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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18114
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LASERMASTER TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-1612861
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7090 Shady Oak Road
Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 941-8687
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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. [X] Yes [_] No
[COVER PAGE 1 OF 2]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 31, 1996 was $37,407,400 based on the last sale price
for the common stock as recorded by the National Association of Securities
Dealers on that date.
As of August 31, 1996, there were 11,458,634 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
LaserMaster Technologies, Inc. 1996 Stock Incentive Plan filed on Form S-8 on
August 30, 1996
[COVER PAGE 2 OF 2]
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PART I
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ITEM 1. BUSINESS.
GENERAL
LaserMaster Technologies, Inc. (the "Company")/1/ designs, develops,
manufactures and markets wide-format (up to 54") digital color printers and
chemical-free filmsetters for professional printing applications. In addition,
it sells all related consumables for its installed base of printing products,
consisting primarily of ink, media, film, process units and toner. The Company's
products combine advanced computer technology with the Company's own
sophisticated software, hardware and proprietary print engines to produce
professional-quality printed output at an affordable cost. The Company's
DisplayMaker/(R)/ Professional, DesignWinder/(TM)/ and DisplayMaker Express Big
Color/(R)/ wide-format digital inkjet color printers are designed to be cost-
effective solutions for the short-run digital printing of photo-realistic, wide-
format color output. The Company's Halon/(TM)/ product provides users with an
interface from their print server to various color laser copiers including those
produced by Canon, Kodak and Xerox. The PressMate/(TM)/-FS proprietary desktop
chemical-free FilmSetter/(TM)/ is capable of dry film output with effective
resolution of 2400 dots per inch. The ColorMark/(R)/ Pro 1600 Print Server is a
raster image processor which is capable of supporting a combination of
DisplayMaker Professional, DesignWinder and DisplayMaker Express printers,
PressMate-FS Personal FilmSetters/(TM)/, and Halon color laser copier interfaces
simultaneously as well as offering time saving features specifically designed
for high-volume, production environments. The RIPStation/(TM)/ is an entry-level
print server which is capable of supporting one DisplayMaker Professional, one
DesignWinder or one PressMate-FS.
The primary users of the Company's products are commercial printers reprographic
service bureaus, photo labs, quick printers, exhibit builders, in-house print
shops, printers, publishers, government and educational facilities and corporate
marketing departments. Applications include point of purchase signs, trade show
exhibit graphics, banners, billboards, courtroom graphics, pre-press proofing
(proofs or other quick output to demonstrate concepts for advertising or
graphics layouts), digital photo imaging and lighted signage.
The Company's products are primarily sold through the Company's direct
telemarketing sales force, supplemented by a network of dealers and value-added
distributors in certain geographic markets throughout the world. The Company's
sales efforts are supported by a direct mail marketing program designed to
achieve frequent contact with its potential customers. The Company complements
its direct mail efforts by advertising in trade journals and by exhibiting
regularly at industry trade shows.
The Company's domestic offices are in Eden Prairie, Minnesota. The Company's
European sales subsidiary is headquartered in Amsterdam, The Netherlands.
MARKET
According to a market survey conducted by IT Strategies, the Large-Format
Digital Printing market for hardware and consumables is projected to grow from
annual sales of approximately $319 million in 1995 to approximately $1.9 billion
in 1998. The rapid growth in this market is being driven primarily by the
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/1/ LaserMaster Technologies, Inc. (the "Company") was incorporated under the
laws of Minnesota as Acquerre Corporation in April 1988. LaserMaster Corporation
("LaserMaster"), the Company's primary operating subsidiary, was incorporated
under the laws of the State of Minnesota in February 1986. European operations
are carried on by LaserMaster Europe Ltd., a Delaware corporation, that is a
wholly-owned subsidiary of LaserMaster. Asian and Pacific operations are carried
on by LaserMaster Asia/Pacific, Ltd., a Minnesota corporation that is a wholly-
owned subsidiary of LaserMaster. LaserMaster Export Corporation, a Virgin Island
corporation, is used by LaserMaster as a Foreign Sales Corporation ("FSC").
Unless the context otherwise indicates, all references to the "Company" refer to
LaserMaster Technologies, Inc. and its subsidiaries.
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increasing desire and need for customized, large-format color graphics, as well
as significant advances in short-run printing and desktop publishing
technologies. Traditional graphics printing methods, consisting of photographic,
screen and offset printing, do not meet the requirements for production of
short-run print jobs due to the time consuming, multi-step processes and set-up
costs involved. As a result, digital printing has developed to fulfill the unmet
demand of short-run users by allowing graphics to be printed directly from
desktop publishing systems with dynamic interchange of data print to print onto
a variety of media.
There are a number of digital printing technologies, including inkjet, pen,
electrostatic and thermal, that allow users to produce large-format output. Each
of these technologies has specific qualities that can be critical to any given
application, including resolution, speed, accuracy, color fill capability, the
ability to render a three-dimensional image, reliability and cost.
A combination of characteristics has made inkjet the fastest growing technology
in the large-format printer market. The characteristics of large-format inkjet
printers include relatively low cost, higher resolution, faster speed and the
ability to print high-quality color. Inkjet printers typically form images,
lines and other characters by placing very small dots of ink as the print head
moves horizontally, called a raster scan, while the media is typically scrolled
vertically. Because inkjet print heads move above the media and do not actually
make contact with the media, there is less mechanical wear and tear than
experienced with other types of devices. Most inkjet printers can print on a
wide variety of media or substrates.
Electrostatic printers generally are more expensive than inkjet printers and
require special plotting paper. They offer certain advantages to users requiring
low cost per square foot and high speed printing characteristics. Thermal
printer/plotters are similar to electrostatic printers in that they require
special paper, but also require ink ribbons to take advantage of the thermal
print head. Thermal printers are typically more costly than comparable-format
inkjet printers.
Other technologies that can be adapted to wide-format use include photographic
output, electrophotographic output and dot matrix printers. These printers have
disadvantages including high costs and relatively poor resolution when compared
to inkjet technology.
STRATEGY
The key elements of LaserMaster's strategy are:
To maintain and enhance its position as a leading provider of affordable, high
quality, proprietary products and consumables supplies to the professional
printing market. A growing portion of LaserMaster products are proprietary
printer architectures designed, developed and manufactured by the Company.
PressMate-FS, DisplayMaker Express and the Company's third proprietary designed
and manufactured printer, DesignWinder, introduced in September 1996, are the
first of many proprietary architectures which the Company expects to develop.
The Company's family of products is expected to grow with the changing
marketplace while meeting the needs of professional printing applications.
To develop and produce value-added software which distinguish its printer
solutions. LaserMaster has consistently taken market standards to a higher level
of performance. The Company has been committed to continually enhancing its
products by adding features and options to its current family of devices through
software enhancements. These enhancements continually evolve with products over
their lives through increasing print speeds, allowing use of additional media
and inks for various applications, improving color matching and print quality
and continuing compatibility with other vendor's software and operating systems.
To continue to emphasize telemarketing as a direct sales approach. LaserMaster
has been very successful developing its targeted markets through direct mail and
telemarketing efforts. The Company intends
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to continue to enhance its global third party distribution channels
simultaneously while continuing to focus on its core direct marketing approach
in North America.
To develop additional media, ink and film for use with the Company's proprietary
print engines to enhance printing applications and market expansion. Fiscal 1996
was a successful year for LaserMaster-branded consumables sales expansion. The
release of larger capacity ink delivery systems, pigmented outdoor inks, new
phase change inks, and the announcement of plans for the sale of 3M Matched
Component System (MCS(/TM)/) outdoor inks and media which carry a written,
one-year guarantee backed by 3M, opened doors to new markets for inkjet users by
expanding the uses and potential applications of their DisplayMaker printers. In
addition, introductions of media such as WaterFast/(TM)/ vinyl, Tyvek/(R)/
(a DuPont product) and canvas should add enhanced profit potential for the
outdoor sector of the inkjet market. In September 1996, the Company entered into
a strategic alliance with Sihl-Zurich Paper Mill on Sihl AG, a leading European
manufacturer of specialty paper and related media, to enhance the development of
unique and high- quality media for use with the Company's print engines.
To increase international sales. International sales has been a growing
percentage of LaserMaster's core business. The Company is committed to
increasing its market share in Europe, Asia, Africa, Central and South America
through its physical presence in Europe as well as by building ongoing
relationships with resellers and dealers throughout the world. The Company may
also choose to increase its global presence by working more closely with one or
more of its international trading partners based in Japan.
To develop original equipment manufacturing (OEM) customers for the Company's
proprietary products. The Company is actively exploring relationships which
would result in OEM customers for its various product offerings. Augmenting the
Company's existing distribution channels with high-quality OEM's could help gain
market acceptance of the Company's products and expand its customer base for
after-market consumables sales.
LASERMASTER PRODUCTS
LaserMaster's three wide-format color inkjet printers, the DisplayMaker
Professional (initial shipments in June 1993), DisplayMaker Express (initial
shipments in December 1995), and DesignWinder (introduced in September 1996),
provide wide-format photo-realistic digital color output. These products are
designed to be cost-effective solutions for short-run digital printing of photo-
realistic wide-format color output. The printers work with most commercially
available desktop digital color manipulation and composition software
applications. Using third-party graphics and page-layout software applications
that allow printed pages to be "tiled", the DisplayMaker products can be used to
create virtually unlimited image sizes. The Company's Big Color products
incorporate a number of proprietary software advances, including ColorMark and
SmoothTone/(TM/) technologies. ColorMark is the Company's color management
system that ensures accurate and consistent color from print to print. This
technology allows the user to print multiple copies of the same file and achieve
near perfect matching of colors, even after changing ink and media. SmoothTone
is an image-enhancement technology that significantly boosts the apparent
resolution of the printing engine to provide output with near continuous-tone
quality.
The Company's ThermalRes/(R)/ technology, for which a United States patent has
issued with additional U.S. and foreign patents pending, accomplishes an even
higher degree of resolution enhancement for text and line art in monochrome and
four-color pre-press printing applications. ThermalRes technology is used in the
Company's chemical-free filmsetter product, PressMate-FS.
DisplayMaker Professional. The Company's first "Big Color" product is a 36-inch
wide, photo-realistic, roll-fed, color inkjet printer capable of printing
poster-size images up to 36 inches wide and, depending on the software
application, up to 50 feet long. The DisplayMaker Professional includes a third-
party-supplied inkjet marking engine and the Company's patented Big Ink/(TM)/
Delivery System. The ColorMark color management system incorporated into the
ColorMark print server also ensures consistent color quality from print to
print.
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DisplayMaker Express. The Company's second proprietary printer is a 54-inch
wide, photo-realistic, high-speed, roll-fed, color inkjet printer which utilizes
phase-change inks together with printhead technologies for which the Company has
reasonably exclusive rights for wide-format applications. The DisplayMaker
Express prints over 100 square feet per hour, or an E-size print in
approximately six minutes. DisplayMaker Express is capable of producing prints
54 inches wide and in excess of 150 feet in length. The DisplayMaker Express
uses specially formulated ColorMark solid pigmented ink pucks, rather than dye-
based aqueous inks used by other inkjet printers, which provides improved UV
stability and water resistance. The DisplayMaker Express requires the use of
ColorMark qualified or certified media, which ensures proper print functionality
and quality.
DesignWinder. LaserMaster's third proprietary printer is a 36-inch wide, drum-
based, wide-format, sheet-fed, color inkjet printer which utilizes a
revolutionary eight printhead station design to produce high-quality signs,
photos and digital art and sets a new five minute benchmark for producing E-size
prints. DesignWinder is capable of producing apparent 1200 dpi resolution E-size
prints utilizing its patent-pending ColorSpan Wide Gamut(TM) printing
technique. The high-precision, drum-based design provides superior dot placement
accuracy and repeatability, setting a new standard in Big Color print quality,
unattainable in traditional inkjet plotter devices.
PressMate-FS. In March 1995, the Company began shipping production quantities of
its PressMate desktop chemical-free filmsetter. PressMate, the Company's first
proprietary printer engine, is a desktop device that uses a dry process to
produce specially designed films necessary for making the printing plates used
in offset printing. Traditionally, these films were produced by photographic (or
wet process) type imagesetters or cameras, using chemicals to develop the image
to be reproduced. PressMate permits printing of text and line art in black and
white, and of cyan, magenta, yellow and black (CMYK) layers used for four-color
separations, at resolutions considered by the Company to be equivalent to 2400
dots per inch using a heat-sensitive, chemical-free film. This fidelity was
previously unavailable in a plain-paper or thermal printing device. PressMate
shipments were suspended in August 1995 to improve registration tolerance across
multiple layers of film required for the highest quality four-color separations
desired by the Company's customers. In December 1995, the Company began shipping
production quantities of PressMate-FS, which incorporated these technical
improvements. The PressMate-FS is a desktop unit that is easily integrated into
just about any office or computer network environment.
Halon. The Halon Color Laser Copier interface provides users of the ColorMark
Pro 1600 color print server the option of printing their digital files to any
one of a variety of color laser copiers.
ColorMark Pro 1600. The DesignWinder printer, DisplayMaker printers, PressMate
filmsetter and Halon color laser copier interface are all served by the
Company's ColorMark Pro 1600 print server, a raster image processor that is
based on a 166 MHz, 32-bit microprocessor. The ColorMark Pro 1600 features
advanced file spooling for multiple users, "RIP Saver(TM)" (which stores
processed files to avoid redundant rasterization), job management and logging
features that track ink and paper consumption for job-costing, work-flow
planning and other purposes. This device has connectivity capacity to handle up
to seven devices simultaneously including one DesignWinder, up to two
DisplayMaker Professionals, one DisplayMaker Express, up to two PressMate-FS's
and up to three Halon interfaces.
RIPStation. The RIPStation is an entry-level color server alternative. It is
based on a 133 MHz, 32-bit microprocessor. It functions similarly to the
ColorMark Pro 1600 without the added advanced or multiple connectivity features
offered by the ColorMark Pro 1600.
Consumables. Color printing consumes significant quantities of inks and media.
LaserMaster products include a range of consumables, such as specialized dye-
based inks for indoor use and pigmented inks for outdoor use. In addition, the
Company has recently signed a supply agreement with 3M Commercial Graphics
Division to market its Matched Component System (MCS) inks, media and laminates
that carry a written guarantee backed by 3M for one year outdoor use. The
Company performs qualification testing on these consumables before releasing
them for customer shipment. The specialized inks are created
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specifically for LaserMaster products to optimize image quality and printer
performance. The Company currently offers a variety of media for its wide-format
inkjet printers that include recent introductions such as WaterFast(TM) vinyl
for outdoor use, canvas, paper and polyester-based substrates.
The Company sells the consumables (inks, media and film) required for optimum
use of the printing products it sells. The Company offers various ColorMark
consumables for its Big Color printers, including cyan, magenta, yellow and
black(R) 500 ml Big Ink packs for use with the DisplayMaker Professional and
DesignWinder, and uniquely configured 150 ml ColorMark solid ink pucks required
for the DisplayMaker Express. In addition, the Company expects to sell ColorMark
ColorSpan Wide Gamut(TM) inks for use with DesignWinder. The Company currently
sells ColorMark Bond, ColorMark Vinyl and ColorMark WaterFast Removable Tyvek
media for use with the DisplayMaker Express and expects to add additional media
in the near future. The Company also offers a variety of print media such as
Coated Gloss paper, PolyGloss(TM), FineArt(TM) Canvas, matte, clearfilm and
TransWhite(R) translucent backlit film for use with the DisplayMaker
Professional. As part of the ColorMark system, the 500 ml Big Ink packs, and 150
ml ColorMark ink pucks ship with ColorMark profilers that plug into the
ColorMark Docking Station, ensuring accurate, consistent color output from print
to print. The domestic price per dye-based Big Ink pack is $199 per color. The
domestic price per ColorMark ink puck is $175. The domestic prices of the
ColorMark paper and other media range from $65 to $439 per 100-to 150-foot,
36-inch wide rolls, and from $239 to $699 per 100- to 160-foot, 54-inch wide
rolls. Big Color consumables revenue for fiscal 1996 was $17.7 million, with
$5.6 million in the June 1996 quarter.
The Company's PressMate-FS Personal FilmSetter(TM) requires specially
developed ThermalRes film rolls which are also supplied by the Company. This
unique specialty film is manufactured to the Company's specifications. The
domestic price is $295 for an 80-foot roll of ThermalRes film. ThermalRes
consumables revenue for fiscal 1996 was $1.6 million, with $.6 million in the
June 1996 quarter.
The Company's Unity(TM) line of plain-paper typesetters requires process units
and toner for operation. The domestic price for toner is $69 per unit, and
process units list for $699 per unit. Plain-paper typesetting consumables
revenue for fiscal 1996 was $9.4 million, with $1.8 million in the June 1996
quarter.
The Company's products, which have suggested US list prices of approximately
$6,995 to $74,000/(1)/, include:
<TABLE>
<CAPTION>
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PRODUCT DISTINGUISHING FEATURES
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<S> <C>
DisplayMaker 500 ml/color Big Ink Delivery System
Professional ColorMark Calibrator
36" wide roll-fed output
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DisplayMaker ColorMark calibrator
Express 54" wide roll-fed output
150 ml ColorMark solid ink pucks
Print speed up to 6 inches per minute
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DesignWinder 500 ml/color Big Ink Delivery System
ColorMark Calibrator
36" wide manual sheet-fed output
E-Size prints in as little as 5 minutes
Apparent resolution of 1200 dpi
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</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
PressMate-FS Chemical-free film processing
Personal FilmSetter 12" x 26" ThermalRes film output
VideoNet connection to the RIPStation or
ColorMark Pro 1600
500 MB Internal Storage
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Halon32 Color Laser Direct digital support for the Canon,
Copier Interface Kodak ColorEdge, Xerox MajestiK and
Xerox Regal color laser copiers.
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ColorMark Pro 1600 166 MHz, 32-bit processor
Print Server 64 MB RAM
PostScript-language compatible Level 2
1 GB storage
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RIPStation Print 133 MHz, 32-bit processor with floating
Server point unit
32 MB RAM
PostScript-language compatible Level 2
1 GB storage
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</TABLE>
/(1)/Effective September 1, 1996.
PRODUCT DEVELOPMENT
The Company's continued success depends on making ongoing investments in product
development to ensure the timely introduction of high-performance products in
response to changes in technology, market demands and customer requirements. For
certain important additional cautionary factors, risks and uncertainties, refer
to Exhibit 99 of this form 10-K. Accordingly, the Company is committed to
creating specialty printing products that yield performance superior to standard
marking engines, designing new engines and enhancing existing products to
achieve higher levels of performance. The Company is also committed to designing
and enhancing products to increase the Company's after-market consumables
business.
As of June 30, 1996, the Company employed approximately 67 people in product
development activities. The Company's product development organization consists
of multiple project teams. Staffing for these teams is flexible, allowing
individual engineers to handle multiple and sometimes overlapping development
objectives. The Company's software development group creates and enhances
software technologies which improve the usefulness, cost-effectiveness and
productivity of printers offered by the Company, and the quality of such
printers' output. The Company's hardware group works to enhance existing
hardware components and products and works with the software group to develop
printer products for specialized applications and markets.
SALES AND MARKETING
The Company sells its products primarily through direct telemarketing,
supplemented by dealers in North America and value-added distributors
Internationally. On June 30, 1996 the Company employed a 73 person telemarketing
sales force including sales professionals focused on developing relationships
with major national printing accounts. The Company's sales efforts are supported
by a direct mail marketing program designed to achieve frequent contact with its
potential customers, including PostScript and reprographic service bureaus,
photo labs, quick printers, sign shops, exhibit houses and corporate marketing
departments. The Company complements its direct mail efforts by advertising in
trade journals and by exhibiting regularly at industry trade shows.
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The Company invests significant resources in developing and training its
telemarketing staff and has implemented computerized sales management and sales
communications systems. Sales representatives participate in continuous training
programs so that they understand product features and benefits as well as
customer applications and business requirements. Telemarketing sales
representatives are compensated on a salary plus bonus and commission basis.
Domestic and Canadian Sales. The Company's domestic and Canadian sales and
marketing operations are based at its headquarters in Eden Prairie, Minnesota.
For all of its products, the Company augments its direct sales activities by
using dealers who offer local product demonstrations and support. Although
dealers may serve as the local point of contact with the end-user, the Company's
factory sales professionals remain the primary sales advocates and work with
dealers to close sales in North America.
For its Big Color products, the Company has also established relationships with
independent copy shops and local service printers that have purchased Big Color
products. These Big Color Digital Printing Centers are provided cooperative
marketing support to promote Big Color printing services and products in their
area. The Company's direct telemarketing sales professionals refer potential
customers to these local Big Color Digital Printing Centers or resellers to
observe the use of the Company's Big Color products. From time to time, the
Company pays a small fee to the showcasing center or reseller following a sale.
The Company believes that this marketing approach permits the Company to price
its Big Color products at competitive levels.
OEM Sales. The Company is currently exploring relationships which would result
in OEM customers for its various product offerings. The Company desires to
expand the market acceptance of its proprietary products and widen its
distribution network for both hardware and after-market consumables.
Relationships with high-quality OEM partners would be a vital link in attaining
this goal, but no OEM agreements have been signed at this point.
International Sales. The Company currently sells its products in all of the
Western European nations and in the principal Eastern European, Latin American,
Pacific and Asian markets. The Company's European sales, support and warehouse
facility is located near Amsterdam, The Netherlands. The Company conducts sales
operations for the Middle East and Africa from its European headquarters, while
it manages other international sales from its headquarters in the United States.
In International markets, the Company sells its products through a network of
non-exclusive distributors and directly to dealers. For Big Color products, the
Company also sells directly to end-users, including Big Color Digital Printing
Service Centers and resellers, which provide some local support in those
locations where the Company does not maintain sales offices and/or direct
distributor support. For the year ended June 30, 1996, sales to customers
outside of the United States accounted for approximately 44% of the Company's
total revenues.
SERVICE AND SUPPORT
At June 30, 1996, the Company had 44 technical and customer support
representatives responding to telephone inquiries from customers and dealers.
The Company offers a limited warranty for all of the products it manufactures.
Under its limited warranty, the Company will repair or replace any defective
product on a factory-return or central depot basis for a period ranging from 90
days to one year following purchase. In addition to its factory warranty, the
Company offers its customers on-site installation, warranty and maintenance
services in some markets, through third-party support organizations.
MANUFACTURING
The Company performs final assembly, functional testing and quality assurance
for essentially all of its products and related components, parts and
subassemblies at its facilities in Eden Prairie, Minnesota.
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For some of its products the Company currently purchases fully assembled printer
marking engines directly from manufacturers and other components, parts and
subassemblies from outside sources. For its PressMate-FS, DisplayMaker Express,
DesignWinder and ColorMark Pro products, the Company purchases components and
uses them to manufacture the printer engines and servers directly. The Company
designs controller boards and software for use with these print engines and
components. The Company utilizes a computerized material requirements planning
and monitoring system to integrate its purchasing, materials handling and
inventory control functions.
Certain components used in the Company's products, including printer marking
engines, printheads and custom fabricated components, are currently available
only 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.
In addition, the Company's sole source supplier for the 36-inch, wide-format,
color inkjet marking engine used in the Company's DisplayMaker Professional,
also sells wide-format color printers that compete with the DisplayMaker
Professional in certain markets. In August 1996, the Company experienced a
severe shortfall in Piezo head components due to a yield problem with one of its
key vendors. That shortfall will cause a material reduction in revenues for the
DisplayMaker Express product line in the September 1996 quarter. The Company
hopes to assist the vendor in overcoming this obstacle during the December 1996
quarter. The Company's potential inability to obtain sufficient sole or limited
source 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. For certain
important additional cautionary factors, risks and uncertainties, refer to
Exhibit 99 of this form 10-K.
In fiscal 1994, the Company made the strategic decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties and to focus on engine products designed and manufactured by the
Company. In fiscal 1995, the Company began active production of its first
proprietary print engine, PressMate, a chemical-free filmsetter. A production
line was also established for DisplayMaker Express which was released in
December 1995. The Company introduced another proprietary printer engine,
DesignWinder, in September 1996. Production of the proprietary engines has
required the Company to increase its inventory beyond historical levels,
requiring the use of additional working capital. The Company has also
experienced increases in production and overhead costs which have had a
significant, negative impact on the overall gross margins of the Company.
A significant portion of the total manufacturing cost of the Company's
filmsetter 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 fluctuations in price
or availability of DRAMs or other components could have a material adverse
effect on the Company's operating results.
Because the Company normally fills orders within a few days of receipt, it
usually carries less than one month's backlog. In addition, customers may
generally cancel or reschedule orders without significant penalty. For these
reasons, the Company believes that backlog is not a meaningful indicator of
future sales. Manufacturing plans and expenditure levels are based primarily on
sales forecasts. The absence of a material backlog could contribute to
unexpected fluctuations in operating results.
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
competitors, have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than the
Company. For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.
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The Company's Big Color inkjet printing products compete in the short-run, wide-
format, photo-realistic color printing market with photographic methods and
electrostatic or inkjet digital printers. Competing manufacturers and vendors in
this market include Electronics for Imaging, Inc., Iris Graphics, Inc., CalComp,
Inc., Hewlett-Packard Co., RasterGraphics, Inc., Versatec, Inc., Roland, Mutoh,
Epson, Summagraphics, ENCAD, Inc and a variety of competitors who purchase
ENCAD's printer engines on an OEM or systems integration basis. It is widely
rumored that Tektronix, Inc. is about to launch a wide-format device as well.
The Company introduced a new, ultra-fast, high-resolution Big Color product,
DesignWinder, in September 1996. This product is based on a drum and uses eight
printheads to achieve the highest quality available on a liquid inkjet printer.
The Company uses the eight printhead design to offer customers the option of
high speed output (E-size prints in 5 minutes) or highest resolution (effective
1200 dpi) through the use of ColorSpan Wide Gamut inks. The Company anticipates
that the successful release of this product will allow it to expand into markets
that require large-format printing at a higher quality than has been available
with traditional, inkjet, reciprocating head, plotter technology. Competition
in this market is generally based on equipment cost, printing quality,
production and printing speed, operating costs and the costs of maintenance and
upkeep. The traditional photographic approach, employed to produce photo-
realistic output one page at a time, is expensive, time-consuming and labor-
intensive, especially when an image includes text. This approach also requires
skilled personnel and special production facilities and creates chemical wastes.
The electrostatic printers that compete with the Company's Big Color products
are expensive, costing from $50,000 to over $200,000, and can involve
significant maintenance and operating costs. They can also require controlled
environments and sophisticated front-end processing systems. Although
electrostatic printers provide significantly faster printing speeds and lower
per-square-foot consumables costs than those of the Company's products, the
Company believes it competes favorably with such devices on the basis of lower
initial purchase price, easier operation, higher quality output and lower
ongoing maintenance and environmental requirements. High-speed, solid inkjet
printers capable of producing photo-realistic output are sold at prices
comparable to those of electrostatic systems. An additional limitation on inkjet
technology for use in production environments has been the relatively high cost
of consumables, especially ink. The Company believes it competes favorably with
solid inkjet systems on the basis of lower initial purchase price, easier
operation, greater reliability, reduced consumables cost and lower ongoing
maintenance and environmental requirements.
While other vendors have introduced wide-format printers based on engineering
plotter engines, at prices comparable to or below those of the Company's
DisplayMaker products, the Company believes that its software and hardware
technologies, including SmoothTone image enhancement and ColorMark color
management offer it a competitive advantage in terms of higher printing quality,
easier operation and lower ongoing operating costs. In particular, with issued
United States patents on its Big Ink Delivery System and other patents pending
in the US and elsewhere, the Company believes it has a competitive advantage in
high-capacity, wide-format, closed-loop color graphics printing using a unitary
system.
The Company's chemical-free filmsetter, PressMate, competes with
phototypesetting equipment produced by a variety of manufacturers such as
Varityper, Inc., Linotype-Hell, Inc. and AGFA. Many of the competitive
imagesetting systems require a darkroom, other dedicated facilities for storing
chemicals required for processing the film, hazardous materials, special
insurance and handling capabilities, and strict adherence to OSHA requirements.
The Company's PressMate is chemical-free and does not require a special
environment for operation. This reduces the cost of operation for users as well
as time required to produce documents by allowing the user to control the film
production process without the use of chemicals. PressMate competes on the basis
of price, operating cost, speed, creative control, convenience and environmental
concerns.
PROPRIETARY RIGHTS
The Company's ability to compete effectively depends, in part, on its ability to
maintain the proprietary nature of its technologies through patents, trademarks,
copyrights and trade secrets. Important features
11
<PAGE>
of the Company's products are represented by 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 software products similar or superior to those
developed or planned by the Company. For certain important additional
cautionary factors, risks and uncertainties, refer to Exhibit 99 of this form
10-K.
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, three United States patents relating to the
Company's Big Ink Delivery System and one patent relating to its ThermalRes
approach to enhancing vertical resolution of printheads which use thermal
marking. Additional patent applications are pending relating to the Company's
TurboRes, FastPort/TM/, VideoNet/TM/, Big Ink Delivery, and other imaging and
image enhancement and wide-format print engine technologies and techniques.
There can be no assurance that patents will issue from any of these pending
applications. In addition, 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 thus there can be no assurance that any foreign patents will issue 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.
LICENSES
The Company licenses Microsoft Corporation's TrueImage/TM/ and Pipeline
Associates, Inc.'s PowerPage(R) printer-language software for enhancement and
use in its products to provide support for and compatibility with the PostScript
page description language. TrueImage is currently used in some typesetting
printing products, with PowerPage employed in the majority of typesetter and all
Big Color products. These license agreements provide for a per unit royalty on
printers shipped by the Company, subject to minimum quarterly requirements.
The Company has licensed operating software from Novell, Inc. and Microsoft
Corporation for use in its Unity typesetters and Big Color products. These
license agreements provide for a per unit royalty on printers shipped by the
Company.
Certain typefaces bundled with the Company's products and offered by the Company
to other customers are licensed from URW Unternehmensberatung ("URW") and others
and are edited by the Company for improved quality and utility. The URW license
agreement does not require additional payments, except with respect to the use
of the trademarked names of certain fonts. Licenses for the use of typeface
designs or trademark typeface names upon payment of royalties have also been
entered into with International Typeface Corporation, Inc., Treacyfaces, Inc.,
Linotype-Hell, Inc. and Fundicion Tipografic Neufville, S.A.
EMPLOYEES
At June 30, 1996 the Company had a total of 417 employees. None of the Company's
employees are represented by a labor organization and the Company has never
experienced a work stoppage or interruption due to a labor dispute. Management
believes its relationship with employees is good.
