<CAPTION>
IMAGING MARKING CONSOLIDATED
(Sandia) (LMC) (LASX)
------- ------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
- ------------------------------
Sales....................... $ 8,197,639 $ 9,383,801 $ 17,581,440
Loss from operations........ (8,642,620) (981,376) (9,623,996)
Identifiable assets......... 9,941,186 7,720,671 17,661,857
Capital expenditures........ 654,832 128,962 783,794
Depreciation................ 377,824 265,999 643,823
YEAR ENDED DECEMBER 31, 1995
- ------------------------------
Sales....................... $ 3,121,577 10,308,154 13,429,731
Loss from operations........ (7,934,839) (195,374) (8,130,213)
Identifiable assets......... 5,844,770 8,797,832 14,642,602
Capital expenditures........ 640,528 354,990 995,518
Depreciation................ 133,991 218,466 352,457
YEAR ENDED DECEMBER 31, 1994
- ------------------------------
Sales....................... $ 3,892,810 11,963,399 15,856,209
Loss from operations........ (6,776,649) (416,160) (7,192,809)
Identifiable assets......... 4,212,664 6,497,792 10,710,456
Capital expenditures........ 372,417 417,992 790,409
Depreciation................ 139,860 174,116 313,976
</TABLE>
21
<PAGE>
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated sales increased to $17,581,440 in 1996 from $13,429,731 in 1995.
In 1994 sales totaled $15,856,209. The increase in 1996 compared to 1995 was
primarily the result of increased sales in the Imaging segment. The decrease in
consolidated sales in 1995 compared to 1994 was the result of the completion of
a large contract in the Marking business and the sale of a product line in the
Imaging business.
The consolidated net loss for 1996 was $11,029,077, a 21% increase over the 1995
consolidated net loss of $9,094,503. A one-time charge of $1,000,000 in the
Imaging business and higher non-cash interest expense associated with financing
in 1995 and 1996 accounted for the majority of the increase. The 1995 net loss
was an increase of $1,807,547, or 25%, compared to the 1994 net loss of
$7,286,956. This increase was primarily due to the greater costs of operating
the Imaging business with a complete staff of sales, marketing, engineering and
administrative personnel, rather than with a partial staff as in 1994.
Gross profit as a percentage of sales (gross margin) remained relatively the
same for 1996 at 31% compared to 32% in 1995 and 33% in 1994. Low margins in
1996 were primarily the result of the Imaging business booking its first
significant drivers' license contract (the Australian drivers' license contract)
at margins that insured Sandia would be awarded the contract (market-entry
margins). In 1995 and 1994 the low margins were the result of significant OEM
sales in the Imaging business, which have typically been less profitable than
direct sales to end-user customers. Sales that comprise backlog at December
31, 1996 generally have margins of 40 to 45 percent for both business segments.
During the second quarter of 1996 the Company recorded a loss on settlement of a
contract as the result of discontinuing a manufacturing agreement with its
Singapore manufacturer, SPI. As part of the settlement, Sandia received plastic
card printers and parts having an estimated net realizable value of $525,000 and
recorded $1,000,000 of expense as a cost of settling the dispute. In addition,
the Imaging segment recorded a $287,000 one-time charge in the third quarter of
1996 to reduce on-going expenses in its international operations. At the end of
1994, the Imaging segment evaluated the long term revenue and profit potential
of each of its product lines. As a result, the Company recorded a charge
totaling $1,148,275 to reflect value adjustments primarily to the DIR and
SnapShot product lines. In addition, capitalized software development costs for
the SnapShot product line of approximately $553,000 were charged to research and
development expense. In 1995, the DIR product line was sold and the SnapShot
product line was discontinued. See "Business - Product Lines and Services -
Imaging Business."
At December 31, 1996 the Company's backlog was $3,595,000 compared to $3,442,000
for year end 1995. The Imaging business backlog was $2,622,000 and $1,668,000
at December 31, 1996 and 1995, respectively, an increase of 57%. The Marking
business backlog was $973,000 and
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<PAGE>
$1,775,000 at December 31, 1996 and 1995, respectively, a decrease of 45%.
IMAGING BUSINESS RESULTS OF OPERATIONS
Imaging segment sales increased in 1996 to $8,197,639, or approximately 165%
from 1995 sales totaling $3,121,577 in 1995. This was a result of an increase
in worldwide demand for the Company's systems which encode fraud-resistant
security and identification media such as drivers' licenses, border crossing
documents, financial transaction cards and health care services cards. Sales in
1994 were $3,892,810, or 20% higher than 1995 because of a decrease in DIR and
SnapShot sales in 1995 of approximately $750,000.
The Imaging segment loss from operations in 1996 increased to $8,642,620, or 9%,
from $7,934,839 in 1995, as compared to the 17% increase in 1995 from the
operating loss in 1994 of $6,776,649. The increase in loss from operations for
1996 results from the $1,000,000 loss on contract settlement and the $287,000
charge noted above plus increases in other operating costs and expenses
partially offset by an improvement in gross profit. The increase in 1995 of
approximately $1,158,000, or 17%, is primarily due to the greater costs of
operating the Imaging business with a complete staff of sales, marketing,
engineering, and administrative personnel rather than with a start-up staff, as
in 1994.
The Imaging segment gross profit margin in 1996 improved slightly to 17%
compared to 16% in 1995. Low margins in 1996 were primarily the result of
booking Sandia's first significant drivers' license contract (the Australian
drivers' license contract) at margins that insured Sandia would be awarded the
contract. In 1995 the low margins were the result of larger than expected OEM
sales of plastic card printers which carry a lower selling price and lower
margin than direct sales to end users, and because of the sale of custom-
designed plastic card printers which have a higher manufacturing cost than
standard models. Although the Imaging segment's 27% gross profit margin in 1994
was higher than for 1996 and 1995, the margin was lower than expected. The low
margin in 1994 was the result of highly competitive pricing on DIR sales and a
high percentage of OEM plastic card printer sales, which carry a lower selling
price and lower margin than direct sales to end users.
Imaging segment operating expenses increased 16% in 1996 to $10,061,712 from the
$8,421,492 of operating expenses in 1995. This increase of $1,640,220 was
primarily the result of approximately $360,000 increase in sales and marketing
costs for the continued expansion of Sandia worldwide operations and a
$1,000,000 one time charge for a loss on a contract settlement with Sandia's
Singapore manufacturer, SPI. Operating expenses in 1995 increased $1,731,035, or
26%, from the $6,690,461 in 1994. There was an increase of approximately
$440,000 in sales and marketing expenses as a result of opening several sales
offices, and an increase of approximately $530,000 in expenses due to the
establishment of a customer service department. In addition, general and
administrative expenses increased $875,000 to support the overall expanded
operations of the Imaging business, including an increase of approximately
$268,000 in the allocation of overhead and other holding company costs.
23
<PAGE>
Research and development expense for 1996 was $2,053,111, or approximately the
same level as 1995, of $1,963,537 and 1994 of $2,078,537. The research and
development costs incurred in 1996 were primarily for manufacturing development,
DataGlyphs/TM/ software development and hardware and software upgrading of
Sandia's high speed plastic card printers. The research and development costs
incurred in 1995 were due to the same factors. In 1994, in addition to the
development costs associated with Sandia's plastic card printers, approximately
$890,000 in research and development costs were incurred by the Imaging business
in the development of the DIR and SnapShot product lines. Development related to
both of these product lines were discontinued at the end of 1994.
Sales and marketing expenses increased approximately 10% to $3,737,867 in 1996
from $3,376,618 in 1995 and general and administrative expenses increased
approximately 6%, to $3,270,734 compared to 1995. Both of these increases were
the result of further expansion of Sandia's worldwide presence in 1996. In 1994
sales and marketing expenses were $2,957,505, or 12% lower than 1995 and general
and administrative expenses were $1,457,750, or less than half of the 1995
general and administrative expenses. Sales and marketing expenses increased
because of the establishment of sales offices in Singapore, the United Kingdom
and the U.S. and the addition of personnel related to the new sales offices.
General and administrative expenses more than doubled in 1995 because of the
increased staff and operations required to support the increases in research and
development and sales and marketing activities in 1995.
MARKING BUSINESS RESULTS OF OPERATIONS
The 1996 operating loss for the Marking segment was $981,376, an increase of
$786,000 over the 1995 operating loss of $195,375. The 1995 operating loss was
an improvement of over $220,000 compared to the 1994 operating loss of $416,016.
Marking segment sales decreased approximately 10%, from $10,308,154 in 1995 to
$9,383,801 in 1996. This was primarily due to a $2,300,000 decrease in domestic
sales of marking systems and a $380,000 decrease in foreign sales in the Pacific
Rim market and offset by a $1,755,000 increase in after-market sales. Marking
segment sales in 1995 declined 14% or $1,655,245 from 1994 sales. This
reduction resulted primarily from a decrease in the domestic systems sales due
to the completion of a $7,500,000 order from Anheuser-Busch.
The 1996 gross profit percentage for the Marking segment was 44% compared to the
1995 gross profit percentage of 37%. Higher margin service sales were the major
contributor to this increase. In 1995 the Marking segment gross profit dollars
decreased from the 1994 level by 8% while the gross profit percentage increased
from 34% in 1994 to 37% in 1995. These changes resulted primarily from the
completion of a significant lower margin system order begun in 1994 and an
increase in higher margin service sales in 1995.
Marking segment operating expenses for 1996 were $4,985,613 compared to
$3,979,056 in 1995.
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<PAGE>
The increase of 25% is primarily the result of a $610,000 increase in general
and administrative expenses, a $500,000 increase in marketing expenses and a
$281,000 reduction in research and development expenses. The reduction in
research and development is the result of narrowing the scope of research and
development activities to upgrading current marking systems only. General and
administrative and marketing expenses have increased primarily due to the
training, trade show expense, and personnel required to support the Marking
segment's increased marketing efforts.
Marking segment operating expenses for 1995 were $561,000 lower than the 1994
expenses of $4,540,085, a decrease of 12%. This decrease resulted from a
$225,000 reduction in research and development expenses because of completion of
the major portion of the research and development efforts on the new
BlazerJet/TM/ system in 1994.
OTHER INCOME AND EXPENSE
Other income/(expense) was ($1,405,081) in 1996, ($964,290) in 1995, and
($94,147) in 1994. Other expense in 1994 was comprised of interest expense and
a nominal amount of interest income. The majority of other expense in 1995 was
related to interest and amortization on the sale of the October 1995 debentures
and short term debt. Other expenses increased again in 1996 due to interest and
amortization on both the October 1995 debentures and the debentures sold in
March 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has utilized the proceeds from a number of public
and private sales of its equity securities, the exercise of options and warrants
and more recently, convertible debt and short-term bridge loans from
shareholders to meet its working capital requirements. Cash and cash equivalents
decreased $293,613 from December 31, 1995 to $1,598,744 at December 31, 1996.
Net proceeds from financing activities in 1996 totaled $14,193,808 including
$5,115,000 of net proceeds from the sale of convertible debentures and
$7,697,826 net proceeds from the issuance of preferred and common stock.
Operating activities used net cash of $13,703,627 primarily to support the
$11,029,077 loss, the $2,187,157 increase in inventory, and the $2,087,326
decrease in accounts payable. The increases in prepaid expenses and other assets
of $775,350 and $1,280,821, respectively primarily reflect a prepaid royalty
related to a $2,100,000 note payable recorded during 1996. Investing activities
used net cash of $783,794 for capital expenditures in 1996 as compared to
$995,518 in 1995. Capital expenditures for 1997 are expected to remain at the
same level as 1996.
Although sales increased from 1995 to 1996, the accounts receivable balance
decreased. Sales during the first three quarters of 1996 accounted for 84% of
the sales for the year. Aggressive collection procedures combined with lower
sales in the fourth quarter of 1996 resulted in the reduced accounts receivable
balance at the end of 1996. In addition, the 1995 balance of accounts
receivable was relatively high due to a large number of shipments made during
the last
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<PAGE>
two weeks of 1995.
Inventory increased $2,187,157 from 1995 to 1996. Of this amount, $1,250,065
was due to a buildup of inventory by LMC for anticipated sales of BlazerJet/TM/
product. Sandia's inventory increased $937,092 due to a buildup for future
sales and due to recording $525,000 of the plastic card printers and parts
received in the contract settlement with SPI. See "Business - Manufacturing and
Suppliers.".
The Company's foreign sales are generated by Sandia Europe (located in Paris,
France), Sandia and LMC. Sandia Europe sales and operating costs are primarily
denominated in French Francs. Sandia and LMC sales are in US dollars, except for
a subcontract that was signed in April 1996 of approximately $5,000,000 which is
being settled in Australian dollars. All but approximately $750,000 has been
received on this contract without incurring an exchange loss. Although the
Company funds some of its European operations out of the U.S., currency exchange
exposure is considered minimal because the majority of French franc expenses are
funded with French franc revenues.
The Company's future working capital requirements will depend upon many factors,
including the extent and timing of the Company's product sales, the Company's
operating results and the status of competitive products. The Company
anticipates that its existing working capital resources and revenues from
operations, together with the additional financing in the aggregate amount of
$13,850,000 arranged in March and July 1996, will be adequate to satisfy its
working capital requirements through 1997. The Company's actual working capital
needs will depend upon numerous factors, however, including actual expenditures
and revenues generated from its operations as compared to its business plan,
none of which can be predicted with certainty, and there can be no assurance
that the Company will not require additional funding prior to 1998. If the
Company's losses continue, the Company may have to obtain sufficient funds to
meet its cash requirements through strategic or other financial transactions
with compatible entities having the resources to support its programs, the sale
of assets or securities or other financing arrangements, or it will be required
to curtail its programs or seek a merger partner. Any additional funding may be
on terms which are unfavorable to the Company or disadvantageous to existing
stockholders. In addition, no assurance may be given that the Company will be
successful in raising additional funds or entering into business alliances.
