<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended September 29, 1996
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________to_____________________________
Commission File No.: 0-18114
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LASERMASTER TECHNOLOGIES, INC.
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(Exact name of registrant as specified in charter)
Minnesota 41-1612861
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(State or other jurisdiction of (IRS 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)
(612) 941-8687
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 9/30/96
- ----- ----------------------
Common Stock, $.01 par value 14,163,455
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
September 29, June 30,
1996 1996
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 845,995 $ 90,851
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$2,032,000 and $2,475,000, respectively 12,973,335 12,563,112
Inventory 15,457,647 13,524,314
Income tax receivable 400,781
Other current assets 2,584,339 2,783,784
Deferred income taxes 3,304,000 3,304,000
----------- -----------
TOTAL CURRENT ASSETS 35,165,316 32,666,842
PROPERTY AND EQUIPMENT, net 4,587,380 5,099,560
CAPITALIZED SOFTWARE, less accumulated
amortization of $4,148,944 and $3,636,979 respectively 4,040,690 4,150,913
DEFERRED INCOME TAXES 2,664,000 2,546,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $1,159,446 and $1,000,154, respectively 2,039,066 2,081,649
----------- -----------
$48,496,452 $46,544,964
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 3,125,420 $ 5,381,037
Note payable-related party 1,765,000 1,765,000
Current maturities of long-term debt 1,214,214 1,248,267
Accounts payable 15,058,012 16,682,191
Accrued payroll and payroll taxes 1,773,390 1,915,908
Income taxes payable 301,474
Other current liabilities 1,309,700 1,200,264
Deferred revenue 1,669,518 1,894,262
----------- -----------
TOTAL CURRENT LIABILITIES 26,216,728 30,086,929
CONVERTIBLE SUBORDINATED DEBENTURE 2,527,830
LONG-TERM DEBT, less current maturities 550,676 820,095
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 14,163,455 and 11,426,134
shares issued and outstanding, respectively 141,634 114,261
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 29,404,957 17,430,555
Notes receivable - stock sales (8,199,998)
Accumulated deficit (2,145,375) (1,906,876)
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TOTAL STOCKHOLDERS' EQUITY 19,201,218 15,637,940
----------- -----------
$48,496,452 $46,544,964
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
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LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 29, September 30,
1996 1995
------------- ------------
<S> <C> <C>
NET SALES $21,452,300 $21,265,871
COST OF GOODS SOLD 13,522,000 12,727,157
----------- -----------
GROSS PROFIT 7,930,300 8,538,714
OPERATING EXPENSES:
Sales and Marketing 4,102,172 5,401,481
Research and Development 1,433,566 1,296,651
General and Administrative 2,354,750 2,874,061
----------- -----------
7,890,488 9,572,193
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OPERATING PROFIT (LOSS) 39,812 (1,033,479)
OTHER INCOME (EXPENSE):
Interest expense (419,227) (340,449)
Interest income 9,922 4,479
Other income 12,994 54,914
----------- -----------
(396,311) (281,056)
----------- -----------
LOSS BEFORE INCOME TAXES (356,499) (1,314,535)
INCOME TAX BENEFIT 118,000 394,000
----------- -----------
NET LOSS $ (238,499) $ (920,535)
=========== ===========
NET LOSS PER COMMON SHARE: $ (.02) $ (.08)
Weighted average common shares outstanding 11,928,840 12,125,312
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 29, September 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (238,499) $ (920,535)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,266,583 1,400,463
Amortization of deferred financing costs 55,346 30,320
Loss on sale of property and equipment 39,051 7,908
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (118,000)
Change in current assets and current liabilities:
Accounts receivable (410,223) 3,259,959
Inventory (516,668) 978,367
Other current assets 144,099 (307,127)
Income tax receivable 400,781 (98,732)
Accounts payable 44,135 (3,952,150)
Accrued payroll and payroll taxes (142,518) (657,779)
Other current liabilities 109,436 (102,060)
Income taxes payable 301,474 (201,768)
Deferred revenue (224,744) 259,061
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (706,412) (304,073)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (128,277) (376,742)
Additions to capitalized software costs (401,742) (758,483)
Proceeds from sale of property and equipment 6,080 11,318
Additions to patents and other assets (116,709) (323,572)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (640,648) (1,447,479)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 3,801,777 159,975
Net repayments under revolving credit lines (1,396,101) (1,659,388)
Net borrowing from related parties 2,965,000
Additions to long-term debt 159,003
Payments on long-term debt (303,472) (249,697)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,102,204 1,374,893
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 755,144 (376,659)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 90,851 607,223
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 845,995 $ 230,564
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
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LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of presentation -
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been
no material change in the information disclosed in the notes to
consolidated financial statements included in the Annual Report on Form 10-
K of LaserMaster Technologies, Inc. and subsidiaries (the "Company") for
the year ended June 30, 1996. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month
period ended September 29, 1996 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1997.