12
<PAGE>
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance with all material aspects of
applicable federal, state and local laws regarding the discharge of materials
into the environment. The Company does not believe that it will be required to
spend any material amount in compliance.
ITEM 2. PROPERTIES.
As of August 31, 1996 the Company leases an aggregate of 296,606 square feet of
office and warehouse space in Eden Prairie, Minnesota of which 168,034 square
feet is from a related party (see Item 13), pursuant to leases expiring at
various times through December 2010. Of the total amount leased, approximately
46,022 square feet has been subleased until October 1, 1996. The leases require
payments of property taxes, insurance and maintenance costs in addition to basic
rent and contain renewal options for periods ranging from one to three years.
The Company also leases approximately 14,850 square feet of office and warehouse
for its European headquarters in Hoofddorp, outside of Amsterdam, The
Netherlands.
ITEM 3. LEGAL PROCEEDINGS.
In October 1995, a shareholder of the Company (Becker) filed an action against
the Company and four of its officers and directors alleging violations of the
Securities and Exchange Act of 1934. In December 1995, two other similar suits
were filed by other shareholders and subsequently consolidated with the Becker
suit. The Becker claims have been pled as a class action including all
purchasers of the Company's stock during the period of December 3, 1993 through
December 8, 1994. In February 1996, one of the directors named in the suit was
dismissed from the case without prejudice. The suit alleges that the Company
and the named individual defendants knew of material, negative, non-public
information, withheld such information from the public so as to cause a fraud on
the market, and that the individual defendants personally benefitted by selling
shares of common stock with knowledge of such material adverse information. The
individual defendants may have the right to indemnification from the Company for
their defense and liability. The individual defendants, but not the Company,
may have coverage for certain claims under the Directors' and Officers'
insurance policies in effect at the relevant time. The Company believes the
action is totally without merit and is vigorously defending the matter. The
Company currently intends to press the case to trial so that the facts will be
heard. In order to contain costs, preserve its ability to meet the demands of
litigation throughout the lengthy trial process and bolster its legal defense
team (which includes the resources of outside counsel), the Company has hired an
in-house litigator and support staff with experience in these types of suits.
The case is in the early stages of discovery and the plaintiffs' total damage
claim has not been articulated. If the matter is not resolved by settlement or
a final judgement within the limits and coverage of the applicable Directors'
and Officers' insurance, this litigation could have a material adverse effect on
the Company. See Exhibit 99 of this form 10-K for additional discussion of risk
factors.
In October 1995, LaserMaster Corporation (LMC) filed suit against Sentinel
Imaging, a division of Sentinel Business System, Inc. The complaint alleges,
among other things, patent infringement, trademark infringement, Lanham Act
violations, misappropriation of trade secrets, and interference with contractual
relationships. This action is related to LaserMaster's Big Color product line
generally and, in particular, LaserMaster's Big Ink delivery system and
ColorMark color management system. Sentinel Imaging has counterclaimed for
false advertising, patent misuse, and unfair competition by LaserMaster. If LMC
does not prevail on its claims and Sentinel does prevail on the claims it has
alleged, the outcome of these proceedings could have a material adverse effect
on the Company.
13
<PAGE>
The Company is involved in legal proceedings related to customers credit and
product warranty issues in the normal course of business. In certain
proceedings, the claimants have alleged claims for exemplary or punitive damages
which may not bear a direct relationship to the alleged actual incurred damages,
and therefore could have a material adverse effect on the Company. At this time
none of the proceedings is expected to have a material effect on the Company's
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the shareholders of LaserMaster Technologies, Inc. was
held on May 23, 1996 pursuant to notice to all shareholders of record at the
close of business on April 5, 1996. As of the notice of the meeting there were
11,395,634 common shares outstanding. The following matters were submitted to a
Vote of the shareholders of record at the annual meeting:
1. The election of Melvin L. Masters and Ralph D. Rolen as directors of the
Company for continuing terms expiring in 1998. The directors were elected by
the vote of 8,788,101 proxies in favor of the resolution to elect both
directors. There were no abstentions or broker non-votes of record.
The terms of directors Lawrence J. Lukis, Jean-Louis Gassee, and Robert J.
Wenzel did not expire in 1996 and continued after the annual meeting.
2. The approval of the adoption of the 1996 Stock Incentive Plan. The
resolution passed by the vote of 4,520,770 votes in favor of the resolution to
approve the plan. There were no abstentions or broker non-votes of record.
3. The approval of the issuance to TimeMasters, Inc. of warrants to purchase
277,952 shares of the Company's common stock and a right to convert $1 million
of a promissory note into the Company's common stock. The resolution in favor
of approval passed by votes of 6,017,657 proxies. There were no abstentions
or broker non-votes of records.
14
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business and,
accordingly, does not anticipate paying any cash dividends in the foreseeable
future. Any payment of dividends in the future will depend upon the capital
requirements, earnings, and general business and financial condition of the
Company, as well as other factors which the Board of Directors may deem
relevant.
MARKET INFORMATION
Since July 17, 1990, the Company's Common Stock has traded on the Nasdaq
National Market System (Nasdaq symbol: LMTS). The following table sets forth
the high and low sale prices reported in the Nasdaq National Market System:
<TABLE>
<CAPTION>
Common Stock
--------------
High Low
---- ---
<S> <C> <C>
Fiscal Year 1995
First Quarter............................ $18.125 $7.50
Second Quarter........................... 17.125 5.875
Third Quarter............................ 7.25 5.00
Fourth Quarter........................... 8.00 4.625
Fiscal Year 1996
First Quarter............................ 7.0 5.125
Second Quarter........................... 7.5 5.125
Third Quarter............................ 7.125 4.75
Fourth Quarter........................... 6.875 3.625
Fiscal Year 1997
First Quarter (through August 31, 1996).. 4.813 3.25
</TABLE>
- ------------------
On August 31, 1996, the last reported sale price of the Common Stock was $4.375
per share. As of such date, there were approximately 259 record holders and
3,640 beneficial holders of the Common Stock.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been derived from
the consolidated financial statements of the Company, which have been audited by
Deloitte & Touche, LLP, independent certified public accountants, for the years
ended June 30, 1996, 1995, 1994, 1993, and 1992. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and notes related thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.............................. $ 93,592 $119,438 $105,849 $ 68,227 $ 59,857
Cost of goods sold..................... 64,379/(a)/ 72,857 59,852 37,387 31,045
-------- -------- -------- -------- --------
Gross profit..................... 29,213 46,581 45,997 30,840 28,812
Operating expenses:
Sales and marketing..................... 21,109 27,091 21,810 19,360 17,450
Research and development................ 6,149 6,210 3,335 1,890 2,034
General and administrative.............. 11,310 11,552 9,634 8,813 7,795
Restructuring and other special charges. 4,431/(a)/
-------- -------- -------- -------- --------
Operating profit (loss)............. (13,786) 1,728 11,218 777 1,533
Other expenses (primarily interest)..... (1,823) (1,433) (1,160) (1,776) (1,935)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and cumulative effect of a change in
accounting principle................... (15,609) 295 10,058 (999) (402)
Income tax benefit (provision)........... 5,147 (89) (3,394) 289 245
-------- -------- -------- -------- --------
Earnings (loss) before cumulative
effect of a change in accounting
principle.............................. (10,462) 206 6,664 (710) (157)
Cumulative effect on prior years
of a change in accounting principle.... 301
-------- -------- -------- -------- --------
Net earnings (loss).................... $(10,462) $ 206 $ 6,664 $ (710) $ 144
======== ======== ======== ======== ========
Per common share:
Earnings (loss) before cumulative
effect of change in accounting
principle.............................. $ (0.93) $ 0.02 $ 0.57 $ (0.07) $ (0.02)
Cumulative effect on prior years
of a change in accounting principle.... 0.04
-------- -------- -------- -------- --------
Net earnings (loss)..................... $ (0.93) $ 0.02 $ 0.57 $ (0.07) $ 0.02
======== ======== ======== ======== ========
Weighted average common and dilutive
common equivalent shares outstanding.... 11,305 12,206 12,189 9,565 9,342
</TABLE>
/(a)/In May 1996, the Company incurred charges of $9.9 million, consisting of
restructuring and other special charges of $4.4 million and a special charge to
cost of sales of $5.5 million related to the Company's revised business plan and
technical problems in one of its products.
16
<PAGE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.......................... $ 2,580 $13,708 $13,973 $ 5,869 $ 6,135
Total assets............................. 46,545 59,161 47,401 29,008 31,476
Current liabilities...................... 30,087 30,933 21,042 12,898 14,578
Long-term debt, less current maturities.. 820 1,599 1,590 5,743 6,069
Stockholders' equity..................... 15,638 25,293 23,139 9,817 10,413
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
(Tabular information: dollars in thousands, except per share and percentage
amounts)
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis that are forward
looking involve numerous risks and uncertainties and are based on current
expectations. Actual results may differ materially. Refer to exhibit 99 of
this form 10-K for certain important cautionary factors, risks and uncertainties
related to "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act").
OVERVIEW
In fiscal 1994, the Company made the long-term decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties to relying on products designed and manufactured by the Company. The
decision to progressively integrate the process of developing proprietary
engines in-house, was made in an effort to better distinguish its products.
Because these proprietary engines require the use of specially designed or
configured media or inks and achieve optimum performance when using complete,
LaserMaster-branded systems, the effect of this strategy has been to generate a
continuous after-market stream of revenue from the sale of LaserMaster-branded
consumables. This consumables strategy is expected to build an increasing base
of revenues for the Company as well as enhance gross profit margins above those
expected from hardware and software sales alone.
The implementation of this engine design and manufacture process has taken
longer and has been more costly than the Company had originally anticipated.
The Company has experienced higher than expected production costs during this
period which were associated with the startup of its first two proprietary
printer engine manufacturing lines, PressMate and DisplayMaker Express. The
start up costs of both new products required substantial resources and the
corresponding use of working capital.
During the fourth quarter of fiscal 1996, the Company incurred pre-tax charges
of $9.9 million consisting of a special charge to cost of sales of $5.5 million
and restructuring and other special charges of $4.4 million as a result of its
revised business plan which is intended to accelerate the Company's migration
away from total reliance on integration of third-party-supplied engines.
17
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 68.8(a) 61.0 56.6
----- ----- -----
Gross margin...................................................... 31.2 39.0 43.4
Expenses:
Sales and marketing............................................ 22.5 22.7 20.6
Research and development....................................... 6.6 5.2 3.1
General and administrative..................................... 12.1 9.7 9.1
Restructuring and other special charges........................ 4.7/(a)/ 0.0 0.0
----- ----- -----
Total operating expenses.......................................... 45.9 37.6 32.8
----- ----- -----
Operating profit (loss)........................................... (14.7) 1.4 10.6
Other income (expense):
Interest expense............................................... (1.9) (1.1) (1.2)
Other.......................................................... (0.1) (0.1) 0.1
----- ----- -----
Earnings (loss) before income taxes............................... (16.7) 0.2 9.5
Income tax benefit (provision).................................... 5.5 0.0 (3.2)
----- ----- -----
Net earnings (loss)............................................... (11.2)% 0.2% 6.3%
===== ===== =====
</TABLE>
/(a)/In May 1996, the Company incurred charges of $9.9 million, consisting of
restructuring and other special charges of $4.4 million and a special charge to
cost of sales of $5.5 million related to the Company's revised business plan and
technical problems in one of its products. The impact on cost of sales and
operating expenses was 5.9% and 4.7%, respectively.
NET SALES
Net sales were $93.6 million, $119.4 million and $105.8 million in fiscal 1996,
1995 and 1994, respectively. The decrease in net sales of 21.6% in fiscal 1996
was attributable to decreases in plain-paper typesetting products and price
competition in the Big Color printer market. These decreases were somewhat
offset by DisplayMaker Express (DME), which was introduced in fiscal 1996, and
increased consumables revenues. Sales growth of 12.8% from fiscal 1994 to 1995
was primarily attributable to increases in the sales of Big Color products and
the introduction of PressMate, offset by a decrease in sales of plain-paper
typesetting and WinPrint(R)/OEM products. Sales during the three-year period
were impacted by the decline in the plain-paper typesetting and
WinPrint/OEM/Imaging product lines as the Company has de-emphasized these
products in favor of more specialized, professional printing products and
proprietary printer products with complimentary consumables. With the reduction
in research, development, sales and marketing expenditures related to the plain-
paper typesetting products, the Company expects the transition out of these
product lines to be complete sometime during fiscal 1997. The Company believes
that plain-paper typesetting revenues will be replaced with revenues from
PressMate-FS, DME, DesignWinder and future product releases expected in fiscal
1997.
In December of 1995, the Company introduced a revised model PressMate product
named PressMate-FS which management believes addresses performance related
concerns experienced with the older model
18
<PAGE>
PressMate. Over the last two fiscal quarters of 1996, the Company embarked on an
aggressive repositioning, repricing and exchange campaign to update or replace
older model PressMates in the field with the new PressMate-FS. PressMate-related
hardware sales increased to $1.7 million in the fourth fiscal quarter of 1996
from $570,000 in the third fiscal quarter. This rebound in PressMate sales can
be attributed to the introduction of 133 line-per-inch traditional halftone
capabilities accompanied by a rejuvenated marketing effort intended to
communicate the new level of reliability and performance achieved with the new
PressMate-FS. The Company believes that revenues from sales of PressMate-FS will
increase in fiscal 1997.
The Company released DisplayMaker Express, its second proprietary printer
engine, late in the second fiscal quarter of 1996, generating Big Color hardware
sales of $9.3 million and after-market ink and media sales of $1.7 million for
the fiscal year ended 1996. The anticipated growth in sales of DME has been
slowed by component quality issues as the Company's sole supplier of a key
component has been unable to provide sufficient production levels and maintain
acceptable quality standards. These quality issues with the supplier have
precluded expected productivity gains in the overall DME line. The Company is
actively working with its vendor to resolve the problems it is currently
experiencing and expects these issues to come under control in the near future.
However, if the vendor is unable to maintain sufficient quantities and product
quality to meet the Company's production needs, revenues from DME could be
significantly below management's expectations for fiscal 1997.
In fiscal 1996, the Company sold $37.2 million (40% of net sales) of higher
margin consumables consisting primarily of ink, media and film, along with
maintenance contracts and spare parts compared to $ 27.1 million (23% of net
sales) in the prior year. With the installed base of printers increasing and the
releases of PressMate, DisplayMaker Express and DesignWinder, the Company
believes that after-market consumables revenues in existing and new markets will
continue to increase in fiscal 1997. During the fourth quarter of 1996, the
Company announced several additions to its consumables product line which allow
the installed base of Big Color customers to capture the business opportunities
presented by both indoor and outdoor applications. Changes included increased
ink capacity from 400 ml to 500 ml, price reductions on its dye-based indoor
inks, and introduction of new pigmented outdoor inks and related media. In
addition, the Company announced a supply agreement with 3M Commercial Graphics
Division providing for a complete Matched Component System of inks, media and
laminate that carry a one-year exterior or five-year interior written warranty.
At this time the Company and 3M are uncertain about the timing of any shipments
for the 3M materials pending new negotiations related to additional
specifications now being requested by the Company.
The following table sets forth net sales by product line expressed in thousands
and as a percent of net sales:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------------------------------
NET SALES 1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consumables.............. $37,174 39.7% $ 27,148 22.7% $ 14,788 14.0%
Big Color................ $35,190 37.6% $ 37,525 31.4% $ 28,686 27.1%
Plain-paper Typesetting.. $13,834 14.8% $ 41,123 34.4% $ 51,269 48.4%
PressMate................ $ 6,028 6.4% $ 7,375 6.2% $ 0 0.0%
WinPrint/OEM/Imaging..... $ 1,366 1.5% $ 6,268 5.3% $ 11,106 10.5%
------- ----- -------- ----- -------- -----
Total net sales.......... $93,592 100.0% $119,439 100.0% $105,849 100.0%
======= ===== ======== ===== ======== =====
</TABLE>
19
<PAGE>
International Sales
Japan, Asia/Pacific sales increased both as a percentage of total net sales and
in dollars from fiscal 1994 to fiscal 1996 as a result of increased penetration
of the Asian markets. The release of DisplayMaker Express in fiscal 1996 and
DisplayMaker Professional in fiscal 1994 generated significant sales in Japan.
Decreased sales in the European market in fiscal 1996 are attributable to
increased competition in the plain-paper typesetting and Big Color product lines
as well as the Company's realignment of its European distribution channels.
These decreases in Europe were somewhat offset by sales of DME and consumables
increases. The following table sets forth international sales expressed as a
percent of total net sales and in thousands:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
----------------------------------------------
INTERNATIONAL SALES 1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Europe............... $19,656 21.0% $23,022 19.3% $17,666 16.7%
Japan, Asia/Pacific.. 13,235 14.1 12,235 10.2 10,887 10.3
Latin America........ 5,146 5.5 5,118 4.3 3,878 3.7
Canada............... 2,892 3.1 2,496 2.1 3,088 2.9
------- ---- ------- ---- ------- ----
Total net sales...... $40,929 43.7 $42,871 35.9% $35,519 33.6
======= ==== ======= ==== ======= ====
</TABLE>
GROSS MARGIN
Gross margins, expressed as a percent of net sales, were 31.2% (37.1% excluding
special charges), 39.0% and 43.4% for fiscal 1996, 1995 and 1994, respectively.
Gross margin decreased in 1996 from 1995 primarily as a result of increased
production costs associated with the manufacture of proprietary engines. The
Company's gross margins during all three fiscal years were negatively affected
by aggressive pricing of its plain-paper typesetting products and, in fiscal
1996, aggressive pricing of some of its Big Color products developed as a
systems integrator, in an attempt to maintain market share against heavy
discounting generated by broad distribution from its third-party OEM supplier of
the platform used in the DisplayMaker Professional printer. In addition, gross
margins during all three fiscal years were negatively impacted by increased
production and overhead costs associated with the start-up of proprietary
printer engine manufacturing. In fiscal 1996, 1995 and 1994 the Company's gross
margins were favorably impacted by increasing sales of after-market consumables
which typically have higher gross margins than hardware/software sales alone.
Included in fiscal 1996 cost of sales is a special charge of $5.5 million
consisting of $4.2 million in inventory revaluation associated with the
transition from certain product lines developed as a systems integrator and $1.3
million to cover replacement costs, product returns, and inventory revaluation
related to the Company's older model PressMate product. These charges are based
on the Company's estimates of net realizable value of the related inventory and
for expected returns of older model PressMates as of the time the charges were
incurred.
Through the release of the Company's first two proprietary printer products many
issues were encountered which required new and innovative customer service,
technical support, and manufacturing process enhancements. The Company responded
to the needs of its installed base of DME customers with a "Do Whatever It Takes
Campaign." In addressing these issues the Company has added experienced customer
service staff, technical support staff, manufacturing managers and engineers.
Production quality and inspection standards have been developed and implemented.
In addition, key personnel of the Company have taken an active role in assisting
major suppliers with implementation of control standards and processes to ensure
component quality as it relates to the Company's needs and requirements.
20
<PAGE>
SALES AND MARKETING
Sales and marketing expenses were $21.1 million, $27.1 million and $21.8 million
in fiscal 1996, 1995 and 1994, respectively. The decrease in expense of $6.0
million in 1996 from 1995 included decreased expenses related to sales of $3.6
million and marketing of $2.5 million, offset by increases in technical support
of $100,000. The decrease in sales and marketing expense in fiscal 1996 is
primarily related to reductions directly related to lower sales volumes. The
increase in expense of $5.3 million in 1995 from 1994 included $3.0 million in
sales expenses, $1.9 million in marketing expense and $400,000 in technical
support services.
RESEARCH AND DEVELOPMENT
The Company capitalized software development costs of $2.7 million, $3.5 million
and $3.3 million in fiscal 1996, 1995 and 1994, respectively, as required by
FASB No. 86 (see Note 1 of Notes to Consolidated Financial Statements). The
decrease in capitalized software development in 1996 from 1995 reflects the
Company's focus on developing its first two proprietary printer engines and less
on the systems integrator type of products. Research and development
expenditures, including amounts expensed and capitalized, were $8.8 million,
$9.7 million and $6.7 million in fiscal 1996, 1995 and 1994, respectively. As a
percent of overall sales, these expenditures represented 9.1%, 8.1% and 6.3% in
fiscal 1996, 1995, and 1994, respectively. The decrease in gross R&D
expenditures from fiscal 1995 to 1996 is attributable to increased efficiency in
the Company's development activities and reductions in man power allocated to
this area. In developing the first two proprietary engines, many process and
systems enhancements were implemented to assist in the research, design and
subsequent release of products to production. Cutting edge design software,
online vendor approval and engineering change order systems have greatly
enhanced the design process as well as the interdepartmental communication
between the design arm of the organization and the operations (continuation
engineering, purchasing and production) arm. Increased benefits and cost savings
are anticipated in future periods as these and other systems continue to
develop. The Company is striving to get the most benefit for its investment in
R&D. The future depends on continually developing new and better products for
the markets it serves. As a result, the Company intends to reinvest any cost
savings into developing new technology and does not anticipate a material change
in the rate it invests in this area. The increase in R&D expenditures from 1994
to 1995 is attributable to increased staffing levels and costs associated with
the development of the Company's first two proprietary printer engines. Software
development costs capitalized during these periods relate primarily to
DisplayMaker Professional, DisplayMaker Express, PressMate, Unity, and
DesignWinder.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $11.3 million, $11.6 million and $9.6
million in fiscal 1996, 1995 and 1994, respectively. Fiscal 1996 decreases are
the result of reductions in the infrastructure necessary to handle lower sales
volumes, offset in part by costs associated with the defense of the shareholder
lawsuit (see" Legal Proceedings" for further details) and higher than normal bad
debt expense as a percent of net sales which was in part, negatively impacted by
product reliability issues related to new engines. Increases during 1995 were
primarily attributable to increased staff and facilities required to support
higher sales levels.
RESTRUCTURING AND OTHER SPECIAL CHARGES
In May 1996, the Company incurred $4.4 million in restructuring and other
special charges as a result of its revised business plan which is intended to
accelerate the Company's migration from a systems integrator to a manufacturer
of proprietary printing engines. Included in the $4.4 million charge is $3.3
million for the revaluation of intellectual property tied to certain
technologies and contract rights and $282,000 for severance related to workforce
reductions. The charge also includes $443,000 for expected
21
<PAGE>
losses on the disposal of property and equipment and $403,000 in commitments
under non-cancelable leases as a result of consolidating foreign sales offices
and certain domestic operations.
INTEREST EXPENSE
Interest expense was $1.8 million, $1.3 million and $1.3 million in fiscal 1996,
1995 and 1994, respectively. The increase in interest expense in 1996 is
attributable to an overall increase in average debt levels and costs associated
with obtaining new financing.
INCOME TAXES
The effective income tax rate was 33.0%, 30.1% and 33.7% in fiscal 1996, 1995
and 1994, respectively. The Company expects its effective tax rate to decrease
as it returns to profitability due to the benefits it can receive from the use
of its Foreign Sales Corporation. See Note 11 of Notes to Consolidated Financial
Statements for further disclosures relating to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended June 30, 1996, liquidity needs have been satisfied
primarily by cash flow from operations and short and long-term borrowings.
Working capital was $2.6 million at June 30, 1996 compared to $13.7 million at
June 30, 1995. The decrease in working capital is primarily due to a net loss
from operations of $10.5 million in fiscal 1996.
Operating activities provided cash of $6.2 million, $4.4 million and $3.4
million in fiscal 1996, 1995 and 1994, respectively. The increase in cash
provided from operations in 1996 compared to 1995 is due principally to lower
levels of inventory resulting from increased efficiencies in forecasting and
planning. In addition, amounts owed to suppliers have increased in proportion to
inventory levels compared to prior years.
Cash used in investing activities was $6.3 million, $8.0 million and $7.3
million in fiscal 1996, 1995 and 1994, respectively, which includes expenditures
on property and equipment, capitalized software development, patents and other
intellectual property. The decrease in cash used in investing activities in 1996
compared to 1995 consists of decreased expenditures on property and equipment
and capitalized software offset somewhat by increases in intellectual property.
The increase in cash used in investing activities in 1995 compared to 1994 is
due primarily to increased expenditures on intellectual property. The Company
does not expect significant increases in expenditures for property and equipment
in fiscal 1997, despite its initial manufacturing ramp up, as its production
processes and equipment are not particularly capital intensive in this phase.
Financing activities consumed $365,000 of cash during fiscal 1996. LMC borrowed
$1,765,000 in the first quarter of fiscal 1996 from TimeMasters, Inc. ("TMI"), a
corporation controlled by the Company's Chief Executive Officer, to cover short-
term cash shortfall. In January 1996, LMC replaced the operating line of credit
that it maintained through a commercial bank with a new, three-year credit
agreement with a commercial financing company. The new agreement allows LMC to
borrow up to $10 million based on availability equal to 60% of net eligible
accounts receivable and 25% of net eligible inventory. As part of this
agreement, the commercial finance company required that the loan to TMI be
subordinated and that a forbearance agreement restrict repayment of the TMI
debt. In consideration for agreeing to such subordination and forbearance, TMI
was issued a warrant to purchase 277,953 shares of the Company's common stock at
an exercise price of $6.35 per share and received a right to convert up to $1
million of indebtedness into common stock at the lower of $5.875 per share or
the market price on the date of such conversion. The warrant and note to TMI,
which the Company believes were on terms at least as favorable to the Company as
could have been obtained from an unaffiliated party, were approved by
shareholders at the Company's annual meeting in May 1996.
22
<PAGE>
Credit availability under the line of credit with the commercial finance company
was exhausted during the first quarter of fiscal 1997. The Company's
relationship with trade creditors, including a number of suppliers of components
that were not available from alternative sources, became strained as the Company
deferred payment of trade payables. The Company worked with several of its trade
creditors to restructure their indebtedness and sought equity financing to meet
its cash needs. In September 1996, the Company entered into a series of
agreements with one of its largest trade creditors and their supplier,
converting approximately $1.7 million of trade payables and a promissory note of
$859,516 into $2.5 million in convertible subordinated debentures. The
debentures allow the trade creditor to convert as much of the debt as would
purchase 30,000 shares of the Company's common stock in any one week period,
provided that the market price for the Company's common stock exceeds $6.00 per
share. A related agreement requires the supplier to provide approximately $1.5
million in inventory to the Company in resolution of quality issues with the
product previously supplied by the trading partner.
Additionally, to meet the cash shortfall in September 1996, the Company
privately placed 2,285,715 shares of its common stock for a purchase price of
$4.375 per share, together with warrants to purchase an additional 2,285,715
shares with an exercise price of $7.00 per share, for an aggregate consideration
of $10 million. Of such shares, 1,371,429 shares were sold to Sihl-Zurich Paper
Mill on Sihl AG, a Swiss corporation ("Sihl"), for $6 million, $2.2 million of
which is represented by a promissory note that is due when a promissory note
from a group of entities affiliated with TMI is paid. Sihl conditioned its
investment on an investment of $4 million by the Company's Chief Executive
Officer or an entity with which he is affiliated. In satisfaction of such
condition, TMI and affiliates (the "TimeMasters Group") purchased 914,286 shares
for $4 million and received warrants to purchase an additional 914,286 shares at
$7.00 per share, all of which is represented by promissory notes that are due
October 15, 1996 or upon sale of real estate that such group is selling to
finance the investment. Both Sihl and the TimeMasters Group pledged the shares
and warrants they purchased to secure their promissory notes and the TimeMasters
Group also secured its notes by a mortgage on the real estate. The warrants
issued to TMI and Sihl have a term of eight years and may be exercised at any
time. The agreement pursuant to which such shares and warrants were purchased
provides for both incidental and demand registration rights for a period of ten
years from the closing date of the transaction. Additionally, it provides to
Sihl, but not to the TimeMasters Group, a right to first refusal to purchase a
pro rata portion (based on the ratio of number of shares Sihl owns or has the
right to purchase to all shares of the Company that are outstanding or subject
to options, warrants or convertible securities), of any securities (subject to
certain exceptions) that the Company proposes to issue until Sihl's percentage
ownership declines below 10%. The agreement prohibits repayments of LMC's
previous indebtedness to TMI until TMI's promissory notes are paid in full or
simultaneously therewith. The Company anticipates applying a portion of the
proceeds from these transactions to repayment of LMC's indebtedness to TMI.
The Company simultaneously entered into a strategic alliance with Sihl, a
leading manufacturer of specialty papers and coatings. The Company and Sihl will
collaborate on research and development and marketing in order to develop new
media and specialty coatings which are intended to address the rapid growth of
the graphics and photo realistic segments of the inkjet printing industry.
In September 1996, the Company also privately placed 410,256 shares of its
common stock for a purchase price of $4.875 per share, together with warrants to
purchase an additional 471,286 shares with an exercise price of $6.79 per share,
for an aggregate consideration of $2 million. The shares and warrants were
issued to General Electric Capital Corporation ("GE"), the Company's senior
lender. Of the total purchase price, $1 million is represented by a full
recourse promissory note that is due the earlier of March 31, 1997 or when a
promissory note from a group of entities affiliated with TMI is paid. The note
also provides that upon default, GE may satisfy the note by trading one half of
the shares and warrants for cancellation. The Stock Purchase Agreement also
provides for both incidental and demand registration rights. The GE investment
does not carry with it the preemptive stock purchase rights granted to Sihl as
described above.
23
<PAGE>
Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.
The Company does not have any significant commitments for capital expenditures,
but is devoting significant cash resources to defense costs associated with the
class action litigation brought against the Company's officers and has plans to
expend significant capital to promote the introduction of its new DesignWinder
product series and to expand sales and marketing efforts related to after-market
consumables. The Company anticipates that the proceeds from the private
placements will be adequate to meet the Company's cash needs through the next
several months. Eventually, the Company's need for cash will be dependent upon
meeting its business plan, and particularly its sales targets. If sales are less
than expected or reasonably priced sources of financing are not available, the
Company may be required to revise its business plan or further restructure its
capitalization. Substantially all of the Company's assets have been pledged to
secure outstanding borrowings and there can be no assurances that the Company
would be able to protect existing equity holders in the event of such a
restructuring.