Currently, there are no existing commitments for any additional external short-
term or long-term financing.
As discussed above, management raised $5,115,000, net of issuance costs, from
the sale of 10% convertible debentures (the "March 1996 Debentures"). The March
1996 Debentures are convertible into Common Stock at $2.00 per share, or at 85%
of the average five day closing bid price for the five trading days immediately
prior to the conversion date. The March 1996 Debentures were placed in
denominations of at least $50,000 and integral multiples of at least $50,000 in
excess thereof. Debenture coupons accrue at a rate of 10% per annum and are
payable in Common Stock upon conversion. March 1996 Debentures can be converted
into Common Stock in increments of up to 1/4 of the original investment
beginning the 60th, 90th, 120th and 150th day after the final closing. At the
end of three years from the closing date, all March 1996 Debentures will
automatically be converted into
26
<PAGE>
Common Stock. March 1996 Debenture holders received warrants in amounts ranging
from 10% to 20% of each holder's position held in shares of Common Stock. The
warrants have a strike price of $2.00 per share of Common Stock with a five year
term.
The Company may elect to redeem any or all of the March 1996 Debentures at a
price that would give each investor the same return as it would have received
had it converted such Debentures on the date of redemption. The Company may
call any or all of the March 1996 Debentures in increments of no less than
$1,500,000 at the following prices and times:
Price Time
-------------------- ------------------------------
130% of stated value 12 months + 1 day to 18 months
125% of stated value 18 months + 1 day to 24 months
120% of stated value 24 months + 1 day to 30 months
115% of stated value 30 months + 1 day to 36 months
The shares of Common Stock issuable upon conversion of the March 1996 Debentures
have not been registered under the Securities Act and may not be offered or sold
in the United States during the restricted period. As of December 31, 1996
approximately 59% of the March 1996 Debentures had been converted into Common
Stock.
In July 1996, management raised $7,698,000, net of issuance costs, from the sale
of Series D Convertible Preferred Stock, par value $.01 per share, (the "Series
D Preferred Stock") at a price of $10,000 per share. Shares of Series D
Preferred Stock are convertible into Common Stock in increments of up to 1/3 at
the lower of $2.1406 per share, or at a variable percentage of the average
closing bid price for the ten trading days immediately prior to the conversion
date at the option of the stockholder as follows: 90%, 87.5%, and 85% beginning
the 60th, 120th, and 180th day after the final closing, respectively. Holders
of Series D Preferred Stock do not receive dividends; however, each share
possesses an 8% per annum accretion rate prior to conversion which is payable in
Common Stock upon conversion or redemption at the conversion price then in
effect. At the end of three years from the closing date, all Series D
Convertible Preferred Stock will automatically be converted into Common Stock.
The Company may redeem any or all of the Series D Convertible Preferred Stock in
increments of at least $1,000,000 according to the same schedule of prices and
times noted above for the March 1996 Debentures. For the twelve month period
immediately following the closing date, the Company may redeem the Series D
Convertible Preferred Stock upon receipt of a notice of conversion from a holder
of Series D Preferred Stock if the conversion price of the Common Stock is less
than the fixed conversion price for the Series D Preferred Stock. The
redemption price for the Series D Preferred Stock is based on a ratio of the
closing bid price of the Common Stock on the date of conversion to the
conversion price calculated using the average closing bid price of the Common
Stock for the ten trading days immediately preceding the conversion date.
Resales of shares of Common Stock issuable upon conversion of the Series D
Preferred Stock have been registered under the Securities Act.
27
<PAGE>
In 1983, the City of Albuquerque, New Mexico issued 8% tax-exempt industrial
development revenue bonds in connection with a 25-year capital lease of LMC's
headquarters facility. The principal amount outstanding as of December 31, 1996
was $955,852. Pursuant to its agreement with the City of Albuquerque,
Lasertechnics is required to maintain a current ratio of at least 1 to 1. At
December 31, 1996, the Company's current ratio was 2.3 to 1 which is in
compliance with the agreement. Previously, the Company was also required to
maintain a debt to equity ratio of not more than 3 to 1. Although the Company's
current ratio was in compliance at December 31, 1995 at 1.5 to 1, its debt to
equity ratio was 4 to 1 which was in violation of the agreement. As a result,
the full amount of the lease was classified as a current liability on the
Company's balance sheet at December 31, 1995. During the fourth quarter of
1996, the bondholder agreed to waive the debt to equity ratio requirement. In
addition, the bondholder agreed to permanently waive its right to call the bond
for redemption provided the Company remains in compliance with all other
covenants and continues to prepay the lease by an additional $8,000 per month.
Failure of the Company to stay in compliance could result in the relocation of
LMC headquarters to other facilities and the associated disruption of the
business, as well as increased difficulty in obtaining financing and credit, and
could affect the Company's ability to continue as a going concern. See Note 5
to the Consolidated Financial Statements.
Lasertechnics' Common Stock is listed on the Nasdaq SmallCap Market, which
requires a minimum $1,000,000 net capital and surplus for continued listing.
Because Lasertechnics' net capital and surplus fell below this limit at
September 30, 1995, Nasdaq temporarily put the Company on a "conditional"
listing until a new minimum of $2,450,000 in equity was met on December 31,
1995. The increase in equity was accomplished by debenture owners converting
$1,045,342 of debt, including accrued interest, into Common Stock and by the
sale of Series C Convertible Preferred Stock, par value $.01 per share. On
January 2, 1996, Nasdaq removed the conditional listing of Lasertechnics' Common
Stock and lowered the equity requirement back to $1,000,000. The Company's net
capital and surplus did not fall below the minimum amount in 1996. Management
forecasts that net capital and surplus will remain in excess of $1,000,000 for
1997.
OTHER
Inflation has not had and is not expected to have a material impact on the
operations and financial condition of the Company.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Transfers of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The provisions of SFAS No. 125 are
generally effective for transactions occurring after December 31, 1996, however,
the effective adoption of SFAS No. 125 is not expected to have a material impact
on the Company's consolidated financial statements.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995... F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994...................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994...................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994...................... F-7
Notes to Consolidated Financial Statements..................... F-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding Directors, Executive Officers, Promoters and Control
Persons is incorporated by reference to the sections entitled "Principal
Shareholders," "Management," and "General" in the Company's Proxy Statement to
be filed with the Commission in connection with the Annual Meeting of
Stockholders to be held on May 13, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section entitled "Management" in the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
sections entitled "Principal Shareholders" and "Management" in the Company's
Proxy Statement.
29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Management" in the Company's Proxy Statement.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 --Certificate of Incorporation of Lasertechnics. Incorporated
herein by reference to Exhibit 3.1 to Lasertechnics' Registration
Statement on Form S-1 (Registration No. 2-80946).
3.2 --By-laws of Lasertechnics. Incorporated herein by reference to
Exhibit 3.2 to Lasertechnics' Registration Statement on Form S-1
(Registration No. 2-80946).
3.3 --First Amendment to Certificate of Incorporation of
Lasertechnics' dated June 6, 1986. Incorporated herein by
reference to Exhibit 3.3 to Lasertechnics' Annual Report on Form
10-KSB for the year ended December 31, 1987.
3.4 --Second Amendment to Certificate of Incorporation of
Lasertechnics, dated May 27, 1987. Incorporated herein by
reference to Exhibit 3.4 to Lasertechnics' Annual Report on Form
10-KSB for the year ended December 31, 1987.
3.5 --Third Amendment to Certificate of Incorporation of
Lasertechnics, dated November 11, 1994. Incorporated herein by
reference to Exhibit 4.4 to Lasertechnics' Registration Statement
on Form S-3 (Registration No. 333-10665).
3.6 --Fourth Amendment to Certificate of Incorporation of
Lasertechnics, dated July 28, 1995. Incorporated herein by
reference to Exhibit 4.5 to Lasertechnics' Registration Statement
on Form S-3 (Registration No. 333-10665).
3.7 --Fifth Amendment to Certificate of Incorporation of
Lasertechnics, dated June 17, 1996. Incorporated herein by
reference to Exhibit 4.6 to Lasertechnics' Registration Statement
on Form S-3 (Registration No. 333-10665).
30
<PAGE>
4.1 --Certificate of Designation of Lasertechnics Series A, B and C
Preferred Stock, dated December 27, 1995. Incorporated herein by
reference to Exhibit 4.7 to Lasertechnics' Registration Statement
on Form S-3 (Registration No. 333-10665).
4.2 --Certificate of Designation of Lasertechnics Series D Preferred
Stock. Incorporated herein by reference to Exhibit 4.1 to
Lasertechnics' Quarterly Report on Form 10-QSB for the period
ended June 30, 1996.
10.1 --License agreement, dated June 30, 1988, between Lasertechnics
and Patlex Corporation. Incorporated herein by reference to
Exhibit 10.17 to Lasertechnics' Annual Report on Form 10-KSB for
the year ended December 31, 1988.
10.2 --Employment agreement dated August 31, 1989, between Louis F.
Bieck, Jr. and Lasertechnics, Inc. as amended. Incorporated
herein by reference to Exhibit 10.17 Lasertechnics' Form 10-KSB
for the year ended December 31, 1990.]
10.3 --1991 Incentive Stock Option Plan, dated August 14, 1991.
Incorporated herein by reference to Exhibit 10.10 to
Lasertechnics' Annual Report on Form 10-KSB for the year ended
December 31, 1991.
10.4 --Purchase Agreement between Sandia Europe and Jean-Luc
Poutchnine, Alain Quilleau and Philippe Bonnevie, dated March 4,
1994. Incorporated herein by reference to Exhibit 10.15 to
Lasertechnics' Annual Report on Form 10-KSB for the year ended
December 31, 1994.
10.5 --Letter confirming sale of shares of Lasertechnics Common Stock
to Singapore Precision Industries PTE LTD, dated May 12, 1994.
Incorporated herein by reference to Exhibit 10.16 to
Lasertechnics' Annual Report on Form 10-KSB for the year ended
December 31, 1994.
10.6 --Contract Manufacturing Agreement between Sandia and Singapore
Precision Industries PTE LTD, dated May 13, 1994. Incorporated
herein by reference to Exhibit 10.17 to Lasertechnics' Annual
Report on Form 10-KSB for the year ended December 31, 1994.
31
<PAGE>
10.7 --Advisory and investment banking services agreement between
Lasertechnics and Wolfensohn International, Inc. , dated May 19,
1993. Incorporated herein by reference to Exhibit 10.18 to
Lasertechnics' Annual Report on Form 10-KSB for the year ended
December 31, 1994.
10.8 --Purchase of Common Stock and Convertible Note Agreement
between Lasertechnics and J.P. Morgan Investment Corporation,
dated July 8, 1994. Incorporated herein by reference to Exhibit
10.19 to Lasertechnics' Annual Report on Form 10-KSB for the year
ended December 31, 1994.
10.9 --OEM License Agreement between Sandia and Xerox Corporation,
dated January 6, 1995. Incorporated herein by reference to
Exhibit 10.20 to Lasertechnics' Annual Report on Form 10-KSB for
the year ended December 31, 1994.
10.10 --Demand Promissory Note issued to J.P. Morgan Investment
Corporation, dated December 19, 1994. Incorporated herein by
reference to Exhibit 10.21 to Lasertechnics' Annual Report on
Form 10-KSB for the year ended December 31, 1994.
10.11 --Demand Promissory Note issued to J.P. Morgan Investment
Corporation, dated December 31, 1994. Incorporated herein by
reference to Exhibit 10.22 to Lasertechnics' Annual Report on
Form 10-KSB for the year ended December 31, 1994.
10.12 --Amendment to the OEM License Agreement between Sandia and
Xerox Corporation, dated December 27, 1996.*
11.0 --Statement Re: Computation of Per Share Earnings.*
21.1 --Subsidiaries of Lasertechnics.*
23.1 --Consent of KPMG Peat Marwick LLP.*
______________
*Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March ___, 1997
LASERTECHNICS, INC.
By: /s/ Richard C.E. Morgan
--------------------------------------
Richard C.E. Morgan
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard C.E. Morgan Chairman of the Board March __, 1997
- ----------------------- and Chief Executive Officer
Richard C.E. Morgan
/s/ Paul J. Coleman, Jr. Director March __, 1997
- ------------------------
Paul J. Coleman, Jr.
/s/ E.A. Milo Mattorano Vice President, Chief Financial March __, 1997
- ----------------------- Officer and Principal Accounting
E.A. Milo Mattorano Officer
/s/ C. Seth Cunningham Director March __, 1997
- ----------------------
C. Seth Cunningham
/s/ Jean-Pierre Arnaudo Director March __, 1997
- -----------------------
Jean-Pierre Arnaudo
33
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Robert E. Kiss Director March __, 1997
- ------------------
Robert E. Kiss
/s/ E. A. Bourque Director March __, 1997
- -----------------
E. A. Bourque
/s/ Alfred E. Paulekas Director March __, 1997
- ----------------------
Alfred E. Paulekas
/s/ Richard M. Clarke Director March __, 1997
- ---------------------
Richard M. Clarke
34
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedule
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Lasertechnics, Inc.