Effective July 1, 1996 the Company changed its accounting periods whereby
each quarter ends on the Sunday closest to the end of the quarter, except
for the fourth quarter which ends on June 30. As a result, information
reported for the first quarter of fiscal 1997 is as of September 29, 1996,
and for the three months ended September 29, 1996. Management does not
believe this change has a material impact on comparability to prior
periods.
2. Inventory -
Inventory consists of the following:
<TABLE>
<CAPTION>
September 29, June 30,
1996 1996
------------- -----------
<S> <C> <C>
Raw materials
Purchased printer engines $ 263,116 $ 469,870
Completed subassemblies 2,959,213 3,053,985
Raw materials 5,607,861 5,994,178
Work in process 574,064 436,753
Finished goods 6,053,393/a/ 3,569,528
----------- -----------
$15,457,647 $13,524,314
=========== ===========
</TABLE>
/a/Includes $1.4 million in products to be received from supplier in
settlement of quality issues.
3. Convertible Subordinated Debenture -
In September 1996, the Company entered into a series of agreements with one
of its largest trade creditors, Marubeni International Electronics Corp.
("Marubeni"), converting approximately $1.7 million of trade payables and a
promissory note of $859,516 into a $2.56 million convertible subordinated
debenture. The debenture is due September 12, 1998 together with accrued
interest at an annual rate of 8.0%. The debenture contains voluntary,
automatic and mandatory conversion provisions. Under the voluntary
conversion provision, the debenture is convertible in whole or in part into
common stock of the Company at $6.00 per share at any time that the market
price of the Company's common stock is less than $6.00 per share. The
debenture is automatically converted at the rate of 30,000 shares a week at
the market price of the common stock at any time that the market price
equals or exceeds $6.00 per share. The automatic conversion provision
contains limited price protection under certain circumstances. Under the
mandatory conversion provision, the debenture will be converted on a
quarterly basis at market prices and in share quantities equal to specified
threshold amounts, less any shares converted under the other provisions.
The mandatory provision is effective for the quarter ending March 31, 1997
and continues until the debenture is fully converted. The debenture
contains certain registration rights and also limits the number of shares
that may be sold in the open market in any one week. A related agreement
with the supplier of the product
5
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purchased from Marubeni, requires the supplier to provide approximately
$1.4 million in inventory to the Company in resolution of quality issues
with a product previously supplied by the Marubeni.
4. Stockholders' Equity -
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 in promissory notes of which
$3.8 million was paid in September 1996 and $2.2 million was paid in
October 1996. 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, TimeMasters, Inc. and
affiliates (the "TimeMasters Group" or "TMI") purchased 914,286 shares for
$4 million and received warrants to purchase an additional 914,286 shares
at $7.00 per share. The $4 million aggregate purchase price is represented
by promissory notes of which $2.2 million has been paid as of October 31,
1996. The Company anticipates applying the remaining $1.8 million of the
proceeds yet to be received from these transactions to repayment of LMC's
indebtedness to TMI by direct payment or by offset. The warrants issued to
TMI and Sihl have a term of eight years and may be exercised at any time.
In September 1996, the Company also privately placed 410,256 shares of its
common stock at a purchase price of $4.875 per share for a total of $2
million. The shares were issued to General Electric Capital Corporation,
the Company's senior lender, together with warrants to purchase an
additional 471,286 shares at an exercise price of $6.79 per share.
5. Supplemental disclosure of cash flow information and non-cash financing
activities -
The Company paid and received cash for the following items:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 29, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Interest paid $365,233 $423,831
Income tax refunds received, net 702,255 93,500
</TABLE>
Financing transactions not affecting cash during the three months ended:
<TABLE>
<CAPTION>
September 29, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Accounts payable converted to subordinated debenture $1,668,314
Note payable converted to subordinated debenture 859,516
Common stock issued for notes receivable 8,199,998
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Realization of these forward looking statements is subject to a number
of risks, including the Company's continuing need for additional cash,
sensitivity of the Company to technology changes in the computer printing
industry and intense competition in that industry, the Company's dependence on
sales of newer products with untested market acceptance, dependence on numerous
product components that are available from single sources, fluctuations in
quarterly operating performance, the
6
<PAGE>
strength of the Company's intellectual property protection, the costs of pending
litigation, and the size of the Company's international operations. These and
other factors which are set forth in Exhibit 99 to this Form 10-Q have caused
wide fluctuations in the market price of the Company's common stock and can be
expected to cause similar fluctuations in the future. Refer to Exhibit 99 of
this Form 10-Q for certain important cautionary factors, risks and uncertainties
related to forward-looking statements.