FOREIGN CURRENCIES
In general, the impact of foreign currency gains/losses are immaterial to the
Company as a whole. LME extends credit in the normal course of business in five
relatively stable European currencies. In addition, LME's financing agreement
allows it to factor those receivables and receive Dutch Guilders in which it
pays its expenses. The impact of this is to effectively hedge the Company's
exposure to foreign currency risk. Essentially all other transactions are in
U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial Statements and Supplementary Data attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
24
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1996, CONCERNING
THE DIRECTORS OF THE COMPANY:
<TABLE>
<CAPTION>
Year
Became
Name, Age, Positions, Principal Occupations, Directorships Director
- --------------------------------------------------------------------------------
<S> <C>
Directors whose terms expire in 1996
MR. WENZEL; age 45; has been Chief Operating Officer of the Company since 1996
1996 October 1991 and President of LaserMaster Corporation, the Company's
principal operating subsidiary, since October 1989. He joined LaserMaster
as General Manager of the PC Division in May 1989 and became Executive
Vice President shortly thereafter. Prior to joining LaserMaster, Mr. Wenzel
was employed by CPT Corporation, a company specializing in the manufacture
and sale of word processing systems, where he served as General Manager of a
computer products division from January 1988 through April 1989, and in other
capacities before that time.
Directors whose terms expire in 1997
LAWRENCE J. LUKIS; age 48; Mr. Lukis co-founded LaserMaster in February, 1989
1986 and has been Chief Technical Officer of the Company since May 1989.
JEAN-LOUIS GASSEE; age 52; Since 1990, Mr. Gassee has been Chairman 1990
and Chief Executive Officer of Be, Inc. of Menlo Park, California.
That company is involved in personal computer technology. From August
of 1988 until September, 1990, Mr. Gassee was President of the Apple
Products Division of Apple Computer, Inc. Prior to that time he held the
offices of Senior Vice President of Research and Development (1987 to
August, 1988) and Vice President of Product Development of Apple
Computer, Inc. from 1985 to 1987. Mr. Gassee is also a director of
Electronics for Imaging of San Bruno, California and 3COM, Sunnyvale,
California.
Directors whose terms expire in 1998
MELVIN L. MASTERS; age 42; Mr. Masters co-founded LaserMaster 1989
in February, 1986 and has been Chairman, Chief Executive Officer and
President of the Company since May 1989. Mr. Masters also owns TimeMasters,
Inc., a company established for the purpose of property management
which also has investments in the fields of wireless voice and data
communications and in personal motorsports products.
RALPH D. ROLEN; age 42; Mr. Rolen is Senior Vice President and 1989
Manager of the Retail Credit Division of First Tennessee National Bank
of Memphis, Tennessee, a position he has held since January, 1989.
</TABLE>
The Board of Directors met two times during the fiscal year ended June 30, 1996.
All directors attended each meeting. The Board of Directors has: (i) an Audit
Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen, ii) a Stock Option
Committee composed of Mr. Gassee and Mr. Rolen, and (iii) a
25
<PAGE>
Compensation Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen. The
Board of Directors has no standing nominating committee.
THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1996, REGARDING THE
EXECUTIVE OFFICERS OF THE COMPANY:
<TABLE>
<CAPTION>
Name Age Positions
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Melvin L. Masters 42 Chief Executive Officer, President and Chairman of the Board
Lawrence J. Lukis 48 Chief Technical Officer
Robert J. Wenzel 45 Chief Operating Officer and President, LaserMaster Corporation
James E. Retterath 35 Secretary and Vice President Research & Development
Timothy N. Thurn 40 Treasurer
Thomas D. Ryan 38 Executive Vice President, LaserMaster Technologies, Inc and
LaserMaster Corporation
</TABLE>
MR. RETTERATH has been Secretary of the Company since March 1994. He joined the
Company in June 1990 and has held a variety of management positions in Research
and Development most recently serving as Vice President which position he has
held since December 1992. From July 1986 to June 1990, Mr. Retterath was a
Senior Design Engineer for Printware, Inc. of Mendota Heights, Minnesota.
MR. THURN has been Treasurer of the Company since June 1989 and of LaserMaster
Corporation since March 1987. Mr. Thurn has experience as both a public and
private accountant. Mr. Thurn is a Certified Public Accountant (CPA) and
Certified Management Accountant (CMA).
MR. RYAN has been Managing Director of LME since January, 1995 and assumed the
Executive Vice President position for the Company and LaserMaster Corporation in
May 1996. Prior to working for the Company, Mr. Ryan worked for Mentor
Corporation as Vice President and General Manager of its Minnesota operations.
Officers of the Company are elected annually by the Board of Directors. All of
the current officers are expected to be re-elected to serve in the same
positions for the coming year.
26
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and the four executive officers of the Company whose salary and
bonus earned in the fiscal year ended June 30, 1996 exceeded $100,000 for
services rendered.
<TABLE>
<CAPTION>
======================================================================================================================
Annual compensation Long term compensation
---------------------------------------------------------------------------
Awards
----------------------
Other All other
annual Restricted Payouts/ compen-
Name and principal Year Salary ($) Bonus compen- stock Options/ LTIP sation
position ($) sation award(s) SARs (#) payouts ($)
($) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Melvin Masters 1996 $246,875 $ 6,736/1/
Chief Executive 1995 250,000 $ 6,016/1/
Officer 1994 250,000 $ 5,096/1/
- ----------------------------------------------------------------------------------------------------------------------
Robert Wenzel 1996 $203,125 220,000
Chief Operating 1995 165,625 $35,000
Officer 1994 150,000 1,000
- ----------------------------------------------------------------------------------------------------------------------
James E. Retterath 1996 $203,125 240,000 $34,100/2/
Secretary 1995 161,667 35,000
1994 127,500
- ----------------------------------------------------------------------------------------------------------------------
Larry Lukis 1996 $150,000 $10,908/1/
Chief Technical 1995 250,000 $ 9,898/1/
Officer 1994 250,000 $ 7,923/1/
- ----------------------------------------------------------------------------------------------------------------------
Thomas D. Ryan 1996 $131,458 $16,500 40,000
Executive Vice 1995 *
President 1994 *
======================================================================================================================
</TABLE>
*Became executive officer during fiscal 1996.
/1/Premiums for life insurance where the Company is not the beneficiary.
/2/Expenses paid by the Company on behalf of the employee.
Stock Options
The Company maintains a Stock Option Plan pursuant to which executive officers,
other employees and certain non-employees providing services to the Company may
receive options to purchase the Company's common stock.
The following table summarizes grants of stock options during fiscal 1996 to the
Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table.
27
<PAGE>
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
===================================================================================================================
Potential Realizable
Value at Assumed Annual
Individual Grants Rates of Stock Price
Appreciation for Option
Term
===================================================================================================================
% of Total
Options/
Options/ SARs Exercise or
SARs Granted to Base Price Expiration 5% ($) 10% ($)
Name Granted Employees ($/Share) Date
(#) in Fiscal
Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Wenzel 100,000/1/ 7.6% $4.00 April 2006 $251,560 $637,480
120,000/2/ 9.1% $4.00 April 2006 $301,872 $764,976
- -------------------------------------------------------------------------------------------------------------------
James E. Retterath 120,000/1/ 9.1% $4.00 April 2006 $301,872 $764,976
120,000/2/ 9.1% $4.00 April 2006 $301,872 $764,976
- -------------------------------------------------------------------------------------------------------------------
Thomas D. Ryan 40,000 3.0% $4.00 April 2006 $100,624 $254,992
===================================================================================================================
</TABLE>
/1/Options vest ratably over eight years.
/2/Options vest ratably over nine years with accelerated vesting contingent upon
meeting performance goals as established by the Chief Executive Officer.
The following table summarizes exercises of stock options during fiscal 1996 by
the Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
===================================================================================================================
Number of Value of unexercised
unexercised in-the-money
options/SARs at options/SARs at FY-
Shares acquired Value Realized FY-end (#) end ($) exercisable/
Name on exercise (#) ($) exercisable/ unexercisable (1)
($) unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Melvin L. Masters -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Robert J. Wenzel -0- -0- 41,250/243,750 $117,200/$189,000
- -------------------------------------------------------------------------------------------------------------------
James E. Retterath -0- -0- 28,750/301,250 $ 66,500/$276,600
- -------------------------------------------------------------------------------------------------------------------
Lawrence J. Lukis -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Thomas D. Ryan -0- -0- 10,000/110,000 $ 5,600/$61,900
===================================================================================================================
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on June 30, 1996 and the exercise price of the options.
Long-Term Incentive Plan Awards
Other than the Stock Option Plan reported on above, the Company does not
maintain any long-term incentive plans.
28
<PAGE>
DIRECTOR COMPENSATION
For fiscal year 1996, there was no plan for compensation to non-employee
directors. All directors were reimbursed for their expenses incurred in
attending meetings. Jean-Louis Gassee, John Meyer and Scott Parr also acted as
consultants to the Company. An additional $30,000 of consulting fees was
incurred for services provided by Mr. Gassee during fiscal 1996. An additional
$15,000 of consulting fees was incurred for services provided by Mr. Meyer
during fiscal 1996. Mr. Parr was paid $8,000 in consulting fees for services
provided during fiscal 1996.
EMPLOYMENT AGREEMENTS
At June 30, 1996, the Company had employment agreements with Messrs. Masters,
Lukis, Wenzel, and Retterath. Those agreements renew automatically on an annual
basis unless terminated by either party by written notice 60 days before the
renewal date. The agreements provide for continuation payments equal to 36
months pay for Mr. Masters and Mr. Lukis and 12 months pay for Mr. Wenzel and
Mr. Retterath, upon termination of employment in certain circumstances,
including change of control. As of June 30, 1996 minimum salary levels of
$250,000 were set for each of Messrs. Masters, Lukis, Wenzel and Retterath. The
Company also has employment agreements with other members of its management. In
total, there are nine employment agreements, with aggregate annual compensation
of $1,670,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chief Executive Officer of the Company, Melvin L. Masters, is a member of
the Compensation Committee. Mr. Masters' compensation is set by the Board of
Directors as a whole with Mr. Masters abstaining.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 31, 1996, certain information with
respect to beneficial share ownership by the directors, individually; by all
persons known to management to own more than 5% of the Company's outstanding
Common Stock, individually; and by all executive officers and directors as a
group. Except as otherwise indicated, the shareholders listed below have sole
investment and voting power with respect to their shares.
<TABLE>
<CAPTION>
Number of
Beneficially Owned Percent of Shares
Name of Beneficial Owner Shares Outstanding
- ------------------------ ------ -----------
<S> <C> <C>
Melvin L. Masters 519,000 4.5%
6425 Beach Road
Eden Prairie, MN 55344
Lawrence J. Lukis (1) 2,199,531 19.2%
3250 Fox Street
Long Lake, MN 55356
Ralph D. Rolen (2) 107,774 *
Jean-Louis Gassee (3) 85,000 *
Robert J. Wenzel (4) 53,050 *
James E. Retterath (5) 28,750 *
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Timothy N. Thurn (6) 54,149 *
Thomas D. Ryan (7) 12,000 *
All officers and directors
as a group (8 persons) (8) 3,059,254 26.3%
</TABLE>
* Less than 1%
(1) Includes shares owned by Donna Lukis, Mr. Lukis' spouse. Includes 183,000
shares held by the Lukis Foundation, of which Mr. Lukis is a director. Mr.
Lukis disclaims beneficial ownership both of Ms. Lukis' shares and those
held by the Lukis Foundation.
(2) On June 6, 1996, effective August 6, 1996, Mr. Rolen resigned his
previously held position as trustee of Masters Trust I and as a result, no
longer controls shares held in that trust.
(3) Includes 60,000 shares issuable to Mr. Gassee under options which are
exercisable.
(4) Includes 41,250 shares issuable to Mr. Wenzel under options which are
exercisable or will become exercisable within 60 days. Also includes
shares held as trustee for four education trusts.
(5) Includes 28,750 shares issuable to Mr. Retterath under options which are
exercisable or will become exercisable within 60 days.
(6) Includes 11,483 shares issuable to Mr. Thurn under options which are
exercisable or will become exercisable within 60 days.
(7) Includes 10,000 shares issuable to Mr. Ryan under options which are
exercisable or will become exercisable within 60 days.
(8) Includes 151,483 shares issuable under options which are exercisable or
will become exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has the following arrangements with certain of its directors,
executive officers or five percent shareholders;
(1) The Company leases space it currently occupies in Shady View I & II, with
the owner of that space, Grandchildren's Realty Alternative Management
Partnership I (GRAMPI), a Minnesota limited partnership. The general
partner of GRAMPI is TimeMasters, Inc., a Minnesota corporation which is
owned by Melvin L. Masters. One of the limited partners of GRAMPI is the
Masters Trust I, of which Ralph Rolen, a director of the Company, was
Trustee at the time of the negotiations. The Company retained the services
of an outside law firm as well as an independent commercial real estate
brokerage firm in negotiating the lease.
(2) Under a Use Indemnification Agreement and certain related Board of
Directors' actions, the Company has the right to sponsor business and
business-related occasions at facilities owned by Masters Trust I and/or
Melvin L. Masters and/or TimeMasters, Inc and/or GRAMPI and/or GRAMPI #2.
For those occasions, the Company indemnifies the owners against loss or
damage, reimburses out-of-pocket expenses and pays a facility charge based
on market rates. In the fiscal year ended June 30, 1996 charges totalled
$30,788.
(3) The Company has currently installed a campus-wide TimeMasters, Inc.
wireless voice system in its Eden Prairie facility. There are no monthly
call operating charges for unlimited use of
30
<PAGE>
that system. The system hardware was acquired in fiscal 1995 for $211,000
based on competitive proposals for two other comparable systems. Upgrades
to the system amounted to $47,853 in fiscal 1996. TimeMasters, Inc. is a
Minnesota corporation wholly-owned by Melvin L. Masters.
(4) During September and October 1995, LaserMaster Corporation's (LMC's) cash
needs exceeded available cash. To cover short-term cash needs, LMC borrowed
$1,765,000 under a demand note from TimeMasters, Inc. (TMI), a corporation
controlled by the Company's Chief Executive Officer. The entire amount of
the note remained outstanding at June 30, 1996 as repayment was restricted
by the terms of a subordination and forbearance agreement between LMC, TMI
and LMC's senior lender, GE Capital Corporation. 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 million of indebtedness 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. This
transaction was submitted to and approved by the shareholders at the
Company's annual meeting in May 1996.
(5) In September 1996, the Company issued 914,286 shares of restricted common
stock for a promissory note of $4 million in a private placement to
TimeMasters, Inc., GRAMPI and GRAMPI #2 (together as a group known as the
TimeMasters group), which is controlled by Melvin L. Masters, the Company's
CEO. The shares were issued at the market price of $4.375 per share and
were paid by promissory notes from the TimeMasters group. The notes are due
the earlier of October 15, 1996 or upon the closing of the sale of the
Shady View properties, which are owned by members of the TimeMasters group.
The notes are secured by the shares and warrants purchased as well as a
mortgage on the Shady View I and II properties (see item (2) above). In
addition, the TimeMasters group was issued a warrant for the purchase of an
additional 914,286 shares at $7.00 per share with an expiration date of
September 16, 2004. The TimeMasters group has the right to require the
Company to effect up to five demand registrations under the Securities Act
within ten years of the closing date of the transaction. The agreement also
provides for incidental registration rights during this same period. In
addition, shares acquired by TimeMasters upon the exercise of the warrant
or conversion right, obtained pursuant to the $1,765,000 demand note
discussed in item (4) above, have preferential incidental registration
rights expiring September 2006.
Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
Consolidated Financial Statements of LaserMaster Technologies, Inc. and
Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Operations for the fiscal years ended
June 30, 1996, 1995 and 1994
31
<PAGE>
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
LaserMaster Technologies, Inc. and Subsidiaries
Schedule I -- Condensed Financial Information of the Registrant
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are either not
applicable or required information has been given in the consolidated
financial statements or notes thereto.
(a) 3. Listing of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<C> <S>
10.1 Common Stock Purchase Agreement dated September 16, 1996 between
LaserMaster Technologies, Inc. and Sihl-Zurich Paper Mill on Sihl AG,
and a business group consisting of Melvin L. Masters, TimeMasters,
Inc., Grandchildren's Realty Alternative Management Program I Limited
Partnership and Grandchildren's Realty Alternative Management Program
I #2 Limited Partnership.
10.2 Common Stock Purchase Agreement dated September 25, 1996 between
LaserMaster Technologies, Inc. and General Electric Capital
Corporation.
10.3 Debenture Exchange and Trade Debt Settlement Agreement dated September
12, 1996 between LaserMaster Technologies, Inc. and Marubeni
International Electronics Corporation.
10.4 LaserMaster Technologies, Inc. Convertible Subordinated Debenture
dated September 12, 1996 to Marubeni International Electronics
Corporation.
10.5 First Amendment to Credit Agreement dated May 15, 1996 between
LaserMaster Corporation and General Electric Capital Corporation.
11.1 Per share earnings calculation.
27.1 Financial Data Schedule
99. Cautionary Factors Under Private Securities Litigation Reform Act of
1995.
</TABLE>
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.
Date: September 30, 1996
LASERMASTER TECHNOLOGIES, INC.
By /s/ Melvin L. Masters
-----------------------------------
Melvin L. Masters, President, Chief
Executive Officer and Chairman of the
Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Melvin L. Masters President, Chief Executive Officer
- ------------------------ and Chairman of the Board
Melvin L. Masters (Principal Executive Officer)
/s/ Lawrence J. Lukis Chief Technical Officer and
- ------------------------ Director
Lawrence J. Lukis
/s/ Ralph D. Rolen Director
- ------------------------
Ralph D. Rolen
/s/ Jean-Louis Gassee Director
- ------------------------
Jean-Louis Gassee
/s/ Robert Wenzel Director
- ------------------------
Robert Wenzel
/s/ Timothy Thurn Treasurer
- ------------------------
Timothy Thurn
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
LaserMaster Technologies, Inc. and
Subsidiaries
Eden Prairie, Minnesota
We have audited the consolidated balance sheets of LaserMaster Technologies,
Inc. and subsidiaries as of June 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996 and financial statement schedules
listed in the index at Item 14(a)(2). These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedules 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of LaserMaster
Technologies, Inc. and subsidiaries as of June 30, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements, taken as
a whole, present fairly in all material respects the information therein set
forth.
Deloitte & Touche, LLP
Minneapolis, Minnesota
August 9, 1996
<PAGE>
<TABLE>
<CAPTION>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 90,851 $ 607,223
Accounts receivable, less allowance for doubtful
accounts and sales returns of $ 2,475,000 and
$2,051,000, respectively (Note 5) 12,563,112 17,104,353
Inventory (Notes 3 and 5) 13,524,314 21,609,487
Income tax receivable 400,781
Other current assets 2,783,784 2,452,766
Deferred income taxes (Note 11) 3,304,000 2,868,000
----------- -----------
TOTAL CURRENT ASSETS 32,666,842 44,641,829
PROPERTY AND EQUIPMENT, NET
(Notes 4, 7 and 12) 5,099,560 6,323,749
CAPITALIZED SOFTWARE, less accumulated
amortization of $3,636,979 and $3,465,724,
respectively (Note 5) 4,150,913 4,991,084
DEFERRED INCOME TAXES (Note 11) 2,546,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $1,000,154 and $967,765, respectively (Note 5) 2,081,649 3,204,610
----------- -----------
$46,544,964 $59,161,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 5,381,037 $ 6,462,901
Note payable - related party (Note 6) 1,765,000
Current maturities of long-term debt (Note 7) 1,248,267 1,009,917
Accounts payable (Note 12) 16,682,191 18,569,479
Accrued payroll and payroll taxes 1,915,908 2,107,533
Income taxes payable 201,768
Other current liabilities (Note 12) 1,200,264 1,386,113
Deferred revenue 1,894,262 1,195,640
----------- -----------
TOTAL CURRENT LIABILITIES 30,086,929 30,933,351
LONG-TERM DEBT, less current maturities (Note 7) 820,095 1,598,546
DEFERRED INCOME TAXES (Note 11) 1,336,000
COMMITMENTS AND CONTINGENCIES (Notes 9 and 15)
STOCKHOLDERS' EQUITY: (Notes 5, 6, 8 and 10)
Common stock, $.01 par value; authorized
30,000,000 shares; 11,426,134 and 11,176,382 shares issued
and outstanding, respectively 114,261 111,764
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 17,430,555 16,626,953
Retained earnings (accumulated deficit) (1,906,876) 8,554,658
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,637,940 25,293,375
----------- -----------
$46,544,964 $59,161,272
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years Ended June 30,
--------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
NET SALES (Note 13) $ 93,592,044 $119,438,719 $105,849,310
COSTS OF GOODS SOLD (Note 2) 64,378,882 72,857,356 59,852,292
------------ ------------ ------------
GROSS PROFIT 29,213,162 46,581,363 45,997,018
OPERATING EXPENSES
Sales and marketing 21,108,559 27,091,414 21,810,013
Research and development 6,148,919 6,210,006 3,335,081
General and administrative (Note 12) 11,310,135 11,552,092 9,634,228
Restructuring and other special charges (Note 2) 4,431,273
------------ ------------ ------------
42,998,886 44,853,512 34,779,322
------------ ------------ ------------
OPERATING (LOSS) PROFIT (13,785,724) 1,727,851 11,217,696
OTHER INCOME (EXPENSE)
Interest expense (Note 12) (1,784,365) (1,331,139) (1,296,810)
Interest income 17,728 26,846 102,130
Other (expense) income (56,173) (128,084) 34,620
------------ ------------ ------------
(1,822,810) (1,432,377) (1,160,060)
------------ ------------ ------------
(LOSS) EARNINGS BEFORE INCOME TAXES (15,608,534) 295,474 10,057,636
INCOME TAX BENEFIT (PROVISION) (Note 11) 5,147,000 (89,000) (3,394,000)
------------ ------------ ------------
NET (LOSS) EARNINGS $(10,461,534) $ 206,474 $ 6,663,636
============ ============ ============
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ (.93) $ .02 $ .57
============ ============ ============
Weighted average common shares in 1996 and
weighted average common and common equivalent
shares in 1995 and 1994 11,305,232 12,206,280 12,188,896
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------------ Paid-in (Accumulated
Shares Amount Capital Deficit) Total
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1993 9,751,156 $ 97,511 $ 8,035,057 $ 1,684,548 $ 9,817,116
Issuance of common stock -
Conversion of debentures, less
issuance costs of $306,334 766,439 7,664 5,214,002 5,221,666
Stock options exercised 428,321 4,284 570,988 575,272
Stock option tax benefit (Note 11) 861,000 861,000
Net earnings 6,663,636 6,663,636
---------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1994 10,945,916 109,459 14,681,047 8,348,184 23,138,690
Issuance of common stock -
Stock options exercised 230,466 2,305 410,906 413,211
Stock option tax benefit (Note 11) 1,535,000 1,535,000
Net earnings 206,474 206,474
---------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1995 11,176,382 111,764 16,626,953 8,554,658 25,293,375
Issuance of common stock -
Stock options exercised 249,752 2,497 577,602 580,099
Stock option tax benefit (Note 11) 226,000 226,000
Net loss (10,461,534) (10,461,534)
---------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1996 11,426,134 $114,261 $17,430,555 $ (1,906,876) $15,637,940
========== ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 14)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
-------------------------------------------------
1996 1995 1994
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 5,859,577 6,302,444 4,950,886
Amortization of deferred financing costs 240,335 96,127 193,672
Revaluation of acquired technology, patents and licenses 2,582,840
Revaluation of capitalized software 768,059
Loss on sale of property and equipment 528,840 131,113 12,048
Deferred income taxes (4,318,000) (1,606,000) 927,000
Stock option tax benefit 226,000 1,535,000 861,000
Change in current assets and current liabilities:
Accounts receivable 4,541,241 (1,175,687) (7,524,524)
Inventory 8,085,173 (8,038,448) (7,293,941)
Other current assets (571,353) (784,152) (734,788)
Income tax receivable (400,781)
Accounts payable (1,027,772) 6,342,131 4,124,447
Accrued payroll and payroll taxes (191,625) 221,415 606,660
Income taxes payable (201,768) (220,911) 345,153
Other current liabilities (185,849) 703,858 1,389
Deferred revenue 698,622 638,591 245,115
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,172,005 4,351,955 3,377,753
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,660,716) (2,654,705) (2,831,073)
Additions to capitalized software costs (2,660,717) (3,535,312) (3,328,224)
Proceeds from sale of property and equipment 53,968 16,363 52,950
Additions to patents and other assets (2,056,156) (1,793,993) (1,172,678)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (6,323,621) (7,967,647) (7,279,025)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowing under revolving credit lines (1,918,979) 2,002,144 2,942,262
Proceeds from note payable to related party 1,765,000
Proceeds from notes payable 271,149 111,345 77,493
Repayments of notes payable (293,550) (103,429) (680,539)
Proceeds from long-term debt 307,514 470,938 2,187,000
Payments on long-term debt (1,075,989) (864,966) (525,981)
Issuance of common stock 580,099 413,210 575,273
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (364,756) 2,029,242 4,575,508
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (516,372) (1,586,450) 674,236
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 607,223 2,193,673 1,519,437
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 90,851 $ 607,223 $ 2,193,673
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
LaserMaster Technologies, Inc. (the Company) designs, manufactures, markets
and sells wide-format color, chemical-free filmsetting, plain-paper
typesetting, and direct-to-plate printing systems for graphic arts, pre-
press, and desktop publishing professionals.
CREDIT RISK
The Company sells its products on a prepaid basis, on a COD basis, through
nonrecourse third-party leasing arrangements and by extending credit in the
normal course of business. Its customer base is comprised primarily of
resellers and end users in the graphic arts, prepress and desktop
publishing industries throughout the world. Credit risk is spread across a
significant number of customers and geographic areas such that no material
credit risk resides with one or a small number of customers or in a given
geographic area. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
CONSOLIDATION
The consolidated financial statements include the accounts of LaserMaster
Technologies, Inc. and its subsidiaries, Digital Typeface Corporation (DTC)
and LaserMaster Corporation (LMC) and LMC's subsidiaries, LaserMaster
Export Corporation, LaserMaster Europe, Ltd. (LME), LaserMaster
Asia/Pacific (LMA), and ColorMasters, Inc. (CMI). All significant
intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION AND WARRANTIES
Product sales are recorded on shipment. Reserves are established for
anticipated returns of product and bad debts. The Company offers extended
maintenance agreements with revenue from these agreements recognized
ratably over the contract period. The Company provides a warranty for labor
and materials on certain products sold. No other stock balancing programs
or product rebate programs exist outside of the terms of the limited
warranty. The estimated warranty liability is included in other current
liabilities in the consolidated balance sheets.
CASH EQUIVALENTS
All highly liquid cash investments with a maturity of three months or less
at the date of purchase are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets of two to seven years.
CAPITALIZED SOFTWARE
Software development costs incurred subsequent to establishment of the
software's technological feasibility are capitalized. Capitalization ceases
when the software is available for general release to customers. The
recoverability of capitalized software costs is continually evaluated, and
provisions for estimated losses are recorded in the period such losses are
determined. Amortization of capitalized software costs is provided at the
greater of the amount computed using (a) the ratio of current gross
revenues from a product to the total of current and anticipated future
gross revenues from the product or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, an original
estimated economic life of three years is assigned to capitalized software
development costs. Amortization of capitalized software costs, included in
cost of goods sold, aggregated $2,732,829, $3,124,616, and $2,409,307 for
the fiscal years ended June 30, 1996, 1995, and 1994, respectively.
ACQUIRED TECHNOLOGY, PATENTS, AND LICENSES
Acquired technology, patents, and licenses are amortized using the
straight-line method over the estimated useful lives of the assets,
generally from three to ten years. The recoverability of these assets is
continually evaluated by comparing the remaining unamortized cost to the
estimated future revenue of the associated assets. Provisions for estimated
losses are recorded in the period such losses are determined.
F-6
<PAGE>
ACCOUNTS PAYABLE
Accounts payable include $389,860 at June 30, 1996 related to issued checks
which had not cleared the Company's bank accounts reduced by deposits in
transit and cash on deposit in the Company's depository banks.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. Cash and cash equivalents, accounts
receivable, short-term debt, accounts payable, and accrued liabilities are
reflected in the financial statements at their estimated fair value. The
carrying amount of the Company's long-term debt approximated its fair value
at June 30, 1996 due to the debt agreements containing market interest
rates.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to the
differences between the financial statement and tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled.
RESEARCH AND DEVELOPMENT
The Company is involved in the development of new products and improvement
of existing products. Research and development costs are charged to expense
as incurred.
ADVERTISING
The Company adopted the provisions of Statement of Position No. 93-7,
"Reporting on Advertising Costs," effective for the Company's 1995 fiscal
year.
The Company expenses the costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.
Direct-response advertising consists of printing, postage, and mailing list
costs relating to direct mail advertising. The capitalized costs of the
advertising are amortized over the period during which the benefits of the
mailings are expected, up to two months following the mailing date.
The effect of this accounting change was to increase fiscal 1995 earnings
before income taxes, net income, and earnings per share by $412,000,
$289,000, and $0.02, respectively.
At June 30, 1996, $333,000 of advertising was included in other current
assets as compared with $412,000 at June 30, 1995. Advertising expense was
$7,343,000, $9,519,000, and $7,470,000 for the fiscal years ended June 30,
1996, 1995, and 1994, respectively.
NET (LOSS) EARNINGS PER SHARE
Net (loss) earnings per common share is based on the weighted average
number of common and dilutive common equivalent shares outstanding. Common
stock equivalents included in the calculation reflect the dilutive effect
of outstanding stock options and warrants. During fiscal year 1996, common
equivalent shares were excluded from the calculation because they are anti-
dilutive.
LIQUIDITY
During 1996, the Company incurred losses and special charges aggregating
$10.5 million and, as of June 30, 1996, had an accumulated deficit in
stockholders' equity totaling $1.9 million. During this period, management
has taken several steps to improve cash flows and return the Company to
profitability. These included securing a new $10 million working capital
line of credit, reducing operating expenses through workforce reductions
and consolidating international sales offices, transitioning out of certain
products, and developing new products to be released during early fiscal
1997. Management believes these changes will allow the Company to meet its
obligations and return to profitability in 1997.
USE OF ESTIMATES
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.
F-7
<PAGE>
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss
should be recognized when the estimated future undiscounted cash flows from
the asset are less than the carrying value of the asset. Assets to be
disposed of should be reported at the lower of their carrying amount or
fair value less cost to sell. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. Management
believes that adoption of this statement will not have a material impact on
results of operations or financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue following the guidance
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," for measurement and recognition of stock-based transactions
with employees. The Company will adopt the disclosure provisions of SFAS
No. 123 in fiscal year 1997.
RECLASSIFICATIONS
Certain reclassifications of previously reported amounts have been made to
conform to the current year's presentation. These reclassifications had no
effect on net income or stockholders' equity as previously reported.
2. RESTRUCTURING AND OTHER SPECIAL CHARGES
In May 1996, the Company incurred pre-tax charges of $9.9 million,
consisting of restructuring and other special charges of $4.4 million and a
special charge to cost of sales of $5.5 million related to its revised
business plan and technical problems in one of its products. The revised
business plan is intended to complete the Company's transition from a
systems integrator to a manufacturer of proprietary printing engines which
utilize the Company's consumable products.