We have audited the accompanying consolidated balance sheets of Lasertechnics,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Lasertechnics, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company's recurring losses from
operations and resulting continued dependence upon access to additional external
financing raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
February 21, 1997
F-1
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,598,744 1,892,357
Accounts receivable - trade, less allowance for doubtful
accounts of $357,136 in 1996 and $278,263 in 1995 3,196,943 4,040,247
Inventory (note 14):
Raw materials 4,293,978 2,700,746
Work-in-process 551,340 329,700
Finished goods 1,754,689 1,423,904
----------- -----------
6,600,007 4,454,350
Prepaid expenses 230,839 155,859
Current portion of deferred license fee (note 7) 700,000 --
Other 67,606 229,089
----------- -----------
Total current assets 12,394,139 10,771,902
----------- -----------
Property, plant & equipment, net (note 4) 3,334,277 3,000,241
Goodwill 172,510 254,546
Deferred license fee (note 7) 1,400,000 --
Other assets 360,931 615,913
----------- -----------
$17,661,857 14,642,602
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable to stockholder (note 8) $ - 200,000
Notes payable (note 7) 775,292 402,945
Accounts payable 1,369,818 3,485,328
Accrued liabilities (note 6) 2,957,525 1,858,562
Current portion of capital lease obligations (note 5) 225,676 28,944
------------ ----------
Total current liabilities 5,328,311 5,975,779
------------ ----------
Convertible debentures (note 9) 1,768,965 4,405,095
Capital lease obligations (note 5) 927,411 1,149,096
Note payable, long-term (note 7) 1,400,000 -
Other 149,387 183,046
------------ ----------
Total liabilities 9,574,074 11,713,016
------------ ----------
Stockholders' equity (notes 8, 9, 10, 11, 12, and 20):
Convertible preferred stock, $.01 par; 7,000,000 shares
authorized in 1996 and 10,000,000 in 1995;
Series A: $1.30 stated value; 1,153,846 shares
issued and outstanding in 1996 and 1995. 1,500,000 1,473,394
Series B: $1.42 stated value; 1,056,338 shares
issued and outstanding in 1996 and 1995. 1,500,000 1,473,394
Series C: $1.51 stated value; 708,530 shares
issued and outstanding in 1996 and 1995. 1,069,880 1,069,880
Series D: $10,000.00 stated value; 585 shares
issued and outstanding in 1996 and none in 1995. 6,049,314 -
Common stock, $.01 par value; Authorized 56,750,000
in 1996 and 41,500,000 in 1995; 37,133,514 shares
issued and outstanding in 1996 and 28,280,798 in 1995 371,335 282,808
Nonvoting convertible common stock; $.01 par value.
Authorized 2,250,000 shares in 1996 and 8,500,000 shares in
1995; 2,249,842 shares issued and outstanding in 1996 and 1995.
Convertible into voting common stock
on a share for share basis. 22,499 22,499
Paid-in capital 47,753,080 37,339,799
Accumulated deficit (50,178,325) (38,482,188)
------------ ----------
8,087,783 3,179,586
Less treasury stock, 200,000 common shares, at cost - (250,000)
------------ ----------
Total stockholders' equity 8,087,783 2,929,586
------------ ----------
Commitments and contingencies
(notes 2, 5, and 13)
$ 17,661,857 14,642,602
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales (notes 3 and 17) $ 17,581,440 13,429,731 15,856,209
Cost of sales 12,158,111 9,159,393 10,670,197
------------ ------------ ------------
Gross profit 5,423,329 4,270,338 5,186,012
Expenses:
Research and development 2,848,767 3,040,830 3,577,209
General and administrative 5,151,502 4,460,724 2,755,063
Selling and marketing 5,760,056 4,898,997 4,898,274
Loss on contract settlement
and other (note 15) 1,287,000 -- 1,148,275
------------ ------------ ------------
Operating expenses 15,047,325 12,400,551 12,378,821
------------ ------------ ------------
Loss from operations (9,623,996) (8,130,213) (7,192,809)
------------ ------------ ------------
Other income (expense):
Interest income 110,007 32,182 44,387
Interest expense (1,541,001) (968,790) (160,071)
Other 25,913 (27,682) 21,537
------------ ------------ ------------
Net other income (expense) (1,405,081) (964,290) (94,147)
------------ ------------ ------------
Loss before income taxes (11,029,077) (9,094,503) (7,286,956)
Income taxes (note 16) -- -- --
------------ ------------ ------------
Net loss (11,029,077) (9,094,503) (7,286,956)
Preferred stock dividend requirements (667,060) (73,234) --
------------ ------------ ------------
Net loss applicable to common stock $(11,696,137) (9,167,737) (7,286,956)
============ ============ ============
Net loss per common share $ (.34) (.33) (.33)
============ ============ ============
Weighted average shares of common stock
outstanding during the year 34,339,313 27,511,489 21,997,410
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Nonvoting
Convertible convertible
preferred stock Common stock common stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance At December 31, 1993 -- $ -- 19,014,171 $ 190,142 -- $ --
Exercise of common stock options
(note 12) -- -- 65,830 658 -- --
Issuance of common stock, net of
issuance expenses (note 20) -- -- 5,998,778 59,988 -- --
Foreign currency translation adjustment -- -- -- -- -- --
Nonvoting convertible common stock
issued for debt (note 20) -- -- -- -- 377,684 3,777
Detachable warrants issued in conjunction
with convertible debt (notes 8 and 11) -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 -- -- 25,078,779 250,788 377,684 3,777
Exercise of common stock options (note 12) -- -- 625,712 6,257 -- --
Detachable warrants issued in conjunction
with convertible debt (notes 8 and 11) -- -- -- -- -- --
Stock issued for debt, net of unamortized
discount and expenses (note 8) 2,521,363 3,469,880 1,383,632 13,836 1,872,158 18,722
Increasing rate preferred stock discount -- (126,446) -- -- -- --
Discount accretion -- 73,234 -- -- -- --
Conversion feature of debentures issued
(note 9) -- -- -- -- -- --
Debentures converted, net of unamortized --
discount and expenses (note 9) -- -- 658,570 6,586 -- --
Issuance of convertible preferred stock
(note 20) 397,351 600,000 -- -- -- --
Exercise of detachable warrants (note 11) -- -- 534,105 5,341 -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 2,918,714 4,016,668 28,280,798 282,808 2,249,842 22,499
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Paid-in Accumulated Treasury
capital deficit stock Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance At December 31, 1993 24,269,712 (22,027,495) (250,000) 2,182,359
Exercise of common stock options
(note 12) 59,401 -- -- 60,059
Issuance of common stock, net of
issuance expenses (note 20) 5,531,232 -- -- 5,591,220
Translation adjustment 27,105 -- -- 27,105
Nonvoting convertible common stock
issued for debt (note 20) 355,023 -- -- 358,800
Detachable warrants issued in conjunction
with convertible debt (notes 8 and 11) 60,000 -- -- 60,000
Net loss -- (7,286,956) -- (7,286,956)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 30,302,473 (29,314,451) (250,000) 992,587
Exercise of common stock options (note 12) 450,593 -- -- 456,850
Detachable warrants issued in conjunction
with convertible debt (notes 8 and 11) 207,000 -- -- 207,000
Stock issued for debt, net of unamortized
discount and expenses (note 8) 2,804,215 -- -- 6,306,653
Increasing rate preferred stock discount 126,446 -- -- --
Discount accretion -- (73,234) -- --
Conversion feature of debentures issued
(note 9) 2,200,000 -- -- 2,200,000
Debentures converted, net of unamortized
discount and expenses (note 9) 673,661 -- -- 680,247
Issuance of convertible preferred stock
(note 20) -- -- -- 600,000
Exercise of detachable warrants (note 11) 684,659 -- -- 690,000
Foreign currency translation adjustment (109,248) -- -- (109,248)
Net loss -- (9,094,503) -- (9,094,503)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 37,339,799 (38,482,188) (250,000) 2,929,586
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, continued
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Nonvoting
Convertible convertible
preferred stock Common stock common stock
------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,918,714 4,016,668 28,280,798 282,808 2,249,842 22,499
Exercise of common stock options (note 12) -- -- 89,222 893 -- --
Discount accretion -- 53,212 -- -- -- --
Conversion feature of debentures issued
(note 9) -- -- -- -- -- --
Debentures converted, net of unamortized
discount and expenses (note 9) -- -- 6,682,561 66,825 -- --
Issuance of convertible preferred stock, net
of expenses (note 10) 835 8,350,000 -- -- -- --
Preferred stock accretion and dividends
(note 10) -- 257,666 -- -- -- --
Preferred stock converted, including
related accretion (note 10) (250) (2,558,352) 2,280,933 22,809 -- --
Retirement of treasury stock (200,000) (2,000)
Foreign currency translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 2,919,299 $ 10,119,194 37,133,514 $ 371,335 2,249,842 $22,499
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Paid-in Accumulated Treasury
capital deficit stock Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 37,339,799 (38,482,188) (250,000) 2,929,586
Exercise of common stock options (note 12) 109,898 -- -- 110,791
Discount accretion -- -- -- 53,212
Conversion feature of debentures issued
(note 9) 2,216,341 -- -- 2,216,341
Debentures converted, net of unamortized
discount and expenses (note 9) 6,526,379 -- -- 6,593,204
Issuance of convertible preferred stock, net
of expenses (note 10) (762,964) -- -- 7,587,036
Preferred stock accretion and dividends
(note 10) -- (667,060) -- (409,394)
Preferred stock converted, including
related accretion (note 10) 2,535,543 -- -- --
Retirement of treasury stock (248,000) -- (250,000) --
Foreign currency translation adjustment (17,708) -- -- (17,708)
Net loss -- (11,029,077) -- (11,029,077)
- -----------------------------------------------------------------------------------------------------------
Balance December 31, 1996 47,699,288 (50,178,325) -- 8,033,991
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LASERTECHNICS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,029,077) (9,094,503) (7,286,956)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 725,859 514,988 410,231
Provision for losses on accounts receivable 248,489 115,375 65,169
Provision for product warranty reserve 639,606 338,250 687,591
Amortization of financing discount and
issuance costs 889,703 674,232 --
Accrued interest not paid 514,163 -- --
Other non-recurring expense -- -- 1,148,275
Write-off of software development costs -- -- 552,989
(Increase) decrease in:
Accounts receivable, trade 628,243 (1,165,875) (1,652,944)
Inventory (2,187,157) (1,616,559) (1,223,892)
Prepaid expenses (775,350) 104,779 (101,952)
Other (1,280,821) 163,769 (99,577)
Increase (decrease) in:
Accounts payable and notes payable (2,087,326) (42,450) 1,799,923
Customer advances (6,409) (278,721) (571,644)
Commissions payable (127,299) (108,575) 196,417
Product warranty reserve (381,042) (348,956) (523,867)
Accrued payroll and payroll taxes (40,740) (147,575) 197,485
Accrued vacation (43,381) (6,685) 66,298
Other 608,912 -- --
------------ ------------ ------------
Net cash used by operating activities (13,703,627) (10,898,506) (6,336,454)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (783,794) (995,518) (790,409)
Business acquisitions -- -- (100,000)
Software development -- -- (119,251)
------------ ------------ ------------
Net cash used by investing activities (783,794) (995,518) (1,009,660)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
(Continued)
<PAGE>
LASERTECHNICS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under financing agreements $ 3,800,000 7,329,906 3,936,828
Principal payments on financing agreements (2,200,000) (2,969,452) (1,770,136)
Proceeds from issuance of convertible debentures 5,500,000 7,000,000 --
Convertible debenture issuance costs (385,000) (520,000) --
Principal payments on capital lease obligations (219,018) (164,860) (160,613)
Net proceeds from issuance of preferred and
common stock 7,697,826 1,683,729 6,355,268
------------ ------------ ------------
Net cash provided by financing activities 14,193,808 12,359,323 8,361,347
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (293,613) 465,299 1,015,233
Cash and cash equivalents at beginning of year 1,892,357 1,427,058 411,825
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,598,744 1,892,357 1,427,058
============ ============ ============
Supplemental information:
Cash paid during the year for interest $ 151,354 173,619 146,271
============ ============ ============
Conversions to stock (notes 8 and 9):
Debentures, net of unamortized discount
and expenses 6,163,561 659,905 --
Notes payable, net of unamortized discount
and expenses -- 5,953,773 345,000
Accrued interest $ 483,435 373,222 --
============ ============ ============
Convertible preferred stock accretion (note 10) $ 257,666 -- --
============ ============ ============
Detachable warrants issued in conjunction
with convertible debt (notes 9 and 11) $ 462,000 207,000 60,000
============ ============ ============
Conversion feature of debentures issued $ 1,610,000 2,200,000 --
============ ============ ============
Borrowings under capital lease obligations $ 194,064 -- --
============ ============ ============
Business assets acquired (note 18):
Fair value of net assets acquired -- -- 779,296
Cash paid -- -- (100,000)
Issuance of common stock of subsidiary -- -- (500)
Assumption of liabilities -- -- (881,918)
Minimum guaranteed royalty $ -- -- (281,610)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Company Organization and Basis of Presentation
----------------------------------------------
The accompanying consolidated financial statements include the accounts
of Lasertechnics, Inc. and its wholly owned subsidiaries
Lasertechnics Marking Corp. (LMC) and Quantrad, Inc., its 96 percent
owned subsidiary Sandia Imaging Systems Corporation (Sandia), and
Sandia's wholly owned French subsidiary Sandia Imaging Systems SA
(Sandia Europe) (collectively, the Company). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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.
(b) Statements of Cash Flows
------------------------
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(c) Inventory
---------
Inventory is valued at the lower of cost or market using the first-in,
first-out method.
(d) Depreciation and Amortization
-----------------------------
Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the
respective assets. Assets acquired under capital leases are
amortized over the lesser of the term of the lease or the
estimated useful life of the asset using the straight-line method.
(e) Goodwill
--------
Goodwill represents the excess of cost over net assets acquired in
the 1994 acquisition of Printis S.A.R.L. (note 18) and is amortized
on a straight-line basis over the expected periods to be benefited
(five years). The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
projected undiscounted future results. The amount of
(Continued)
F-9
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
goodwill impairment, if any, is measured based on projected,
discounted future results. Amortization expense for the years ended
December 31,1996, 1995, and 1994 was $82,036, $82,037 and $73,601,
respectively. Accumulated amortization was $237,674, $155,638 and
$73,601 at December 31, 1996, 1995, and 1994, respectively.