Net sales for the three months ended September 29, 1996 were $21.5 million
compared to $21.3 million in the same period one year ago. Net loss for the
three months ended September 29, 1996 was $238,000 or $.02 per share compared to
a net loss of $921,000 or $.08 per share in the same period one year ago.
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>
Three Months Ended
------------------------------
September 29, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Net Sales ....................... 100.0% 100.0%
Cost of goods sold .............. 63.0 59.9
----- -----
Gross profit .................. 37.0 40.1
Expenses:
Sales and marketing ......... 19.1 25.4
Research and development .... 6.7 6.1
General and administrative .. 11.0 13.5
----- -----
Total operating expenses .. 36.8 45.0
----- -----
Operating profit (loss) ......... .2 (4.9)
Other income (expense):
Interest expense ............ (2.0) (1.6)
Other ....................... 0.1 0.3
----- -----
Loss before income taxes ........ (1.7) (6.2)
Income tax benefit .............. .6 1.9
----- -----
Net Loss ........................ (1.1)% (4.3)%
===== =====
</TABLE>
Net Sales. Net sales for the three months ended September 29, 1996 were $21.5
million compared to $21.3 million in the same period one year ago and $23.8
million in the quarter ended June 30, 1996. During the September 1996 quarter,
the Company recorded hardware/software sales of $11.8 million or 55% of total
net sales compared to $13.9 million or 65% of total net sales in the same period
one year ago and $13.4 million or 56% of net sales in the quarter ended June 30,
1996. During the September 1996 quarter, the Company recorded consumables sales,
consisting primarily of ink, media, film, maintenance contracts and spare parts,
of $9.7 million or 45% of total net sales compared to $7.4 million or 35% of
total net sales in the same period one year ago and $10.4 million or 44% of net
sales in the quarter ended June 30, 1996.
Net sales in the September 1996 quarter, while relatively consistent with the
same period one year ago, have come more from the Company's Big Color products
and less from the plain-paper typesetting products than in the same period one
year ago. This trend is expected to continue as the Company introduces
additional Big Color products such as DisplayMaker/(R)/ Express, which was
introduced late in the December 1995 quarter, and DesignWinder/TM/, which is
scheduled to be shipped in production quantities in the December 1996 quarter.
The decline in plain-paper typesetter sales in the quarter ended September 29,
1996, as compared to the same quarter last year, was largely offset by increases
in sales of Big Color products including DisplayMaker Express. Nevertheless,
quality and supply problems with certain DisplayMaker Express hardware
components in the first quarter of fiscal 1997 caused net sales of that product
to decline 35% from net sales in the immediately preceding quarter. The Company
devoted a considerable amount of time and resources to make certain that
purchasers of DisplayMaker Express do not suffer from quality issues. Customer
misuse, evolving hardware systems and general inexperience with this new
product, however, has caused damage to many of the printer heads in use in the
field. Such heads are only available from a single source and that source has
been unable to meet the
7
<PAGE>
Company's needs. Although the Company believes that it satisfied the field
repair requirements of DisplayMaker Express customers, its inability to obtain
more heads resulted in several unit returns and affected the product's
reputation making it more difficult to sell new machines. This resulted in lower
net revenue in the September 1996 quarter than expected. Progress has been made
on these issues and quality and head production levels are expected to increase
in the second quarter. The Company also anticipates that sales of DesignWinder,
a LaserMaster designed and manufactured drum-based wide format inkjet printer
will contribute to increased Big Color revenue in the quarter ending December
31, 1996.
International Sales. The following table sets forth international sales by
region expressed in thousands and as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 29, September 30,
1996 1995
--------------- --------------
<S> <C> <C> <C> <C>
Europe ..................... $ 4,538 21.1% $4,014 18.9%
Japan, Asia, Pacific ....... 3,753 17.5 2,631 12.4
Latin America .............. 1,386 6.5 916 4.3
Canada ..................... 347 1.6 754 3.5
------- ---- ------ ----
Total international sales .. $10,024 46.7% $8,315 39.1%
======= ==== ====== ====
</TABLE>
The increase in Asian and Latin American sales over the prior year is due
primarily to sales of DisplayMaker Express.
Gross Profit. Gross profit, expressed as a percent of net sales, was 37.0% in
the quarter ended September 29, 1996 compared to 40.1% in the same period one
year ago and 37.3% (excluding special charges) in the fourth quarter of fiscal
1996. Included in the Company's results for the first quarter of fiscal 1997 is
a $1.4 million reduction in costs of goods sold related to the settlement of a
product quality claim with one of its suppliers. Excluding the effects of the
benefit from the quality claim, the Company's gross profit was 30.4%. Gross
profit as a percent of net sales decreased from the fourth quarter of fiscal
1996 as a result of several factors which can be broken into two distinct
groups.