Included in the $4.4 million charge is $3.3 million for the revaluation of
intellectual property tied to certain technologies and contract rights
associated with the transition from a systems integrator to a manufacturer
of printing engines. The charge also includes a $1.1 million provision for
severance related to workforce reductions, expected losses on the sale of
tangible assets and expenses under non-cancelable leases as a result of
consolidating foreign sales offices and certain domestic operations. At
June 30, 1996, approximately $1.3 million of the total $4.4 million charge
remains in current liabilities.
Included in the $5.5 million charge to cost of sales is $4.2 million in
inventory revaluation associated with the transition from certain product
lines developed as a systems integrator. In addition, the charge includes
$1.3 million to cover replacement costs, product returns, and inventory
revaluation related to the Company's older model PressMate product. This
product has been replaced with the PressMate-FS model, which is believed to
have solved the technical problems of the earlier model.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Raw materials
Purchased printer engines $ 469,870 $ 796,940
Completed subassemblies 3,053,985 5,419,774
Raw materials 5,994,178 9,397,341
Work in process 436,753 987,009
Finished goods 3,569,528 5,008,423
----------- -----------
$13,524,314 $21,609,487
=========== ===========
</TABLE>
F-8
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Life Used
for Depreciation June 30, 1996 June 30, 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Computer equipment 2 - 5 years $10,358,217 $10,088,455
Trade show computer equipment 2 - 5 years 600,475 424,410
Capitalized tooling 3 years 234,206 202,913
Furniture and fixtures 5 - 7 years 4,245,907 4,241,649
Purchased software 3 years 961,970 764,351
Vehicles 5 years 420,706 505,490
Leasehold improvements 5 years 2,577,253 2,282,348
----------- -----------
19,398,734 18,509,616
Accumulated depreciation and amortization 14,299,174 12,185,867
----------- -----------
$ 5,099,560 $ 6,323,749
=========== ===========
</TABLE>
Property and equipment includes assets under capital leases as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Computer equipment and purchased software $ 212,085 $ 31,810
Furniture and fixtures 740,319 1,301,995
Vehicles 10,499 49,109
---------- ----------
962,903 1,382,914
Accumulated amortization 248,368 558,905
---------- ----------
$ 714,535 $ 824,009
========== ==========
5. NOTES PAYABLE
Notes payable consists of the following:
June 30, 1996 June 30, 1995
------------- -------------
Note payable under revolving
line of credit (1) $3,529,459 $4,961,468
Note payable under revolving
line of credit (2) 972,977 1,459,947
Promissory note from trading partner (3) 859,516
Other 19,085 41,486
---------- ----------
$5,381,037 $6,462,901
========== ==========
Weighted average interest rate 10.15% 9.78%
========== ==========
</TABLE>
(1) 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. Borrowings are secured by inventory, accounts
receivable, and general intangibles and bear interest at a defined bank
reference rate (prime) plus 2.0% (10.25% at June 30, 1996) with a 0.5% unused
line fee. At June 30, 1996, approximately $1,407,000 of eligible financing was
unused under this credit line. Availability under this credit line fluctuates
daily. The agreement expires January 17, 1999 and 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.
F-9
<PAGE>
(2) LME, a subsidiary of the Company's LMC subsidiary, maintains a
receivables financing arrangement, which has no stated expiration, with a
commercial finance company whereby LME may borrow up to 70% of eligible
accounts receivable, with a maximum advance of $2,500,000. At June 30,
1996, approximately $1,149,345 was unused under this credit line.
Borrowings are due in Dutch Guilders on demand and bear interest at the
Promissory Note Discount Rate of the Dutch Central Bank plus 2.5% (10.25%
at June 30, 1996). Borrowings in U.S. Dollars are due on demand and bear
interest at a rate that fluctuates with the market (no U.S. Dollars were
borrowed at June 30, 1996).
(3) 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, bears interest at 10% and was
originally due on May 29, 1996. LaserMaster Corporation and the trading
partner are currently discussing new payment terms on this note and on
subsequent accounts payable balances due this supplier.
6. NOTE PAYABLE - RELATED PARTY
During September and October 1995, LMC borrowed $1,765,000 under a demand
note from TimeMasters, Inc. (TMI), a corporation controlled by the
Company's Chief Executive Officer. The note bears interest at prime rate
plus 1.75% (10% at June 30, 1996). In January 1996, LMC obtained a new line
of credit with a commercial finance company that required the indebtedness
to TMI be subordinated to the line of credit and not be repaid unless
certain financial covenants were achieved. In return for such subordination
and for the significant restrictions on repayment, the Company issued to
TMI a warrant to purchase 277,953 shares of common stock and the right to
convert up to $1,000,000 of the indebtedness into common stock in the event
either LMC is unable to repay such indebtedness before January 17, 1998 or
an event of default occurs. The warrant is exercisable at $6.35 per share
through January 17, 2002. The conversion right is equal to the lesser of
$5.875 per share or the fair market value of the common stock on the date
of the exercise.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Note payable to a finance company,
payments, including principal and interest at 8.53%, of
$59,000 due monthly through August 1997,
secured by certain domestic property and equipment $ 789,260 $1,405,777
Notes payable to a finance company, with monthly
payments aggregating $24,504, including interest at the
"One-Month" Commercial Paper rate plus 4.0%
(9.40% at June 30, 1996), expiring January 1998
through May 1999, secured by certain domestic
property and equipment 527,151 412,021
Note payable to bank, with interest at prime
plus .5% (8.75% at June 30, 1996), final
payment due December 1997 8,405 13,374
Obligations under capital leases for equipment,
payable in monthly installments (Note 9) 743,546 777,291
---------- -------------
2,068,362 2,608,463
Less current maturities 1,248,267 1,009,917
---------- -------------
$ 820,095 $1,598,546
========== =============
</TABLE>
F-10
<PAGE>
Maturities of long-term debt at June 30, 1996, excluding capital lease
obligations, are as follows:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1997 $ 936,695
1998 327,824
1999 60,297
----------
$1,324,816
==========
</TABLE>
8. CONVERTIBLE SUBORDINATED DEBENTURES
In February 1994, the Company notified the holders of its subordinated
debentures that the Company was exercising its option to redeem the
remaining debentures, which had a face value of $5,528,000. The debentures,
originally issued in 1990 and bearing interest at 10 percent, were due in
November 1997. By March 21, 1994, all of the holders had elected to convert
their debentures into common stock of the Company. The Company issued
766,439 additional shares as a result of the conversion.
The Company incurred a total of $1,099,030 of costs to complete the
original $10,000,000 offering. The costs were being amortized on a
straight-line basis over the life of the debentures. A summary of the
transactions associated with the debentures follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1994
------------------------
<S> <C>
Debentures converted $5,528,000
Unamortized offering costs
charged to additional
paid-in capital $ 306,334
Amortization of offering
costs included in interest
expense $ 58,583
Shares of common stock
issued as a result of
conversion 766,439
</TABLE>
9. COMMITMENTS
LEASES
The Company leases certain equipment under leases which meet the criteria
for capital lease classification. These agreements have been capitalized at
the lesser of fair market value of the equipment or the present value of
the future minimum lease payments. The Company also leases other equipment
under operating leases. In addition, the Company leases its office and
warehouse facilities under operating leases which expire at various dates
through December 2010. The leases require payments of property taxes,
insurance, and maintenance costs in addition to basic rent and contain
renewal options for periods ranging from one to three years.
Certain of the facilities leases are under a 15-year commercial lease with
Grandchildren's Realty Alternative Management Program I ("GRAMPI"), a
Minnesota limited partnership controlled by the Company's Chief Executive
Officer for space it currently occupies in Shady View I & II. The Shady
View space is approximately 50% of all space leased by the Company. GRAMPI
purchased the real estate in April 1995, after the Company's Board of
Directors declined to do so. The Company's Board of Directors retained
services of an outside commercial real estate brokerage firm and outside
legal counsel to negotiate the lease with the landlord's outside legal
counsel. Management and the outside brokerage firm and legal counsel
believe that the lease is at market rate.
F-11
<PAGE>
Rent expense under all equipment and facilities operating leases (including
property taxes, insurance, and maintenance costs) was as follows:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
GRAMPI $1,355,000 198,000/(a)/
Other parties 1,211,000 1,996,000 $1,882,000
---------- ----------- ----------
Total $2,566,000 $ 2,194,000 $1,882,000
========== =========== ==========
</TABLE>
/(a)/Two months rent following April 1995 purchase.
Future minimum lease payments under capital and operating leases in effect at
June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Capital -------------------------
Year ending June 30: Leases GRAMPI Other
-------- ----------- ----------
<S> <C> <C> <C>
1997 $376,650 $ 963,000 $ 743,000
1998 336,422 963,000 532,000
1999 126,211 1,086,000 401,000
2000 3,821 1,208,000 373,000
2001 1,209,000 30,000
Thereafter (2002 through 2010) 12,376,000
-------- ----------- ----------
843,104 $17,805,000 $2,079,000
=========== ==========
Less interest 99,558
--------
Present value of net minimum lease payments $743,546
========
</TABLE>
Future minimum operating lease payments are net of $211,200 of sublease rentals
to be received by the Company due ratably through January 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with nine of its officers and executives
which renew automatically on an annual basis. Three of the agreements provide
continuation payments equal to 36 months pay upon termination of employment in
certain circumstances, including change of control. The other six agreements
provide for 12 months notice of termination, other than for cause, or payment in
lieu of notice. Three of the agreements also provide for acceleration of option
vesting in the event of a change in control or termination without cause. As of
June 30, 1996, minimum annual salary levels set for the nine individuals was,
in aggregate, $1,670,000.
EMPLOYEE BENEFIT PLAN
The Company has a qualified defined contribution 401(k) plan covering
substantially all employees. The plan offers an employee savings feature and
discretionary Company matching contributions. There were no employer
contributions to the plan for the years ended June 30, 1996, 1995, and 1994.
OTHER
At June 30, 1996, the Company had outstanding letters of credit totaling
$300,000, all of which are secured by property and equipment.
F-12
<PAGE>
10. STOCK OPTIONS AND WARRANTS
During fiscal 1991, the stockholders amended and restated three stock
option plans as the 1990 Restated Stock Option Plan. Under the plan,
incentive stock options and non-statutory stock options may be granted to
key employees, directors, and consultants of the Company at exercise prices
not less than 100 percent of the fair market value of the common stock at
the date of grant and 110 percent for incentive stock options granted to
individuals owning 10 percent or more of the Company's common stock. The
total number of shares authorized under the plan is 3,513,309. The plan is
administered by a Stock Option Committee appointed by the Board of
Directors. The committee establishes all terms and conditions of each
grant, except that, in the case of incentive options, the term may not
exceed 10 years.
On May 23, 1996 the stockholders approved the adoption of the "LaserMaster
Technologies, Inc. 1996 Stock Incentive Plan" (the 1996 Plan). The
aggregate number of shares of the Company's common stock which may be
issued pursuant to the 1996 Plan is 1,500,000. Terms and conditions of the
1996 Plan are similar to those of the 1990 Restated Stock Option Plan.
Warrant activity and activity under the plan is summarized as follows:
<TABLE>
<CAPTION>
Average Average
Warrants Warrant Price Options Option Price
Outstanding Per Share Outstanding Per Share
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 2,351,179 $ 2.08
Granted 15,000 $ 5.50 324,000 6.09
Exercised (428,321) 1.34
Forfeited (151,289) 3.19
------------ -----------
Balance, June 30, 1994 15,000 5.50 2,095,569 2.76
Granted 544,000 6.04
Exercised (230,466) 1.81
Forfeited (268,417) 5.06
------------ -----------
Balance, June 30, 1995 15,000 5.50 2,140,686 3.38
Granted 277,953 6.35 1,322,000 4.29
Exercised (249,752) 2.32
Forfeited (449,824) 4.18
Repriced* (1.23)
Balance, June 30, 1996 292,953 $ 6.31 2,763,110 $ 3.54
============ ===========
Exercisable, June 30, 1996 292,953 722,339
============ ===========
</TABLE>
*The Company's Board of Directors approved the repricing of 249,250 non-
statutory stock options to the closing Nasdaq price on July 3, 1995 ($5.40
per share). These options had original exercise prices ranging from $5.63
to $8.50 per share with an average exercise price of $6.75 per share. The
Company's Board of Directors approved the repricing of 210,000 non-
statutory stock options to the closing Nasdaq price on April 23, 1996
($4.00 per share). These options had original exercise prices ranging from
$5.00 to $5.40 per share with an average exercise price of $5.09 per share.
F-13
<PAGE>
11. INCOME TAXES
The benefit (provision) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal $ 835,000 $ (1,626,000) $ (2,349,000)
State (6,000) (69,000) (118,000)
------------- ------------- -------------
829,000 (1,695,000) (2,467,000)
Deferred, primarily federal 4,318,000 1,606,000 (927,000)
------------- ------------- ------------
$ 5,147,000 $ (89,000) $ (3,394,000)
============= ============= ============
</TABLE>
A reconciliation of the expected federal income tax benefit (provision) at
the statutory rates of 35% with the benefit (provision) for income taxes is
as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Tax benefit (provision)
computed at statutory rates $5,463,000 $(103,000) $(3,520,000)
State income tax, net of
federal benefit 283,000 (6,000) 201,000)
Graduated tax bracket
benefit (provision) (156,000) 5,000 101,000
Increase in valuation allowance (821,000)
Research and development
activities 48,000
Foreign Sales Corporation 218,000
Other 378,000 15,000 (40,000)
------------ ------------- ------------
$ 5,147,000 $ (89,000) $ (3,394,000)
============ ============= ============
</TABLE>
Under SFAS No. 109, deferred tax assets and liabilities are classified as
current and noncurrent on the basis of the classification of the related
asset or liability for financial reporting. Deferred taxes are recorded for
temporary differences between the bases of assets and liabilities for
financial reporting purposes and tax purposes. Temporary differences
comprising the net deferred taxes shown on the consolidated balance sheets
are as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
--------------------------------------- -------------
Assets Liabilities Total Total
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns $ 773,000 $ 773,000 $ 718,000
Inventory costs 2,383,000 2,383,000 1,831,000
Accrued vacation 228,000 228,000 267,000
Other 281,000 $ (361,000) (80,000) 52,000
----------- ----------- ----------- -----------
Current 3,665,000 (361,000) 3,304,000 2,868,000
Research and development costs (1,411,000) (1,411,000) (1,747,000)
Property and equipment basis 343,000 343,000 104,000
Net operating loss carryforwards 2,646,000 2,646,000
Research and development credit
carryforwards 1,775,000 1,775,000
Alternative minimum tax credits 225,000 225,000 181,000
Other 189,000 (400,000) (211,000) 126,000
----------- ----------- ----------- -----------
Noncurrent 5,178,000 (1,811,000) 3,367,000 (1,336,000)
----------- ----------- ----------- -----------
Gross 8,843,000 (2,172,000) 6,671,000 1,532,000
Valuation allowance (821,000) (821,000)
----------- -----------
Net $ 8,022,000 $(2,172,000) $ 5,850,000 $ 1,532,000
=========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
The valuation allowance for deferred tax assets as of June 30, 1996 was
$821,000 and is primarily related to the uncertainty of realizing state net
operating loss carryforwards. The net change in the total valuation
allowance for the year ended June 30, 1996 was an increase of $821,000.
At June 30, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $7 million which are available
to offset future taxable income, if any, through 2011. The Company also has
alternative minimum tax credit carryforwards of approximately $225,000
available to reduce future federal income taxes, if any, over an indefinite
period and research and development credit carryforwards of approximately
$1.3 million available to reduce future federal income tax, if any, through
2011.
The Company recognized income tax benefits of $226,000, $1,535,000, and
$861,000 in 1996, 1995, and 1994, respectively, pertaining to the exercise
of stock options, which are reflected in additional paid-in capital.
12. RELATED PARTY TRANSACTIONS
The Company is involved in various transactions with TimeMasters, Inc., a
corporation controlled by the Company's Chief Executive Officer, as
follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Note Payable (Note 6) $1,765,000
Accrued interest 14,507
Interest expense 139,398
Equipment purchases (a) 47,853 $211,362
Rent expense (Note 9) 1,355,000 198,000
Operating expenses (b) 30,788 63,128 $15,200
Accounts payable 35,845 65,878
</TABLE>
(a) The Company has currently installed a campus-wide TimeMasters, Inc.
wireless voice system in its Eden Prairie facility. There are no monthly
call operating charges for unlimited use of that system. The system
hardware was acquired in 1995 for $211,362 based on competitive proposals
for two other comparable systems. In 1996, the Company acquired an
additional $47,853 of hardware.
(b) Under a Use Indemnification Agreement and certain related Board of
Director's actions, the Company has the right to sponsor business and
business-related occasions at facilities owned by Masters Trust I and/or
Melvin L. Masters and/or TimeMasters, Inc. For those occasions, the Company
indemnifies the owners against loss or damage, reimburses out-of-pocket and
operating expenses, and pays a facility charge based on what management
believes are market rates.
F-15
<PAGE>
13. INTERNATIONAL OPERATIONS
Financial information by geographic location is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
North America and other $ 60,701,808 $ 84,181,438 $ 77,296,161
Europe 19,655,566 23,021,944 17,666,149
Japan, Asia, Pacific 13,234,670 12,235,337 10,887,000
------------ ------------ ------------
Total sales $ 93,592,044 $119,438,719 $105,849,310
============ ============ ============
Operating (loss) profit:
North America and other $(17,227,577) $ (1,963,763) $ 8,504,516
Europe (106,343) 303,028 (302,820)
Japan, Asia, Pacific 3,548,196 3,388,586 3,016,000
------------ ------------ ------------
(13,785,724) 1,727,851 11,217,696
Interest expense and other (1,822,810) (1,432,377) (1,160,060)
------------ ------------ ------------
(Loss) earnings before
income taxes $(15,608,534) $ 295,474 $ 10,057,636
============ ============ ============
Assets:
North America $ 38,383,859 $ 49,641,247 $ 39,118,472
Europe 4,828,561 7,901,241 6,029,118
Japan, Asia, Pacific 3,332,544 1,618,784 2,253,645
------------ ------------ ------------
Total assets $ 46,544,964 $ 59,161,272 $ 47,401,235
============ ============ ============
</TABLE>
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
ACTIVITIES
The Company paid cash for the following items:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1996 1995 1994
-------------------- ------------- -------------
<S> <C> <C> <C>
Interest paid $2,001,050 $1,243,051 $1,175,794
Income tax (received) paid (452,451) 380,911 1,260,846
</TABLE>
Financing transactions not affecting cash during the years ended June 30,
1996, 1995, and 1994 were:
Accounts payable totaling $859,516 were converted to a note payable
during the year ended June 30, 1996 (Note 5).
Capital lease obligations of $228,374, $599,236, and $195,136 were
incurred during the years ended June 30, 1996, 1995, and 1994,
respectively.
Debentures totaling $5,528,000 were converted into 766,439 shares
of common stock during the year ended June 30, 1994. Upon
conversion, a pro-rata allocation of costs associated with the
original issuance of debentures reduced additional paid-in capital by
$306,334 during the year ended June 30, 1994.
F-16
<PAGE>
15. LITIGATION
In October 1995, a shareholder of the Company (Becker) filed an action
against the Company and four of its officers and directors alleging
violations of the Securities and Exchange Act of 1934. In December 1995,
similar claims filed by other shareholders were consolidated into the
Becker claim as a class action to include all purchasers of the Company's
stock during the period of December 3, 1993 through December 8, 1994. In
February 1996, one of the directors named in the suit was dismissed from
the case without prejudice. The basic allegation is that the Company and
the named defendants knew of material, negative, non-public information and
withheld such information from the market so that they could personally
benefit by selling shares of common stock at an inflated price. The case is
at a very early stage, and the size of the plaintiffs' damage claim has not
yet been articulated. The Company believes the action is without merit and
is vigorously defending its position. Whether the case is disposed of by
settlement or by court adjudication, it is anticipated that a substantial
portion of any payment obligation would be covered by the Company's
Directors and Officers liability insurance coverage. However, if insurance
coverage is not adequate or if this matter is not disposed of with the
insurance carrier's assistance and the plaintiffs obtain a verdict in their
favor, this litigation could have a material adverse effect on the Company.
In October 1995, LMC filed suit against Sentinel Imaging, a division of
Sentinel Business Systems, Inc. The complaint alleges, among other things,
patent infringement, trademark infringement, and other violations relating
to the Company's Big Color product line. In response, Sentinel Imaging has
counterclaimed for false advertising, patent misuse, and unfair competition
by LaserMaster. If the court were to find LMC's claims were without merit
and endorse the claims made by Sentinel, the outcome of these proceedings
could have a material adverse effect on the Company.
One of LMC's suppliers claims that LMC is in default on a $2.6 million
trade payment obligation under the terms of a credit agreement. This
obligation is included in current liabilities at June 30, 1996. LMC claims
that at least part of the delay in payment is due to quality problems with
the products purchased from that supplier. The Company is currently
negotiating a settlement which contemplates converting the trade debt to
convertible subordinated debentures. If the negotiations break down and the
supplier initiates legal action to collect, the Company believes that it
would have several meritorious counter-claims. However, there can be no
assurance that the supplier wouldn't ultimately succeed in such a claim. If
the claim does not settle and if the supplier is able to obtain a judgement
in its favor, this claim could have a material adverse effect on the
Company.
In addition, in the ordinary course of its business the Company experiences
various types of claims which sometimes result in litigation or other legal
proceedings. The Company does not anticipate that any of these proceedings
will have a material adverse effect on the Company.
16. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------ Fiscal
Sept. 30 Dec. 31 Mar. 31 June 30 Year
--------- ------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1996:
Net sales $21,266 $25,340 $23,227 $23,759 $ 93,592
Gross profit 8,539 9,898 7,426 3,350/(a)/ 29,213/(a)/
Net earnings (loss) (921) 79 (2,230) (7,390)/(b)/ (10,462)/(b)/
Net earnings (loss) per share (0.08) 0.01 (0.18) (.65) (.93)
1995:
Net sales $30,263 $28,484 $30,979 $29,713 $ 119,439
Gross profit 13,178 11,851 11,511 10,041 46,581
Net earnings (loss) 1,499 54 (289) (1,058) 206
Net earnings (loss) per share 0.12 0.00 (0.02) (0.09) 0.02
</TABLE>
(a) Includes a special charge to cost of sales of $5.5 million related to
the Company's revised business plan and technical problems in one of its
products.
(b) Includes pre-tax restructuring and other special charges of $4.4
million and a special charge to cost of sales of $5.5 million related to
the Company's revised business plan and technical problems in one of its
products.
F-17
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
June 30, June 30,
ASSETS 1996 1995
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 33,932 $ 71,484
Accounts receivable 21,932 4,010
Receivable from subsidiary 4,648,498 10,173,716
Income tax receivable 400,781
Other current assets 60,030 115,248
------------ -----------
TOTAL CURRENT ASSETS 5,165,173 10,364,458
PROPERTY AND EQUIPMENT, NET 805,965 1,003,734
INVESTMENT IN SUBSIDIARIES 10,563,097 14,870,493
------------ -----------
$ 16,534,235 $26,238,685
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 41,486
Accounts payable $ 652,005 500,790
Accrued payroll 182,559 151,841
Accrued expenses 31,823 36,051
Income taxes payable 201,768
Current maturities of long-term debt 10,691 4,943
----------- -----------
TOTAL CURRENT LIABILITIES 877,078 936,879
LONG-TERM DEBT, less current maturities 19,217 8,431
STOCKHOLDERS' EQUITY:
Common stock 114,261 111,764
Additional paid-in capital 17,430,555 16,626,953
Retained earnings (accumulated deficit) (1,906,876) 8,554,658
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,637,940 25,293,375
----------- -----------
$16,534,235 $26,238,685
=========== ===========
</TABLE>
See notes to condensed financial information of registrant on page F-20.
F-18
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I
(Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years ended June 30,
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
REVENUES (management fees from subsidiaries) $ 4,200,000 $4,200,000 $4,200,000
OPERATING EXPENSES 4,653,138 4,547,489 4,284,055
------------ ---------- ----------
(LOSS) BEFORE INCOME TAXES AND EQUITY
IN (LOSS) EARNINGS OF SUBSIDIARIES (453,138) (347,489) (84,055)
EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES (10,157,396) 449,963 6,719,691
INCOME TAX BENEFIT 149,000 104,000 28,000
------------ ---------- ----------
NET (LOSS) EARNINGS (10,461,534) 206,474 6,663,636
RETAINED EARNINGS AT BEGINNING OF YEAR 8,554,658 8,348,184 1,684,548
------------ ---------- ----------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
AT END OF YEAR $ (1,906,876) $8,554,658 $8,348,184
============ ========== ==========
</TABLE>
See notes to condensed financial information of registrant on page F-20.
F-19
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I
(Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636
Equity in loss (earnings) of subsidiaries 10,157,396 (449,963) (6,719,691)
Adjustments to reconcile net (loss) earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 368,828 504,519 393,563
Amortization of deferred financing costs 58,582
Stock option tax benefit 226,000 1,535,000 861,000
Loss (gain) on sale of property and equipment 402 (186) (89)
Net change in operating current assets and liabilities (712,331) (1,843,912) (1,241,340)
------------ ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (421,239) (48,068) 15,661
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (146,461) (366,221) (738,789)
Proceeds from sale of property and equipment 2,629 5,690
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (146,461) (363,592) (733,099)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 580,099 413,210 575,273
Payments on long-term debt (8,466) (4,571) (41,909)
Net (payments) borrowing under short-term debt (41,485) 7,916 16,954
Proceeds from long term debt 21,000
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 530,148 416,555 571,318
------------ ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (37,552) 4,895 (146,120)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 71,484 66,589 212,709
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,932 $ 71,484 $ 66,589
============ =========== ===========
</TABLE>
NOTES: See consolidated financial statements for details of and changes in
stockholders' equity. See Note 8 to consolidated financial statements
for information regarding the convertible subordinated debentures.
Capital lease obligations of $25,000 were incurred during the year ended
June 30, 1996. No capital lease obligations were incurred during the
years ended June 30, 1995 and 1994, respectively.
During the year ended June 30, 1994, the Company exercised its option to
redeem the remaining Debentures which had a face value of $5,528,000.
These Debentures were converted into 766,439 shares of common stock.
Upon conversion, all remaining costs associated with the original
issuance of Debentures reduced additional paid-in capital by $306,334
during the year ended June 30, 1994.
No cash dividends have been paid to LaserMaster Technologies, Inc. by
the subsidiaries.
F-20
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------------------------------------------
Balance Charged Balance
beginning to costs Accounts at
of and written end of
Description period expenses off period
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996:
Allowance for doubtful accounts
and sales returns $2,051,485 $1,730,491/(a)/ $1,306,497 $2,475,479
1995:
Allowance for doubtful accounts
and sales returns $1,890,000 $ 636,207 $ 474,722 $2,051,485
1994:
Allowance for doubtful accounts
and sales returns $1,945,000 $ 744,930 $ 799,930 $1,890,000
</TABLE>
/(a)/ Includes special charge of $1 million to cover product returns related to
the Company's older model PressMate product.
F-21
<PAGE>
Exhibit 10.1
================================================================================
LASERMASTER TECHNOLOGIES, INC.
--------------------
COMMON STOCK PURCHASE AGREEMENT
--------------------
Dated September 15, 1996
Shares
of
Common Stock
($.01 Par Value)
================================================================================
-1-
<PAGE>
LASERMASTER TECHNOLOGIES, INC.
COMMON STOCK PURCHASE AGREEMENT
AGREEMENT, made and entered into as of the 15th day of September,
1996, between LaserMaster Technologies, Inc., a Minnesota corporation (the
"Company"), Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation ("Sihl"),
and a business group (the "TimeMasters Group") consisting of TimeMasters, Inc.,
a Minnesota corporation wholly owned by Melvin L. Masters, Grandchildren's
Realty Alternative Management Program I Limited Partnership and Grandchildren's
Realty Alternative Management Program I #2 Limited Partnership, Minnesota
limited partnerships for which TimeMasters, Inc. serves as general partner. Sihl
and the TimeMasters Group are sometimes together referred to herein as the
"Investors".
For good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and the Investors agree as follows:
1. AUTHORIZATION OF ISSUE OF SHARES. The Company has authorized (i) the
issue and sale of up to 2,694,000 shares of its Common Stock, $.01 par value per
share (the "Common Stock") and (ii) the issuance of Warrants to purchase up to
2,694,000 shares of its Common Stock to the Investors.
2. SALE AND PURCHASE PRICE.
(a) Effective on the date hereof (the "Effective Date"), and subject
to the terms and conditions herein set forth, Sihl shall purchase from the
Company the number of shares (the "Sihl Shares") of Common Stock as is
equal to $6 million divided by the purchase price (the "Purchase Price")
for such Shares and the TimeMasters Group shall purchase from the Company
the number of shares of Common Stock as is equal to $4 million divided by
the Purchase Price (the "TimeMasters Shares" and together with the Sihl
Shares, the "Shares"). The Purchase Price shall be equal to the last sale
price of the Common Stock on the Nasdaq National Market on the date
immediately preceding the date hereof; provided, however, that the Purchase
Price shall not be more than $4.5375 nor less than $3.7125. Simultaneous
with the purchase of Common Stock, the Company shall issue to each such
Investor a Warrant in the form of the attached Exhibit A (the "Warrants")
dated as of the date of such Closing, and without any additional
consideration, to purchase one share of Common Stock (subject to
appropriate adjustment in the event of stock splits, stock dividends or
other reorganizations) at an exercise price equal to one-hundred and sixty
percent (160%) of the Purchase Price for each Share purchased (the "Warrant
Shares").
(b) Simultaneous with execution of this Agreement (i) Sihl shall
purchase the Sihl Shares by delivering its promissory note in the form of
the attached Exhibit B for $6 million ("Sihl Promissory Note") and the
TimeMasters Group shall purchase the TimeMasters Shares by delivering its
promissory notes in form of the attached Exhibit C and Exhibit D in the
aggregate amount of $4 million (the "TimeMasters Promissory Notes" and
together with the Sihl Promissory Note, the "Promissory Notes"), and (ii)
the Company shall issue and deliver the Shares and Warrants to the
Investors. The Investors shall each simultaneously (i) execute a stock
pledge agreement in the form of Exhibit E (the "Stock Pledge Agreement")
and (ii) in accordance with the Stock Pledge Agreements, deliver the Shares
and Warrants to the Company, with associated stock powers executed in
blank. The TimeMasters Group and the Company shall also simultaneously
execute the Mortgage and Security Agreement and Fixture Financing Agreement
in the form of the attached Exhibit F (the "Mortgage").
