<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________to_______________________
Commission File No.: 0-18114 ___________________________________________________
LASERMASTER TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
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(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 941-8687
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
-----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 3/31/96
- ----- ----------------------
Common Stock, $.01 par value 11,390,634
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
March 31, June 30,
----------- -----------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 157,531 $ 607,223
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$1,592,000 and $2,051,000, respectively 13,695,597 17,104,353
Inventory 18,339,042 21,609,487
Income tax receivable 413,390
Other current assets 3,680,375 2,452,766
Deferred income taxes 2,004,000 2,868,000
----------- -----------
TOTAL CURRENT ASSETS 38,289,935 44,641,829
PROPERTY AND EQUIPMENT, net 5,753,787 6,323,749
CAPITALIZED SOFTWARE, less accumulated
amortization of $5,562,684 and $3,465,724
respectively 5,039,061 4,991,084
DEFERRED INCOME TAXES 519,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $1,451,943 and $967,765, respectively 3,768,896 3,204,610
----------- -----------
$53,370,679 $59,161,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 5,795,919 $ 6,462,901
Notes payable-related parties 1,765,000
Accounts payable 15,424,071 18,204,869
Accrued payroll and payroll taxes 2,270,242 2,642,947
Income taxes payable 201,768
Other current liabilities 3,035,719 2,410,949
Current maturities of long-term debt 1,150,284 1,009,917
----------- -----------
TOTAL CURRENT LIABILITIES 29,441,235 30,933,351
LONG-TERM DEBT, less current maturities 988,987 1,598,546
DEFERRED INCOME TAXES 1,336,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 11,390,634 and 11,176,382
shares issued and outstanding, respectively 113,906 111,764
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or
outstanding
Additional paid-in capital 17,343,535 16,626,953
Retained earnings 5,483,016 8,554,658
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 22,940,457 25,293,375
----------- -----------
$53,370,679 $59,161,272
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
----------- ----------- ----------- -----------
NET SALES $23,227,012 $30,978,737 $69,832,883 $89,726,111
COST OF GOODS SOLD 15,800,516 19,467,341 43,969,533 53,185,605
----------- ----------- ----------- -----------
GROSS PROFIT 7,426,496 11,511,396 25,863,350 36,540,506
OPERATING EXPENSES:
Sales and Marketing 5,307,727 6,852,431 15,774,487 20,814,714
Research and Development 1,926,550 1,813,033 4,847,631 4,612,586
General and Administrative 2,960,760 2,828,359 8,445,094 8,362,940
----------- ----------- ----------- -----------
10,195,037 11,493,823 29,067,212 33,790,240
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) (2,768,541) 17,573 (3,203,862) 2,750,266
OTHER INCOME (EXPENSE):
Interest expense (540,114) (309,865) (1,325,666) (807,443)
Interest income 2,476 5,707 11,383 21,018
Other expense (23,186) (126,159) (13,497) (157,491)
----------- ----------- ----------- -----------
(560,824) (430,317) (1,327,780) (943,916)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,329,365) (412,744) (4,531,642) 1,806,350
INCOME TAX BENEFIT (PROVISION) 1,099,000 124,000 1,460,000 (542,000)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $(2,230,365) $ (288,744) $(3,071,642) $ 1,264,350
=========== =========== =========== ===========
PER COMMON SHARE:
Net Earnings (Loss) $ (.18) $ (.02) $ (.25) $ .10
Average common and common
equivalent shares outstanding 12,141,231 12,099,081 12,149,456 12,265,318
</TABLE>
See notes to consolidated financial statements.
3
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LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings (Loss) $(3,071,642) $ 1,264,350
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,457,016 4,590,423
Amortization of deferred financing costs 188,954 66,400
Loss on sale of property and equipment 46,520 32,616
Deferred income taxes (991,000) 74,000
Stock option tax benefit 226,000
Change in current assets and current liabilities:
(Increase) decrease in:
Accounts receivable 3,408,756 (1,221,059)
Inventory 3,270,445 (6,067,266)
Other current assets (1,416,563) (536,346)
Income tax receivable (413,390)
Increase (decrease) in:
Accounts payable (1,921,282) 2,743,192
Accrued payroll and payroll taxes (372,705) 464,590
Other current liabilities 624,770 881,490
Income taxes payable (201,768) (35,550)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,834,111 2,256,840
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,234,205) (2,185,833)
Additions to capitalized software costs (2,144,937) (2,766,292)
Proceeds from sale of property and equipment 34,173 16,640
Additions to patents and other assets (1,048,464) (1,440,911)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,393,433) (6,376,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 492,725 407,708
Net borrowing (repayments) under revolving credit lines (1,526,498) 3,093,929
Net borrowing from related parties 1,765,000
Proceeds from long-term debt 159,003 470,938
Payments on long-term debt (780,600) (605,206)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 109,630 3,367,369
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (449,692) (752,187)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 607,223 2,193,673
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 157,531 $ 1,441,486
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of presentation -
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to consolidated
financial statements included in the Annual Report on Form 10-K of
LaserMaster Technologies, Inc. and subsidiaries (the "Company") for the year
ended June 30, 1995. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending June 30, 1996.