(f) Fair Value of Financial Instruments
-----------------------------------
Cash and cash equivalents, accounts receivable, inventory deposit,
accounts payable, notes payable, customer advances, commissions
payable and accrued liabilities are reflected in the financial
statements at fair value because of the short-term maturity of these
instruments.
At December 31, 1995, the fair value of the October 1995 convertible
debentures (note 9) approximates recorded value because the fair
value of the debt and equity components of the financial instrument
were valued at the issuance dates and market conditions had not
changed significantly since that date.
At December 31, 1996, the net carrying value of the March 1996
convertible debentures (note 9) approximates fair value as such
debentures are recorded based on the current effective interest rate.
The outstanding borrowings under the Company's note payable to Xerox
Corporation (note 7) bear interest at current market rates, and
therefore, the carrying amount of debt approximates estimated fair
value at December 31, 1996.
(g) Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Under this 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 tax bases.
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.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the total of tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
(h) Foreign Currency Translation
----------------------------
The functional currency for the Company's foreign subsidiary is the
applicable local currency. Assets and liabilities of the foreign
subsidiary are translated to U.S. dollars at year-end exchange rates.
Income and expense items are translated at the average rates of
exchange prevailing during the year. The adjustments resulting from
translating the financial statements of the foreign subsidiary are
reflected in stockholders' equity.
(Continued)
F-10
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Net Loss Per Common Share
-------------------------
Net loss per common share is based on the weighted average shares of
common stock and, if dilutive, common equivalent shares (options,
warrants, convertible preferred stock and convertible debt)
outstanding during the period. None of the common stock equivalents
were dilutive during the periods presented. Net loss applicable to
common stock is derived by adding to consolidated net loss the
accretion of the discount recorded for the Company's increasing rate
preferred stock Series A, B and C and the annual accretion applicable
to the Series D Preferred Stock (note 10).
(j) Revenue Recognition
-------------------
The Company recognizes revenue on sales of its products either when the
products are shipped from the plant or received by the customer,
depending on shipping terms. Revenue related to product sales that
require installation or customer acceptance is recognized upon
fulfillment of such requirements.
(k) Warranty Costs
--------------
The Company warrants its products against defects in material and
workmanship for periods ranging from 30 days to two years from the
date of installation. The Company provides for future warranty
obligations in the period product sales are recorded. The warranty
reserve is reviewed quarterly and adjusted based upon the Company's
actual historical warranty costs and its estimate of future costs.
(l) Impairment of Lon-Lived Assets and Long-Lived Assets to Be Disposed Of
----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of this Statement did not have a material impact on
the Company's financial position or results of operations.
(m) Advertising Costs
-----------------
Advertising costs, all of which are nondirect response advertising, are
expensed as incurred. Advertising expense was $250,098, $326,542, and
$234,892 for the years ended December 31, 1996, 1995, and 1994,
respectively.
(Continued)
F-11
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(n) Stock Compensation Plans
------------------------
Effective January 1, 1996, the Company adopted the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which requires pro forma disclosure of net income (loss) and net
income (loss) per share as if the fair value method of SFAS No. 123
had been applied. The Company continues to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, for the preparation of its basic
consolidated financial statements.
(o) Reclassifications
-----------------
Certain reclassifications have been made to prior year consolidated
financial statements to conform to the current year presentation.
(2) Operations, Liquidity and Going Concern
---------------------------------------
The Company's operations in 1996 continued to generate losses. The loss in
1996 significantly exceeded losses in either 1995 or 1994. Although,
during 1996, the Company raised gross proceeds of approximately $13.85
million through equity and debt transactions, the Company's operations,
capital expenditures and debt service requirements have utilized a
significant portion of such proceeds through February 1997. These factors
raise substantial doubt about the Company's ability to continue as a
going concern.
The Company's business plan for 1997 is predicated principally upon
significant increases in sales for existing Sandia products, the
successful introduction of new products in both of its business segments,
significant improvements in gross margins and reductions in research and
development expenditures. Because of the anticipated timing of new
product introductions and manufacturing cost reductions, together with
the necessity to prepay all or a portion of the balance of its lease
obligation financing, the Company may require additional external
financing to meet its 1997 requirements. However, there can be no
assurance that sufficient additional external financing could be obtained
to fund any increases in financing requirements resulting from delays in
or inability to significantly increase sales of existing Sandia products,
successfully introduce planned new products, or achieve gross margin
improvements. If the Company is unable to obtain such additional funds,
it may be necessary to either reduce or stop certain product development
programs, reduce its sales and marketing efforts, dispose of assets or
undertake other actions as may be appropriate.
(3) Significant Customers
---------------------
One customer accounted for 18, 16, and 46 percent of consolidated revenues
in 1996, 1995 and 1994, respectively. Another customer accounted for 29
percent of 1996 consolidated revenues.
(Continued)
F-12
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Property, Plant and Equipment
-----------------------------
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1995
-------------------- ------------------- ------------
<S> <C> <C> <C>
Property, plant and
equipment under capital
leases
Land (note 5) $ 336,396 336,396
Building lease term 923,550 923,550
Machinery and equipment lease term 127,411 127,411
Research equipment lease term 21,339 21,339
Furniture and fixtures lease term 530,913 363,022
---------- ---------
1,939,609 1,771,718
---------- ---------
Accumulated amortization $ (648,131) (493,975)
---------- ---------
Property, plant and
equipment under
capital leases, net 1,291,478 1,277,743
---------- ---------
Other property, plant and
equipment:
Building 14 to 45 years 148,200 148,200
Leasehold improvements lease term 331,891 328,985
Machinery and equipment 5 to 8 years 1,382,267 1,151,409
Demonstration equipment 2 to 3 years 933,363 480,226
Research equipment 3 years 136,005 139,536
Furniture and fixtures 5 years 682,153 717,685
---------- ---------
3,613,879 2,966,041
Accumulated depreciation (1,571,080) (1,243,543)
---------- ---------
Other property, plant
and equipment, net 2,042,799 1,722,498
---------- ---------
Total property, plant
and equipment, net $3,334,277 3,000,241
========== =========
</TABLE>
(5) Lease Obligations
-----------------
In 1983, the Company entered into a long-term capital lease agreement with
the City of Albuquerque, New Mexico for office, manufacturing and
warehouse facilities and equipment. In connection with the transaction,
the City of Albuquerque issued industrial development revenue bonds. The
leased assets will revert to the Company upon retirement of the lease
obligations and payment of a nominal amount.
Pursuant to the original agreement, the bondholder has the right to call
the bonds starting in November 1993 and in each November thereafter. On
October 1, 1993, the Company and
(Continued)
F-13
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
bondholder entered into an agreement whereby the Company increased the
monthly lease payment by $8,000. This additional prepayment amount
started in April 1994 and was to be made for a 24 month period. In
exchange for the Company's agreement to make these prepayments, the
bondholder agreed to waive its right to call the bonds during this 24
month period provided that the Company made its monthly payments on a
timely basis and remained in compliance with the agreementOs debt
covenants, which required the Company to maintain a current ratio of
not less than 1 to 1 and a debt to equity ratio of not more than 3 to
1. Although the Company's current ratio was in compliance at December
31, 1995 at 1.5 to 1, its debt to equity ratio was 4 to 1 which was in
violation of the agreement. As a result, the full amount of the lease
was classified as a current liability on the Company's balance sheet at
December 31, 1995. During the fourth quarter of 1996, the bondholder
agreed to permanently waive the debt to equity ratio requirement and
its right to call the bond for redemption provided the lessee remains
in compliance with all other covenants. At December 31, 1996, the
Company's current ratio was 2.3 to 1, which is in compliance with the
lease terms. In addition to the covenants mentioned previously, the
agreement includes a provision whereby the debt can be called anytime
the bondholder reasonably believes itself to be insecure. No such call
has occurred as of February 1997 and management believes the likelihood
that such acceleration provisions will be exercised in 1997 is remote.
<TABLE>
<CAPTION>
Capital lease obligations are as follows:
1996 1995
--------- --------
<S> <C> <C>
City of Albuquerque, New Mexico, due monthly
(approximately $19,100 to maturity) including
interest at 75% of the prime rate of Chase Manhattan
Bank (6.19% at December 31, 1996) but not less
than 8% nor more than 14%, maturing September
2001 $ 955,852 1,113,768
Other capital leases, due $6,601 monthly, with maturity
dates through June 2002, including interest ranging
from 15.15% to 19.4% 197,235 64,272
---------- ---------
Total capital lease obligations 1,153,087 1,178,040
Less:
Current portion of capital leases 225,676 28,944
---------- ---------
$ 927,411 1,149,096
========== =========
</TABLE>
(Continued)
F-14
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The annual aggregate lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31
-----------------------
<S> <C>
1997 $ 354,275
1998 299,988
1999 270,653
2000 251,627
2001 228,132
----------
1,404,675
Less amount representing interest (251,588)
----------
$1,153,087
==========
(6) Accrued liabilities
-------------------
Accrued liabilities consist of the following at December 31, 1996 and 1995:
1996 1995
---------- ---------
Customer advances $ 436,249 426,978
Commissions payable 65,249 192,548
Product warranty reserve 516,783 256,003
Accrued payroll and payroll taxes 265,928 299,096
Accrued vacation 163,935 205,541
Preferred stock dividends 356,182 -
Other 1,153,199 478,396
---------- ---------
Accrued liabilities $2,957,525 1,858,562
========== =========
</TABLE>
(7) Notes Payable
On December 27, 1996, Sandia signed a $2,100,000 note payable to
Xerox Corporation ("Xerox"). One-third of the note principal plus accrued
interest is due on December 15 of 1997, 1998 and 1999. Interest payable
is calculated based on a specified prime rate (8.25% at December 31,
1996) on each due date. The Company has classified as a current liability
the first $700,000 payment due in 1997.
Concurrent with the signing of the note, Sandia signed an amendment to its
OEM License Agreement with Xerox. Under the terms of the amendment to
this agreement, Xerox granted to Sandia an exclusive license for the
development and sale of DataGlyphs/TM/, a portable database symbology,
for use on security and identification media such as passports, visas,
drivers licenses, border crossing, and government entitlement programs.
The license fee of $2,100,000 has been recorded as a deferred license fee
and will be amortized over the three year term of the license agreement.
Accordingly, the Company has reflected $700,000 as a current asset and
$1,400,000 as a noncurrent asset. In years following 1999, upon license
renewal the Company
(Continued)
F-15
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
will pay a minimum royalty of $500,000. The royalty on annual sales in
excess of $10 million is to be calculated using a declining percentage
ranging from 4.5 percent to 3 percent.
(8) Convertible Notes Payable to Stockholders
-----------------------------------------
During June and July 1996, the Company obtained a 12 percent per annum
working capital bridge loan totaling $1.7 million from Wolfensohn
Partners LP ("Wolfensohn"), a significant stockholder. The loan principal
and related interest were paid in full in August 1996 with proceeds from
the sale of Series D Convertible Preferred Stock, par value $.01 per
share, ("Series D Preferred Stock") (note 10).
In December 1994, the Company entered into agreements to borrow a total
of $2,000,000 from J.P. Morgan Investment Corporation ("JPMIC"), a
significant stockholder. During 1995, the Company borrowed an additional
$6,900,000 from Wolfensohn. These borrowings from shareholders were
evidenced by unsecured notes bearing interest at 12 %. Interest and
principal were due on demand, but if no demand was made, principal and
interest became due and payable at various dates from February 1, 1996
through September 15, 1996. In the event that the Company completed an
equity financing of $5,000,000 or more, then JPMIC and Wolfensohn had the
right to convert the outstanding principal and interest, or a portion
thereof, into either the Company's voting common stock, par value $.01
per share, (the "Common Stock") or non-voting convertible common stock,
par value $.01 per share (the "Non-voting Common Stock"), at the price
per share paid by the investors in the equity financing. In connection
with these note agreements, JPMIC and Wolfensohn also received warrants
to purchase the Company's Common Stock (see note 11).
Although the Company did not complete an equity financing of $5,000,000,
the Company agreed to convert $6,210,000 of the debt plus accrued
interest of approximately $353,000 held by the shareholders above into a
combination of Common Stock, Non-voting Common Stock and preferred stock
of the Company evidenced by debt to equity conversion agreements. In
addition, the Company paid Wolfensohn $2,000,000 of principal out of the
proceeds of the October 1995 convertible debenture private placement
(note 9). The remaining outstanding debt to Wolfensohn was repaid when
Wolfensohn exercised 534,105 warrants to purchase Common Stock (note 11)
resulting in total proceeds of $690,000. The following table summarizes
the 1995 convertible note payable conversion activity:
(Continued)
F-16
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Conversion Shares of
Amount price per stock
Date Noteholder converted share Class of stock received
---- ---------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
May 1995 JPMIC $ 314,450 $0.95 Voting common 331,000
May 1995 JPMIC 1,778,550 0.95 Non-voting common 1,872,158
May 1995 Wolfensohn 1,000,000 0.95 Voting common 1,052,632
August 1995 Wolfensohn 1,500,000 1.30 Series A preferred 1,153,846
September 1995 Wolfensohn 1,500,000 1.42 Series B preferred 1,056,338
December 1995 Wolfensohn 469,879 1.51 Series C preferred 311,179
---------- ----- ------------------ ---------
TOTAL $6,562,879 5,777,153
========== =========
</TABLE>
(9) Convertible Debentures
----------------------
In March 1996, the Company completed a $5,500,000 private placement of 10
percent convertible subordinated debentures maturing March 1, 1999 (the
"1996 Debentures"). The 1996 Debentures, plus accrued interest, are
convertible into the Company's unregistered common stock at the option of
the holder as follows: (a) between March 13, 1996 and May 11, 1996 at the
fixed exercise price of $2.00 per share and (b) at the lesser of $2.00
per share or 85 percent of the average five day closing bid price of the
Common Stock prior to conversion for up to one-fourth of the 1996
Debentures purchased beginning on each of these dates in 1996: May 12,
June 11, July 11, and August 10. The Company has the right to convert the
1996 Debentures at its own election at any time after March 1, 1997
utilizing the formula described above. The Company also has the right to
redeem the 1996 Debentures for cash upon notice of conversion by a holder
or at any time after March 1, 1997. The Common Stock issued upon
conversion has registration rights under certain circumstances. The
Company has assigned a value of $2,072,000 to the conversion feature of
the 1996 Debentures and the 550,000 related detachable warrants to
purchase Common Stock (note 11). This value is being amortized ratably as
an interest rate adjustment over the life of the 1996 Debentures or until
conversion. Assuming no 1996 Debentures are converted until maturity, the
effective yield is approximately 30%. All outstanding 1996 Debentures
shall automatically be converted into Common Stock at maturity. During
1996, $3,250,000 face amount of the 1996 Debentures plus $127,612 of
accrued interest were converted into 2,392,061 shares of Common Stock.