3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company hereby
represents and warrants to the Investors that:
-2-
<PAGE>
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota, and has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business in all material respects as it is now being conducted and
as it currently proposes to conduct it in the future. The Company has the
requisite corporate power and authority to issue the Shares, the Warrants and
the Warrant Shares and to otherwise perform its obligations under this
Agreement.
(b) The copies of the Articles of Incorporation, as amended (the
"Articles of Incorporation") and bylaws of the Company which have been delivered
to legal counsel for Sihl prior to the execution of this Agreement are true and
complete copies of the duly and legally adopted Articles of Incorporation and
Bylaws of the Company in effect as of the date of this Agreement.
(c) The Company is duly qualified, licensed or domesticated as a
foreign corporation in good standing in each jurisdiction wherein the nature of
its activities or the properties owned or leased by it makes such qualification,
licensing or domestication necessary and in which failure to so qualify or be
licensed or domesticated would have a material adverse impact upon its business.
(d) The Company has delivered to Sihl and the TimeMasters Group
copies of (i) its Form 10-K for the Year Ended June 30, 1995, which includes its
audited statements of operations, cash flows, and changes in stockholders'
equity for the three years ended June 30, 1995 and its balance sheets as of June
30, 1995 and 1994, (ii) its quarterly reports on Form 10-Q for the quarters
ended September 30, 1995, December 31, 1995 and March 31, 1996, which contain
its unaudited statements of operations for the quarterly and year to date
periods then ended and for the prior year periods, unaudited statements of cash
flow for the year to date and prior year comparative periods, and balance sheets
as of quarter end, (iii) its 1995 annual report to shareholders, (iv) its proxy
statement for its annual meeting held May 23, 1996, and (v) Company's audited
financial statements for the year ended June 30, 1996.
(e) The Shares, when issued and paid for pursuant to the terms of
this Agreement, will be duly authorized, validly issued and outstanding, fully
paid, nonassessable shares and shall be free and clear of all pledges, liens,
encumbrances and restrictions, except for the encumbrances created by the Stock
Pledge Agreements and restrictions on transfer under applicable securities laws.
The Warrants are duly authorized, and when issued pursuant to the terms of this
Agreement will be validly granted and outstanding, fully paid and free and clear
of all pledges, liens, and encumbrances and restrictions, except for the
encumbrances created by the Stock Pledge Agreements and restrictions on transfer
under applicable securities laws. The Warrant Shares have been duly authorized
and reserved for issuance and, when issued upon exercise of the Warrant, will be
duly authorized, validly issued and outstanding, fully paid, nonassessable and
free and clear of all pledges, liens, encumbrances and restrictions, except for
the encumbrances created by the Stock Pledge Agreements and restrictions on
transfer under applicable securities laws.
(f) The authorized capital stock of the Company consists of
35,000,000 shares, 30,000,000 of which are shares of Common Stock, $.01 par
value, and 5,000,000 of which are shares of preferred stock, undesignated as to
terms and preferences. As of September 1, 1996, 11,458,634 shares of Common
Stock were outstanding, 292,951 shares of Common Stock were reserved for
issuance upon the exercise of outstanding warrants and 3,739,379 shares of
Common Stock were reserved for issuance pursuant to the Stock Option Plans. No
shares of Preferred Stock are outstanding. Neither the offer nor the issuance or
sale of the Shares or the Warrants constitutes an event, under any anti-dilution
provisions of any securities issued or issuable by the Company or any agreements
with respect to the issuance of securities by the Company, which will either
increase the number of shares issuable pursuant to such provisions or decrease
the consideration per share to be received by the Company pursuant to such
provisions. No holder of any security of the Company is entitled to any
preemptive or similar rights to purchase any securities of the Company from the
Company.
-3-
<PAGE>
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action of the Company,
and no other corporate proceedings on its part are necessary to authorize the
execution, delivery or performance of this Agreement. This Agreement has been
duly executed and delivered by the Company and constitutes the valid and binding
obligation of the Company, enforceable in accordance with its terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby do not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of the Company, or require any authorization,
consent, approval, exemption or other action by or notice to any court or other
governmental body, under the provisions of the Article of Incorporation or
Bylaws of the Company or any indenture, mortgage, lease, loan agreement or other
agreement or instrument by which the Company is bound or affected, or any law,
statute, rule or regulation or order, judgment or decree to which the Company is
subject.
(i) The Company is not required to submit any notice, report or other
filing with any governmental authority in connection with the execution or
delivery by it of this Agreement or, except as contemplated herein, the
consummation of the transactions contemplated hereby. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by the Company in connection with its
execution, delivery and performance of this Agreement or the transactions
contemplated hereby.
(j) No person, firm or corporation has or will have, as a result of
any act or omission by the Company, any right, interest or valid claim against
any Investor or the Company for any commission, fee or other compensation as a
finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES BY THE INVESTORS. Each of the
Investors, for itself and not for any other Investor, represents and warrants to
the Company that:
(a) It is purchasing the Shares for investment for its own account
and not with the view to, or for resale in connection with, any distribution of
the Shares in violation of any applicable securities law. Each Investor
understands that the Shares have not been registered under the Securities Act or
any state securities laws by reason of their contemplated issuance in
transactions exempt from the registration and prospectus delivery requirements
of the Securities Act pursuant to Section 4(2) thereof and that the reliance of
the Company and others upon this exemption is predicated in part upon this
representation by the Investors. Each Investor further understands that the
Shares may not be transferred or resold without (i) registration under the
Securities Act and any applicable state securities laws, or (ii) an exemption
from the requirements of the Securities Act and applicable state securities
laws.
(b) Each Investor understands that an exemption from such
registration is not presently available pursuant to Rule 144 promulgated under
the Securities Act by the Commission. Each Investor understands that any sales
pursuant to Rule 144 can be made only in full compliance with the provisions of
Rule 144.
(c) Each Investor is an "accredited investor" for purposes of
Regulation D promulgated under the Securities Act and, either alone or with such
Investor's representative, has such knowledge and experience in financial and
business matters that such Investor is capable of evaluating the merits and
risks of the investment in the Shares and Warrants and bear the economic
consequences thereof. Each Investor has relied upon such Investors' own
independent investigation and, to the extent believed
-4-
<PAGE>
appropriate, such Investors' own professional, tax and other advisors, and has
not relied upon any representation or warranty from the Company, or any of their
respective officers, directors, employees agents, affiliates or representatives,
with respect to the value of the Shares. Each of the Investors has evaluated the
merits and risks of an investment in the Shares and has determined that such
shares are a suitable investment for the Investor in light of such Investor's
overall financial condition and prospects. Each of the Investors has been
advised, and is aware, that the market prices of shares of stock of publicly
traded companies fluctuate and that there can be no assurance as to the future
performance of any given securities, including the Shares. Each of the Investors
has been furnished with all publicly available information about the Company's
assets, operations, and business activities which such Investor has requested
and which such Investor considers necessary or relevant to enable such Investor
to make a prudent decision about the purchase of the Shares and Warrants.
(d) The execution, delivery and performance of this Agreement by each
Investor and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action of each Investor,
and no other corporate proceedings on its part are necessary to authorize the
execution, delivery or performance of this Agreement. This Agreement has been
duly executed and delivered by each Investor and constitutes the valid and
binding obligation of such Investor, enforceable in accordance with its terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
(e) The execution, delivery and performance of this Agreement by each
Investor and the consummation by such Investor of the transactions contemplated
hereby do not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of either Investor, or require any authorization,
consent, approval, exemption or other action by or notice to any court or other
governmental body, under the provisions of the Article of Incorporation or
Bylaws of such Investor or any indenture, mortgage, lease, loan agreement or
other agreement or instrument by which such Investor is bound or affected, or
any law, statute, rule or regulation or order, judgment or decree to which such
Investor is subject.
(f) The Investor is not required to submit any notice (other than
reports under Section 16(a) or 13D of the Securities Act of 1934), report or
other filing with any governmental authority in connection with the execution or
delivery by it of this Agreement or the consummation of the transactions
contemplated hereby. No consent, approval or authorization of any governmental
or regulatory authority or any other party or person is required to be obtained
by the Investor in connection with its execution, delivery and performance of
this Agreement or the transactions contemplated hereby.
(g) No person, firm or corporation has or will have, as a result of
any act or omission by the Investor, any right, interest or valid claim against
the Company for any commission, fee or other compensation as a finder or broker,
or in any similar capacity, in connection with the transactions contemplated by
this Agreement. Each Investor will indemnify, defend and hold the Company
harmless against any and all liability (including without limitation, reasonable
attorneys' fees and expenses) with respect to any such commission, fee or other
compensation which may be payable or determined to be payable in connection with
the transactions contemplated by this Agreement as a result of any act or
omission by the Investor.
5. COVENANTS OF THE COMPANY. So long as the Warrants shall remain
outstanding and not fully exercised, the Company covenants and agrees, and
solely with respect to section 5(f) Grandchildren's Realty Alternative
Management Program I Limited Partnership and Grandchildren's Realty Alternative
Management Program I #2 Limited Partnership (collectively "Grampi") covenant and
agree as follows:
-5-
<PAGE>
(a) The Company will maintain its corporate existence in good
standing and comply with all applicable laws and regulations of the United
States or of any state or political subdivision thereof and of any government
authority where failure to so comply would have a material adverse impact on the
Company or its business or operations.
(b) The Company will keep books of record and account in which full,
true and correct entries are made of all of its dealings, business and affairs,
in accordance with GAAP consistently applied. The Company will employ certified
public accountants of recognized national standing selected by the Board of
Directors of the Company who are "independent" within the meaning of the
accounting regulations of the Commission. The Company will have annual audits
made by such independent public accountants in the course of which such
accountants shall make such examinations, in accordance with generally accepted
auditing standards, as will enable them to give such reports or opinions with
respect to the financial statements of the Company as will satisfy the
requirements of the Commission in effect at such time with respect to reports or
opinions of accountants (except with regard to the Commission's requirements for
accounting for preferred shares as debt rather than equity).
(c) The Company will deliver to each Investor promptly upon
transmission thereof, copies of all reports, notices, financial statements,
proxy statements, registration statements and notifications filed by it with the
Commission pursuant to any act administered by the Commission or furnished to
shareholders of the Company or to any national securities exchange, except
reports on Form D filed pursuant to Rule 503 under the Securities Act and
registration statements relating to employee benefit plans.
(d) The Company hereby grants to Sihl (but to no other Investor) the
right of first refusal to purchase its Pro-Rata Share (as defined below) of all
or any part of any New Securities (as defined in this Section 5(d)) that the
Company may, from time to time, propose to sell and issue. Sihl's "Pro-Rata
Share" shall be the ratio of the number of shares of Common Stock held by Sihl,
as of the date of the Rights Notice (as defined below) to the total number of
shares of Common Stock outstanding as of such date. The number of shares of
Common Stock held by Sihl shall be deemed to include the aggregate of the number
of shares of Common Stock held by Sihl (but shall not exceed the number of such
shares constituting the Shares purchased by Sihl hereunder, plus any shares
issued in any stock splits, stock dividends, recapitalization, reclassification
and similar events with respect to such Shares or pursuant to exercise of the
right of first refusal pursuant to this Section 5(d)) together with the number
of shares of Common Stock issuable upon exercise of the Warrant (as if the
Warrant had been exercised in full), and the number of shares of Common Stock
outstanding shall be deemed to include the aggregate of (A) all Common Stock
outstanding, (B) all Common Stock issuable upon exercise of all outstanding
options or warrants to purchase Common Stock and (C) the conversion of all
outstanding convertible securities and of all convertible securities issuable
upon exercise of outstanding options or warrants to purchase convertible
securities. "New Securities" shall mean any Common Stock or preferred shares of
any kind of the Company, whether now or hereafter authorized, and rights,
options, or warrants to purchase said Common Stock or preferred shares, and
securities of any type whatsoever that are, or may become, convertible into said
Common Stock or preferred shares; provided, however, that "New Securities" shall
not include securities issued in any of the transactions set forth in Schedule
I. If the Company proposes to issue New Securities, it shall give Sihl written
notice (the "Rights Notice") of its intention, describing the New Securities,
the price, and the general terms upon which the Company proposes to issue them.
Sihl shall have ten (10) business days from the date of mailing of the Rights
Notice to agree to purchase all or any part of its pro-rata share of such New
Securities, for the price and upon the general terms specified in the Rights
Notice by giving written notice to the Company setting forth the quantity of New
Securities to be purchased. The rights of Sihl under this Section 5(d) shall
terminate and be of no further force or effect on and after the date on which
its "Pro-Rata Share" (as defined above but without the parenthetical limitation
above as to the number of Shares purchased hereunder) is less than ten percent
(10%).
-6-
<PAGE>
(e) The Company will not repay, or allow its subsidiary LaserMaster
Corporation to repay, the indebtedness represented by that certain Promissory
Note to TimeMasters, Inc. dated January 17, 1996 (the "January Note") in
original principal amount of $1,765,000 until payment in full of the TimeMasters
Promissory Notes, except that the Company may, with the agreement of or at the
direction of TimeMasters, offset the obligation under the January Note against
the TimeMasters Promissory Notes. Sihl shall be deemed to be a third party
beneficiary of this subsection (e).
(f) The Company will, upon the occurrence of an event of default
under the Mortgage or the TimeMasters Promissory Note attached hereto as Exhibit
D (the "Mortgage Note"), diligently exercise its remedies under the Mortgage in
a commercially reasonable manner, including, in the event the mortgagor is not
actively proceeding with the sale of the property subject to the Mortgage,
commencing foreclosure thereof, and will, in any event, commence foreclosure
proceedings within 60 days after any notice of such event of default unless Sihl
otherwise agrees in writing that such remedy shall be further delayed. The
Company and GRAMPI acknowledge that the agreement of Sihl hereunder, and the
timing of the payments of the Sihl Promissory Note, is conditional on the
payment of the TimeMasters Promissory Notes. Accordingly, the Company and GRAMPI
agree that Sihl may exercise the Company's rights under the Mortgage on behalf
of the Company through the receivership described in Section 8(d).
6. REGISTRATION.
(a) Definitions. As used in this Section 6, the following terms have
the following meanings:
(i) "Forms S-1, SB-1, S-2, SB-2 and S-3" shall mean the forms
so designated, promulgated by the Commission for registration of securities
under the Securities Act, and any forms succeeding to the functions of such
forms, whether or not bearing the same designation.
(ii) "Holder" shall mean Investor and any holder of Registrable
Stock to whom the registration rights granted hereunder have been
transferred in accordance with Section 6(j), provided that anyone who
acquires any Registrable Stock in a distribution pursuant to a registration
statement filed by the Company under the Securities Act shall not thereby
be deemed to be a "Holder."
(iii) "Register", "registered" and "registration" shall refer to
a registration effected by filing a registration statement in compliance
with the Securities Act and the declaration or ordering by the Commission
of effectiveness of such registration statement.
(iv) "Registrable Stock" shall mean the Shares, all shares of
Common Stock issued or issuable upon exercise of the Warrants, and in each
case held by a Holder, all shares of Common Stock issued by the Company in
respect of such shares. Registrable Stock does not include any common stock
currently held by the TimeMasters Group (including shares held by Melvin
Masters and his affiliates and family members).
(b) Required Registration.
(i) If at any time until two years after the earlier to occur of
the full exercise, or the termination, of the Warrants a Holder proposes to
dispose of the then Registrable Stock (the "Initiating Holders"), and such
disposition may not, in the opinion of such Initiating Holders, be effected
in the public marketplace (as opposed to a private transaction under the
Securities Act) at equally favorable net terms to the Initiating Holders
without registration of such shares under the Securities Act, the
Initiating Holders may request the Company in writing to effect such
registration, stating the number of shares of Registrable Stock to be
disposed of by such Initiating Holders and the intended method of
disposition. Upon receipt of such request, the Company will give prompt
written notice thereof to all other Holders, whereupon such other
-7-
<PAGE>
Holders shall give written notice to the Company within 20 days after the
date of the Company's notice (the "Notice Period") if they propose to
dispose of any shares of Registrable Stock pursuant to such registration,
stating the number of shares of Registrable Stock to be disposed of by such
Holder(s) and the intended method of disposition.
(ii) The Company will use its best efforts to effect promptly
after the Notice Period the registration under the Securities Act of all
shares of Registrable Stock specified in the requests of the Initiating
Holders, and the requests of the other Holders, subject, however, to the
limitations set forth in Section 6(d).
(c) Registration Procedures. Whenever the Company is required by the
provisions of Section 6(b) to use its best efforts to effect promptly the
registration of shares of Registrable Stock, the Company will:
(i) prepare and file with the Commission a registration
statement with respect to such shares and use its best efforts to cause
such registration statement to become and remain effective as provided
herein;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and current and to comply with the provisions of the
Securities Act with respect to the disposition of all shares covered by
such registration statement, including such amendments and supplements as
may be necessary to reflect the intended method of disposition from time to
time of the prospective seller or sellers of such shares, but for no longer
than ninety (90) days subsequent to the effective date of such
registration in the case of a registration statement on Form S-1, SB-1, SB-
2 or S-2 and for no longer than one hundred fifty (150) days in the case of
a registration statement on Form S-3;
(iii) furnish to each prospective seller such number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as such
seller may reasonably request in order to facilitate the public sale or
other disposition of the shares owned by such seller; and
(iv) use its best efforts to register or qualify the shares
covered by such registration statement under such other securities or blue
sky or other applicable laws of such jurisdictions within the United States
as each prospective seller shall reasonably request, to enable such seller
to consummate the public sale or other disposition in such jurisdictions of
the shares owned by such seller; provided, however, that in no event shall
the Company be obligated to qualify to do business in any jurisdiction
where it is not at the time so qualified.
(d) Limitations on Required Registrations.
(i) The TimeMasters Group (considered together with any Holder
that acquires Registrable Stock therefrom and registration rights pursuant
to Section 6(j)) shall have the right to require the Company to effect no
more than five registrations pursuant to Section 6(b)) and Sihl (considered
together with any Holder that acquires Registrable Stock therefrom and
registration rights pursuant to Section 6(j)) shall have the right to
require the Company to effect no more than five registrations pursuant to
Section 6(j)).
(ii) The Company shall not be required to effect a registration
pursuant to Section 6(b) more frequently than once every six months.
(iii) Whenever a requested registration is for an underwritten
offering, only shares which are to be included in the underwriting may be
included in the registration. Notwithstanding the provisions of Sections
6(b), if the underwriter determines that (A) marketing factors require a
limitation of the total number of shares to be underwritten, or (B) the
offering price per share would be reduced by the inclusion of the shares of
the Company, then the number of shares to be included in the registration
and underwriting shall first be allocated among all Holders who indicated
to the Company their decision to distribute any of their Registrable Stock
-8-
<PAGE>
through such underwriting, in proportion, as nearly as practicable, to the
respective numbers of shares of Registrable Stock owned by such Holders at
the time of filing the registration statement, and the remainder, if any,
to the Company. No stock excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration.
If the Company disapproves of any such underwriting, the Company may elect
to withdraw therefrom by written notice to the Initiating Holders and the
underwriter. The securities so withdrawn from such underwriting shall also
be withdrawn from such registration.
(iv) If at the time of any request to register Registrable Stock
pursuant to Section 6(b), the Company is engaged, or has fixed plans to
engage within 90 days of the time of the request, in a registered public
offering as to which the Holders may include such Stock pursuant to Section
6(e) or is engaged in any other activity which, in the good faith
determination of the Company's Board of Directors, would be adversely
affected by the requested registration to the material detriment of the
Company, then the Company may at its option direct that such request be
delayed for a period not in excess of 90 days from the effective date of
such offering, or the date of commencement of such other material activity,
as the case may be, such right to delay a request to be exercised by the
Company not more than once with respect to any request for registration.
(e) Incidental Registration. If the Company at any time until two
years after the earlier to occur of the full exercise, or the termination, of
the Warrants proposes to register any of its securities under the Securities Act
(other than a registration effected solely to implement an employee benefit plan
or a transaction to which Rule 145 of the Commission is applicable), it will
each such time give written notice to all Holders of its intention so to do.
Upon the written request of a Holder or Holders (stating the number of shares of
Registrable Stock to be disposed of by such Holder or Holders and the intended
method of disposition) given within 30 days after receipt of any such notice,
the Company will use its best efforts to cause all such shares of Registrable
Stock intended to be disposed of, the Holders of which shall have requested
registration thereof, to be included in such registration, subject, however, to
the following limitations:
(i) If any registration pursuant to Section 6(e) shall be
underwritten in whole or in part, the Company may require that the
Registrable Stock requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters.
(ii) If in the good faith judgment of the managing underwriter
of such public offering the inclusion of all of the Selling Shareholders'
Shares originally covered by a request for registration would reduce the
number of shares to be offered by the Company or interfere with the
successful marketing of the shares of stock offered by the Company, the
number of Selling Shareholders' Shares otherwise to be included in the
underwritten public offering may be reduced pro rata among the holders
thereof requesting such registration (based upon the number of shares
requested to be included by each such holder), other than holders of shares
of Common Stock issued or issuable upon conversion of that certain
Promissory Note dated January 17, 1996 between TimeMasters and the Company
or pursuant to exercise of that certain Stock Purchase Warrant dated
January 17, 1996 between TimeMasters and the Company.
(iii) If, in connection with a registration initiated at the
request of any security holder of the Company pursuant to a demand
registration right granted to such security holder (the "Requesting
Security Holder"), the Registrable Stock requested for inclusion pursuant
to Section 6(e), together with all additional shares of all other
shareholders that have requested inclusion of their shares (the Registrable
Stock and all of the other shares requested for inclusion are herein
together referred to as the "Other Selling Shareholders' Shares") pursuant
to the incidental registration rights granted by the Company prior to the
date hereof (including permitted transferees and assignees of such
incidental registration rights), would reduce the number of shares to be
offered by the Requesting Shareholder or interfere with the successful
marketing of the shares of stock offered by the Requesting Shareholder, the
number of Other
-9-
<PAGE>
Selling Shareholders' Shares otherwise to be included in the underwritten
public offering may be reduced pro rata among the holders thereof
requesting such registration (based upon the number of shares requested to
be included by each such holder).
(iv) Those Selling Shareholders' Shares or Other Selling
Shareholders' Shares which are excluded from the underwritten public
offering pursuant to this Section 6(e) shall be withheld from the market by
the holders thereof for a period, not to exceed 90 days, which the
managing underwriter reasonably determines is necessary in order to effect
the underwritten public offering.
(f) Rule 144. The registration rights granted under Section 6 shall
terminate as to any Holder or permissible transferees or assignees of such
rights if such person would be permitted to sell all of the Registrable Stock
held by him or it within one three-month period pursuant to Rule 144.
(g) Cooperation by Prospective Sellers.
(i) Each prospective seller of Registrable Stock, and each
underwriter designated by each such seller, will furnish to the Company
such information as the Company may reasonably require from such seller or
underwriter in connection with the registration statement (and the
prospectus included therein).
(ii) The Holders holding shares included in the registration
statement will suspend (until further notice) further sales of such shares
after receipt of telegraphic or written notice from the Company to suspend
sales to permit the Company to correct or update a registration statement
or prospectus or, if the Company reasonably determines that correcting or
updating the registration statement or prospectus would require disclosure
of material information which the Company has a bona fide business purpose
for preserving as confidential, during the time that such suspension is
necessary so that the registration statement and prospectus will meet the
requirements of the Securities Act. At the end of the period during which
the Company is obligated to keep the registration statement current and
effective as described in Section 6(b)(i)(and any extensions thereof
required by the preceding sentence), the Holders holding shares included in
the registration statement shall discontinue sales of shares pursuant to
such registration statement upon receipt of notice from the Company of its
intention to remove from registration the shares covered by such
registration statement which remain unsold, and such Holders shall (after
written request for such notice, describing the information required in the
response) notify the Company of the number of shares registered which
remain unsold promptly upon receipt of such notice from the Company.
(h) Expenses of Registration. All expenses incurred in effecting any
registration pursuant to this Section 6, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and expenses of any audits incidental to or required by
any such registration, shall be borne by the Company, except (a) that all
underwriting discounts and commissions shall be borne by the Holders holding the
securities registered pursuant to such registration, pro-rata according to the
quantity of their securities so registered; and (b) the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 6(b) if the registration request is subsequently withdrawn at the
request of the Initiating Holder, and not at the request of the Company or
because of any other action by the Company, unless the Initiating Holder agrees
to forfeit its right to one demand registration pursuant to Section 6(b) (in
which case the Company shall bear such expenses).
(i) Indemnification.
(i) To the extent permitted by law, the Company will indemnify
each Holder requesting or joining in a registration, each agent, officer
and director of such Holders, each person controlling such Holder, and each
underwriter and selling broker of the securities so registered
(collectively, "Representatives" and collectively with each such Holder,
agent, officer, director or person, "Indemnitees") against all claims,
losses, damages and liabilities (or actions in
-10-
<PAGE>
respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document incident to any registration,
qualification or compliance (or in any related registration statement,
notification or the like) or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances in
which they were made, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company
and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance, and will reimburse
each such Indemnitee for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim,
loss, damage, liability or action, provided, however, that the Company will
not be liable to any Indemnitee in any such case to the extent that any
such claim, loss, damage or liability is caused by any untrue statement or
omission so made in strict conformity with written information furnished to
the Company by an instrument duly executed by such Indemnitee and stated to
be specifically for use therein and except that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) made in the preliminary prospectus but eliminated or remedied in
the amended prospectus on file with the Commission at the time the
registration statement becomes effective or in the amended prospectus filed
with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any Representative,
if a copy of the Final Prospectus was not furnished to the person or entity
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act; provided, further, that this
indemnity shall not be deemed to relieve any underwriter of any of its due
diligence obligations; provided, further, that the indemnity agreement
contained in this subsection 6(i) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability or action if such
settlement is effected without the consent of the Company, which consent
shall not be unreasonably withheld; and provided, further, that the
foregoing shall not relieve the Company from liability for indemnity to an
officer or director that furnishes information to the Company in his
capacity as an officer or director.
(ii) To the extent permitted by law, each Holder requesting or
joining in a registration and each underwriter of the securities so
registered will indemnify the Company and its officers and directors and
each person, if any, who controls any thereof within the meaning of Section
15 of the Securities Act and their respective successors against all
claims, losses, damages and liabilities or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance (or in any related registration statement, notification or the
like) or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances in which they were
made; and will reimburse the Company and each other person indemnified
pursuant to this paragraph (ii) for all legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided, however, that this
paragraph (ii) shall apply only if (and only to the extent that) such
statement or omission was made in reliance upon and in strict conformity
with written information (including, without limitation, written negative
responses to inquiries) furnished to the Company by an instrument duly
executed by such Holder or underwriter and stated to be specifically for
use in such prospectus, offering circular or other document (or related
registration statement, notification or the like) or any amendment or
supplement thereto and except that the foregoing indemnity agreement is
subject to the condition that, insofar as it relates to any such untrue
statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the Commission at the time the registration
statement becomes effective or in the Final Prospectus, such indemnity
agreement shall not inure to the benefit of any Representative, if a copy
of the Final Prospectus was not furnished to the person or entity asserting
the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act;
-11-
<PAGE>
provided, further, that this indemnity shall not be deemed to relieve any
underwriter of any of its due diligence obligations; provided, further,
that the indemnity agreement contained in this subsection 6(i)(ii) shall
not apply to amounts paid in settlement of any such claim, loss, damage,
liability or action if such settlement is effected without the consent of
the Holder, which consent shall not be unreasonably withheld; provided,
further, that the obligations of such Holders shall be limited to an amount
equal to the proceeds to each such Holder of the Registrable Stock sold as
contemplated herein, unless such claim, loss, damage, liability or action
resulted from such Holder's fraudulent misconduct; and provided, further,
that the foregoing shall not create right to indemnity from an officer or
director that furnishes information to the Company in his capacity as an
officer or director.
(iii) Each party entitled to indemnification hereunder (the
"indemnified party") shall give notice to the party required to provide
indemnification (the "indemnifying party") promptly after such indemnified
party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the indemnifying party (at its expense) to assume
the defense of any claim or any litigation resulting therefrom, provided
that counsel for the indemnifying party, who shall conduct the defense of
such claim or litigation, shall be satisfactory to the indemnified party,
and the indemnified party may participate in such defense at such party's
expense, and provided, further, the omission by any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 6(i), except to the extent that the
omission results in a failure of actual notice to the indemnifying party
and such indemnifying party is damaged solely as a result of the failure to
give notice. No indemnifying party, in the defense of any such claim or
litigation, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation.
(j) Transfer of Registration Rights. One or more of the five demand
registration rights granted to each Investor under Section 6(b) may be
transferred but only to a transferee who shall acquire not less than 100,000
shares of Registrable Stock (as adjusted for Recapitalization Events) and the
registration rights under Section 6(e) may not be transferred separate from the
registration rights under section 6(b); provided, however, that the rights under
section 6(e) shall apply to all members of the TimeMasters Group who acquire
Registrable Stock. Any request for transfer of the Registrable Stock to which a
transfer of registration rights pursuant to this Section 6(j) is intended to
apply shall be accompanied by notice to the Company of the number of demand
registration rights which the transferring party intends that the transferee
acquire. Notwithstanding any provision of this Section 6, the registration
rights granted to the Holders under this Section 6 may not be assigned to any
person or entity which, in the Company's reasonable judgment, is a competitor of
the Company.
(k) Delay of Registration. The Holders shall have no right to take
any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 6.
7. RESTRICTION ON TRANSFER OF SHARES.
(a) Restrictions. The Shares, the Warrant and the Warrant Shares are
only transferable pursuant to (a) an offering registered under the Securities
Act, (b) Rule 144 or Rule 144A or other exemption under the Securities Act (or
any similar rule then in effect) if such rules are or become available, or (c)
and, with respect to the Warrant, the terms of the Warrant, any other legally
available means of transfer.
(b) Legend. Each certificate representing Shares or Warrant Shares
shall be endorsed with the following legends:
"The shares represented by this certificate may not be transferred
-12-
<PAGE>
without (i) the opinion of counsel reasonably satisfactory to this
corporation that such transfer may lawfully be made without
registration under the Securities Act of 1933, as amended, and all
applicable state securities laws or (ii) such registration."
8. MISCELLANEOUS.
(a) Waivers Amendments and Approvals. No amendment or waiver of any
provision of this Agreement, shall in any event be effective against an Investor
unless the same shall be in writing and signed by such Investor and the Company,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
(b) Changes, Waiver, Etc. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing.