2. Inventory -
Inventory consists of the following:
March 31, June 30,
1996 1995
----------- -----------
Raw materials
Purchased printer engines $ 644,775 $ 796,940
Completed subassemblies 4,894,444 5,419,774
Raw materials 7,446,760 9,397,341
Work in process 302,027 987,009
Finished goods 5,051,036 5,008,423
----------- -----------
$18,339,042 $21,609,487
=========== ===========
3. Short-term financing -
On January 17, 1996 LMC replaced the operating line of credit that it had
maintained with a commercial bank with a new credit agreement with a
commercial finance company. The new agreement allows LMC to borrow up to
$10,000,000 based on availability equal to 60% of the net eligible accounts
receivable and 25% of the net eligible inventory. Borrowing is secured by
inventory, accounts receivable, and general intangibles and bears interest
at a defined bank Reference Rate (prime) plus 2.0% (10.25% at March 31,
1996) with a 0.5% unused line fee. At March 31, 1996 approximately
$1,396,000 of eligible financing was unused under this credit line. The
agreement expires January 17, 1999. The agreement requires the borrower to
meet various financial covenants involving capital expenditures, additions
to capitalized software and intellectual property, minimum debt service
coverage ratio, and maintenance of a minimum net worth. The agreement also
requires LMC to meet various non-financial covenants.
During September 1995, LaserMaster Corporation borrowed $1,565,000 under a
demand note from TimeMasters, Inc., a corporation controlled by the
Company's Chief Executive Officer. The note bears interest at a defined bank
Reference Rate (prime) plus 1.75% (10% at March 31, 1996). On October 11,
1995, an additional $200,000 was added to the existing note bringing the
total amount owed to TMI, as of March 31, 1996, to $1,765,000 plus accrued
interest. LaserMaster(R) also agreed to issue TimeMasters(R) a warrant if
the demand note was required to become a longer term obligation. In January
1996, LaserMaster completed negotiation of a new credit agreement with a
commercial finance company that refused to allow any proceeds from the
credit line to be applied to reduction of the indebtedness to TimeMasters
and, in addition, required that the indebtedness to TimeMasters be
subordinated to the line of credit and not be
5
<PAGE>
repaid unless certain financial covenants were achieved. In return for such
subordination and for the significant restrictions on repayment, the Company
issued to TimeMasters a warrant to purchase common stock and a new
promissory note, a portion of which was convertible into common stock of the
Company. In February 1996, Nasdaq notified the Company that it believed that
the issuance of the warrants and the conversion right were not in compliance
with Nasdaq Non-Quantitative Listing Standards. To satisfy Nasdaq's
concerns, the Company and TimeMasters agreed to rescind the warrants and the
conversion right and to submit the transaction to shareholders for approval
at the Company's annual meeting on May 23, 1996.
On November 29, 1995 LaserMaster Corporation converted $859,516 of accounts
payable into a promissory note. The note is payable to a trading partner
that supplies inventory to LMC and bears interest at 10%. The note is due in
two installments of $429,758 on March 29, 1996 and the remaining principal
plus accrued interest on May 29, 1996. In addition, the trading partner was
granted a warrant for the purchase of 68,596 shares of the Company's common
stock at an exercise price of $5.875 per share. LaserMaster Corporation and
the trading partner are currently discussing new payment terms as the
principal payment that was originally due on March 29, 1996 has not yet been
made due to cash flow constraints of LMC and product quality issues
associated with the inventory supplied by the trading partner.
4. Supplemental disclosure of cash flow information and non-cash financing
activities -
The Company paid and received cash for the following items:
Nine months ended
March 31,
-----------------------
1996 1995
---------- ----------
Interest paid $1,584,389 $ 782,293
Income tax (received) paid (79,842) 577,550
Capital lease obligations of $152,405 and $356,615 were incurred during the nine
months ended March 31, 1996, and 1995, respectively.
Accounts payable totaling $859,516 were converted to a note payable during the
nine months ended March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
This Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Refer to Exhibit 99 of this Form 10-Q for certain important cautionary
factors, risks and uncertainties related to forward-looking statements.
Net sales for the three months ended March 31, 1996 were $23.2 million compared
to $31.0 million for the same period one year ago. Net loss for the three
months ended March 31, 1996 was $2.2 million or $0.18 per share compared to a
net loss of $289,000 or $0.02 per share for the three months ended March 31,
1995. Net sales for the nine months ended March 31, 1996 were $69.8 million
compared to $89.7 million for the same period one year ago. Net loss for the
nine months ended March 31, 1996 was $3.1 million or $.25 per share compared to
net income of $1.3 million or $0.10 per share for the nine months ended March
31, 1995.
6
<PAGE>
The decrease in net sales for the three and nine months ended March 31, 1996
compared to the same periods one year ago, was attributable to the continued
decrease in sales of the Company's plain-paper typesetting and WinPrint(R)/OEM
products, recent increased competition in the aqueous inkjet sector of the
market, and decreased sales of PressMate/TM/ caused by lack of confidence in
earlier PressMate models. Decreases in sales of the Company's plain-paper
typesetting products are primarily a result of increased competition in the form
of low-priced, plain-paper devices as well as the increasing performance of
laser printers marketed by major manufacturers for the office automation market.