In October 1995, the Company completed a $7,000,000 private placement of 10
percent convertible debentures maturing in October 1998 (the "1995
Debentures"). The 1995 Debentures plus accrued interest were convertible
by the holder into unregistered Common Stock as follows: (a) between
October 11, 1995 and November 25, 1995 at an exercise price of $2.34375,
(b) between November 26, 1995 and December 25, 1995, one-half of the 1995
Debentures could be converted at the lesser of $2.34375 or 85 percent of
the average five day closing bid price of the Common Stock prior to
conversion, and (c) after December 25, 1995, and during the term of the
1995 Debentures, all 1995 Debentures could be converted by the holder
under the same terms described in (b). The Company had the right to
convert the 1995
(Continued)
F-17
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidate Financial Statements
Debentures at its own election subject to the terms of the 1995 Debenture
agreement. The Common Stock issued upon conversion has registration
rights under certain circumstances. The Company assigned a value of
$2,200,000 to the conversion feature of the 1995 Debentures which was
amortized ratably as an interest rate adjustment over the life of the
1995 Debentures or until conversion. Assuming that no 1995 Debentures
were converted prior to maturity, the effective yield at the time the
1995 Debentures were issued was 26 percent. In 1995, $1,025,000 face
amount of 1995 Debentures plus $20,342 of accrued interest were converted
into 658,570 shares of Common Stock. During 1996, all remaining 1995
Debentures having a face value of $5,975,000, plus $355,823 of accrued
interest were converted into 4,290,500 shares of Common Stock.
(10) Preferred Stock
---------------
In July 1996, the Company completed an $8,350,000 private placement of 835
shares of a new class of preferred stock, Series D Convertible Preferred
Stock, par value $.01 per share ("Series D Preferred Stock"). Shares of
Series D Preferred Stock are convertible into Common Stock in increments
of up to 1/3 of Series D Preferred Stock purchased at the lesser of (i)
$2.1406 per share or (ii) (a) the average closing bid price of the Common
Stock for the ten trading days immediately prior to the conversion date
multiplied by (b) a percentage which is 90 percent from October 1, 1996
through November 29, 1996, 87.5 percent from November 30, 1996 through
January 28, 1997, and 85 percent thereafter. The Series D Preferred Stock
does not accrue dividends; however, each share possesses an 8 percent per
annum accretion rate prior to conversion which is payable in Common Stock
upon conversion or redemption at the conversion price then in effect. All
shares of Series D Preferred Stock outstanding on August 2, 1999 are
subject to automatic conversion at the conversion rate then in effect.
The Company has effected a Registration Statement on Form S-3
(Registration No. 333-10665), which registers up to 6,000,000 shares of
Common Stock to be offered by the holders of Series D Preferred Stock
upon such holders' conversion of such Series D Preferred Stock into
Common Stock. During 1996, 250 shares of Series D Preferred Stock, having
an aggregate face value of $2,500,000, and an aggregate accretion value
of $58,352, were converted into 2,280,933 shares of Common Stock.
The Company has three additional classes of convertible preferred stock,
Series A, B and C Convertible Preferred Stock, stated value $1.30, $1.42,
and $1.51, respectively. Each share of Series A, B, and C Convertible
Preferred Stock is convertible at the option of the holder into voting
Common Stock on a share for share basis and is entitled to vote
as if converted into voting Common Stock. The Company may redeem the
preferred stock at anytime at stated value plus accrued dividends.
The Series A and B Preferred Stock accrue dividends at the following rates
per annum: 0 percent through December 31, 1995; 5 percent January 1, 1996
through March 31, 1996; 7.5 percent April 1, 1996 through June 30, 1996
and 10 percent thereafter. Series C Preferred Stock accrues dividends at
0 percent per annum through December 31, 1995 and 10 percent per annum
(Continued)
F-18
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
thereafter. Dividends are payable within 15 days following each calendar
quarter in cash or in additional shares of preferred stock at the option
of the Company through June 30, 1996 (September 30, 1996 for Series
C Preferred Stock). After June 30, 1996 (September 30, 1996 for Series C
Preferred Stock), dividends are payable in cash or additional shares of
preferred stock at the option of the stockholders. There were no
dividends in arrears at December 31, 1996 and 1995.
A discount on the Series A, B, and C Convertible Preferred Stock was
recorded equal to the present value of the difference between the actual
dividends that would be paid and the 10 percent perpetual dividend
amount, calculated over the increasing dividend rate period. The discount
was amortized to provide a constant effective dividend rate. The 1996 and
1995 aggregate discount amortization for all three series of preferred
stock was $53,212, and $73,234, respectively. The discount was fully
amortized during 1996.
All series of preferred stock rank senior in right of payment to the
Company's Common Stock as to dividends or upon a liquidation or
dissolution of the Company.
(11) Common Stock Warrants
---------------------
In connection with the 1996 Debenture private placement (note 9), five year
warrants to purchase 192,500 shares of Common Stock at $2.20 per share
were issued to the placement agent for the offering as part of the
placement fee. In addition, five year warrants to purchase 550,000 shares
of Common Stock, at $2.00 per share were issued with the 1996
Debentures.
In connection with the Series D Preferred Stock issued in July 1996 (note
10), a five year warrant to purchase 195,039 shares of Common Stock at
$2.1406 per share was issued to the placement agent for the offering as
part of the placement fee.
In connection with the June and July 1996 bridge loan (note 8), a five year
warrant to purchase a total of 56,341 shares of Common Stock was issued
to Wolfensohn. The warrants may be exercised at prices ranging from $2.18
to $3.39, or at an alternate rate dependent upon either of the following
events: (i) if the Company completes an equity financing of $5 million or
more on or before December 31, 1996, the exercise price shall equal the
price per share at which shares of the Common Stock are issued in such
financing, or (ii) if such financing involves convertible or exchangeable
securities, the exercise price shall equal the price at which such
securities may be converted into or exchanged for Common Stock.
In connection with the 1995 Debenture private placement (note 9), a five
year warrant to purchase 222,222 shares of Common Stock, priced at 20
percent above the $2.34375 closing price, or $2.81 per share, was issued
to the placement agent for the offering as part of the placement fee.
During 1995, the Company agreed to issue to an unrelated third party
warrants to purchase up to 65,000 shares of voting Common Stock at a
price of $2.00 per share in connection with an
(Continued)
F-19
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
investor relations agreement. The issuance of the warrants was
conditioned upon an increase in the Company's stock price to specified
levels, which were reached in May 1996. Accordingly, a warrant to
purchase 25,000 shares of Common Stock at a price of $2.00 per share,
which expires in 5 years, was issued to the third party. This agreement
expired in September 1996. In addition, the Company issued to unrelated
employees of the investor relations firm warrants to purchase up to
95,000 shares of voting Common Stock at a price of $1.50 per share and
warrants to purchase up to 80,000 shares of voting Common Stock at a
price of $2.50 per share, all such warrants expiring in 5 years.
During 1995, the Company entered into convertible notes payable agreements
with Wolfensohn (note 8). In conjunction with these agreements,
Wolfensohn received detachable warrants to purchase 534,105 shares of
Common Stock. The warrants were fully exercised in 1995 at an aggregate
price of $690,000, and an exercise price ranging from $1.01 to $1.76 per
share. The value allocated to the warrants, $207,000, was reflected as a
discount on the convertible promissory notes and was being amortized
ratably over the one year stated term of the notes. Wolfensohn converted
its debt during 1995, and the unamortized portion of the discount was
netted against additional paid-in capital as of the date of conversion.
During 1994, the Company entered into several convertible notes payable
agreements with JPMIC (note 8). In conjunction with these agreements
JPMIC received detachable warrants to purchase Common Stock as follows:
warrants issued on December 14, 1994 to purchase 58,824 shares and
warrants issued on December 29, 1994 to purchase 66,225 shares. The
exercise price of the warrants is the lesser of (i) $1.70 per share
(December 14, 1994 warrants) or $1.51 per share (December 29, 1994
warrants) or (ii) the price per share realized in an equity financing
completed prior to December 31, 1995. No such financing was completed.
The warrants have not been exercised and they expire in December 1999.
The value allocated to the warrants, $60,000, was reflected as a discount
on the convertible promissory notes and was being amortized ratably over
the one year stated term of the notes. JPMIC converted its debt during
1995 and the unamortized portion of this discount was netted against
additional paid-in capital as of the date of conversion.
In connection with a 1994 investor relations agreement, the Company agreed
to issue to an unrelated third party warrants to purchase up to 110,000
shares of voting Common Stock at a price of $1.22 per share. Warrants for
the purchase of 20,000 shares of voting Common Stock were issued upon
execution of the agreement, February 15, 1994. Issuance of the warrants
for the other 90,000 shares of Common Stock was conditioned upon an
increase in the Company's stock price to specified levels to be measured
at three points in time. Although the first target price level was not
achieved under the original terms of the agreement, the Company's stock
rose to the targeted level soon thereafter. The Company amended the
original agreement and issued a warrant to purchase 30,000 shares of
Common Stock at a price per share of $1.22. However, the other target
stock prices set out in the agreement were not met so the final
conditional warrants for 60,000 shares of common stock were not issued by
the Company. The
(Continued)
F-20
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
two warrants to purchase an aggregate of 50,000 shares of the Company's
Common Stock expire February 15, 1999.
A summary of the warrants activity is as follows:
<TABLE>
<CAPTION>
Warrants Price per
outstanding share
----------- -----------
<S> <C> <C>
December 31, 1994 175,049 1.22 - 1.70
Warrants issued 931,327 1.01 - 2.81
Warrants exercised (534,105) 1.01 - 1.76
--------- -----------
December 31, 1995 572,271 1.50 - 2.81
Warrants issued 1,018,525 2.00 - 2.20
--------- -----------
December 31, 1996 1,590,796 2.00 - 2.81
========= ===========
</TABLE>
(12) Stock Compensation Plans
------------------------
At December 31, 1996, the Company has four stock-based compensation plans
that are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized related to stock option grants since the
intrinsic value of stock options awarded is zero at the date of grant.
Had compensation cost for the Company's four stock-based compensation
plans been determined based on the grant date fair value method in
accordance with SFAS No. 123, the Company's net loss and net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C> <C>
Net loss applicable to common stock As reported $ (11,696,137) $ (9,167,737)
Pro forma $ (11,696,137) $ (9,167,737)
Net loss per common share As reported $ (0.34) $ (0.33)
Pro forma $ (0.34) $ (0.33)
</TABLE>
The Company had a key employee stock option plan (the 1981 Plan) that
terminated on November 29, 1991. Under the 1981 Plan, 98,286 shares of
Common Stock have been reserved for the outstanding options, all of which
are exercisable at a price of $.66 per share through December 21, 2000,
when they expire.
Under the Company's 1991 Employee Stock Option Plan, the Company may grant
up to 1,000,000 shares of Common Stock to its employees. The exercise
price of each option equals the market price of the Company's stock on
the date of grant and an option's maximum term is ten years.
(Continued)
F-21
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Options granted vest over a four year period. In addition to employees,
the Company has issued stock options to various members of the Board of
Directors and officers of the Company. The exercise price of each option
equals the average market price of the Company's stock during the thirty
trading days immediately prior to the date of grant and the option term
is five years. Options are generally granted each year and have various
vesting requirements.
The Company also has separate Employee Stock Option Plans for each of its
subsidiary companies. The Sandia unit, under its 1994 Employee Stock
Option Plan, may grant up to 2,000,000 shares of its common stock to
employees of Sandia. The LMC unit, under its 1995 Employee Stock Option
Plan, may grant 450,000 shares of its common stock to LMC employees.
Under both plans, the exercise price of each option equals the estimated
fair value of the subsidiary's stock on the date of grant and an option's
maximum term is 10 years. Options are generally granted each year and
vest over a four year period. In addition to employees, each subsidiary
has issued stock to its Board of Directors and officers. The exercise
price of each option equals the estimated fair value of each subsidiary's
stock on the date of grant and the option's maximum term is five years.