(c) Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered if personally
delivered, the next business day if sent by overnight courier or when receipt is
acknowledged if mailed by first class mail, return receipt requested or if sent
by facsimile, telecopy or other electronic transmission device. Notices,
demands and communications will, unless another address is specified in writing,
be sent to the address indicated below:
Notices to the Company: with a copy to:
- ----------------------- ---------------
LaserMaster Technologies, Inc. Dorsey & Whitney LLP
7090 Shady Oak Road 220 South Sixth Street
Eden Prairie, Minnesota 55344 Minneapolis, Minnesota 55402
Attention: General Counsel Attention: Thomas O. Martin, Esq.
Telecopy: (612) 941-8687 Telecopy: (612) 340-8738
Notices to Sihl: with a copy to:
- ---------------- ---------------
Sihl-Zurich Paper Mill on Sihl AG Homburger Rechtsanwalte
Giesshubelstrasse 15 Weinbergstrasse
56/58
CH-8045 Zurich GH-8006 Zurich
Switzerland Switzerland
Attention: Mr. Melk M. Lehner, Chairman Attention: Mr. Ueli Huber
Telecopy: 011-41-1-205-48-35
Telecopy: 011-41-1-265-35-11
and:
----
Oppenheimer Wolff & Donnelly
Plaza VII
45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402-1609
Attention: Steven A. Wellvang, Esq.
Telecopy: (612) 344-9376
Notices to the TimeMasters Group:
- ---------------------------------
TimeMasters, Inc.
6245 Beach Road
Eden Prairie, MN 55344
Attention: Melvin Masters
Telecopy: (612) 942-8911
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<PAGE>
(d) Remedies. The parties agree that, in addition to, but not to the
exclusion of any other available remedy, Sihl shall have the right to enforce
the provisions of sections 5(d), 5(e) and 5(f) by applying for and obtaining
specific performance or temporary and permanent restraining orders or
injunctions from a court of competent jurisdiction. In addition, in the event
that the Company fails to commence foreclosure proceedings in accordance with
Section 5(d) within 60 days after notice of an event of default, the Company and
GRAMPI agree that Sihl shall have the right, without notice and without giving
bond and without regard to the solvency or insolvency of the Company or GRAMPI,
or waste of the premises or adequacy of the security of the premises, to apply
on behalf of the Company for the appointment of a receiver under any statute or
law who shall have all the rights, powers and remedies as provided by such
statute or law, including without limitation the rights of receiver pursuant to
Minn. Stat. Section 576.01, as amended, and who shall from the date of his
appointment through any period of redemption existing at law collect the rents,
and all other income of any kind; manage the premises so as to prevent waste;
and perform the terms, including any rights to foreclosure on behalf of the
Company, of the Mortgage, and apply the rents, issues and profits to the payment
of the expenses enumerated in Minn. Stat. Section 576.01, Subd. 2 in the
priority mentioned therein and to all expenses for maintenance of the premises
and to the costs and expenses of the receivership, including attorney's fees, to
the repayment of the indebtedness secured by the first mortgage and then of the
Mortgage Note and as further provided in any assignment of leases and rents
executed by the Mortgagor to the Mortgagee whether contained in this Mortgage or
in a separate instrument. GRAMPI does hereby irrevocably consent to such
appointment. The Company further agrees that, in the event a receiver is
appointed as provided in this subparagraph (d), the Company shall promptly grant
such receiver a power of attorney to authorize the receiver and/or its legal
counsel to foreclose on the Mortgage on behalf of the Company.
(e) Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made by Sihl or on
their behalf, and the sale and purchase of the Shares and payment therefor. All
statements contained in any certificate, instrument or other writing delivered
by or on behalf of the Company pursuant to this Agreement (other than legal
opinions) or in connection with or in contemplation of the transactions herein
contemplated shall constitute representations and warranties by the Company
hereunder.
(f) Parties in Interest. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto, whether so
expressed or not, and, in particular, shall inure to the benefit of and be
enforceable by the holder or holders from time to time of any of the Purchased
shares.
(g) Headings. The headings of the Sections of this Agreement have
been inserted for convenience of reference only and do not constitute a part of
this Agreement.
(h) Choice of Law. The laws of Minnesota shall govern the validity
of this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties hereunder.
(i) Counterparts. This Agreement may be executed concurrently in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(j) Definition of Purchased Shares. For purposes of this Agreement
the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the
Warrant Shares, (c) any shares of capital stock of the Company issued with
respect to, or in exchange for, any of the foregoing in any corporate
recapitalization or corporate restructuring and (d) all shares of the Company's
capital stock which Sihl may purchase pursuant to their preemptive rights or
rights of first refusal or otherwise.
(k) Confidentiality. Sihl agrees that it shall not divulge, furnish
or make accessible to anyone or use in any way any confidential or secret
knowledge or information of the Company which Sihl has acquired or become
acquainted with or will acquire or become acquainted with pursuant to the terms
of this Agreement, except that Sihl may use such knowledge or information in
furtherance of its interests as an investor in the Company. Sihl acknowledges
that the above-described knowledge or information constitutes a unique and
valuable asset of the Company and represents a substantial investment of time
and expense by the Company, and that any disclosure or other use of such
knowledge or information other than for the sole benefit of the Company would be
wrongful and would cause
-14-
<PAGE>
irreparable harm to the Company. Sihl will refrain from any acts or omissions
that would reduce the value of such knowledge or information to the Company. The
foregoing obligations of confidentiality shall not apply to any knowledge or
information which is now published or which subsequently becomes generally
publicly known in the form in which it was obtained from the Company, other than
as a direct or indirect result of the breach of this agreement.
(l) Entire Agreement. This Agreement and exhibits and schedules
referenced herein contain the entire agreement between the parties with respect
to the transactions contemplated hereby and thereby, and supersede all
negotiations, agreements, representations, warranties, commitments, whether in
writing or oral, prior to the date hereof.
(m) Successors and Assigns. All of the terms of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto, provided, however, that, except as
otherwise provided herein, Sihl's rights and obligations under this Agreement
may only be assigned to any entity under common control of Sihl.
(n) Severability. In the event any provision of this Agreement or
the application of any such provision to any party shall be held by a court of
competent jurisdiction to be contrary to law, the remaining provisions of this
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
Very truly yours,
LASERMASTER TECHNOLOGIES, INC.
By /s/ Robert Wenzel
-----------------------------
Name: Robert Wenzel
Title: Chief Operating Officer
SIHL-ZURICH PAPER MILL ON SIHL AG
By /s/ Melk Lehne
------------------------------
Its CEO
---------------------------
TIMEMASTERS, INC.
By /s/ Melvin Masters
---------------------------------
Melvin Masters, Chief Executive Officer
Grandchildren's Realty Alternative Management
Program I Limited Partnership and Grandchildren's
Realty Alternative Management Program I #2 Limited
Partnership
By TimeMasters, Inc., their General Partner
By /s/ Melvin Masters
--------------------------------------
Melvin Masters, Chief Executive Officer
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<PAGE>
EXHIBIT 10.2
================================================================================
LASERMASTER TECHNOLOGIES, INC.
---------------------
COMMON STOCK PURCHASE AGREEMENT
---------------------
Dated September 25, 1996
Shares
of
Common Stock
($.01 Par Value)
================================================================================
-1-
<PAGE>
LASERMASTER TECHNOLOGIES, INC.
COMMON STOCK PURCHASE AGREEMENT
AGREEMENT, made and entered into as of the 25th day of September, 1996,
between LaserMaster Technologies, Inc., a Minnesota corporation (the "Company")
and General Electric Capital Corporation (the "Investor").
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Investor agree as follows:
1. AUTHORIZATION OF ISSUE OF SHARES. The Company has authorized (i) the
issue and sale of up to 538,720 shares of its Common Stock, $.01 par value per
share (the "Common Stock") and (ii) the issuance of Warrants to purchase up to
541,406 shares of its Common Stock to the Investor.
2. SALE AND PURCHASE PRICE.
(a) Effective on the date hereof, and subject to the terms and
conditions herein set forth, Investor shall purchase from the Company
410,256 shares (the "Shares") of Common Stock at a price of $4.875 per
share for an aggregate purchase price of $1,999,998. Simultaneous with the
purchase of the Shares, the Company shall issue to the Investor a Warrant
in the form of the attached Exhibit A (the "Warrants") dated as of the date
hereof, and without any additional consideration, to purchase 471,285
shares of Common Stock at an exercise price (subject to adjustment) of
$6.79 per share.
(b) Simultaneous with execution of this Agreement (i) Investor shall
purchase the Shares by delivering its promissory note in the form of the
attached Exhibit B for $1,999,998 ("Promissory Note"), and (ii) the Company
shall issue and deliver the Shares and Warrants to the Investor.
3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company hereby
represents and warrants to the Investor that:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota, and has the requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business in all material respects as it is now being conducted and
as it currently proposes to conduct it in the future. The Company has the
requisite corporate power and authority to issue the Shares, the Warrants and
the Warrant Shares and to otherwise perform its obligations under this
Agreement.
(b) The copies of the Articles of Incorporation, as amended (the
"Articles of Incorporation") and bylaws of the Company which have been delivered
to legal counsel for Investor prior to the execution of this Agreement are true
and complete copies of the duly and legally adopted Articles of Incorporation
and Bylaws of the Company in effect as of the date of this Agreement.
(c) The Company is duly qualified, licensed or domesticated as a
foreign corporation in good standing in each jurisdiction wherein the nature of
its activities or the properties owned or leased by it makes such qualification,
licensing or domestication necessary and in which failure to so qualify or be
licensed or domesticated would have a material adverse impact upon its business.
(d) The Company has delivered to Investor copies of (i) its Form 10-K
for the Year Ended June 30, 1995, which includes its audited statements of
operations, cash flows, and changes in stockholders' equity for the three years
ended June 30, 1995 and its balance sheets as of June 30, 1995 and 1994, (ii)
its quarterly reports on Form 10-Q for the quarters ended September 30, 1995,
December 31, 1995 and March 31, 1996, which contain its unaudited statements of
operations for the quarterly and year to date periods then ended and for the
prior year periods, unaudited statements of cash flow for the year to date and
prior year
-2-
<PAGE>
comparative periods, and balance sheets as of quarter end, (iii) its 1995 annual
report to shareholders, (iv) its proxy statement for its annual meeting held May
23, 1996, and (v) Company's audited financial statements for the year ended June
30, 1996.
(e) The Shares, when issued and paid for pursuant to the terms of
this Agreement, will be duly authorized, validly issued and outstanding, fully
paid, nonassessable shares and shall be free and clear of all pledges, liens,
encumbrances and restrictions, except for restrictions on transfer under
applicable securities laws. The Warrants are duly authorized, and when issued
pursuant to the terms of this Agreement will be validly granted and outstanding,
fully paid and free and clear of all pledges, liens, and encumbrances and
restrictions, except for restrictions on transfer under applicable securities
laws. The Warrant Shares have been duly authorized and reserved for issuance
and, when issued upon exercise of the Warrant, will be duly authorized, validly
issued and outstanding, fully paid, nonassessable and free and clear of all
pledges, liens, encumbrances and restrictions, except for restrictions on
transfer under applicable securities laws.
(f) The authorized capital stock of the Company consists of
35,000,000 shares, 30,000,000 of which are shares of Common Stock, $.01 par
value, and 5,000,000 of which are shares of preferred stock, undesignated as to
terms and preferences. As of September 1, 1996, 11,458,634 shares of Common
Stock were outstanding, 292,951 shares of Common Stock were reserved for
issuance upon the exercise of outstanding warrants and 3,739,379 shares of
Common Stock were reserved for issuance pursuant to the Stock Option Plans. No
shares of Preferred Stock are outstanding. Neither the offer nor the issuance or
sale of the Shares or the Warrants constitutes an event, under any anti-dilution
provisions of any securities issued or issuable by the Company or any agreements
with respect to the issuance of securities by the Company, which will either
increase the number of shares issuable pursuant to such provisions or decrease
the consideration per share to be received by the Company pursuant to such
provisions.
(g) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action of the Company,
and no other corporate proceedings on its part are necessary to authorize the
execution, delivery or performance of this Agreement. This Agreement has been
duly executed and delivered by the Company and constitutes the valid and binding
obligation of the Company, enforceable in accordance with its terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby do not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of the Company, or require any authorization,
consent, approval, exemption or other action by or notice to any court or other
governmental body, under the provisions of the Articles of Incorporation or
Bylaws of the Company or any indenture, mortgage, lease, loan agreement or other
agreement or instrument by which the Company is bound or affected, or any law,
statute, rule or regulation or order, judgment or decree to which the Company is
subject.
(i) The Company is not required to submit any notice, report or other
filing with any governmental authority in connection with the execution or
delivery by it of this Agreement or, except as contemplated herein, the
consummation of the transactions contemplated hereby. No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by the Company in connection with its
execution, delivery and performance of this Agreement or the transactions
contemplated hereby.
(j) No person, firm or corporation has or will have, as a result of
any act or omission by the Company, any right, interest or valid claim against
any Investor or the Company for any commission, fee or other compensation as a
finder or broker, or in any similar capacity, in connection with the
transactions
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contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES BY THE INVESTOR. The Investor
represents and warrants to the Company that:
(a) It is purchasing the Shares for investment for its own account
and not with the view to, or for resale in connection with, any distribution of
the Shares in violation of any applicable securities law. The Investor
understands that the Shares have not been registered under the Securities Act or
any state securities laws by reason of their contemplated issuance in
transactions exempt from the registration and prospectus delivery requirements
of the Securities Act pursuant to Section 4(2) thereof and that the reliance of
the Company and others upon this exemption is predicated in part upon this
representation by the Investor. The Investor further understands that the Shares
may not be transferred or resold without (i) registration under the Securities
Act and any applicable state securities laws, or (ii) an exemption from the
requirements of the Securities Act and applicable state securities laws.
(b) The Investor is an "accredited investor" for purposes of
Regulation D promulgated under the Securities Act and, either alone or with such
Investor's representative, has such knowledge and experience in financial and
business matters that such Investor is capable of evaluating the merits and
risks of the investment in the Shares and Warrants and bear the economic
consequences thereof. The Investor has relied upon such Investors' own
independent investigation and, to the extent believed appropriate, the
Investor's own professional, tax and other advisors, and has not relied upon any
representation or warranty from the Company, or any of their respective
officers, directors, employees agents, affiliates or representatives, with
respect to the value of the Shares. The Investor has evaluated the merits and
risks of an investment in the Shares and has determined that such shares are a
suitable investment for the Investor in light of such Investor's overall
financial condition and prospects. The Investor has been advised, and is aware,
that the market prices of shares of stock of publicly traded companies fluctuate
and that there can be no assurance as to the future performance of any given
securities, including the Shares. The Investor has been furnished with all
publicly available information about the Company's assets, operations, and
business activities which the Investor has requested and which the Investor
considers necessary or relevant to enable the Investor to make a prudent
decision about the purchase of the Shares and Warrants.
(c) The execution, delivery and performance of this Agreement by the
Investor and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action of the Investor,
and no other corporate proceedings on its part are necessary to authorize the
execution, delivery or performance of this Agreement. This Agreement has been
duly executed and delivered by the Investor and constitutes the valid and
binding obligation of such Investor, enforceable in accordance with its terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights or by general principles of equity.
(d) The execution, delivery and performance of this Agreement by the
Investor and the consummation by such Investor of the transactions contemplated
hereby do not conflict with or result in any breach of any of the provisions of,
constitute a default under, result in a violation of, result in the creation of
a right of termination or acceleration or any lien, security interest, charge or
encumbrance upon any assets of either Investor, or require any authorization,
consent, approval, exemption or other action by or notice to any court or other
governmental body, under the provisions of the Articles of Incorporation or
Bylaws of such Investor or any indenture, mortgage, lease, loan agreement or
other agreement or instrument by which such Investor is bound or affected, or
any law, statute, rule or regulation or order, judgment or decree to which such
Investor is subject.
(e) The Investor is not required to submit any notice (other than
reports under Section 16(a) or 13D of the Securities Act of 1934), report or
other filing with any governmental authority in connection with the execution or
delivery by it of this Agreement or the consummation of the transactions
contemplated hereby. No consent, approval or authorization of any governmental
or regulatory authority or any other
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party or person is required to be obtained by the Investor in connection with
its execution, delivery and performance of this Agreement or the transactions
contemplated hereby.
(f) No person, firm or corporation has or will have, as a result of
any act or omission by the Investor, any right, interest or valid claim against
the Company for any commission, fee or other compensation as a finder or broker,
or in any similar capacity, in connection with the transactions contemplated by
this Agreement.
5. COVENANTS OF THE COMPANY. So long as the Warrants shall remain
outstanding and are not fully exercised, the Company covenants and agrees as
follows:
(a) The Company will maintain its corporate existence in good
standing and comply with all applicable laws and regulations of the United
States or of any state or political subdivision thereof and of any government
authority where failure to so comply would have a material adverse impact on the
Company or its business or operations.
(b) The Company will keep books of record and account in which full,
true and correct entries are made of all of its dealings, business and affairs,
in accordance with GAAP consistently applied. The Company will employ certified
public accountants of recognized national standing selected by the Board of
Directors of the Company who are "independent" within the meaning of the
accounting regulations of the Commission. The Company will have annual audits
made by such independent public accountants in the course of which such
accountants shall make such examinations, in accordance with generally accepted
auditing standards, as will enable them to give such reports or opinions with
respect to the financial statements of the Company as will satisfy the
requirements of the Commission in effect at such time with respect to reports or
opinions of accountants (except with regard to the Commission's requirements for
accounting for preferred shares as debt rather than equity).
(c) The Company will deliver to the Investor promptly upon
transmission thereof, copies of all reports, notices, financial statements,
proxy statements, registration statements and notifications filed by it with the
Commission pursuant to any act administered by the Commission or furnished to
shareholders of the Company or to any national securities exchange, except
reports on Form D filed pursuant to Rule 503 under the Securities Act and
registration statements relating to employee benefit plans.
(d) The Company shall use its best efforts to cause its shares to
continue to be quoted on the Nasdaq National Market, or listed on a national
securities exchange.
(e) The Company will not repay, or allow its subsidiary LaserMaster
Corporation to repay, the indebtedness represented by that certain Promissory
Note to TimeMasters, Inc., a Minnesota corporation ("TimeMasters") dated January
17, 1996 (the "January Note") in original principal amount of $1,765,000 until
payment in full of that certain promissory note from TimeMasters to the Company
dated September 15, 1996 in $1,800,000 original principal amount (the
"TimeMasters Note") and that certain promissory note dated September 15, 1996
from Grandchildren's Realty Alternative Management Program I Limited Partnership
and Grandchildren's Realty Alternative Management Program I #2 Limited
Partnership, Minnesota limited partnerships for which TimeMasters serves as
general partner (together, "GRAMPI") to Company in original principal amount of
$2,200,000 (the "Mortgage Note" and together with the TimeMasters Note, the
"TimeMasters Promissory Notes"), except that the Company may, with the agreement
of or at the direction of TimeMasters, offset the obligation under the January
Note against the TimeMasters Note. Investor shall be deemed to be a third party
beneficiary of this subsection (e).
(f) The Company will, upon the occurrence of an event of default under
the Mortgage Note or that certain Mortgage and Security Agreement and Fixture
Financing Agreement dated September 15, 1996 securing the Mortgage Note (the
"Mortgage"), diligently exercise its remedies under the Mortgage in a
commercially reasonable manner, including, in the event the mortgagor is not
actively proceeding with the sale of the property subject to the Mortgage,
commencing foreclosure thereof, and will, in any event, commence foreclosure
proceedings within 60 days after any notice of such event of default unless
Investor, together with Sihl-Zurich Paper Mill on Sihl AG , a Swiss corporation
("Sihl"), otherwise agree in writing that such remedy shall be further delayed.
The Company acknowledges that the agreement of Investor
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hereunder, and the timing of the second installment of the Promissory Note, is
conditional on the payment of the TimeMasters Promissory Notes.
6. REGISTRATION.
(a) Definitions. As used in this Section 6, the following terms have
the following meanings:
(i) "Forms S-1, SB-1, S-2, SB-2 and S-3" shall mean the forms
so designated, promulgated by the Commission for registration of securities
under the Securities Act, and any forms succeeding to the functions of such
forms, whether or not bearing the same designation.
(ii) "Holder" shall mean Investor and any holder of Registrable
Stock to whom the registration rights granted hereunder have been
transferred in accordance with Section 6(j), provided that anyone who
acquires any Registrable Stock in a distribution pursuant to a registration
statement filed by the Company under the Securities Act shall not thereby
be deemed to be a "Holder."
(iii) "Register", "registered" and "registration" shall refer to
a registration effected by filing a registration statement in compliance
with the Securities Act and the declaration or ordering by the Commission
of effectiveness of such registration statement.
(iv) "Registrable Stock" shall mean the Shares, all shares of
Common Stock issued or issuable upon exercise of the Warrants, and in each
case held by a Holder, all shares of Common Stock issued by the Company in
respect of such shares.
(v) "Registration Rights Period" shall mean the period of time
commencing on the date of this Agreement and ending on the latter to occur
of (A) two years after the earlier to occur of the full exercise, or the
termination, of the Warrants, or (B) in the event that the Warrants are
exercised within the first six years of their term after a notice of, but
prior to a record date for, a dividend pursuant to section 3(f) of such
Warrants, four years after such exercise.
(b) Required Registration.
(i) If at any time during the Registration Rights Period a
Holder proposes to dispose of the then Registrable Stock (the "Initiating
Holders"), and such disposition may not, in the opinion of such Initiating
Holders, be effected in the public marketplace (as opposed to a private
transaction under the Securities Act) at equally favorable net terms to the
Initiating Holders without registration of such shares under the Securities
Act, the Initiating Holders may request the Company in writing to effect
such registration, stating the number of shares of Registrable Stock to be
disposed of by such Initiating Holders and the intended method of
disposition. Upon receipt of such request, the Company will give prompt
written notice thereof to all other Holders, whereupon such other Holders
shall give written notice to the Company within 20 days after the date of
the Company's notice (the "Notice Period") if they propose to dispose of
any shares of Registrable Stock pursuant to such registration, stating the
number of shares of Registrable Stock to be disposed of by such Holder(s)
and the intended method of disposition.
(ii) The Company will use its best efforts to effect promptly
after the Notice Period the registration under the Securities Act of all
shares of Registrable Stock specified in the requests of the Initiating
Holders, and the requests of the other Holders, subject, however, to the
limitations set forth in Section 6(d).
(c) Registration Procedures. Whenever the Company is required by the
provisions of Section 6(b) to use its best efforts to effect promptly the
registration of shares of Registrable Stock, the Company will:
(i) prepare and file with the Commission a registration
statement with respect to such shares and use its best efforts to cause
such registration statement to become and remain
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effective as provided herein;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and current and to comply with the provisions of the
Securities Act with respect to the disposition of all shares covered by
such registration statement, including such amendments and supplements as
may be necessary to reflect the intended method of disposition from time to
time of the prospective seller or sellers of such shares, but for no longer
than ninety (90) days subsequent to the effective date of such
registration in the case of a registration statement on Form S-1, SB-1, SB-
2 or S-2 and for no longer than one hundred fifty (150) days in the case of
a registration statement on Form S-3;
(iii) furnish to each prospective seller such number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as such
seller may reasonably request in order to facilitate the public sale or
other disposition of the shares owned by such seller;
(iv) use its best efforts to register or qualify the shares
covered by such registration statement under such other securities or blue
sky or other applicable laws of such jurisdictions within the United States
as each prospective seller shall reasonably request, to enable such seller
to consummate the public sale or other disposition in such jurisdictions of
the shares owned by such seller; provided, however, that in no event shall
the Company be obligated to qualify to do business in any jurisdiction
where it is not at the time so qualified; and
(v) if such registration includes an underwritten public
offering, cooperate with the Holders in the preparation and execution of an
underwriting agreement containing customary representations and warranties
on the part of the Company and furnish at the closing provided for in the
underwriting agreement: (i) opinions, dated such respective dates, of the
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, covering such matters as such underwriters
and holder or holders may reasonably request; and (ii) letters, dated such
respective dates, from the independent certified public accountants of the
Company, addressed to the underwriters, covering such matters as such
underwriters and holder or holders may reasonably request.
(d) Limitations on Required Registrations.
(i) Investor (considered together with any Holder that acquires
Registrable Stock therefrom and registration rights pursuant to Section
6(j)) shall have the right to require the Company to effect no more than
five registrations pursuant to Section 6(j)).
(ii) The Company shall not be required to effect a registration
pursuant to Section 6(b) more frequently than once every six months.
(iii) Whenever a requested registration is for an underwritten
offering, only shares which are to be included in the underwriting may be
included in the registration. Notwithstanding the provisions of Sections
6(b), if the underwriter determines that (A) marketing factors require a
limitation of the total number of shares to be underwritten, or (B) the
offering price per share would be reduced by the inclusion of the shares of
the Company, then the number of shares to be included in the registration
and underwriting shall first be allocated among all Holders who indicated
to the Company their decision to distribute any of their Registrable Stock
through such underwriting, in proportion, as nearly as practicable, to the
respective numbers of shares of Registrable Stock owned by such Holders at
the time of filing the registration statement, and the remainder, if any,
to the Company. No stock excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration.
If the Company disapproves of any such underwriting, the Company may elect
to withdraw therefrom by written notice to the Initiating Holders and the
underwriter. The securities so withdrawn from such underwriting shall also
be withdrawn from such registration.
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<PAGE>
(iv) If at the time of any request to register Registrable Stock
pursuant to Section 6(b), the Company is engaged, or has fixed plans to
engage within 90 days of the time of the request, in a registered public
offering as to which the Holders may include such Stock pursuant to Section
6(e) or is engaged in any other activity which, in the good faith
determination of the Company's Board of Directors, would be adversely
affected by the requested registration to the material detriment of the
Company, then the Company may at its option direct that such request be
delayed for a period not in excess of 90 days from the effective date of
such offering, or the date of commencement of such other material activity,
as the case may be, such right to delay a request to be exercised by the
Company not more than once with respect to any request for registration.
(e) Incidental Registration. If at any time during the Registration
Rights Period the Company proposes to register any of its securities under the
Securities Act (other than a registration effected solely to implement an
employee benefit plan or a transaction to which Rule 145 of the Commission is
applicable), it will at each such time give written notice to all Holders of its
intention so to do. Upon the written request of a Holder or Holders (stating
the number of shares of Registrable Stock to be disposed of by such Holder or
Holders and the intended method of disposition) given within 30 days after
receipt of any such notice, the Company will use its best efforts to cause all
such shares of Registrable Stock intended to be disposed of, the Holders of
which shall have requested registration thereof, to be included in such
registration, subject, however, to the following limitations:
(i) If any registration pursuant to Section 6(e) shall be
underwritten in whole or in part, the Company may require that the
Registrable Stock requested for inclusion pursuant to this Section be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters.
(ii) If in the good faith judgment of the managing underwriter
of such public offering the inclusion of all of the Registrable Stock
requested for inclusion pursuant to Section 6(e), together with all
additional shares of all other shareholders that have requested inclusion
of their shares pursuant to incidental registration rights granted by the
Company prior to the date hereof (the Registrable Stock and all of the
other shares requested for inclusion, other than shares of Common Stock
issued or issuable upon conversion of that certain Promissory Note dated
January 17, 1996 between TimeMasters and the Company or pursuant to
exercise of that certain Stock Purchase Warrant dated January 17, 1996
between TimeMasters and the Company, being herein together referred to as
the "Selling Shareholders' Shares") would reduce the number of shares to be
offered by the Company or interfere with the successful marketing of the
shares of stock offered by the Company, the number of Selling Shareholders'
Shares otherwise to be included in the underwritten public offering may be
reduced pro rata among all holders of Selling Shareholders' Shares (based
upon the number of shares requested to be included by each such holder) .
(iii) If, in connection with a registration initiated at the
request of any security holder of the Company pursuant to a demand
registration right granted to such security holder (the "Requesting
Security Holder"), the Selling Shareholders' Shares would reduce the number
of shares to be offered by the Requesting Shareholder or interfere with the
successful marketing of the shares of stock offered by the Requesting
Shareholder, the number of Selling Shareholders' Shares otherwise to be
included in the underwritten public offering may be reduced pro rata among
the holders thereof requesting such registration (based upon the number of
shares requested to be included by each such holder).
(iv) Those Selling Shareholders' Shares which are excluded from
the underwritten public offering pursuant to this Section 6(e) shall be
withheld from the market by the holders thereof for a period, not to exceed
90 days, which the managing underwriter reasonably determines is necessary
in order to effect the underwritten public offering.
(f) Rule 144. The registration rights granted under Section 6 shall
terminate as to any Holder or permissible transferees or assignees of such
rights if such person would be permitted to sell all of
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the Registrable Stock held by him or it within one three-month period pursuant
to Rule 144.
(g) Cooperation by Prospective Sellers.
(i) Each prospective seller of Registrable Stock, and each
underwriter designated by each such seller, will furnish to the Company
such information as the Company may reasonably require from such seller or
underwriter in connection with the registration statement (and the
prospectus included therein).
(ii) The Holders holding shares included in the registration
statement will suspend (until further notice) further sales of such shares
after receipt of telegraphic or written notice from the Company to suspend
sales to permit the Company to correct or update a registration statement
or prospectus or, if the Company reasonably determines that correcting or
updating the registration statement or prospectus would require disclosure
of material information which the Company has a bona fide business purpose
for preserving as confidential, during the time that such suspension is
necessary so that the registration statement and prospectus will meet the
requirements of the Securities Act. At the end of the period during which
the Company is obligated to keep the registration statement current and
effective as described in Section 6(b)(i)(and any extensions thereof
required by the preceding sentence), the Holders holding shares included in
the registration statement shall discontinue sales of shares pursuant to
such registration statement upon receipt of notice from the Company of its
intention to remove from registration the shares covered by such
registration statement which remain unsold, and such Holders shall (after
written request for such notice, describing the information required in the
response) notify the Company of the number of shares registered which
remain unsold promptly upon receipt of such notice from the Company.
(h) Expenses of Registration. All expenses incurred in effecting any
registration pursuant to this Section 6, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and expenses of any audits incidental to or required by
any such registration, shall be borne by the Company, except (a) that all
underwriting discounts and commissions shall be borne by the Holders holding the
securities registered pursuant to such registration, pro-rata according to the
quantity of their securities so registered; and (b) the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 6(b) if the registration request is subsequently withdrawn at the
request of the Initiating Holder, and not at the request of the Company or
because of any other action by the Company, unless the Initiating Holder agrees
to forfeit its right to one demand registration pursuant to Section 6(b) (in
which case the Company shall bear such expenses).
(i) Indemnification.