Decreases were partially offset by sales of DisplayMaker(R) Express and by
increased sales of the Company's proprietary consumables.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
Three months ended Nine months ended
------------------ -------------------
March 31, March 31,
----------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... 68.0 62.8 63.0 59.3
------ ------ ------ ------
Gross profit........................ 32.0 37.2 37.0 40.7
Operating expenses:
Sales and marketing................ 22.9 22.1 22.6 23.2
Research and development........... 8.3 5.9 6.9 5.1
General and administrative......... 12.7 9.1 12.1 9.3
------ ------ ------ ------
Total operating expenses........... 43.9 37.1 41.6 37.6
------ ------ ------ ------
Operating profit (loss).............. (11.9) 0.1 (4.6) 3.1
Other income (expense):
Interest expense................... (2.3) (1.0) (1.9) (0.9)
Interest income.................... 0.0 0.0 0.0 0.0
Other.............................. (0.1) (0.4) (0.0) (0.2)
------ ------ ------ ------
Earnings (loss) before income taxes.. (14.3) (1.3) (6.5) 2.0
Income tax (provision) benefit....... 4.7 0.4 2.1 (0.6)
------ ------ ------ ------
Net earnings (loss).................. (9.6)% (0.9)% (4.4)% 1.4%
====== ====== ====== ======
Net Sales. The following table sets forth net sales by product line expressed
in thousands and as a percentage of net sales:
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
----------------------------------- -------------------------------------
1996 1995 1996 1995
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Big Color(R)................ $ 5,964 25.7% $ 9,466 30.6% $22,490 32.2% $27,575 30.8%
Big Color Consumables.... 3,930 16.9 3,663 11.8 11,509 16.5 8,539 9.5
DisplayMaker Express........ 3,879 16.7 0 0.0 4,846 6.9 0 0.0
DME Consumables.......... 525 2.3 0 0.0 588 0.9 0 0.0
PressMate................... 570 2.4 4,472 14.4 4,176 6.0 4,701 5.2
PressMate Consumables.... 361 1.6 52 0.2 1,037 1.5 52 0.1
Plain-paper typesetting..... 4,930 21.2 9,840 31.8 16,493 23.6 37,148 41.4
Typesetting Consumables.. 2,739 11.8 2,337 7.5 7,542 10.8 6,467 7.2
WinPrint/OEM/Imaging........ 329 1.4 1,149 3.7 1,152 1.6 5,244 5.8
------- ------ ------- ------ ------- ------ ------- ------
Total net sales............. $23,227 100.0% $30,979 100.0% $69,833 100.0% $89,726 100.0%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
7
<PAGE>
The Company sold $3.9 million in Big Color consumable products and $6.0 million
in Big Color hardware for the three months ended March 31, 1996 compared to
sales of $3.7 million and $9.5 million for the three months ended March 31,
1995. The Company sold 264 DisplayMaker Professional 36-inch wide color
printers during the third quarter of fiscal 1996. This compares to 317 units for
the preceding fiscal quarter and 293 units in the March 1995 quarter.
Several factors have caused the drop in Big Color revenue noted above. The
Company has discontinued reselling computer equipment and peripherals.
Previously, as a courtesy to its customers, the Company would source and resell
all of the equipment and peripherals necessary to provide a complete solution to
each of its customers. Falling prices, low margins and wide-spread availability
of these products caused the Company to discontinue the sale of these items
early in fiscal 1996. The Company is experiencing increased competition from
its engine supplier which has introduced a low-cost, 50-inch, wide-format
NovaJet 50 during the quarter and from an increased number of resellers handling
the supplier's NovaJet 36-inch wide-format printer. This competition has
impacted Big Color revenues by lowering unit volumes by 10% and average selling
price by 11% when compared with the same period one year ago. The Company
expects to meet this challenge with the introduction of a new product offering
at a competitive price point within the next several quarters
During the third fiscal quarter of 1996, the Company shipped 107 new PressMate-
FS/TM/ revenue units compared to 200 older model units for the preceding
quarter. During the third fiscal quarter of 1996, 8 PressMate-FS units were
returned for credit along with 61 older model PressMate units compared to 64
older model units returned for credit in the preceding quarter. The Company also
replaced 100 older model units with new PressMate-FS units during the March
quarter at no charge to the customer. Over the past two quarters, the Company
has embarked on an aggressive repositioning, repricing and exchange campaign to
update or replace older models in the field with the new PressMate-FS which it
expects to continue at least through the next quarter. During the third quarter
of fiscal 1996, $361,000 of PressMate-related consumables were sold compared to
$472,000 in the second quarter ended December 31, 1995. This decrease was caused
by fewer PressMate units producing output during the exchange process coupled
with the fact that the Company provided some customers with film at no charge to
facilitate the upgrade. In addition to the efforts described above, the Company
is considering a "rent-to-buy" program to increase confidence in the new
PressMate-FS and increase PressMate consumables revenue. PressMate was the first
proprietary printer designed and manufactured by the Company.