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: (i) expected
volatility of 90 and 92 percent, except that expected volatility is
assumed to be zero in the computation of fair value of the non-public
subsidiary options since such stock does not trade, (ii) risk-free
interest rates of 8% and expected lives of 5 years for non-employee
options and 10 years for employee options.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Lasertechnics, Inc. Shares Price Shares Price Shares Price
- ------------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 707,162 $ 1.19 2,624,743 $ 0.69 2,546,449 $ 0.63
Granted 70,000 1.80 127,587 1.42 187,624 1.38
Exercised (69,228) 1.06 (627,212) 0.73 (25,830) 0.77
Forfeited (92,374) 1.07 (1,417,956) 0.50 (83,500) 1.09
-------- ---------- ---------
Outstanding at end of year 615,560 1.29 707,162 1.19 2,624,743 0.69
======== ========== =========
Options exercisable at end of year 528,060 647,245 2,560,537
Weighted-average fair value of
options granted during the year $ 1.60 $ 1.20 N/A
</TABLE>
(Continued)
F-22
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
SUBSIDIARIES
- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 177,500 $ 0.20 227,500 $ 0.09 180,000 $ 0.01
Granted 1,260,675 0.97 40,000 0.50 70,000 0.26
Exercised (10,000) 0.01 (45,000) 0.01 (5,000) 0.01
Forfeited (153,000) 0.93 (45,000) 0.06 (17,500) 0.01
--------- ------- -------
Outstanding at end of year 1,275,175 0.87 177,500 0.20 227,500 0.09
========= ======= =======
Options exercisable at end of year 249,747 95,208 91,250
Weighted-average fair value of
options granted during the year $ 0.53 $ 0.28 N/A
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1996. Certain ranges of exercise prices overlap
because of the significant difference in contract lives.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Outstanding Exercise
Exercise Prices at 12/31/96 Life/Years Price at 12/31/96 Price
--------------- ----------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
LASERTECHNICS,INC.
$0.66 98,286 4.0 $ 0.66 98,286 $ 0.66
$1.00 to $1.29 93,750 4.6 1.04 93,750 1.04
$1.22 to $1.81 322,624 2.3 1.44 285,124 1.41
$1.58 to $1.79 100,900 8.5 1.67 50,900 1.67
------- -------
$0.66 to $1.81 615,560 3.9 1.29 528,060 1.23
======= =======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Outstanding Exercise
Exercise Prices at 12/31/96 Life/Years Price at 12/31/96 Price
--------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
SUBSIDIARIES:
$0.01 97,500 1.9 $ 0.01 92,500 $ 0.01
$0.50 to $1.00 1,177,675 9.2 0.94 157,247 0.75
--------- -------
$0.01 to $1.00 1,275,175 8.6 0.87 249,747 0.48
========= =======
</TABLE>
(Continued)
F-23
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Commitments and Contingencies
The Company has entered into license agreements that provide for royalty
payments based on various percentages of certain product sales. Royalty
expenses under these agreements for the years ended December 31, 1996,
1995 and 1994 were approximately $126,000, $151,000, and $248,000,
respectively.
On February 28, 1996, an investor group filed suit against the Company.
This lawsuit arises out of the Company's refusal to recognize the
investor group's attempt to exercise an option to purchase 1,400,000
shares of Common Stock at $.495 per share. The option had been granted to
the Company's former President and CEO who attempted to transfer his
option to the investor group on the last day of the option term in
September 1995. On that same day the investor group attempted to exercise
the option. The Company refused to recognize the attempted transfer of
the option to the investor group on the primary grounds that the option
was granted personally to the Company's former President and CEO and was
not transferable to third parties. The lawsuit seeks issuance and
registration of the 1,400,000 shares upon payment of the exercise price,
or in the alternative, monetary damages which the investor group alleges
to be not less than $2,800,000. The Company believes the claim is without
merit and will vigorously oppose it. At December 31, 1996, management
estimates that the ultimate outcome of this claim will not have a
materially adverse effect upon the Company's financial position or
results of operations. Management's estimates could change depending upon
the progress of the lawsuit.
On March 15, 1996, LMC was notified about a potential future patent
infringement claim by a competitor relating to LMC's electronic code
changing device. LMC does not believe that its product infringes on the
identified patent, but it is in the process of investigating the merits
of the asserted claim. Management currently estimates that the ultimate
outcome of this claim will not have a materially adverse effect upon the
Company's financial position or results of operations. Management's
evaluation may change depending upon the results of its investigation.
The Company is also involved in various other claims and lawsuits which are
generally incidental to its business. The Company is vigorously
contesting all such matters and believes that their ultimate resolution
will not have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
(14) Termination of Manufacturing Agreement
--------------------------------------
In 1993, the Company engaged Wolfensohn International, Inc., a subsidiary
of James D. Wolfensohn, Inc., which is an affiliate of a significant
stockholder, Wolfensohn Associates, L.P. (Wolfensohn), to provide
advisory and investment banking services with respect to a possible
strategic alliance with a third party to develop and manufacture the
Company's products. On May 13, 1994, Sandia and Singapore Precision
Industries (SPI), a unit of Singapore Technology
(Continued)
F-24
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Industrial Corporation, the technology manufacturing arm of the Singapore
government, entered into a contract manufacturing agreement and a
distribution agreement whereby SPI became a licensed distributor of
Sandia products. Concurrently, SPI purchased 826,447 shares of Common
Stock for $1,000,000 (note 20). Pursuant to the agreement with Wolfensohn
the Company paid Wolfensohn $50,000 during 1994 based upon the $1,000,000
SPI stock purchase transaction. The Company does not anticipate that any
additional fees will be paid to Wolfensohn International, Inc. pursuant
to this agreement.
In the third quarter of 1995 the Company instructed SPI to discontinue
production, and subsequently began negotiations with SPI to terminate the
manufacturing agreement pursuant to the cancellation provisions of the
contract. The negotiations were not completed until the second quarter of
1996. In settlement of all outstanding claims under this agreement, the
Company agreed to pay $1,525,000 to SPI. As part of the settlement, the
Company received plastic card printers and parts having an estimated net
realizable value of $525,000. As a result, the Company recorded an
expense of $1 million in the second quarter of 1996 as a cost of settling
the dispute. As part of the settlement, the Company was granted the
option to distribute two new plastic card printer lines in North and
South America and Western Europe. Of the total settlement amount,
$465,000 was deposited with SPI as of December 31, 1995. The remaining
amounts were paid in 1996 after completion of the negotiations.
(15) Loss on Contract Settlement and Other
-------------------------------------
The company recorded an expense of $1 million in the second quarter of 1996
as a cost of settling the termination of a manufacturing agreement which
is more fully described in note (14) above. Additionally in 1996, the
imaging segment recorded a one-time $287,000 charge in the quarter to
reduce on-going expenses in its international operations.
During the fourth quarter of 1994, Sandia and Sandia Europe recorded a
charge of $1,148,275 to adjust the net carrying value of certain
inventory to its estimated net realizable value. The provision was
principally necessitated by the planned discontinuance of the Digital
Image Recorder product line and the introduction of a new generation
plastic card printer product. The provision was estimated by management
based on a review of the market for its products and the anticipated net
revenues, less disposal costs, to be received from the sale of this
inventory.
(16) Income Taxes
------------
Due to the Company's losses, no income tax expense was recorded for the
years ended December 31, 1996, 1995 and 1994. At December 31, 1996, the
Company had a net operating loss carryforward of approximately
$39,000,000 for U.S. federal income tax purposes, which will begin
expiring in 1997. Of this federal net operating loss carryforward
approximately $7,000,000 is available for state income tax purposes. The
tax benefit (approximately $13,260,000) of the net operating loss
carryforward has been fully offset by a valuation allowance, since the
Company cannot currently conclude that it is more likely than not that
the
(Continued)
F-25
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
benefit will be realized. The valuation allowance increased by
approximately $2,760,000 during 1996. Because of conversions of existing
convertible debt, a change in ownership, as defined for purposes of the
Internal Revenue Code, occurred in 1996 that limits the annual
utilization of the U.S. federal net operating loss carryforward under
applicable Internal Revenue Service regulations. Additionally, the
Company had approximately $400,000 and $40,000, respectively, of research
and development and investment tax credit carryforwards. The
carryforwards expire from 1997 to 2006. The credit carryforwards will
also be restricted in their usage as a result of the ownership change.
(17) Export Sales
------------
Export sales totaled approximately $9,411,000, $4,991,000, and $4,191,000
in 1996, 1995 and 1994, respectively.
(18) Acquisitions
------------
On February 19, 1992, the Company purchased a 43 percent equity interest in
Printis, S.A.R.L. (Printis) of Paris, France for approximately $279,000.
In April 1994, Sandia Europe purchased the remaining 57 percent equity
interest in Printis for $100,000 cash, 50,000 shares of Sandia common
stock and minimum royalties totaling approximately $282,000 through 1999.
This acquisition was accounted for using the purchase method of
accounting and resulted in goodwill of approximately $410,000. During
1995 Printis was merged into Sandia Europe.
(19) Segment Information
-------------------
Business Segments
-----------------
The Company operates with its product groups organized into two business
segments: marking and imaging. Operations in marking involve the
production and sale of laser systems which mark products with a serial
number, logo or bar code. Imaging operations involve the sale of plastic
card printers.
Operating results and other financial data are presented in the information
which follows for the principal business segments of the Company for the
years ended December 31, 1996, 1995 and 1994. General corporate assets
and expenses are allocated to the respective business segments.
<TABLE>
<CAPTION>
Imaging Marking Consolidated
(Sandia) (LMC) (LASX)
------------ ----------- -------------
<S> <C> <C> <C>
1996:
----
Sales $ 8,197,639(a) 9,383,801(b) 17,581,440
Loss from operations (8,642,620) (981,376) (9,623,996)
Identifiable assets (c) 9,941,186 7,720,671 17,661,857
Capital expenditures 654,832 128,962 783,794
Depreciation 459,860 265,999 725,859
</TABLE>
(Continued)
F-26
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1995:
----
<S> <C> <C> <C>
Sales $ 3,121,577 (a) 10,308,154 13,429,731
Loss from operations (7,934,839) (195,374) (8,130,213)
Identifiable assets (c) 5,844,770 8,797,832 14,642,602
Capital expenditures 640,528 354,990 995,518
Depreciation 133,991 218,466 352,457
1994:
----
Sales $ 3,892,810 (a) 11,963,399 15,856,209
Loss from operations (6,776,649) (416,160) (7,192,809)
Identifiable assets (c) 4,212,664 6,497,792 10,710,456
Capital expenditures 372,417 417,992 790,409
Depreciation 139,860 174,116 313,976
=========== ========== ============
</TABLE>
(a) Sales of imaging products to two customers were $5,122,000 and
$1,107,000 in 1996, which represents 63% and 14% of imaging sales for
that year.
(b) Sales of marking products to single customers were $3,153,000,
$2,171,000, and $7,296,000 in 1996, 1995 and 1994, which represents 34,
21, and 61 percent of marking sales, respectively.
(c) Identifiable assets by business segment are those assets used in the
Company's operations in each segment.
Geographic Segments
-------------------
The Company operates primarily in the United States and France. Operating
results and other financial data are presented in the information which
follows for the principal geographic segments of the Company.
<TABLE>
<CAPTION>
United Intercompany
States (g) France Activity (f) Consolidated
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
1996:
Sales $18,320,335 7,143,779 (7,882,674) (d) 17,581,440
Loss from operations (6,989,549) (1,927,536) (706,911) (9,623,996)
Identifiable assets (e) 17,470,744 2,535,828 (2,344,715) 17,661,857
1995:
Sales $11,730,377 2,549,943 (850,589) (d) 13,429,731
Loss from operations (6,565,747) (1,557,388) (7,078) (8,130,213)
Identifiable assets (e) 12,356,388 2,520,500 (234,286) 14,642,602
</TABLE>
(Continued)
F-27
<PAGE>
LASERTECHNICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994:
<S> <C> <C> <C> <C>
Sales $13,722,594 2,831,014 (697,399) (d) 15,856,209
Loss from operations (5,644,499) (1,511,232) (37,078) (7,192,809)
Identifiable assets (e) 10,326,512 3,639,280 (3,255,336) 10,710,456
=========== ========== ========== ==========
</TABLE>
(d) Sales between geographic regions are recorded at amounts above cost in
accordance with the rules and regulations of the governing tax
authorities.
(e) Identifiable assets by geographic segment are those assets used in the
Company's operations in each segment.
(f) Intercompany activity is eliminated in consolidation.
(g) All corporate activity and assets are included in the United States
geographic segment.
(20) Stock Issuances
---------------
In July 1996, the Company issued 835 shares of its new class of convertible
preferred stock, the Series D Preferred Stock, at $10,000 per share, or
$8,350,000 (see note 10).
On December 27, 1995, the Company issued 198,676 shares of convertible
preferred stock to Wolfensohn for cash totaling $300,000 and an
additional 198,675 shares of convertible preferred stock to an affiliate
of Wolfensohn for cash totaling $300,000.
In January 1994, the Company issued 272,331 shares of its unregistered
Common Stock to Wolfensohn at a per share price of approximately $.73.
The $200,000 proceeds from this sale were principally utilized by Sandia
in its acquisition of Printis (note 18).
In June 1994, the Company issued 826,447 shares of its unregistered Common
Stock at $1.21 per share (total of $1,000,000) to SPI. Under the terms of
the agreement, a nonvoting representative of SPI is entitled to attend
Lasertechnics, Inc., board meetings. Concurrently with SPIOs purchase of
Common Stock, Sandia entered into a contract manufacturing agreement and
a distribution agreement with SPI (see note 14).
In July 1994, the Company issued 4,900,000 shares of its unregistered
Common Stock to JPMIC at $.95 per share (total of $4,655,000). The
Company also issued a $345,000 convertible note payable bearing interest
at 10 percent and convertible at $.95 per share into Non-voting Common
Stock. The Non-voting Common Stock is convertible into voting Common
Stock on a one share for one share basis. On November 29, 1994, the
convertible note payable plus interest was converted into 377,684 shares
of Non-voting Common Stock. Under the terms of the stock purchase
agreement JPMIC is entitled to one seat on the Board of Directors.