(i) To the extent permitted by law, the Company will indemnify
each Holder requesting or joining in a registration, each agent, officer
and director of such Holder, each person controlling such Holder, and each
underwriter and selling broker of the securities so registered
(collectively, "Representatives" and collectively with each such Holder,
agent, officer, director or person, "Indemnitees") against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other
document incident to any registration, qualification or compliance (or in
any related registration statement, notification or the like) or any
omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances in which they were made, or
any violation by the Company of any rule or regulation promulgated under
the Securities Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Indemnitee for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, provided, however, that (A) the Company will not be liable to any
Indemnitee in any such case to the extent that any such claim, loss, damage
or liability is caused by any untrue statement or omission so made in
strict conformity with written information furnished to the Company by an
instrument duly executed by
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such Indemnitee and stated to be specifically for use therein; (B) the
foregoing indemnity agreement is subject to the condition that, insofar as
it relates to any such untrue statement (or alleged untrue statement) or
omission (or alleged omission) made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the
Commission at the time the registration statement becomes effective or in
the amended prospectus filed with the Commission pursuant to Rule 424(b)
(the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of any Representative, if a copy of the Final Prospectus was not
furnished to the person or entity asserting the loss, liability, claim or
damage at or prior to the time such furnishing is required by the
Securities Act; (C) this indemnity shall not be deemed to relieve any
underwriter of any of its due diligence obligations; (D) the indemnity
agreement contained in this subsection 6(i) shall not apply to amounts paid
in settlement of any such claim, loss, damage, liability or action if such
settlement is effected without the consent of the Company, which consent
shall not be unreasonably withheld; and (E) the foregoing shall not relieve
the Company from liability for indemnity to an officer or director that
furnishes information to the Company in his capacity as an officer or
director.
(ii) To the extent permitted by law, each Holder requesting or
joining in a registration and each underwriter of the securities so
registered will indemnify the Company and its officers and directors and
each person, if any, who controls any thereof within the meaning of Section
15 of the Securities Act and their respective successors against all
claims, losses, damages and liabilities or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance (or in any related registration statement, notification or the
like) or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances in which they were
made; and will reimburse the Company and each other person indemnified
pursuant to this paragraph (ii) for all legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided, however, that (A) this
paragraph (ii) shall apply only if (and only to the extent that) such
statement or omission was made in reliance upon and in strict conformity
with written information (including, without limitation, written negative
responses to inquiries) furnished to the Company by an instrument duly
executed by such Holder or underwriter and stated to be specifically for
use in such prospectus, offering circular or other document (or related
registration statement, notification or the like) or any amendment or
supplement thereto; (B) the foregoing indemnity agreement is subject to the
condition that, insofar as it relates to any such untrue statement (or
alleged untrue statement) or omission (or alleged omission) made in the
preliminary prospectus but eliminated or remedied in the amended prospectus
on file with the Commission at the time the registration statement becomes
effective or in the Final Prospectus, such indemnity agreement shall not
inure to the benefit of any Representative, if a copy of the Final
Prospectus was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is
required by the Securities Act; (C) this indemnity shall not be deemed to
relieve any underwriter of any of its due diligence obligations; (D) the
indemnity agreement contained in this subsection 6(i)(ii) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability or
action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; (E) the obligations of
such Holders shall be limited to an amount equal to the proceeds to each
such Holder of the Registrable Stock sold as contemplated herein, unless
such claim, loss, damage, liability or action resulted from such Holder's
fraudulent misconduct; and (F) the foregoing shall not create any right to
indemnity from an officer or director that furnishes information to the
Company in his capacity as an officer or director.
(iii) Each party entitled to indemnification hereunder (the
"indemnified party") shall give notice to the party required to provide
indemnification (the "indemnifying party") promptly after such indemnified
party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the indemnifying party (at its expense) to assume
the defense of any claim or any litigation resulting therefrom, provided
that counsel for the indemnifying party, who shall conduct the defense of
such claim or litigation, shall be satisfactory to the indemnified party,
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and the indemnified party may participate in such defense at such party's
expense, and provided, further, the omission by any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Section 6(i), except to the extent that the
omission results in a failure of actual notice to the indemnifying party
and such indemnifying party is damaged solely as a result of the failure to
give notice. No indemnifying party, in the defense of any such claim or
litigation, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation.
(iv) The Company agrees that the failure of the Company or any
Holder of Registrable Stock to negotiate an underwriting agreement that
excludes from the Company's obligation to indemnify Representatives the
matters set forth in section 6(i)(i)(A) or (B) shall not relieve the
Company of its obligation to proceed with such registration on the terms
proposed by such Representative.
(j) Transfer of Registration Rights. One or more of the five demand
registration rights granted to the Investor under Section 6(b) may be
transferred but only to a transferee who shall acquire not less than 100,000
shares of Registrable Stock (as adjusted for Recapitalization Events) and the
registration rights under Section 6(e) may not be transferred separate from the
registration rights under section 6(b). Any request for transfer of the
Registrable Stock to which a transfer of registration rights pursuant to this
Section 6(j) is intended to apply shall be accompanied by notice to the Company
of the number of demand registration rights which the transferring party intends
that the transferee acquire. Notwithstanding any provision of this Section 6,
the registration rights granted to the Holders under this Section 6 may not be
assigned to any person or entity which, in the Company's reasonable judgment, is
a competitor of the Company.
(k) Delay of Registration. The Holders shall have no right to take
any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 6.
7. RESTRICTION ON TRANSFER OF SHARES.
(a) Restrictions. The Shares, the Warrant and the Warrant Shares are
only transferable pursuant to (a) an offering registered under the Securities
Act, (b) Rule 144 or Rule 144A or other exemption under the Securities Act (or
any similar rule then in effect) if such rules are or become available, or (c)
and, with respect to the Warrant, the terms of the Warrant, any other legally
available means of transfer.
(b) Legend. Each certificate representing Shares or Warrant Shares
shall be endorsed with the following legends:
"The shares represented by this certificate may not be transferred
without (i) the opinion of counsel reasonably satisfactory to this
corporation that such transfer may lawfully be made without
registration under the Securities Act of 1933, as amended, and all
applicable state securities laws or (ii) such registration."
8. MISCELLANEOUS.
(a) Waivers Amendments and Approvals. No amendment or waiver of any
provision of this Agreement, shall in any event be effective against an Investor
unless the same shall be in writing and signed by such Investor and the Company,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
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<PAGE>
(b) Changes, Waiver, Etc. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing.
(c) Notices. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered if personally
delivered, the next business day if sent by overnight courier or when receipt is
acknowledged if mailed by first class mail, return receipt requested or if sent
by facsimile, telecopy or other electronic transmission device. Notices,
demands and communications will, unless another address is specified in writing,
be sent to the address indicated below:
Notices to the Company: with a copy to:
- ----------------------- ---------------
LaserMaster Technologies, Inc. Dorsey & Whitney LLP
7090 Shady Oak Road 220 South Sixth Street
Eden Prairie, Minnesota 55344 Minneapolis, Minnesota 55402
Attention: General Counsel Attention: Thomas O. Martin, Esq.
Telecopy: (612) 941-8687 Telecopy: (612) 340-8738
Notices to Investor: with a copy to:
- -------------------- ---------------
General Electric Capital Corporation Winston & Strawn
105 West Madison Street 35 West Wacker Drive
Suite 1600 Chicago, Illinois 60601-9703
Chicago, Illinois 60602 Attention: David G. Crumbaugh, Esq.
Attention: John Hatherly Telecopy: (312) 588-5700
Telecopy: (312) 419-5992
(d) Remedies. The parties agree that, in addition to, but not to the
exclusion of any other available remedy, Investor shall have the right to
enforce the provisions of sections 5(e) and 5(f) by applying for and obtaining
specific performance or temporary and permanent restraining orders or
injunctions from a court of competent jurisdiction.
(e) Survival of Representations and Warranties, Etc. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made by Investor or on
their behalf, and the sale and purchase of the Shares and payment therefor. All
statements contained in any certificate, instrument or other writing delivered
by or on behalf of the Company pursuant to this Agreement (other than legal
opinions) or in connection with or in contemplation of the transactions herein
contemplated shall constitute representations and warranties by the Company
hereunder.
(f) Headings. The headings of the Sections of this Agreement have
been inserted for convenience of reference only and do not constitute a part of
this Agreement.
(g) Choice of Law. The laws of Minnesota shall govern the validity
of this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties hereunder.
(h) Counterparts. This Agreement may be executed concurrently in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(i) Confidentiality. Investor agrees that the confidentiality
letter dated November 22, 1995 between Investor and LaserMaster Corporation, a
subsidiary of the Company ("LMC"), shall apply to all information provided by
the Company to the Investor hereunder as if the Company, rather than LMC, was a
party thereto and that Investor shall keep all such information provided to
Investor hereunder or pursuant hereto confidential to the same extent such
confidentiality letter requires Investor to keep information obtained from LMC
confidential.
(j) Entire Agreement. This Agreement and exhibits and schedules
referenced herein contain the entire agreement between the parties with respect
to the transactions contemplated hereby and
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<PAGE>
thereby, and supersede all negotiations, agreements, representations,
warranties, commitments, whether in writing or oral, prior to the date hereof.
(k) Successors and Assigns. All of the terms of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto, provided, however, that, except as
otherwise provided herein, Investor's rights and obligations under this
Agreement may only be assigned to any entity under common control of Investor.
(l) Severability. In the event any provision of this Agreement or
the application of any such provision to any party shall be held by a court of
competent jurisdiction to be contrary to law, the remaining provisions of this
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
LASERMASTER TECHNOLOGIES, INC.
By /s/Robert Wenzel
------------------------------
Name: Robert Wenzel
Title: Chief Operating Officer
GENERAL ELECTRIC CAPITAL CORPORATION
By /s/ Glenn P. Bartley
--------------------------------
Its duly-authorized signatory
---------------------------------
<PAGE>
Exhibit 10.3
DEBENTURE EXCHANGE
AND TRADE DEBT SETTLEMENT
AGREEMENT
THIS AGREEMENT is made and entered into this 12th day of September, 1996,
by and between LaserMaster Technologies, Inc., a Minnesota corporation having
its principal office at 7090 Shady Oak Road, Eden Prairie, MN 55344 (the
"Company") and Marubeni International Electronics Corporation, a Massachusetts
corporation having its principal address at 20 William Street, Wellesley,
Massachusetts, 02181 ("Marubeni").
WHEREAS, LaserMaster Corporation ("LMC"), a wholly owned subsidiary of the
Company is indebted to Marubeni in the aggregate amount of Two Million Five
Hundred Twenty Seven Thousand Eight Hundred Twenty Nine Dollars and Seventy Nine
Cents ($2,527,829.79) (the "Indebtedness") for product purchased from Marubeni
pursuant to that certain Purchase Agreement dated May 28, 1992, as amended (the
"Purchase Agreement"); and
WHEREAS, the Indebtedness is currently due and owing pursuant to the terms
of the Purchase Agreement and LMC and the Company have represented to Marubeni
that they are presently unable to satisfy the indebtedness in accordance with
the terms of the Purchase Agreement; and
WHEREAS, the Company, LMC and Marubeni desire to provide for the timely
repayment of the Indebtedness and for the right for Marubeni to acquire an
equity interest in the Company.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Issuance of Debenture - Exchange of Indebtedness. Subject to the terms
hereof, Marubeni agrees to accept, in full satisfaction of the Indebtedness, and
the Company agrees to deliver, the Company's Convertible Debenture, in the
original principal amount equal to the balance of the Indebtedness, in the form
attached hereto as Exhibit A (the "Debenture"). Marubeni shall accept the
Debenture and the Company shall deliver the Debenture, upon the effectiveness of
the Registration Statement (as defined in Section 7 of the Debenture). Upon
exchange of the Debenture for the Indebtedness, the Company and LMC shall be
released from any further liability under the Indebtedness in accordance with
Section 3 hereof. Until such time as the Registration Statement (as defined in
Section 7 of the Debenture) becomes effective under the Securities Act of 1933,
or December 31, 1996, whichever date is earlier, Marubeni agrees that it will
stand still and forebear from taking any action to collect the Indebtedness,
provided no default has occurred hereunder or under the Debenture. Marubeni
further agrees that absent a failure of the Registration Statement to become
effective, it is obligated to accept the Debenture as provided herein.
Notwithstanding the December 31, 1996 deadline imposed hereinabove, Marubeni
agrees that it will continue to stand still and forebear for an additional
period of time extending up through January 31, 1997, if the Securities and
Exchange Commission rejects or objects to the Registration Statement due at
least in part to either (a) the fact that the Debenture
<PAGE>
was not accepted by Marubeni in exchange for the Indebtedness prior to the
effectiveness of the Registration Statement, or (b) the fact that Marubeni
receives "price restoration" on the sales of securities issued pursuant to
conversion of the Debenture; provided the Company files the Registration
Statement by October 15, 1996, and provides Marubeni with copies of the filings
and correspondence with the Securities and Exchange Commission relating solely
to the Registration Statement. During such extension, LaserMaster shall use its
best efforts to obtain effectiveness of Registration Statement. Marubeni shall
have the right to approve a further extension of time to enable the Company to
obtain effectiveness of the Registration Statement, not to exceed sixty (60)
days, which approval shall not be unreasonably withheld.
2. Representations and Warranties. In connection with the exchange of
the Debenture for the Indebtedness, Marubeni hereby represents and warrants as
follows:
(a) That Marubeni has received, carefully reviewed and is familiar with
the Company's (i) Annual Report on Form 10-K for the year ended June 30, 1995;
(ii) Quarterly Reports on Form 10-Q for the quarters ended September 30, 1995,
December 31, 1995 and March 31, 1996; (iii) the Proxy Statement for the annual
meeting of shareholders of the Company held May 23, 1996; and (iv) 1996 annual
report to shareholders (the "Filed Documents");
(b) That Marubeni has been given access to full and complete financial
information regarding the Company and has utilized such access to its
satisfaction for the purpose of obtaining financial information in addition to,
or verifying information included in the Filed Documents. Further, Marubeni has
met with officers of the Company for the purpose of asking questions of, and
receiving answers from, such officers concerning the Company's financial
information and to obtain any additional financial information, to the extent
reasonably available, necessary to verify the accuracy of financial information
provided in the Filed Documents;
(c) That Marubeni recognizes that the Common Stock issued upon conversion
thereof involves certain risks, including, but not limited to, the risks
described in Exhibit 99 to the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996;
(d) That Marubeni realizes that the Debenture has not been registered
under federal and applicable state securities laws and that the transferability
of the Debenture and the Common Stock issuable upon conversion thereof is
restricted and requires conformity with the restrictions contained in paragraph
7 of the Debenture;
(e) That Marubeni is an Accredited investor as defined in Rule 501 of the
Securities and Exchange Commission.
3. Release of Indebtedness. In consideration of issuance of the
Debenture, and effective upon receipt thereof, Marubeni, for itself, its
affiliates, agents, and suppliers, hereby agrees that the Indebtedness is
discharged and further releases and forever discharges the Company and each of
its subsidiaries, including LMC, each of their respective directors, officers,
agents, employees, successors and assigns from any and all liability with
respect to the Indebtedness, and any claims, demands, actions liability, damages
or rights of any kind, whether known or unknown, arising out of or resulting
from the Indebtedness, except for claims relating to the Debenture issued
pursuant hereto. Marubeni further agrees that it will not institute or
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<PAGE>
authorize any other party, either governmental or otherwise, to institute any
administrative or legal proceedings against the Company, LMC or any Subsidiary,
its directors, officers, agents, employees, successors and assigns as a result
of any claims of any kind or character which Marubeni might have against them
arising from or related to the Indebtedness, except for claims relating to the
Debenture issued pursuant hereto. This unconditional release includes, but is
not limited to, claims based upon any federal, state, or local anti-
discrimination law, rule, or regulation, and any contract, quasi-contract,
estoppel, tort, or statutory claims, whether developed or undeveloped, that
arose before, or existed as of, the date of this Agreement.
4. Price Restoration. Notwithstanding Section 3 of this Agreement, the
Company hereby agrees to pay to Marubeni, at the end of the two year term of the
Debenture, the difference between (a) the principal amount of the Debenture plus
accrued interest and (b) the sum of the following:
(i) the net sales proceeds actually received by Marubeni (after payment of
any customary brokerage commissions or mandatory fees but excluding taxes) ("Net
Proceeds") on the sale of the Company's common stock acquired through Automatic
Conversion or Mandatory Conversion and held for ten (10) business days or less,
plus (ii) the principal amount of the Debenture which has been converted through
Optional Conversion, plus (iii) the principal amount of the Debenture which has
been converted through Automatic Conversion or Mandatory Conversion where
Marubeni has held the shares of Company's common stock received through such
conversion for more than ten (10) business days, provided, however, that (A) Net
Proceeds for purposes of such calculation on any individual sale of Common Stock
was not more than $.50 per share less than the conversion price pursuant to
which such stock was acquired and that all of such sales were executed in good
faith by Marubeni, (B) Marubeni provides to the Company, within 20 days after
the trade date on which it executes any trade in the Company's Common Stock
acquired upon any such conversion, copies of the trade confirmations referencing
the sale price, and, where applicable, a certificate that the shares so sold
were acquired through Automatic Conversion or Mandatory Conversion of the
Debenture at a price less than such sale price (and confirming such conversion
price), and (C) the ten (10) business day holding period set forth in Section
4(b)(i) and 4(b)(iii) shall be tolled during any Suspension Period set forth in
Section 7 of the Debenture.
5. Confidentiality Agreement. Marubeni agrees to keep and hold
confidential (except where it is legally required to disclose such information
by a court of competent jurisdiction) and not to disclose to unrelated third
parties all information of whatever kind or nature which relates in any way to
this transaction, the settlement of the underlying trade debt which is the basis
of this transaction, or any other aspect of the facts or circumstances
surrounding this transaction. Marubeni expressly acknowledges and agrees to
this obligation shall remain binding upon it even if the Company discloses this
transaction to the public.
6. Choice of Law. The laws of Minnesota shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties hereunder.
7. Counterparts. This Agreement may be executed concurrently in two or
more
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<PAGE>
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LaserMaster Technologies, Inc. Marubeni International Electronics
Corporation
By /s/ Mel Masters By /s/ Hideaki Takagi
----------------------------- -------------------------------
Melvin Masters, CEO Its President & CEO
------------------------
LaserMaster Corporation
/s/ Mel Masters
- -----------------
By: Mel Masters
Its: CEO
#110481v2
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<PAGE>
Exhibit 10.4
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF THE STATE OF MINNESOTA, OR ANY OTHER STATE.
THIS DEBENTURE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR APPROPRIATE EXEMPTION FROM
REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS DEBENTURE MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) THE OPINION OF COUNSEL
SATISFACTORY TO THIS CORPORATION THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT
REGISTRATION UNDER THE FEDERAL SECURITIES ACT OF 1933 AND THE SECURITIES LAWS OF
THE STATE OF MINNESOTA OR ANY OTHER APPLICABLE STATE SECURITIES LAWS; OR (ii)
SUCH REGISTRATION. THIS LEGEND REPRESENTS A RESTRICTION ON TRANSFERABILITY OF
THIS DEBENTURE.
LASERMASTER TECHNOLOGIES, INC.
CONVERTIBLE SUBORDINATED DEBENTURE
$2,527,829.79 September 12, 1996
------------ Eden Prairie, Minnesota
LaserMaster Technologies, Inc., a Minnesota corporation (hereinafter referred to
as the "Company"), for value received, hereby promises to pay to Marubeni
International Electronics Corporation, at the address designated below, or to
its successors and assigns (hereinafter referred to as "Holder"), the principal
sum of Two Million Five Hundred Twenty Seven Thousand Eight Hundred Twenty Nine
Dollars and Seventy Nine Cents ($2,527,829.79) in lawful money of the United
States of America, plus simple interest on the unpaid principal balance of this
Debenture at an annual rate of eight percent (8%). Interest only shall accrue
on the principal balance until paid in full. The principal amount of this
Debenture, and any accrued and unpaid interest, shall be payable in lump sum on
the second anniversary of the date of this Debenture.
The Company covenants and agrees that so long as any portion of this Debenture
remains outstanding and unpaid either as to the principal hereof or the interest
hereon, it will comply with the following provisions, to which this Debenture is
subject and by which it will be governed:
1. Prepayment. The Company may prepay all or any part of the principal
amount of this Debenture at any time or from time to time without payment of any
penalty or premium. Any prepayment made by the Company shall be applied first
to the payment of accrued interest and then to the unpaid principal installments
in the inverse order of maturity.
2. Acceleration of Maturity. Upon the occurrence of any of the following
events, to-wit:
<PAGE>
(a) Nonpayment within thirty (30) days of the date due of the
principal and interest on this Debenture; or
(b) Any receivership, insolvency proceeding, bankruptcy, assignment
for the benefit of creditors, reorganization, whether or not pursuant to
bankruptcy laws, dissolution, liquidation or any other marshalling of assets and
liabilities of the Company; or,
(c) If the Registration Statement (defined in Section 7 hereof) ceases
to be effective for any period of time beyond a Suspension Period (defined in
Section 7 hereof) through the negligence, recklessness or bad faith of the
Company.
Holder may declare the entire principal and accrued interest on this Debenture
due and payable immediately, and upon such declaration this Debenture shall
become immediately due and payable without further notice, demand or
presentment.
The Company agrees to pay all reasonable costs of collection, including
reasonable attorneys' fees, in the event that payment shall not be made under
the terms and conditions of this Debenture.
3. Subordination. The indebtedness evidenced by this Debenture is and
shall remain subordinate in right of payment to all Senior Debt to the extent
and in the manner hereinafter set forth. "Senior Debt" shall mean the principal
and interest on indebtedness of the Company to financial institutions for
borrowed money (other than the indebtedness evidenced by this Debenture),
including indebtedness outstanding under that certain Credit Agreement dated
January 17, 1996 with General Electric Capital Corporation, indebtedness to
TimeMasters, Inc. under that certain convertible Promissory Note dated as of
January 17, 1996, and for purchase money loans secured by real estate or
personal property used in connection with the business of the Company, whether
created, incurred or assumed before or after the date hereof, except such as by
its terms is expressly not superior in right of payment to this Debenture, and
renewals, extensions and refundings of any such indebtedness.
Notwithstanding the foregoing, payment of principal and interest on this
Debenture shall not be subordinated to the prior payment of such Senior Debt as
to all amounts which actually are paid by the Company under this Debenture if
the Company is not in default under any or all of said Senior Debt at the time
or times such payment or payments are made.
4. Conversion. This Debenture shall be converted into fully paid and
nonassessable shares of common stock, $.01 par value, of the Company (the
"Common Stock"), upon the terms set forth in this Section 4.
(a) Definitions. For purposes of this Section 4:
(i) "Market Price" shall mean the last sale price of the Common Stock as
reported by the Nasdaq National Market on the immediately preceding trading day
(or if not so quoted, the average of the last bid and asked price quoted by the
three principal market makers in such Common
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<PAGE>
Stock);
(ii) "Base Price" shall mean $6.00 per share, provided that, if the Company
at any time divides the outstanding shares of its Common Stock into a greater
number of shares (whether pursuant to a stock split, stock dividend or
otherwise), and conversely, if the outstanding shares of its Common Stock are
combined into a smaller number of shares, the Base Price in effect immediately
prior to such division or combination shall be proportionately adjusted to
reflect the reduction or increase in the value of each such common share;
(iii) "Suspension Period" shall have the meaning assigned to it in Section 8(a)
of this Debenture.
(iv) "Threshold Amount" shall mean (A) 75,000 shares of Common Stock with
respect to the quarter ending March 31, 1997, (B) 100,000 shares of Common Stock
with respect to the quarter ending June 30, 1997, (C) 125,000 shares of Common
Stock with respect to the quarter ending September 30, 1997, and (D) 150,000
shares of Common Stock with respect to the quarter ending December 31, 1997, and
any calendar quarter thereafter during which this Debenture remains outstanding.
(b) Automatic Conversion. That portion of the principal amount of this
Debenture as would purchase 30,000 shares of the Common Stock at the Market
Price shall be automatically converted into shares of Common Stock, without any
further action by the Company or by the Holder of this Debenture, and the
principal balance of this Debenture shall be reduced by the same amount, at the
close of business on Wednesday of each calendar week during which this Debenture
remains outstanding and unpaid (the "Automatic Conversion Date"), if (i) the
Market Price on the Automatic Conversion Date is equal to or greater than the
Base Price in effect on such Automatic Conversion Date, (ii) the registration
statement filed by the Company pursuant to paragraph 7 has been declared
effective and (iii) the Company has not notified the Holder of a Suspension
Period.
(c) Mandatory Conversion. Notwithstanding Section 4(b), if there remains
outstanding any principal amount of this Debenture and if less than the
Threshold Amount of shares of the Common Stock have been issued upon conversion
of this Debenture in any calendar quarter commencing with respect to the quarter
ending March 31, 1997, this Debenture shall automatically be converted with
respect to the principal amount of this Debenture as would purchase one-half of
the Threshold Amount of shares of the Common Stock at the Market Price at the
close of business on the first and second Wednesday (for a total of the
Threshold Amount of shares) ending at least 72 hours after the Company's
earnings release (a "Mandatory Conversion Date") with respect to such quarter,
without any further action by the Company or by the Holder of this Debenture,
and the principal balance of this Debenture shall be reduced, provided that (i)
the registration statement filed by the Company pursuant to paragraph 7 has been
declared effective and (ii) the Company has not notified the Holder of a
Suspension Period.
(d) Record of, and Procedures for, Automatic or Mandatory Conversion. The
trading records of the Common Stock, as reported by the Nasdaq Stock Market, or
as reported by the three principal market makers of such Common Stock if the
Common Stock is not then traded, shall be conclusive evidence of such conversion
and of the extinguishment of the obligation of the
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<PAGE>
Company to pay the principal balance so converted. The Company shall, by the
close of business on each Automatic Conversion Date or Mandatory Conversion
Date, advise and provide issuance instructions to its transfer agent of such
automatic conversion with an objective of issuing certificates in the Holder's
name within three days. The Company shall simultaneously notify Holder, or such
agent of Holder as it may designate, or both, of such conversion by facsimile to
the number below. Failure by the Company to provide such issuance instructions
to the Transfer Agent or notice to the Holder shall not effect the validity of
such conversion as of the close of business on the Automatic Conversion Date or
Mandatory Conversion Date.
(e) Optional Conversion. This Debenture may be converted, in whole or in part,
at the Option of the Holder, at any time that the Base Price exceeds the Market
Price. The conversion price for purposes of this paragraph shall be equal to the
Base Price. To convert this Debenture into shares of the Common Stock pursuant
to this Section 4(e), Holder shall give written notice to the Company that it
elects to convert all, or any part of this Debenture, which notice shall specify
the portion hereof to be converted. As promptly as possible thereafter, the
Company shall issue and deliver to Holder certificates representing the number
of shares of Common Stock into which this Debenture has been converted.
Thereupon, this Debenture, or the portion hereof converted, shall be deemed to
have been satisfied and discharged, and the shares of Common Stock into which
this Debenture shall be so converted shall be fully paid and nonassessable
shares.
(f) Fractional Shares. The Company shall not be required to issue any fraction
of a share of Common Stock representing a fraction of such shares of Common
Stock upon any conversion of this Debenture. The Company may make a cash
adjustment in lieu of any such fraction of a share which otherwise would be
issuable upon such conversion.
(g) Reorganizations. If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of the Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for such common shares, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, Holder shall
have the right to purchase and receive upon the basis and upon the terms and
conditions specified in this Debenture and in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock, other
securities or assets as would have been issued or delivered to Holder if Holder
had exercised this Debenture and had received such shares of Common Stock
immediately prior to such reorganization, reclassification, consolidation,
merger or sale. The Company shall not effect any such consolidation, merger or
sale, unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed to the registered Holder of this Debenture at the last address of
such Holder appearing on the books of the Company, the obligation to deliver to
such Holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such Holder may be entitled to purchase.
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<PAGE>
5. Transfer and Investment Representation. Holder understands that this
Debenture has not been registered under the federal Securities Act of 1933 or
any state securities laws and that this Debenture may not be subsequently
transferred or resold without (i) such registration, or (ii) the existence of an
exemption from the applicable registration requirements. In furtherance of this
representation, Holder agrees that this Debenture shall be legended to prohibit
transfer, sale or other disposition except in compliance with such investment
representation.
6. Transfer of Debenture and Common Stock.
---------------------------------------
(a) Unless such transfer is made pursuant to registration in accordance with
Section 7, Holder agrees to give written notice to the Company before
transferring this Debenture or transferring any shares of the Common Stock
issuable or issued upon the exercise of this Debenture of Holder's intention to
do so, describing briefly the manner of any proposed transfer of this Debenture
or Holder's intention as to the shares of Common Stock issuable upon the
exercise hereof or the intended disposition to be made of shares of Common Stock
upon such exercise. Promptly upon receiving such written notice, the Company
shall present copies thereof to legal counsel for the Company. If, in the
opinion of such counsel, the proposed transfer of this Debenture or disposition
of shares may be effected without registration or qualification (under any
federal or state law) of this Debenture or the shares of Common Stock issuable
or issued upon the exercise hereof, the Company, as promptly as practicable,
shall notify Holder of such opinion, whereupon Holder shall be entitled to
transfer this Debenture, or to exercise this Debenture in accordance with its
terms and dispose of the shares received upon such exercise or to dispose of
shares of Common Stock received upon the previous exercise of this Debenture,
all in accordance with the terms of the notice delivered by Holder to the
Company, provided that an appropriate legend in substantially the form set forth
at the end of this Debenture respecting the foregoing restrictions on transfer
and disposition is endorsed on this Debenture or the certificates for such
shares.
(b) Holder further agrees that, notwithstanding any registration of the resale
of the Common Stock issuable upon conversion of this Debenture in accordance
with Section 7, and unless the Company is in default under this Debenture,
without the written consent of the Company (as certified by its Chief Executive
Officer) Holder will not sell, transfer or assign in any calendar week prior to
the original scheduled maturity of this Debenture more than 30,000 shares of the
Common Stock issued upon Automatic or Optional conversion of this Debenture.
Holder and the Company further agree that in addition to the shares of Common
Stock permitted to be sold upon Automatic Conversion and Optional Conversion,
Holder may sell, in any calendar week, up to 50% of the Common Stock which has
been issued through Mandatory Conversion in that calendar quarter pursuant to
Section 4(c) of this Debenture. Holder also agrees to execute its trades in a
reasonable and orderly fashion. Holder further agrees that the Company may
place stop transfer orders and a legend on the certificates representing the
shares issued upon conversion of the Debentures referencing such restrictions.