The Company released a new wide-format color printer in December 1995,
DisplayMaker Express (DME), selling 64 units during the fiscal quarter ended
March 31, 1996 together with $525,000 in consumables for a total of $4.4 million
in DME sales. DME is a 54-inch wide, color inkjet printer and is capable of
printing an "E" size print in approximately six minutes by using a phase-change
ink technology which allows printing on a variety of media. DME is the Company's
second proprietary engine. DME has had a significantly lower return rate during
introduction than PressMate. As of March 31, 1996, only 2 DME's have been
returned for credit.
Plain-paper typesetting sales for the three months ended March 31, 1996
decreased 45% from sales in the same period one year ago. The decrease in sales
of the Company's plain-paper typesetting products are a result of competitive
pressure and market changes. The Company expects revenues from the sale of
plain-paper typesetters to continue to experience significant declines and
ultimately to be phased out entirely.
International Sales. Revenues from foreign sources during the three months
ended March 31, 1996 were comparable to the same period one year ago. The
increase in revenues as a percent of net sales is the result of reductions in
overall revenues from U.S. sources. International sales as a whole have
decreased as a result of the same competitive pressures noted in the United
States. The following table sets forth international sales by region expressed
in thousands and as a percentage of total net sales:
<TABLE>
<CAPTION>
Three months ended March 31, Nine months ended March 31,
------------------------------ -----------------------------
1996 1995 1996 1995
---------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe..................... $ 5,120 22.0% $ 5,757 18.6% $14,306 20.5% $16,158 18.0%
Japan, Asia, Pacific....... 3,377 14.6 2,678 8.6 9,101 13.0 9,556 10.7
Latin America.............. 1,243 5.4 1,537 5.0 3,446 4.9 3,626 4.0
Canada..................... 684 2.9 463 1.5 2,287 3.3 1,727 1.9
------- ---- ------- ---- ------- ---- ------- ----
Total international sales.. $10,424 44.9% $10,435 33.7% $29,140 41.7% $31,067 34.6%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
8
<PAGE>
Gross Profit. The Company's gross profit margin for the three and nine months
ended March 31, 1996 was 32% and 37%, respectively, compared to 37% and 41% for
the same periods one year ago. Gross margins on plain-paper typesetters,
expressed as a percent of net sales, remained steady in the three months ended
March 31, 1996 compared to the previous quarter. Gross margins on Big Color
products in the third quarter of fiscal 1996 decreased from the previous quarter
due in part to the introduction of a new entry-level version of the
DisplayMaker Professional and increased competition. Big Color product margins
may continue to decline as a result of such factors and as a result of pricing
on the next generation of inkjet print engines that will be purchased by the
Company for use in the Company's non-proprietary Big Color printers. See
"Exhibit 99-Dependence on Component Availability and Costs." With current
PressMate volumes and the repositioning, repricing and exchange programs
executed during the quarter, gross margins on this product were also lower than
anticipated. Overhead expenses for the three months ended March 31, 1996 were
$6.1 million compared to $4.7 million for the quarter ended December 31, 1995
and $4.5 million for the quarter ended September 30, 1995. Increasing DME
production from 17 units in the December quarter to 64 units in the March
quarter, and costs associated with reworking product returns, caused the Company
to experience higher than expected levels of scrap, rework and obsolescence.
Reducing scrap, rework and obsolescence is a major part of the Company's
ongoing efforts to increase efficiencies in operations. The Company's
consolidated gross margins for the quarter have been favorably impacted by
increasing sales of high-margin, proprietary consumables and DisplayMaker
Express products as a percent of overall net sales. For the three months ended
March 31, 1996, 37% of total Company sales were for spare parts, maintenance
contracts and consumables related to DisplayMaker Express, DisplayMaker Pro,
PressMate-FS, and plain-paper typesetting, compared to 23% for the same period
one year ago. The Company expects the revenues from spare parts, maintenance
contracts and consumables to continue to be a significant portion of total
revenues as the installed base of printer engines increases.
Operating Expenses. Sales and marketing expenses for the three months ended
March 31, 1996 decreased $1.6 million to $5.3 million, compared to $6.9 million
for the same period one year ago as a result of evolving and consolidating the
sales structure. Sales and marketing expense decreases included reductions in
sales related expenses of $1.2 million and marketing related expenses of
$400,000. Research and development expenditures, including amounts expensed
and capitalized, were $2.6 million in the three months ended March 31, 1996, a
decrease of $100,000 in expenditures compared to the same period one year ago.
Research and development expenditures capitalized for the three months ended
March 31, 1996 were $658,000 compared to $884,000 for the three months ended
March 31, 1995. General and administrative expenses were $3.0 million and $2.8
million for the three months ended March 31, 1996 and 1995, respectively.
General and administrative expense increased due in part to higher than normal
bad debt expense. Overall operating expenses for the three months ended March
31, 1996 decreased to $10.2 million compared to $11.5 million for the same
period one year ago.
Interest expense was $540,000 and $1.3 million for the three and nine months
ended March 31, 1996, respectively, compared to $310,000 and $807,000 in the
same periods one year ago. The increase in interest expense is attributable to
an overall increase in average debt levels.
The Company's effective income tax rate for the three and nine months ended
March 31, 1996, was 33% and 32%, respectively compared to a rate of 30% for the
same periods one year ago.