F-28
<PAGE>
Schedule I
LASERTECHNICS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
Balance charged Balance
at to at
beginning costs end
of and of
Description Period expenses Deductions period
------------------------------------------ --------- -------- ---------- -------
<S> <C> <C> <C> <C>
e year ended December 31, 1996:
Reserves and allowance deducted
from asset accounts-allowance
for doubtful accounts $ 278,263 248,489 (169,616)(a) 357,136
=============================================== ==============
Product Warranty Reserve $ 256,003 639,606 (378,826)(b) 516,783
=============================================== ==============
For the year ended December 31, 1995:
Reserves and allowance deducted
from asset accounts-allowance
for doubtful accounts $ 170,010 115,375 (7,122)(a) 278,263
=============================================== ==============
Product Warranty Reserve $ 261,138 338,250 (343,385)(b) 256,003
=============================================== ==============
For the year ended December 31, 1994:
Reserves and allowance deducted
from asset accounts-allowance
for doubtful accounts $ 104,841 65,169 - (a) 170,010
=============================================== ==============
Product Warranty Reserve $ 97,415 687,591 (523,868)(b) 261,138
=============================================== ==============
</TABLE>
(a) Charge-offs.
(b) Actual costs incurred.
S-1
<PAGE>
EXHIBIT 10.12
AMENDEMENT TO THE OEM LICENSE AGREEMENT
---------------------------------------
This Amendment to the OEM License Agreement ("Agreement") by and between
Xerox Corporation ("Xerox") and Sandia Imaging Systems ("Sandia") is made this
27/TH/ day of December, 1996 (the "Effective Date"), by and between Xerox and
Sandia. The purpose of this Amendment is to define the terms and conditions of
Sandia's continued license of the Licensed Programs, the extension of Sandia's
licensing rights, the continued payment of royalties and the license to use
Xerox Source.
All portions of the Agreement, unless specifically identified and
replaced by, or amended by this Amendment, are incorporated herein and continue
to be in effect and will be unchanged by this Amendment. All capitalized terms
used herein have the same meaning as in the Agreement.
1. DEFINITIONS
-----------
1.1 XEROX SOURCE. The term "Xerox Source" shall mean the human readable
------------
source code documentation described in Exhibit A and any changes,
alternations, corrections or enhancements to the source code
documentation described in Exhibit A provided by Xerox to Sandia
pursuant to the terms hereof or of any subsequent agreement between
Xerox and Sandia.
1.2 DOCUMENTATION. "Documentation shall mean Xerox' documentation for the
-------------
Xerox Source supplied to Sandia for internal use only.
2. LICENSE GRANTS
--------------
2.1 LICENSE TO USE XEROX SOURCE
---------------------------
2.1.1 LICENSE GRANT. Xerox hereby grants to Sandia a non-exclusive
non-transferable license, during the term of this Agreement and
subject to Sandia's compliance with Paragraph 2.1.2 ("Protection
---------------
of Xerox Source") and the other terms of this Agreement, to use the
Xerox Source at it s facility located at 3208 Commander Drive,
Carrollton, TX 75006, or upon notification to Xerox such other
Sandia location ("Development Site") for the sole purpose of
creating dedicated reading and writing dataglyph systems ("Systems")
to read and write to the Products. Sandia may sell such Systems to
Resellers and/or End-Users but such Systems shall not provide access
to Xerox Source. Sandia shall have no right to sublicense such
rights in and to Xerox Source to a third party. Xerox shall own the
copyrights and patents in all of the Sandia changes and
enhancements.
2.1.2 PROTECTION OF XEROX SOURCE. Sandia agrees that it will not (a)
disclose all or any portion of the Xerox Source to third
parties, with the exception of authorized employees ("Authorized
Employees") and
1
<PAGE>
authorized contractors ("Authorized Contractors") (i) who
require access thereto for a purpose authorized by this
Agreement, (ii) who have signed the appropriate employee or
contractor agreement substantially in the form attached as
Exhibit B-1 ("Employee/Contractor Agreement") and who sign an
-----------
amendment in the form attached as Exhibit B-2 ("Confidentiality
-----------
Amendment") prior to the initial access to Xerox Source
specifically recognizing and agreeing to protect the
confidentiality of such information; (the forms of agreements
attached as Exhibit B-1 (b) reproduce Xerox Source, or any
-----------
portion of Xerox Source, in any form or medium, without Xerox's
prior written permission except as necessary for developing and
maintaining as provided in Section 2.1.1 and for archival storage,
(c ) use Xerox Source for any purpose not specifically authorized in
this Agreement of (d) will take the same precautions and security
measures to protect he confidentiality and security of Xerox Source
as Sandia does with its own source code, including, but not limited
to, employees wearing Sandia identification badges at all times
while on company premises; visitors signing in and being accompanied
by Sandia employees, access to facilities during 'non-working' hours
limited to management approved individuals. In addition, Sandia
agrees to maintain a log which contains a list of all Authorized
Employees and Authorized Contractors who actually have had access to
Xerox Source. Sandia agrees to comply with Xerox's requests, from
time to time, to provide Xerox with copies of its list and updates
thereto, and all such Confidentiality Agreements entered into by
Sandia and its Authorized Employees and Authorized Contractors and
not previously provided to Xerox. Finally, upon termination or
resignation of an employee, perform an exit interview reminding the
employee about his/her requirements regarding confidentiality.
2.1.3 XEROX SOURCE SUPPORT. Xerox warrants that Xerox shall make
available, as part of the payments, to Sandia a Xerox employee
knowledgeable about the Xerox' Source. Such employee is only
obligated to support Sandia with one-third of his/her time, as
calculated on an annual basis, and solely to help Sandia with its
use of the Xerox Source as licensed under Section 2.1.1. In the
event the assigned employee is not available during the normal work
week, Xerox will make available another employee knowledgeable about
the Xerox ' Source. If additional resources are needed, as
determined by Sandia and/or Xerox, the parties agree to negotiate
the price and terms and conditions of such additional support. In
addition, Sandia acknowledges that the Xerox Source is of such
complexity that it may have inherent defects, and agrees that Xerox
makes no other warranty, either express or implied, as to any matter
whatsoever, including without limitation, the condition of the Xerox
Source. Xerox
2
<PAGE>
may, from time to time, at its sole discretion, update or improve
the Xerox Source with modifications and enhancements to the Xerox
Source and corresponding documentation, if available, which are
designed by Xerox to correct or improve the performance of the
software. Xerox agrees to provide information to Sandia regarding
any modifications or enhancements that may become available. Such
source code updates, if any, will be provided to Sandia if requested
and at a price (such prices to be based on the actual cost of the
enhancement or modifications) and terms to be agreed upon. Xerox
agrees, however, that it will provide to Sandia proposed source code
release number 1.5 of the Xerox Source when such release becomes
available. Sandia agrees to pay for any requested 'build' of such
release up to but not to exceed $25,000.
2.1.4 PROPRIETARY RIGHTS AUDIT. During the term of this Agreement
and for a period of eighteen (18) months thereafter, Xerox may
appoint an independent third party who shall have access to such
portion of Sandia' records and premises to allow Xerox to determine
whether Sandia is substantially in compliance with Paragraph 2.1.2
---------------
("Protection of Xerox Source") of this Agreement (i.e. that Sandia
is observing the agreed upon rules and procedures as to the
protection and authorized use of the Xerox Source). In no event
shall audits be made hereunder more frequently than every six (6)
months. Such access shall be (a) during Sandia's regular business
hours and with a minimum notification of 48 hours, (b) arranged so
that, to the extent possible, Sandia's regular business activities
are minimally disrupted and (c ) under the terms of an appropriate
confidentiality agreement executed by the individual(s) conducting
such audit. Xerox shall pay the costs of such audit. Sandia shall
immediately correct any deficiencies discovered in the course of the
audit.
2.2 LICENSE TO LICENSED PROGRAMS.
----------------------------
2.2.1 LICENSE GRANT. Sandia shall have a license to the Licensed
Programs as provided in Section 7 of the Agreement. That right shall
be interpreted to include the sublicensing of dataglyphing
capability to 3/rd/ party vendors (i.e. scanner vendors) who will
market products designed to read Sandia's keyed dataglyphs via
products sold under the 3/rd/ party's and other labels.
2.3 NEW EMBEDDED TECHNOLOGY.
-----------------------
2.3.1 Both parties recognize that Xerox is, and will continue, to
develop embedded technologies during the course of this Agreement.
If Xerox develops embedded technology that the parties agree is
competitive to
3
<PAGE>
the Licensed Program, the parties agree that they will discuss the
availability of such embedded technology to Sandia upon the
commercialization of such technology by Xerox.
3. ROYALTY
-------
3.1 Royalty Amounts. In consideration of the license grants provided under
the Agreement and this Amendment, Sandia shall pay to Xerox in US
dollars two million one hundred thousand dollars ($2,100,000) as set
forth in the payment schedule below:
December 15, 1997 $700,000.00 + interest
December 15, 1998 $700,000.00 + interest
December 15, 1999 $700,000.00 + interest
3.2 The parties agree that Exhibit A of the Agreement is deleted and
replaced with the new Exhibit A attached hereto.
3.3 The parties agree that Section 3.8, including 3.8.1, 3.8.2, 3.8.3, and
3.10 of the Agreement are not applicable until after December 31, 1999.
4. EXHIBIT B AND D./ SANDIA'S PRODUCTS / MARKET FOR EXCLUSIVITY
------------------------------------------------------------
4.1 The parties agree that Exhibit B of the Agreement is deleted and
replaced with the new Exhibit B attached hereto. The parties agree that
Exhibit D of the Agreement is deleted and replaced with the new Exhibit
D attached hereto.
5. TERMINATION
-----------
5.1 Section 13.1 of the Agreement is deleted and replaced with the
following: "This Agreement is effective upon the date of execution by
Xerox and Sandia, unless terminated sooner by a provision of this
Agreement, will continue until December 31, 1999 and thereafter will
automatically renew for successive one year terms."
5.2 Section 13.2 of the Agreement is deleted.
5.3 Section 13.3 of the Agreement is deleted and replaced as follows: At
any time after December 31, 1999, Sandia may terminate, or not renew,
this Agreement based upon its own business reasons and objectives
notwithstanding that Xerox is not then in default of its obligations
hereunder. In this circumstance, Sandia shall give Xerox written notice
of termination or non-renewal at least ninety days in advance.
4
<PAGE>
5.4 Section 13.5 of the Agreement is deleted and replaced as follows:
"Should Sandia fail to pay Xerox the minimum annual royalty payment by
the expected dates as defined in Exhibit A, the provision granting
Sandia the sole distribution rights for the Licensed Programs reverts
to a non-exclusive license grant. Termination of exclusivity is Xerox'
sole remedy for Sandia's failure to pay the minimum royalty, and such
failure shall not be deemed a breach of the Agreement."
5.5 In addition to the effects of termination set forth in Section 14 of
the Agreement, if the license granted pursuant to Paragraph 2.1 of the
Amendment shall be terminated; Sandia shall continue to be responsible
for safeguarding the trade secrets and proprietary rights of Xerox in
accordance with the terms of the Agreement and this Amendment after
such cancellation, termination, or expiration and Sandia shall erase,
destroy or return to Xerox any of Xerox's proprietary information
provided pursuant to this Amendment or Agreement. Upon Xerox's request,
Sandia shall warrant in writing to Xerox its return or destruction of
Xerox's proprietary information within thirty (30) days of
cancellation.
6. GENERAL
-------
6.1 Governing Law. This Amendment shall be governed in all respects by the
internal laws of California.
6.2 Injunctive Relief. It is understood and agreed that, notwithstanding
any other provisions of this Amendment or the Agreement, breach of the
provisions of this Amendment or the Agreement by Sandia will cause
Xerox irreparable damage for which recovery of money damages would be
inadequate, and that Xerox shall therefore be entitled to obtain timely
injunctive relief in a court of competent jurisdiction to protect
Xerox's rights under this Amendment or the Agreement in addition to any
and all remedies available at law.
6.3 Waiver. The failure of either party to require performance by the other
party of any provision hereof shall not affect the full right to
require such performance at any time thereafter, nor shall the waiver
by either party of a breach of any provision hereof be taken or held to
be a waiver of the provision itself.
6.4 Entire Agreement. This Agreement, the Agreement and their respective
Exhibits constitute the entire agreement between the parties with
respect to the subject matter hereof. In the event of a conflict
between the terms and conditions of the Agreement and this Amendment,
the terms of this Amendment shall control. This Amendment may only be
changed by mutual agreement of authorized representatives of the
parties in writing.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their respective duly authorized employees to be effective as of the date
first written on page 1 of this Agreement.
Xerox: Sandia:
XEROX CORPORATION SANDIA CORPORATION
By: By:
------------------------ -------------------------
Print Print
Name: Name:
---------------------- ------------------------
Title: Title:
-------------------- ----------------------
Date: Date:
--------------------- -----------------------
6
<PAGE>
EXHIBIT A:
LICENSED PROGRAMS
-----------------
The Licensed Program is the SmartPaper Tooklit for Windows (Version 1.1a)
previously provided to Sandia by Xerox.
ROYALTY SCHEDULE after December 31, 1999.
ROYALTY FEE
-----------
ITEMS TO APPLY ROYALTY % OF ACHIEVED REVENUE*
- ---------------------- ----------------------
On all Sandia hardware used to read, 5%
write and decode SmartPaper Objects**,
locally or via a server***
On all Sandia software used to read, 5%
write and decode SmartPaper Objects
On all other Sandia revenues from 5%
SmartPaper related royalties and
services.
Any and all reading and writing 5%
dataglyph systems using Xerox Source.