7. Registration of Common Stock. (a) The Company shall prepare and file with
the Securities and Exchange Commission (the "Commission") as soon as practicable
after execution of this Debenture, a registration statement ("Registration
Statement"), on such form as is available to the Company, relating to the resale
of the Common Stock issuable upon conversion
-5-
<PAGE>
of the Debenture in accordance with the methods of distribution set forth in
such Registration Statement (which shall not include any distribution in
violation of section 6(b) of this Debenture) and shall use its best efforts to
cause such Registration Statement to be declared effective by the Commission as
soon as reasonably practicable thereafter. The Company agrees to use its best
efforts to keep such Registration Statement continuously effective for a period
of two years after the date hereof, or such shorter period as is necessary to
allow all of the shares of Common Stock issued upon conversion of the Debentures
to be sold; provided, however, that the Company need not maintain such
Registration Statement, nor update or amend the same in accordance with
subparagraph (b), (i) during any period deemed necessary by the Company or any
underwriter in connection with any offering of shares by the Company, or (ii)
during any period deemed necessary by the Company, not to exceed thirty (30)
days, which thirty (30) day period may be extended with consent of Holder, which
consent shall not be unreasonably withheld, to consider and act upon an material
plan of acquisition or disposition, any tender offer or any merger,
consolidation, corporate reorganization or restructuring or other transaction
material to the Company and its subsidiaries taken as a whole (a "Suspension
Period").
(b) The Company will:
(i) except during a Suspension Period, prepare and file with the Commission
such amendments to such Registration Statement and supplements to the prospectus
contained therein as may be necessary to keep such Registration Statement
effective for such period as may be reasonably necessary to effect the sale of
such securities, not to exceed two (2) years, which two (2) year period shall
automatically be extended for a period of time equal to any Suspension Periods
declared by the Company during the term of this Debenture.
(ii) furnish to the Holder such reasonable number of copies of the Registration
Statement, preliminary prospectus, final prospectus and such other documents
relating solely to the sale of the securities as the Holder may reasonably
request;
(iii) use its best efforts to register or qualify the securities covered by
such Registration Statement under such state securities or blue sky laws of such
jurisdictions as the Holder may reasonably request within 20 days following the
original filing of such Registration Statement, except that the Company shall
not for any purpose be required to execute a general consent to service of
process or to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified; and
(iv) except during a Suspension Period, prepare and promptly file with the
Commission and promptly notify the Holder of the filing of such amendment or
supplement to such Registration Statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading.
(c) The Company shall bear the following fees, costs and expenses in connection
with such
-6-
<PAGE>
registration: all registration, filing and NASD fees, printing expenses, fees
and disbursements of counsel and accountants for the Company, all internal
Company expenses, the premiums and other costs of the Company's policies of
insurance against liability arising out of the sale, and all of the Company's
legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to be
offered are to be registered or qualified. Fees and disbursements of counsel and
accountants for Holder, underwriting discounts and commissions and transfer
taxes for Holder and any other expenses incurred by Holder not expressly
included above shall be borne by Holder.
(d) (i) The Company will indemnify and hold harmless Holder and any
underwriter (as defined in the Securities Act) for Holder from and against any
and all loss, damage, liability, cost and expense to which Holder or any such
underwriter may become subject under the Securities Act or otherwise, insofar as
such losses, damages, liabilities, costs or expenses are caused by any untrue
statement or alleged untrue statement of any material fact contained in such
Registration Statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, damage, liability,
cost or expense arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by Holder or such underwriter. Holder will indemnify and
hold harmless the Company and any underwriter from and against any and all loss,
damage, liability, cost or expense to which the Company or any underwriter may
become subject under the Securities Act or otherwise, insofar as such losses,
damages, liabilities, costs or expenses are caused by any untrue or alleged
untrue statement of any material fact contained in such Registration Statement,
any prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with information furnished by
Holder. Holder's liability under this Debenture shall not exceed the total
amount received by it hereunder.
(ii) Promptly after receipt by an indemnified party pursuant to the provisions
of paragraph (i) of this section of notice of the commencement of any action
involving the subject matter of the foregoing indemnity provisions, such
indemnified party will, if a claim thereof is to be made against the
indemnifying party pursuant to the provisions of said paragraph (i), promptly
notify the indemnifying party of the commencement thereof; but the omission to
so notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than hereunder. In case such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof with
counsel satisfactory to the indemnifying party; provided, however, if the
defendants in any action include both the indemnified party and the indemnifying
party and there is a conflict of interest which would
-7-
<PAGE>
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel reasonably satisfactory to the indemnifying party to
participate in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party pursuant to the provisions of said paragraph
(i) for any legal or other expense subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation, unless (x) the indemnified party shall have employed counsel in
accordance with the proviso of the preceding sentence, or (y) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.
8. Covenants of the Company. So long as any amount is owing to Holder
pursuant to this Debenture, the Company covenants and agrees with Holder as
follows:
(a) Within forty five (45) days after the end of each fiscal quarter, the
Company shall deliver to Holder unaudited financial statements (consisting of a
balance sheet and a statement of receipts and expenditures) for such fiscal
quarter, which financial statements shall be certified as correct by the chief
financial officer of the Company;
(b) Within ninety (90) days after the end of each fiscal year, the Company
shall deliver to Holder a copy of its financial statements for such fiscal year,
which financial statements shall have been audited by the Company's regular
certified public accountants; and
(c) The Company shall reserve and set aside a sufficient number of authorized
shares of its Common Stock for issuance to Holder upon the exercise of the
conversion rights contained in this Debenture.
9. Notices. All demands and notices to be given hereunder shall be delivered
or sent by certified mail, return receipt requested or by telefax transmission
with proper evidence of receipt. In the case of the Company, such notice should
be addressed to its corporate headquarters, LaserMaster Technologies, Inc., 7090
Shady Oak Road, Eden Prairie, MN 55344, Tel. (612) 941-8687, Fax (612) 941-8652
with copies to "General Counsel, LaserMaster Technologies", at the same address
until a new address shall have been substituted by like notice; and in the case
of Holder, addressed to Holder care of Kazuhiko Yoshie, 20 William Street,
Wellesley, Massachusetts, Tel. (617) 237-2115, Fax. (617) 237-1046 until a new
address shall have been substituted by like notice with copies to Paul F.
O'Donnell, III, Esq., Hinckley, Allen & Snyder, One Financial Center, Boston, MA
02111 Tel. (617) 345-9000, Fax. (617) 345-9020.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be executed and
delivered by its duly authorized officer as of the date first above written.
LASERMASTER TECHNOLOGIES, INC. MARUBENI INTERNATIONAL
ELECTRONICS CORPORATION
By /s/ Mel Masters By: /s/ Hideaki Takagi
------------------------ ------------------------
Melvin Masters, President Hideaki Takagi
President & CEO
#110479v3
-9-
<PAGE>
Exhibit 10.5
EXECUTION COPY
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
May 15, 1996, is by and between LASERMASTER CORPORATION, a Minnesota corporation
("Borrower"), a GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in
its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for
Lenders.
RECITALS
A. Borrower, Agent and Lenders are parties to that certain Credit
Agreement dated as of January 17, 1996 (the "Credit Agreement"), pursuant to
which Lenders have made and may hereafter make loans and advances and other
extensions of credit to Borrower;
B. Borrower, Agent and Lender wish to amend certain provisions of the
Credit Agreement, all on the terms and conditions set forth in this Amendment;
and
C. Capitalized terms used in this Amendment and not otherwise defined in
this Amendment shall have the meanings ascribed to them in Schedule A to the
Credit Agreement. This Amendment shall constitute a Loan Document. These
Recitals shall be construed as part of this amendment.
NOW, THEREFORE, in consideration of the foregoing and the agreements,
promises and covenants set forth herein and in the Credit Agreement, and for
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Amendment of the Credit Agreement.
1.1 The definition of "EBITDA" appearing in Schedule A to the Credit
Agreement is hereby amended by inserting the following sentence at the end of
such definition:
"Notwithstanding the foregoing, there shall be excluded from the
computation of net income for purposes of computing EBITDA any non-
operating gain, including but not limited to, any gain which must be
treated under GAAP as an extraordinary item, an unusual gain, a prior
period adjustment, a normal recurring correction and adjustment, a change
in accounting principles, or as a gain or income from discontinued
operations, or any gain realized upon the sale or other disposition of any
property or asset that is not sold in the ordinary course of business."
1.2 Paragraph (c) of Schedule H to the Credit Agreement is hereby amended
to read as follows:
"(c) Minimum Net Worth. Borrower and its Subsidiaries (other than
LaserMaster Europe) on a consolidated basis shall maintain at all times Net
Worth equal to or greater than $2,500,000."
1.3 Paragraph (d) of Schedule H to the Credit Agreement is hereby amended
to read as follows:
<PAGE>
"(d) Minimum Debt Service Coverage Ratio. Borrower and its
Subsidiaries (other than LaserMaster Europe) on a consolidated basis shall
have at the end of each Fiscal Quarter, a Debt Service Coverage Ratio for
the 12-month period then ended (or for the Fiscal Quarters ending on or
before June 30, 1997, the period from July 1, 1996 to such date) of not
less than (i) with respect to the Fiscal Quarter ending September 1996,
0.00 to 1.00 and (ii) with respect to the Fiscal Quarter ending December
31, 1996 and each Fiscal Quarter thereafter, 1.00 to 1.00."
2. Conditions to Effectiveness. This Amendment shall become effective
upon satisfaction of the following conditions:
(a) Agent shall have received duly executed counterparts of this
Amendment; and
(b) Agent shall have received such other documents, instruments or
agreements as Agent may reasonably request.
3. Due Execution, Delivery and Performance by Borrower; No Conflicts.
Borrower hereby represents and warrants to Agent and Lenders that the execution,
delivery and performance by Borrower of this Amendment and each of the documents
and agreements described herein, or contemplated hereby, to which Borrower is a
party (a) are within its corporate powers and have been duly authorized by all
necessary corporate action on the part of Borrower, and this Amendment and such
documents and agreements are the legal, valid and binding obligation of Borrower
enforceable against Borrower in accordance with their respective terms; (b) are
not in contravention of any provision of Borrower's certificate or articles or
incorporation or bylaws; (c) will not violate any law or regulation, or any
order or decree of any court or governmental instrumentality; (d) will not
conflict with or result in the breach or termination of, constitute a default
under or accelerate any performance required by, any indenture, mortgage, deed
of trust, lease, agreement or other instrument to which Borrower is a party or
by which Borrower or any of its property is bound; (e) will not result in the
creation or imposition of any Lien upon any of the property of such Person other
than those in favor of Agent, on behalf of itself and Lenders, all pursuant to
the Loan Documents; and (f) do not require the consent or approval of any
Governmental Authority or any other Person.
4. Status of Loan Documents; Reference to Credit Agreement. Except as
specifically modified and amended hereby, the Credit Agreement and the other
Loan Documents shall remain in full force and effect and effect and are hereby
ratified and confirmed. This Agreement shall not operate as a waiver of any
provision of the Credit Agreement or the other Loan Documents, nor is it to be
construed as a release or waiver of any Default or Event of Default, whether now
existing or hereafter arising, or of any of the rights, powers or remedies of
Lenders or Agent under the Credit Agreement or any of the other Loan Documents.
Upon the effectiveness of this Agreement each reference in (a) the Credit
Agreement to "this Agreement," "hereunder," "hereof," or words of similar import
and (b) any other Loan Document to "the Credit Agreement" shall, in each case
and except as otherwise specifically stated therein, mean and be a reference to
the Credit Agreement, as amended and modified hereby pursuant to the terms
hereof.
5. Fees and Expenses. As provided in Section 11.3 of the Credit Agreement,
Borrower agrees to pay on demand all fees, costs and expenses incurred by Agent
in connection with the preparation, execution and delivery of this Amendment.
6. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
7. Counterparts. This Amendment may be executed in any number of separate
counterparts, each of which shall collectively and separately constitute one
agreement.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first written above.
LASERMASTER CORPORATION
By: /s/Melvin Masters
------------------
Title: CEO
---------------
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Glenn P. Bartley
--------------------
Title: Its Duly Authorized Signatory
-----------------------------
<PAGE>
REAFFIRMATION OF GUARANTIES
The undersigned acknowledge receipt of copies of the First Amendment to
Credit Agreement dated as of May 15, 1996 and each of the undersigned hereby
reaffirms its respective obligations applicable under the Holdings Guaranty of
Guaranty, each dated as of January 17, 1996 in favor of General Electric Capital
Corporation, as Agent and Lender.
Dated: May ____, 1996 LASERMASTER TECHNOLOGIES, INC.
By: /s/Melvin Masters
------------------
Title: CEO
---------------
LASERMASTER ASIA/PACIFIC, LTD.
By: /s/Melvin Masters
------------------
Title: CEO
---------------
COLORMASTERS, INC.
By: /s/Melvin Masters
------------------
Title: CEO
---------------
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Item 15(a)(3)
PER SHARE EARNINGS (LOSS) COMPUTATIONS Exhibit 11.1
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
PRIMARY
-------
Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636
Add:
Interest on convertible subordinated debentures,
net of applicable income taxes 262,653
------------ ----------- -----------
Net (loss) earnings for primary earnings per share $(10,461,534) $ 206,474 $ 6,926,289
============ =========== ===========
Weighted average number of common shares
outstanding 11,305,232 11,097,091 10,191,694
Add:
Common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of warrants and employee stock options 844,688 1,109,189 1,468,044
Common stock equivalents from assumed exercise of
convertible debentures 529,158
------------ ----------- -----------
Weighted average number of shares used in
the calculation of primary earnings per share 12,149,920 12,206,280 12,188,896
============ =========== ===========
Primary (loss) earnings per common and common
equivalent share $(0.86) $0.02 $0.57
============ =========== ===========
FULLY DILUTED
-------------
Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636
Add:
Interest on convertible subordinated debentures,
net of applicable income taxes 262,653
------------ ----------- -----------
Net (loss) earnings for fully diluted earnings per share (10,461,534) 206,474 6,926,289
============ =========== ===========
Weighted average number of common shares
outstanding 11,305,232 11,097,191 10,191,694
Add:
Common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of warrants and employee stock options 1,020,376 1,216,355 1,608,528
Common stock equivalents from assumed exercise
of convertible debentures 529,158
------------ ----------- -----------
Weighted average number of shares used in
the calculation of fully diluted earnings per share 12,325,608 12,313,446 12,329,380
============ =========== ===========
------------ ----------- ----------
Fully diluted (loss) earnings per common and
common equivalent share $ (0.85) $ 0.02 $ 0.56
============ =========== ==========
</TABLE>
The calculation of fully diluted EPS uses the higher of the ending market price
for the period or the average market price.
For the year ended June 30, 1996, the inclusion of common stock equivalents in
the primary and fully diluted earnings per share shown above have an anti-
dilutive effect on the per share loss reported. Consistent with the provisions
of Accounting Principles Board No. 15, the Company's earnings per share reported
on its statement of operations for the year ended June 30, 1996, exclude common
stock equivalents in the earnings per share amounts reported. Accordingly, such
per share amounts do not agree with the amounts shown above.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERNAL FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> APR-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 90,851 90,851
<SECURITIES> 0 0
<RECEIVABLES> 12,563,112 12,563,112
<ALLOWANCES> 2,475,000 2,475,000
<INVENTORY> 13,524,314 13,524,314
<CURRENT-ASSETS> 32,666,842 32,666,842
<PP&E> 5,099,560 5,099,560
<DEPRECIATION> 14,299,174 14,299,174
<TOTAL-ASSETS> 46,544,964 46,544,964
<CURRENT-LIABILITIES> 30,086,929 30,086,929
<BONDS> 0 0
<COMMON> 114,261 114,261
0 0
0 0
<OTHER-SE> 15,523,679 15,523,679
<TOTAL-LIABILITY-AND-EQUITY> 46,544,964 46,544,964
<SALES> 23,759,161 93,592,044
<TOTAL-REVENUES> 23,759,161 93,592,044
<CGS> 20,409,349 64,378,882
<TOTAL-COSTS> 20,409,349 64,378,882
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 458,699 1,784,365
<INCOME-PRETAX> (11,076,892) (15,608,534)
<INCOME-TAX> 3,687,000 5,147,000
<INCOME-CONTINUING> (7,389,892) (10,461,534)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,389,892) (10,461,534)
<EPS-PRIMARY> (.65) (.93)
<EPS-DILUTED> (.65) (.93)
</TABLE>
<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-K 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; uncertain demand for new or
existing products; the impact of competitor's advertising, products or pricing;
availability or reliability of component parts, including sole source parts;
manufacturing limitations; availability of sources of financing; economic
developments both domestically and internationally; new accounting standards;
and, the 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 adequately financed its cash requirements in the past,
net operating losses in fiscal 1996 and manufacturing and inventory requirements
for current and new printer engines have resulted in a need for additional
financing. In September 1996, projected cash requirements in excess of
available sources required the issuance of private placements of common stock
and warrants to purchase common stock in the Company. There can be no
assurances that cash availability under the credit agreement and proceeds from
the private placements 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. In addition, there can be no assurance that the Company
can achieve profitability on a quarterly or annual basis in the future.
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 depends upon its
ability to enhance current products, to develop and introduce new and superior
products on a timely basis and at acceptable pricing, to respond to evolving
customer requirements, and to design and build products which achieve general
market acceptance. Any quality, durability or reliability problems with such
new products, regardless of materiality, or any other actual or perceived
problems with new Company products could have a material adverse effect on
market acceptance of such products. There can be no assurance that such
problems or perceived problems will not arise with respect to any existing
products or that even in the absence of such problems, the Company's products
will achieve market acceptance. In addition, the market anticipation or the
announcement of new products and technologies could cause customers to defer
purchases of the Company's existing products, which could have a material
adverse effect on the Company's business and financial condition. The Company
is currently undertaking a number of development projects. Although the Company
has had successes introducing new products, some products have experienced
limited market acceptance, the introductions of some products have been delayed,
and the quality and reliability reputation of certain products may unfavorably
affect new products. There can be no assurance that the Company will be
successful with future product introductions, that future market introductions
will be timely and competitive, that future products will be priced
appropriately, or that future products will achieve market acceptance. The
<PAGE>
Company's inability to achieve market acceptance, for technological or other
reasons, could have a material adverse effect on the Company's financial
condition.
Various potential actions by any of the Company's competitors, especially those
with a substantial market presence, could have a material adverse effect on the
Company's business, financial condition and results of operations. Such actions
may include reduction of product price, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways, product
bundling or other competitive actions. Additionally, a competitors entry into
the wide-format market in such ways as to compete more directly and effectively
with the Company's products could adversely affect operational results.
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 longer operating histories, greater technical
resources, more established and larger sales and marketing organizations,
greater name recognition, larger customer bases and significantly greater
financial resources than the Company. Suppliers of large-format print engines
and systems compete on the basis of print quality, color, print time, print
size, product features, including ease of use and service, and price.
Competitive product sales practices such as price reductions, increased
promotion, product giveaways and bundling, or announcement or accelerated
introduction of new or enhanced products could have a material adverse effect on
the sales and financial condition of the Company. New product introductions and
changes in pricing structure by competitors have had, and can be expected to
continue to have, a significant impact on the demand for the Company's 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 sales of plain-paper typesetting products. In addition,
the manufacturer of the printing engine for the Company's DisplayMaker
Professional sells its own branded products in direct competition with the
Company's products and continues to sell its engines to other systems
integrators and distributors that compete directly with the Company. Also, it
is possible that the companies that supply the Company with consumable products
such as ink and media will compete with the Company by selling directly to users
or sell to competitors who may offer the products to the users. Further, a
number of competitors have introduced consumables which they allege to be
compatible with the Company's products and have priced the consumables below the
LaserMaster-branded consumables. Although the Company believes that its Big
Color products possess certain advantages over the competitors' products, the
increased competition has impacted sales volumes and margins and may continue to
impact volumes and margins in the future. The Company has generally competed in
these markets by introducing technologically advanced products that create new
market demand and products which offer optimum performance characteristics.
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 or
that other competitors will not achieve sufficient product performance with
products offering better pricing or other competitive features.
The Company's PressMate-FS, DisplayMaker Express and DesignWinder products are
based on relatively new technology, are complex and must be reliable and durable
to achieve market acceptance and enhance revenue opportunities. Development and
production of new, complex technologies and products often have associated
difficulties and delays. Consequently, customers may experience reliability and
durability problems that arise only as the product is subjected to extended use
over a prolonged period of time. The Company and certain DisplayMaker Express
users have encountered operational problems which the Company is addressing.
However, given the recent introduction of several new engines, there can be no
assurance that the Company has successfully resolved these operational problems
or that the Company will successfully resolve any future problems in the
manufacture or operation of the DisplayMaker Express printers or any new
product. Failure by the Company to resolve manufacturing or operational
problems with the DisplayMaker Express printer or
2
<PAGE>
any new product in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 and standards of product
performance and quality. In addition, recent losses from operations of the
Company have restricted cash availability and the ability to keep supplier debt
current or within the established credit limits. The requirement to bring
certain component suppliers' debt obligations current, or other restrictions in
credit terms of such component suppliers, could result in an inability to
manufacture certain product lines and thereby adversely affect the financial
performance of the Company. 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 typesetting 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 affect
on the Company's operating results.
In addition, the Company is dependent upon a third-party supplier for the inkjet
engine used in its DisplayMaker Professional product. The Company believes that
it will be able to purchase adequate inventory of current and future versions of
the supplier's print engines to meet its requirements for integration into the
DisplayMaker product line. Nevertheless, there can be no assurances that the
supplier will make its print engines available on the same terms as the current
print engine or that the Company will be able to successfully integrate product
revisions into the Company's product line in the time frame required to minimize
competitive sales pressures in the marketplace.
The Company is also dependent on a sole source supplier for the printheads used
in DisplayMaker Express. The Company has experienced availability and quality
issues with this supplier that have affected shipping schedules and customer
satisfaction and have negatively impacted operating results in the past. There
can be no assurance that this supplier will be able to meet the Company's
production requirements in the future or that the quality of the product will be
acceptable.
The Company sells consumable print media and inks for use with its Big Color
product line, and film used with the PressMate-FS. The Company depends on the
availability of consumable products to support its installed base of print
engines. There is no assurance that the suppliers of these consumables will
continue to offer their products to the Company, or that the consumable products
will continue to be available to the company at the same quarterly, pricing and
terms. The unavailability of consumable products or negative changes in quality
could adversely impact the market acceptance of the Company's new and existing
products, and may adversely affect sales of consumables.
Uncertainty Regarding Development of Wide-Format Market; Uncertainty Regarding
Market Acceptance of New Products. The Wide-Format market is relatively new and
evolving. The Company's future financial performance will depend in large part
on the continued growth of this market and the continuation of present large-
format printing trends such as use and customization of large-format
advertisements, use of color, transferring of color images onto a variety of
substrates, point-of-purchase printing, in-house graphics design and production
and the demand for limited printing runs of less than 200 copies. The failure
of the Wide-Format market to achieve anticipated growth levels or a substantial
change in large-format printing customer preferences could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, in a new market,
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customer preferences can change rapidly and new technology can quickly render
existing technology obsolete. Failure by the Company to respond effectively to
changes in the Wide-Format market, to develop or acquire new technology or to
successfully conform to industry standards could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company's products currently target the high-performance production segment
of the Wide-Format printing market. The future success of the Company will
likely depend on its ability to develop and market new products that provide
superior performance at acceptable prices within this segment. In addition, the
Company's future success will likely depend on the Company's ability to
successfully introduce lower-cost products aimed at a broader segment of the
Wide-Format market. Any quality, durability or reliability problems with such
new products, regardless of materiality, or any other actual or perceived
problems with new Company products, could have a material adverse effect on
market acceptance of such products. There can be no assurance that such
problems or perceived problems will not arise or that, even in the absence of
such problems, new Company products will receive market acceptance. In
addition, the announcement by the Company of new products and technologies could
cause customers to defer purchases of the Company's existing products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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; fluctuations and
availability in customer financing; the relative percentages of sales of
consumables and printer architectures; risks related to international sales and
trade; 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. Certain products
require significant capital expenditures, causing some customers to delay their
purchasing decision. Delays in purchases of low volume, high-cost printers
may cause significant fluctuations in the sales volume for a given period.
Also, the Company's manufacturing plans, sales staffing levels and marketing
expenditures are primarily based on sales forecasts. Accordingly, 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 could 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 sales of the
Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, or substitute third-party consumables for
those of the Company, the Company's results of operations could be adversely
affected. Further, although the Company's consumables are manufactured
specifically to operate with its printing products to produce optimum results,
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, or that other products will not produce results which are
satisfactory to the customer at a lower cost. 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 misappropriation of trade secrets, there can be no assurances
that other manufacturers will not independently and legitimately develop
competing consumable products. In addition, limitations in the availability of
sole source consumables or changes in credit or trade terms from sole sources
could adversely affect the sales of consumables.
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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 patents, 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. Further, the Company's
intellectual property may not be subject to the same level of protection in all
countries where the products are sold. There can be no assurance that the
measures taken by the Company will be adequate to protect the intellectual
property or 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)/, 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 be issued from any of these pending applications,
although the ThermalRes process and mechanical aspects of the PressMate engine
received U.S. patent coverage during May 1996. With regard to current patents or
patents that may be issued, 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, invalidated or violated, requiring expenditures
of cash to pursue and enforce the Company's rights in the patented technology.
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. Although the Company has not received
any notices from third parties alleging intellectual or proprietary property
infringement, 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 expend funds defending such claims or requiring
the Company to enter into royalty arrangements on such terms as may be
available, which may adversely affect financial performance of the company. Any
claim that the Company's current or future products or manufacturing processes
infringes on the proprietary rights of others, with or without merit, could
result in costly litigation which could adversely affect the financial
performance of the company.
The Company is actively pursuing development of new and unique print solutions
and processes, media and inks. Although the research and development process
involves an analysis of protected proprietary rights in any technology that is
being pursued, there is no assurance that competitors or others will not
interpret any such products or processes developed by the Company as violating
protected intellectual rights and pursue legal action, which could be costly and
may affect the financial performance of the Company. In addition, although the
Company does not have any knowledge of violations of its intellectual property
rights, there can be no assurance that the Company will not be forced to take
action to protect its intellectual property portfolio. Such enforcement
activity could require the expenditure of significant cash resources and could
affect the financial performance of the Company.
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or
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manufacturing processes infringe the proprietary rights of others. Any such
claim, with or without merit, could result in costly litigation or might require
the Company to enter into a royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
There can be no assurance that others will not independently develop similar
products, duplicate the Company's products or design products that circumvent
any patents used by the Company. No assurance can be given that the Company's
processes or products will not infringe patents or proprietary rights of others
or that any licenses required under any such patents or proprietary rights would
be made available on terms acceptable to the Company, if at all. If the company
does not obtain such licenses, it could encounter delay in product introductions
while it attempts to design around such patents, or it could find that the
development, manufacture or sale of products requiring such licenses could be
enjoined. In addition, the Company could incur substantial costs in defending
itself in suits brought against the Company on such patents or in bringing suits
to protect the Company's patents against infringement. If the outcome of any
such litigation is adverse to the Company, the Company's business could be
adversely affected.
Litigation and Litigation Costs. The Company and three of its officers are
currently subject to various claims in a securities lawsuit relating to a
decline in the market price of the Company's common stock in December 1994. The
Company is vigorously contesting the action against itself and its officers.
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 certain statutory
requirements are met.
Further, the Company has instituted action against a competitor for patent
infringement, misappropriation of trade secrets and other causes of action. The
competitor counter-claimed for false advertising, patent misuse, and unfair
competition by LaserMaster. The Company believes these counter-claims are
without merit. Such competitor has also published an allegation that the
Company's consumables sales practices are in violation of trade and antitrust
laws. Although the Company does not believe any of its practices violate
applicable trade or anti-trust laws, there is no assurance that claims or
actions will not be commenced by customers, competitors or governmental
authorities based on trade or anti-trust claims which could affect the Company's
operations and cash position.
The Company is also engaged in various actions related to transactional matters,
customers credit and product quality and/or warranty issues. Some of these
actions include claims against the Company for punitive, exemplary or multiple
damages. An award of punitive damages may not bear a direct relationship to the
actual or compensatory damages claimed from the Company. Although the Company
does not believe there are any actions pending or threatened against the Company
which would have a material adverse impact on the financial position of the
company, there is no assurance that there will not be an adverse award of
multiple punitive or exemplary damages which could adversely affect the cash
position of the company.
Any litigation which the Company is involved may have an adverse impact on the
Company's operations and may result in a distraction or diversion of
management's attention, thereby adversely affecting the operations by the
Company.
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, differing economic conditions
and trends, 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.
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Fluctuations in currency exchange rates could result in lower sales volume
reported in U.S. dollars. Fluctuations in foreign exchange rates are
unpredictable and may be substantial. 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 retain key
personnel. The Company also depends on its ability to attract and retain highly
skilled personnel. Competition for employees in this market is high and there
can be no assurance that the Company will be able to attract and retain the
employees needed. In addition, past financial performance of the Company may
limit the ability to hire and retain management professionals.
Environmental. The Company is subject to local and federal laws and regulations
regarding the use, storage and disposition of inks used with the Company's
print products. Although the Company believes it is in compliance with all such
laws and regulations, and the Company is not aware of any notice or complaint
alleging any violation of such laws or regulations, there can be no assurance
that there will not be some accidental contamination, disposal or injury from
the use, storage, or disposition of inks or other materials used in the
Company's operations. In the event of such accident, the Company could be held
liable for any damages that result and any such liability could have a material
adverse effect on the Company's financial condition. In addition, there can be
no assurance that the Company will not be required to comply with environmental
claims, laws, or regulations in the future which could result in significant
costs which could materially adversely affect the Company's financial condition.
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,
changes in the laws or regulations to which the company may be subject,
announcements of new products or technological innovations by the Company or its
competitors, overall economic conditions and indicators, market conditions
unrelated to Company performance, and general conditions in the industry.
Factors such as quarterly variation in actual or anticipated operating results,
changes in earnings estimates by analysts, and analysts' reactions to Company
statements and actions also contribute to stock price fluctuations. 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
materially affect the market price of the Company's common stock.
One time in the past, following fluctuations in the market price of the
Company's stock, a securities action was commenced alleging that the Company and
certain insiders had knowledge of certain material, adverse information about
the Company prior to the time that such information allegedly caused a drop in
the market price of the stock. Because the Company's stock has historically
fluctuated significantly, it is possible that following a significant change in
the market price of the stock another securities action could be commenced
against the company. Such action, whether commenced by one or more individuals,
or by a class of securities holders, could result in substantial costs and
diversion of management's attention and resources and thereby cause an adverse
effect on the business and financial performance of the Company.
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