Foreign Currency. The Company purchases certain raw materials, primarily from
Japan, which are subject to currency fluctuations. It also sells finished
goods, extends credit, and maintains accounts receivable and payable in five
major European denominations. The impact of currency fluctuations on these
activities to date is immaterial to the financial statements taken as a whole.
The Company has some contractual protection against currency fluctuations
(primarily the Japanese yen) with regard to purchases of raw printer engines
and memory. The Company does not consider its exposure with regard to European
currencies to be material and has not entered into any substantial currency
hedging transactions as they relate to these currencies.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.8 million and $2.3 million for
the nine months ended March 31, 1996 and 1995, respectively. Accounts
receivable decreased by $3.4 million for the nine months ended March 31, 1996
compared to an increase of $1.2 million for the same period one year ago.
During the nine months
9
<PAGE>
ended March 31, 1996 inventory decreased by $3.3 million compared to an
increase of $6.1 million in the same period one year ago. The decrease in
inventory in fiscal 1996 is primarily attributable to the strengthening of
internal controls and procedures related to the purchasing and inventory control
functions as an engine manufacturer. The increase in inventory in fiscal 1995
was a result of entering the business of manufacturing print engines which
requires higher levels of raw material. Accounts payable decreased by $1.9
million in the nine months ended March 31, 1996 compared to an increase of $2.7
million in the same period one year ago.
Net cash used in investing activities was $4.4 million and $6.4 million for the
nine months ended March 31, 1996 and 1995, respectively. The Company acquired
fixed assets totaling $1.2 million in fiscal 1996, a decrease of $1.0 million
from $2.2 million in fiscal 1995. During the nine months ended March 31, 1996,
the Company invested $2.1 million in the development of software which was
capitalized, compared to $2.8 million for the same period one year ago. The
Company invested $1.0 million in intellectual property in the nine months ended
March 31, 1996, a decrease of $400,000 from $1.4 million in the same period one
year ago.
During the nine months ended March 31, 1996, LaserMaster Corporation (LMC)
borrowed $1.765 million from TimeMasters, Inc. (TMI), a related party, which
remains outstanding at March 31, 1996. In January 1996, the amount borrowed
from TMI was converted from a demand note to a promissory note payable.
Repayment of the note is restricted pursuant to the terms of a subordination and
forbearance agreement between LMC, TMI and LMC's senior lender. In
consideration for providing financing to LMC and executing the subordination and
forbearance agreement, TMI was issued a warrant for the purchase of 277,953
shares of the Company's common stock at an exercise price of $6.35 per share,
and the right to convert up to $1.0 million of the debt into shares of the
Company's common stock upon the occurrence of certain events, at the lower of
$5.875 per share or market price at the time of conversion. In addition, TMI
was granted a second, secured interest in accounts receivable, inventory and
general intangibles of LMC. In February 1996, Nasdaq notified the Company that
it believed that the issuance of the warrants and the conversion right were not
in compliance with Nasdaq Non-Quantitative Listing Standards. To satisfy
Nasdaq's concerns, the Company and TMI agreed to rescind the warrants and the
conversion right and to submit the transaction to the shareholders for approval
at the Company's annual meeting on May 23, 1996.
On January 17, 1996, LMC entered into a three-year agreement with a commercial
finance company providing up to $10 million of revolving credit replacing the
Company's existing credit facility with a commercial bank. The agreement allows
LMC to borrow up to 60% of eligible accounts receivable and 25% of eligible
inventory at an interest rate equal to the prime lending rate plus two percent.
The agreement requires LMC to meet various financial and non-financial
covenants. At March 31, 1996 approximately $1,396,000 of eligible financing was
unused under this credit line. In addition, LaserMaster Europe, Ltd., a
subsidiary of LMC, maintains a receivables financing arrangement with a Dutch
commercial finance company whereby LME may borrow up to 70% of its eligible
accounts receivable, with a maximum advance of $2,500,000. At March 31, 1996
approximately $773,000 of eligible financing was unused under this credit line.
Availability under both agreements varies daily with fluctuations in accounts
receivable and inventory.
On November 29, 1995, LMT signed a promissory note for $859,516 with a trading
partner who provided interim financing and logistical support to LMC in its
purchases of standard print engines used in the Company's plain-paper
typesetting product line. In addition to a promissory note, LMT granted the
trading partner a warrant for the purchase of 68,596 shares of LMT common stock
at an exercise price of $5.875 per share. The promissory note is due in two
installments of $429,758 on March 29, 1996 and the remaining principal balance
plus accrued interest on May 29, 1996. LMC and the trading partner are
currently discussing alternative payment terms as the principal payment
originally due on March 29, 1996 has not yet been made due to cash flow
constraints of LMC and product quality issues associated with the inventory
supplied by the trading partner. In addition, the Company is engaged in
discussions with the trading partner and its Japanese supplier of laser marking
engines regarding availability and quality consistency of spare parts, process
units and other consumables supplied by the manufacturer. The Company believes
that a continued supply of these components is important to the installed base
of Unity(TM) plain-paper typesetting customers. Failure to reach an agreement
with the trading partner and/or the engine supplier could result in costly
litigation.