*Sandia shall pay to Xerox a per item royalty of a percentage of Sandia's
achieved revenue as indicated above. For purposes of this Agreement, "achieved
revenue" shall be the total price at which an order for the above items is
invoiced to the customer, including any increase or decrease in the total amount
of the order, i.e., net of any returns or allowances, but excluding all costs of
shipping, tax and insurance.
**"SmartPaper Objects" are comprised of the following components: (1)
DataGlyphs; (2) Clip Regions; (3) Signature Regions; (4) Check Boxes.
***Royalty does not apply to Sandia Imaging's basic card printer, but, rather,
only to dedicated Hardware to encode and decode SmartPaper Objects.
7
<PAGE>
MINIMUM ANNUAL ROYALTY PAYMENT:
By December 31, every year after 1999 $500,000
Subject to the provisions of Section 13.5, at the end of any particular year, as
described above, Sandia will determine if the accrued and payable earned
royalties for such year are less than the Minimum Annual Royalty for such year,
and shall pay Xerox in cash any such amount under the Minimum, at the time
Sandia makes the payment for the quarter then ended.
ROYALTY DISCOUNT SCHEDULE:
The 5% Royalty set forth in Amendment A on achieved revenues, as defined in
Amendment A., shall be subject to a declining percentage based on attaining
revenues beyond minimum amount thresholds:
Achieved Revenue within Calendar Year Achieved Royalty Percentage
Minimum of $10 Million 4.5%
Minimum of $20 Million 4.0%
Minimum of $30 Million 3.5%
$30 Million or more 3.0%
8
<PAGE>
EXHIBIT B
SANDIA'S PRODUCTS
Product Description: A product which prints and reads from any security
identification and security portable database media. These media refer to cards
made substantially of plastic, or such other material as becomes adopted by the
identification and secured access industry and other security media including
passports, visas, drivers licenses, national identification media, boarder
crossing media all falling under the category of "security and identification
media."
9
<PAGE>
EXHIBIT D
THE MARKET FOR SANDIA'S EXCLUSIVITY
Sandia is granted by Xerox the right to be the sole value added reseller for use
of the Licensed Programs in the secured access industry. That being, Xerox
shall not license the Licensed Programs to a third party for purposes of using
such Licensed Programs to create a competitively similar product (set forth as
in Exhibit D as Product Description) that will print and read from security
identification and security portable database media.
Sole value added reseller, as used herein, means that Xerox will not grant to a
third party a license to use the Licensed Program to make competitive products
within the above defined market. Xerox Corporation or its subsidiaries reserved
the right to enter this market itself.
10
<PAGE>
EXHIBIT A-1
XEROX SOURCE
For the purpose of this agreement, SmartPaper Source Code is defined to be the
source code versions of all files found in the code tree used to build version
1.1a of the SmartPaper Toolkit for Windows, plus any code that is changed or
modified, added or enhance by DDS in this code tree prior to December 15, 1996.
11
<PAGE>
EXHIBIT B-1
SANDIA'S EMPLOYEE/CONTRACTOR AGREEMENT
Sandia must provide a copy of their standard employee and contractor
confidentiality agreement for our review and incorporation into the Amendment.
12
<PAGE>
EXHIBIT B-2: CONFIDENTIALITY AMENDMENT
---------------------------------------
In connection with my [employment by / or my engagement as an independent
contractor with] Sandia, I entered into a confidentiality agreement which
required me to treat as confidential certain proprietary information (the "Prior
Agreement"). In return for my access to certain source code owned and provided
to Sandia by Xerox Corporation ("Xerox"), Sandia and I hereby agree to amend the
Prior Agreement as follows:
1. PROPRIETARY INFORMATION. I am to receive access to certain source code,
------------------------
documentation or other proprietary information supplied to Sandia by Xerox
("Confidential Information") who is a third party supplier of Sandia. I
acknowledge that such information is confidential or proprietary as defined
by the Prior Agreement. I agree to maintain the Confidential Information in
the strictest of confidence and to treat all such Confidential Information in
accordance with the restrictions imposed on other proprietary or confidential
information pursuant to the Prior Agreement.
2. INJUNCTIVE RELIEF. I understand and agree that if I breach this Agreement, as
------------------
hereby amended, I will cause Sandia and its suppliers irreparable damage for
which recovery of money damages would be inadequate, and that Sandia and its
suppliers shall be entitled to obtain timely injunctive relief to protect
their rights hereunder in addition to any and all remedies available at law.
3. THIRD PARTY BENEFICIARY. I understand that Xerox is a third party beneficiary
------------------------
to this Agreement. I agree that Xerox is entitled to enforce all the
provisions of this Agreement in addition to Sandia.
4. REAFFIRMATION OF OBLIGATIONS UPON REASSIGNMENT. If I am reassigned from a
-----------------------------------------------
project involving access to the proprietary information of Xerox to a project
not involving such access, I agree to reaffirm my obligations pursuant to
this agreement by re-executing this Amendment.
[EMPLOYEE/CONTRACTOR] SANDIA
- --------------------- ------
- -------------------------------- -------------------------------
Signature Signature
- -------------------------------- -------------------------------
Print Name Print Name
- -------------------------------- -------------------------------
Date Date
DATE TO COMMENCE ACCESS TO XEROX INFORMATION:
-------------------------
13
<PAGE>
SECURED PROMISSORY NOTE
Date: _____________________________________ XEROX
1. Amount Loaned $2,100,000 3. Total of Payments (1+2) $2,100,000
2. Interest on the payment due shall be 4. Annual Percentage Rate fixed.
at the prime rate on the payment due
date.
a. TERMS AND REPAYMENT: The term of this note shall be until December 15, 1999
--------------------
or until paid. For value received the undersigned (hereinafter referred to
as "Debtor") promises to pay Xerox Corporation (Xerox) at its offices
located at 3400 Hillview Avenue, PAHV 211, Palo Alto California 94304, or to
anyone Xerox may designate, as follows: (1) On December 15, 1997, the sum of
$7000,000 together with imputed interest at the prime rate of interest as
published in the Wall Street Journal (Western edition) on December 15, 1997,
computed monthly from the Effective Date of the Amendment; (2) On December
15, 1998, the sum of $700,000 together with imputed interest at the prime
rate of interest as published in the Wall Street Journal (Western Edition)
on December 15, 1998, computed monthly from the Effective Date of the
Amendment, and; (3) On December 15, 1999, the sum of $700,000 together with
Imputed Interest at the prime rate of interest as published in the Wall
Street Journal (Western Edition) on December 15, 1999, computed monthly from
the Effective Date of the Amendment. This will constitute "total of payments
(Item 3, above). Debtor agrees, however, that Xerox may at any time require
that Debtor pay the entire unpaid balance of the amount financed and all
unpaid accrued interest in one lump sum upon the happening of any event
enumerated in the paragraph entitled "Default" and the interest rate shall
be the prime rate of Interest as published in the Wall Street Journal
(Western Edition) as of such notice by Xerox.
B. DEFAULT At Xerox' option, the unpaid balance of the amount financed and all
-------
unpaid accrued interest will become immediately due and payable without any
notice or demand to Debtor if any one of more of the following events
occurs:
1. Debtor fails to make a required payment on time;
2. Debtor ceases or suspends business;
3. Debtor files a petition of bankruptcy or has one filed against it or
him/her;
4. Debtor makes an assignment for the benefit of creditors or a receiver or
trustee is appointed for Debtor or any other type of insolvency
proceeding is begun by or against Debtor;
14
<PAGE>
5. Debtor makes any false representation to Xerox;;
6. Xerox determines Debtor's ability to repay this note has been impaired;
7. Debtor fails to make timely payment on any debt owing Xerox Corporation
or any subsidiary thereof.
8. The OEM License Agreement between the parties dated December 28, 1994 is
terminated.
C. a. Debtor hereby grants to Xerox as additional security for the payment
of the debt which is the subject of this Promissory Note 600,000 shares
of the common stock of Lasertechnics, Inc. is to be maintained by Xerox
in a safe deposit box during the term of this note with demand
registration rights to be exercised in the event of default.
b. Debtor represents, warrants, and covenants that Debtor has good and
marketable title to the said common stock and is owned by Lasertechnics,
Inc. in its own right free from any lien, security interest, or other
encumbrance and that there will be no set-offs or counter-claims of any
nature whatsoever. Debtor will warrant and defend the title to stock
against the lawful claims and demands of all persons;
c. In the event the parties mutually agree to pledge other collateral;
i. Debtor will execute alone or with Xerox such Financing Statements or
other documents, in form satisfactory to Xerox, which Xerox may at
any time desire to file in order to perfect and protect its security
interests under this Promissory Note, and reimburse Xerox for the
costs of filing the same; and that it will execute and deliver to
Xerox any instrument, document, assignment, or other writing, which
may be necessary or convenient to Xerox to carry out the terms of
this Paragraph C and to perfect its security interest in and
facilitate the collection of accounts receivable, the proceeds of
the Collateral and any other property constituting security to
Xerox;
ii. Debtor hereby irrevocably nominates, constitutes and appoints Xerox
as the true and lawful attorney-in-fact of Debtor, in its name,
place and stead, to notify account debtors, to collect, receive,
receipt and sue for all monies or other proceeds due from the
accounts receivable, to endorse the name of Debtor on all commercial
paper given in payment or in part payment thereof, and to settle,
adjust, or compromise any claims or disputes as to the accounts as
to the accounts receivable as
15
<PAGE>
fully as Debtor could itself do, and to take any other steps that it
deems necessary or desirable to fulfill Debtor's obligations
hereunder.
iii. Xerox shall have the right to enter upon Debtor's premises at any
reasonable time to inspect Debtor's books and records and make
extracts therefrom and inspect the Collateral or its proceeds, and
Debtor shall assist Xerox in whatever way necessary to make such
inspection.
iv.
D. LEGAL FEES AND COURT COSTS. In the event that legal proceedings are
---------------------------
instituted to collect any amount due upon any installment of this note, the
undersigned, jointly and severally, agree to pay to the holder hereof in
addition to the amount of the unpaid balance or principal and accrued unpaid
interest, all costs and expenses of such proceedings, plus reasonable
attorney fees.
E. WAIVER The undersigned and all endorsers, sureties, and guarantors hereof
------
hereby jointly and severally waive presentment for payment, demand, notice
of non-payment, and notice of sureties. Guarantors hereof consent to any and
all extension of time, renewals, waivers, or modifications that may be
granted by Xerox with respect to the payments or other provisions of this
note, and to the release of the collateral, or any part thereof without
substitution and agree that additional makers, endorsers, guarantors, and
sureties may become parties hereto without notice to them or without
affecting their liability hereunder. No delay or omission to exercise any
right, power or remedy accruing to Xerox upon breach or default by Debtor or
guarantor under this promissory note shall impair any such right, power or
remedy of Xerox, or shall be construed as a waiver of any breach or default
or any similar breach or default thereafter occurring; nor shall any waiver
of a single breach or default be deemed a waiver of any subsequent breach or
default. All waivers by Xerox must be in writing.
F. CONFESSION OF JUDGMENT: Debtor hereby empowers any attorney of any court of
-----------------------
competent jurisdiction within the United States or elsewhere to appear for
Debtor and with or without one or more declarations, confess a judgment or
judgments against Debtor in favor of the holder of this promissory note for
all sums due hereunder plus accrued unpaid interest thereon, together with
costs of suit and reasonable attorney fees. Debtor waives all errors that
may occur in any such proceeding and all stays of execution, and the
exemption of all property from levy and sale on any execution after such
confession is hereby expressly waived by Debtor and Debtor shall claim no
benefit of exemption under or by virtue of any exemption law now in force or
which may hereinafter be enacted.
Payments due under this Promissory Note shall be made without claim of set-off,
counterclaim or deduction of any nature or kind or for any cause whatsoever.
16
<PAGE>
Upon prior written notice, Xerox may change the address to which Debtor makes
payments under this Promissory Note. Debtor shall give Xerox reasonable prior
written notice of any address change by Debtor.
The liability of each of the undersigned shall be absolute and unconditional and
without regard to the liability of any other party.
This promissory note and the security interest(s) granted to Xerox hereunder
shall be governed by the interpreted in accordance with the laws of California.
XEROX CORPORATION SANDIA CORPORATION
By: By:
----------------------- -------------------------
Name: Name:
---------------------- -----------------------
Title Title:
---------------------- ----------------------
Date: Date:
---------------------- -----------------------
Address 3400 Hillview Avenue Address: 3208 Commander Drive
Palo Alto, CA 94566 Carrollton, TX 75006
17
<PAGE>
EXHIBIT 11.0
Lasertechnics, Inc. and Subsidiaries
Computation of Per Share Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
Weighted average of shares of
Common Stock outstanding: 34,339,313 27,511,489 21,997,410
Net Loss applicable to
Common Stock: $11,696,137 $ 9,167,737 $ 7,286,956
Net Loss Per Share: $ (0.34) $ (0.33) $ (0.33)
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
Lasertechnics, Inc. List of Subsidiaries
----------------------------------------
Names of Subsidiaries State of Incorporation
- --------------------- ----------------------
Sandia Imaging Systems Corporation Delaware
Sandia Imaging Systems Europe, S.A. France
Lasertechnics Marking Corporation Delaware
Quantrad Corporation Delaware
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Lasertechnics, Inc.:
We consent to incorporation by reference in the registration statements Nos. 33-
42214 and 33-98160 on Form S-8 and No. 333-10665 on Form S-3 of Lasertechnics,
Inc. and subsidiaries of our report dated February 21, 1997, relating to the
consolidated balance sheets of Lasertechnics, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which reports appear in the December
31, 1996 annual report on Form 10-KSB of Lasertechnics, Inc.
Our report dated February 21, 1997 contains an explanatory paragraph that states
that the Company's recurring losses from operations and resulting continued
dependence upon access to additional external financing raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG Peat Marwick LLP
Dallas, Texas
March 24, 1997
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