10
<PAGE>
During the past two years, the Company has invested heavily in research and
development and in fixturing for the manufacture of its "proprietary engine"
product lines. (Introduced to date--PressMate and DisplayMaker Express with
others to follow.) Although the Company has generally financed such expenditures
with cash flow from operations, declines in sales of its plain-paper typesetter
products combined with unanticipated delays in the introduction of, and
unexpected rework costs on, new products have caused the Company's cash needs to
exceed cash provided from operations and required special credit arrangements
during the past nine months. The Company has actively taken steps to reduce
expenses via work-force reductions both domestically and internationally and to
implement tighter budgeting controls on an ongoing basis. In addition, the
Company intends to aggressively pursue an OEM engine sales effort and is
currently reviewing several other options in its efforts to return to
profitability. The Company is working closely with its senior lender as it
pursues a plan to improve its working capital position.
The Company's business plan is contingent on continuing to obtain reasonably
priced sources of capital and sales remaining uninterrupted. There can be no
assurances that availability under the Company's credit line will be adequate,
or that other sources of financing would be available to the Company on
favorable terms, or at all, if the Company's operations are further affected by
declining revenues. The Company does not believe that inflation will have a
material affect on the results from operations or its financial condition in
fiscal 1996.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In the Company's report on form 10-Q for the quarter ended September 30, 1995,
the Company reported a lawsuit filed by John D. Becker (the "Becker" lawsuit).
On December 5, 1995 and December 13, 1995 suits were filed by McQuinn and
Nielsen respectively on the same theory as the Becker lawsuit. On February 29,
1996, director Ralph D. Rolen, who had been a defendant, was dismissed from the
case without prejudice. Subsequently, the Becker, McQuinn, and Nielsen lawsuits
have been consolidated.
In the Company's report on form 10-Q for the quarter ended September 30, 1995,
the Company reported it filed a lawsuit against Sentinel Imaging. Sentinel has
since counterclaimed for false advertising, patent misuse and unfair competition
by LaserMaster. In press releases and other media, Sentinel has alleged that
LaserMaster's approach to selling ink for its Big Color products violates
antitrust law. Although Sentinel has not asserted a claim on this basis,
LaserMaster has learned that Sentinel is publishing its allegations. The Company
has also learned that these activities have contributed to one customer's
decision to complain that LaserMaster's practices related to sales of
proprietary ink and its ColorMark color management system violates various trade
laws. LaserMaster does not believe that any of its practices or licenses related
to the ColorMark(R) color management system violate any applicable U.S. laws or
regulations.
ITEM 2: CHANGES IN SECURITIES
Nothing to report.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Nothing to report
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
11
<PAGE>
Nothing to report.
ITEM 5: OTHER INFORMATION
Effective May 1, 1996, Randall Ruegg, formerly the Chief Financial Officer, is
no longer employed by the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
-------------------
99. Cautionary Factors Under Private Securities Litigation Reform Act of
1995.
(b) Reports on Form 8-K
-------------------
None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LASERMASTER TECHNOLOGIES, INC.
/s/Melvin L. Masters
- --------------------
Melvin L. Masters
Chief Executive Officer
/s/Timothy N. Thurn
- -------------------
Timothy N. Thurn
Treasurer
Dated: May 15, 1996
13
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
LaserMaster desires to take advantage of the new "safe harbor" provisions
contained in the Private Securities Litigation Reform Act of 1995 (the "Act").
Contained in this Form 10-Q are statements which are intended as "forward-
looking statements" within the meaning of the Act. The words or phrases
"expects", "will continue", "is anticipated", "management believes", "estimate",
"projects", "hope" or expressions of a similar nature denote forward-looking
statements. Those statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on forward-looking statements. Readers
should also be advised that the factors listed below have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not ship when
expected or may contain technical difficulties; demand for new or existing
products; the impact of competitor's advertising, products or pricing;
availability of component parts, including sole source parts; manufacturing
limitations; availability of sources of financing; economic developments both
domestically and internationally; new accounting standards; impact of the
initiation, defense and resolution of litigation.
Other factors include the following:
Cash Needs. Although the Company has a credit agreement with a commercial
finance company that has been adequate to finance its cash requirements in the
past, there can be no assurances that availability under such credit line will
be adequate, or that other sources of financing would be available to the
Company on favorable terms or at all, if the Company's operations are further
affected by declining revenue from existing product lines or introduction
difficulties with new product lines, or by market conditions in general.
Product Development and Technological Change. The pre-press and wide-format
color printing industries are highly competitive and are characterized by
frequent technological advances and new product introductions and enhancements.
Accordingly, the Company believes that its future success will depend upon its
ability to enhance its current products, to develop and introduce new products
on a timely basis, to respond to evolving customer requirements and to achieve
market acceptance. The Company's inability to do so, for technological or other
reasons, would have a material adverse effect on the Company's results of
operations. The Company is currently undertaking a number of development
projects. Although the Company has generally been successful introducing new
products, some products have experienced limited market acceptance and the
introductions of some products have been delayed several times. There can be no
assurance that the Company will be successful with future product introductions,
or that future products will achieve market acceptance.
Competition. The computer printer industry is intensely competitive and rapidly
changing. Some of the Company's existing competitors, as well as a number of
potential new competitors, have larger technical staffs, more established and
larger sales and marketing organizations and significantly greater financial
resources than the Company. New product introductions and changes in pricing
structure by competitors have had and can be expected to continue to have a
significant negative impact on the demand for competing products. In particular,
the high resolution laser printer market in which the Company's plain-paper
typesetters compete has become increasingly competitive as the resolution of
commodity laser printers sold for general purpose business printing, such as
those manufactured by Hewlett-Packard, has improved. The Company anticipates
decreasing demand for its products in this market and decreasing revenue from
sale of plain-paper typesetting products. In addition, the manufacturer of the
printing engine for the Company's Big Color wide format inkjet printers has
introduced its own products in direct competition with the Company's products
and has sold its engines
<PAGE>
to other systems integrators and distributors that compete directly with the
Company. Although the Company believes that its Big Color products possess
certain advantages over these products, the increased competition has impacted
margins and may continue to impact margins in the future. The Company has
generally competed in these markets by introducing technologically advanced
products that create new market demand. There can be no assurance that the
Company will be able to continue to innovate to the extent necessary to maintain
a competitive advantage in these markets.
Dependence on Component Availability and Costs. Certain components used in the
Company's current and planned products, including printer marking engines and
other printer components, are currently available from sole sources, and certain
other components are available from only a limited number of sources. The
Company has in the past experienced delays as a result of the failure of certain
suppliers to meet requested delivery schedules. The Company's inability to
obtain sufficient supply of components, or to develop alternative sources, could
result in delays in product introductions, interruptions in product shipments or
the need to redesign products to accommodate substitute components, any of which
could have a material adverse effect on the Company's operating results. A
substantial portion of the total manufacturing cost of the Company's typesetter
and Big Color products is represented by certain components, particularly
dynamic random access memory chips ("DRAMs"), the prices of which have
fluctuated significantly in recent years. Significant increases or decreases in
the price or reductions in the availability of DRAMs or other components, could
have a material adverse affect on the Company's operating results.
In addition, the Company is dependent upon ENCAD, Inc. for the inkjet engine
used in its DisplayMaker Professional product. ENCAD(R) has advised the Company
that it intends to cease manufacturing the version of such print engine
currently incorporated into the DisplayMaker Professional and the Company is
currently negotiating with ENCAD the terms on which it will purchase other print
engine(s) manufactured by ENCAD. The Company believes that it will be able to
purchase adequate inventory of current and future versions of ENCAD's print
engine(s) to meet its requirements for integration into the DisplayMaker product
line. Nevertheless, there can be no assurances that ENCAD's new print engine(s)
will be available on the same terms as the current print engine or that the
Company will be able to successfully integrate it into its product line in the
time frame required to minimize competitive sales pressures in the marketplace.
Fluctuations in Quarterly Operating Results. The Company's quarterly results of
operations have fluctuated and are expected to continue to fluctuate
significantly. These fluctuations have been caused by various factors,
including: the timing of new product announcements; product introductions and
price reductions by the Company and its competitors; the availability and cost
of key components and materials for the Company's products; and general economic
conditions. In addition, the Company's operating results are influenced by the
seasonal buying patterns of its customers, which have in the past generally
resulted in reduced revenues and earnings during the Company's first fiscal
quarter. Further, the Company's customers typically order products on an as-
needed basis and virtually all of the Company's sales in any given quarter
result from orders received in that quarter. Accordingly, the Company's
manufacturing plans and sales staffing and marketing levels are primarily based
on sales forecasts. Deviations from these sales forecasts may cause significant
fluctuations in operating results from quarter to quarter and may result in
unanticipated quarterly earnings shortfalls or losses. Historically, a large
percentage of orders have been received and shipped near the end of each month.
If anticipated sales and shipments do not occur, expenditure and inventory
levels may be disproportionately high and operating results would be adversely
affected.
Dependence on Consumables Revenues. The Company anticipates it will derive an
increasing percentage of its revenues and operating income from the sale of ink,
paper, film and other consumables to its customers. To the extent purchases of
the Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, or substitute third-party consumables for
2
<PAGE>
those of the Company, the Company's results of operations would be adversely
affected. Further, although the Company's consumables are manufactured
specifically to operate with its printing products, there can be no assurances
that other manufacturers of printing inks and papers will not develop products
that can be sold and compete with the Company's printing products. The Company
alleges that at least one manufacturer has improperly used the Company's trade
secrets to commence such competition. Although the Company has commenced legal
action against such manufacturer for theft of trade secrets, there can be no
assurances that other manufacturers will not independently and legitimately
develop competing consumable products.
Intellectual Property and Proprietary Rights. The Company's ability to compete
effectively will depend, in part, on its ability to maintain the proprietary
nature of its technologies through patents, copyrights and trade secrets.
Important features of the Company's products are incorporated in proprietary
software, some of which is licensed from others and some of which is owned by
the Company. The Company attempts to protect its proprietary software with a
combination of copyrights, trademarks and trade secrets, employee and third-
party nondisclosure agreements and other methods of protection. Despite these
precautions, it may be possible for unauthorized third parties to copy certain
portions of the Company's products or to reverse engineer or obtain and use
information that the Company regards as proprietary. In addition, there can be
no assurance that others will not independently develop or patent products
similar or superior to those developed, patented or planned by the Company.
The Company has been granted three United States patents for inventions related
to its TurboRes(R) approach to enhancing the vertical resolution of conventional
laser printer engines and three United States patents relating to the Company's
Big Ink(TM) Delivery System. Additional patent applications are pending relating
to the Company's TurboRes, ThermalRes(TM), TurboGray(TM), FastPort(TM), Big Ink
Delivery System, oversized A3 printing, high resolution imaging and image
enhancement and wide-format printing technologies and techniques. There can be
no assurance that patents will issue from any of these pending applications
although the ThermalRes process and mechanical aspects of the PressMate engine
will receive U.S. patent coverage during May 1996. With regard to current
patents or patents that may issue, there can be no assurance that the claims
allowed will be sufficiently broad to protect the Company's technology or that
issued patents will not be challenged or invalidated. Applications to patent the
basic TurboRes, ThermalRes and Big Ink Delivery System approaches and related
technologies have been filed in selected foreign countries. Patent applications
filed in foreign countries are subject to laws, rules and procedures which
differ from those of the United States, and there can be no assurance that
foreign patents will be granted as a result of these applications. Furthermore,
even if these patent applications result in the issuance of foreign patents,
some foreign countries provide significantly less patent protection than the
United States. There can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such assertion
will not require the Company to enter into royalty arrangements or result in
costly litigation.
Litigation and Litigation Costs. The Company and three of its officers are
currently subject to various claims relating to a decline in the market price of
the Company's common stock in December 1994. The Company is obligated to
indemnify its officers for the costs of their defense and to advance such costs
prior to final disposition to the extent that such indemnification is requested
and to the extent the Company cannot conclude that such officers did not believe
their conduct was in the best interests of the corporation. Further, the Company
has instituted action against a competitor in the printing ink business for
patent infringement, theft of trade secrets and other causes of action. In
response, such competitor has advertised its allegation that the Company's
consumables sales practices are in violation of trade and antitrust laws. The
Company has learned that these activities have contributed to one customer's
decision to complain that LaserMaster's practices related to sales of
proprietary ink and its ColorMark color management system violates U.S.
antitrust laws. The Company intends to vigorously contest the action against
itself and its officers in the stock-price litigation, and to prosecute the
action against its competitor in the patent infringement litigation. The costs
of defense of litigation and prosecution of claims may have an adverse impact on
its operations
3
<PAGE>
during the pendency of any such litigation. Although the Company does not
believe any of its practices violate applicable trade laws, additional actions
that might be instituted in response to the published allegations of its
competitor or based on other claims could further affect the Company's
operations and cash position. In addition, the Company is engaged in discussions
with the trading partner and its Japanese supplier of laser marking engines
regarding availability and quality consistency of spare parts, process units and
other consumables supplied by the manufacturer. The Company believes that a
continued supply of these components is important to the installed base of
Unity{TM} plain-paper typesetting customers. Failure to reach an agreement with
the trading partner and/or the engine supplier could result in costly
litigation.
International Operations. The Company expects that international revenues will
continue to represent a substantial portion of its total revenues. International
operations are subject to various risks, including exposure to currency
fluctuations, political and economic instability, unexpected changes in
regulatory requirements and tariffs, difficulty in staffing and managing foreign
operations, longer customer payment cycles, greater difficulty in accounts
receivable collection, potentially adverse tax consequences and varying degrees
of intellectual property protection. From time to time the Company has engaged
in limited foreign currency hedging transactions. There can be no assurance that
the Company will be successful if it engages in such practices to a significant
degree in the future.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon certain key personnel, including Mr. Masters, its Chief Executive
Officer and President, and Mr. Lukis, its Chief Technical Officer. The loss of
either of these individuals, or other key management or technical personnel,
could adversely affect the Company's business. The Company maintains key person
life insurance in the amount of $2,000,000, payable to the Company, on each of
Mr. Masters and Mr. Lukis. In addition, the Company has certain non-compete and
continuation contracts with key personnel, which are currently under review by
the Company's Board of Directors in an effort to recruit and maintain key
personnel.
Volatility of Stock Price. The trading price of the Company's Common Stock is
subject to wide fluctuations in response to variations in operating results,
announcements of new products or technological innovations by the Company or its
competitors and general conditions in the industry. In addition, the prices of
securities of many high technology companies have experienced significant
volatility in recent years for reasons frequently unrelated to the operating
performance of the specific companies. These fluctuations may adversely affect
the market price of the Company's Common Stock.
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1996 10Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 157,531
<SECURITIES> 0
<RECEIVABLES> 13,695,597
<ALLOWANCES> 1,592,000
<INVENTORY> 18,339,042
<CURRENT-ASSETS> 38,289,935
<PP&E> 5,753,787
<DEPRECIATION> 13,915,190
<TOTAL-ASSETS> 53,370,679
<CURRENT-LIABILITIES> 29,441,235
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<COMMON> 113,906
0
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<OTHER-SE> 22,826,551
<TOTAL-LIABILITY-AND-EQUITY> 53,370,679
<SALES> 69,832,883
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