The first group consists of those factors that are considered temporary and
include costs related to component quality issues with DisplayMaker Express and
ColorMark/(R)/ Pro 1600 suppliers, replacement of 400 ml Big Ink/TM/ packs with
the newly released 500 ml size, and a product mix shift in sales whereby fewer
higher-margin DisplayMaker Express print engines were sold, as a percent of
total net sales, in the first quarter of fiscal 1997 than in the fourth quarter
of fiscal 1996. DisplayMaker Express hardware sales represented 18% of total net
sales in the fourth quarter of fiscal 1996 and 13% of total net sales in the
first quarter of fiscal 1997. These factors represent approximately five
percentage points of the decline.
The second group consists of those factors that are considered longer-term in
nature and are in response to market conditions and consist primarily of
generally lower selling prices on certain ink products. These factors represent
approximately two percentage points of the decline. The Company intends to
address its gross margin decline by offering a variety of new high-quality
ColorMark media and ink products for its Big Color printers. These additional
offerings could have a positive impact on gross margins going forward.
Operating Expenses. Sales and marketing expenses were $4.1 million in the
quarter ended September 29, 1996 compared to $5.4 million in the same period one
year ago. The decrease in sales and marketing expenses consists of a $918,000
decrease in sales expenses and a $502,000 decrease in marketing expenses, offset
by a $121,000 increase in technical support expenses from the prior year.
Research and development expenditures were $1.8 million in the September 1996
quarter, of which $401,000 was capitalized, compared to $2.1 million, of which
$758,000 was capitalized, in the same period one year ago.
General and administrative expenses were $2.4 million in the September 1996
quarter compared to $2.9 million in the same period one year ago.
8
<PAGE>
The reduction in sales expenses, research and development expenditures, and
general and administrative expenses from the prior year is due primarily to cost
reduction efforts implemented in the fourth quarter of fiscal 1996. These cost
reduction efforts included the consolidation of certain foreign sales offices
along with personnel reductions throughout the Company.
Other. Interest expense was $419,000 in the September 1996 quarter compared to
$340,000 in the same period one year ago. The increase in interest expense is
primarily due to increased interest-bearing trade credit arrangements with
Company suppliers and also outstanding debt with related parties for the full
quarter in fiscal 1996 compared to only a few weeks in fiscal 1995.
The Company's effective tax rate was 33% in the September 1996 quarter compared
to 30% in the same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the three months ended September
29, 1996 was $706,000 compared to $304,000 for the same period one year ago. The
Company's cash flow was affected by a net loss for the September 1996 quarter of
$238,000 compared to a net loss of $921,000 for the September 1995 quarter.
Included in the September 1996 net loss is a non-cash gain of $1.4 million
related to a settlement of product quality issues with a supplier. Cash flow was
positively affected by the receipt of an income tax refund, net of income tax
payments made, of $702,000 in the September 1996 quarter. Accounts receivable
increased by $410,000 during the quarter ended September 29, 1996 compared to a
decrease of $3.3 million in the same period one year ago. Inventory increased by
$517,000, excluding the non-cash gain from settlement of product quality issues,
during the quarter ended September 29, 1996 compared to a decrease of $978,000
in the same period one year ago. Accounts payable increased $44,000 during the
quarter ended September 29, 1996 compared to a decrease of $4.0 million in the
same period one year ago.
Net cash used in investing activities was $641,000 during the quarter ended
September 29, 1996 compared to $1.4 million in the same period one year ago.
Investment in capital equipment was $128,000 in the September 1996 quarter
compared to $377,000 in the same period one year ago. Investment in intellectual
property was $117,000 in the September 1996 quarter compared to $324,000 in the
same period one year ago. The Company capitalized $402,000 of software
development costs in the September 1996 quarter compared to $758,000 in the same
period one year ago.
Net cash provided by financing activities was $2.1 million during the quarter
ended September 29, 1996 compared to $1.4 million in the same period one year
ago. Included in the September 1996 quarter is $3.8 million in proceeds from the
issuance of common stock, net of transaction costs. The primary source of
financing in the September 1995 quarter was $3.0 million in borrowings from
related parties. Net repayments under revolving credit lines were $1.4 million
in the quarter ended September 29, 1996 compared to $1.7 million in the same
period one year ago.
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 in promissory notes of which $3.8 million was paid in
September 1996 and $2.2 million was paid in October 1996. 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, TimeMasters, Inc. and affiliates (the "TimeMasters Group" or "TMI")
purchased 914,286 shares for $4 million and received warrants to purchase an
additional 914,286 shares at $7.00 per share. The $4 million aggregate purchase
price is represented by promissory notes of which $2.2 million has been paid as
of October 31, 1996. The Company anticipates applying the remaining $1.8 million
of the proceeds yet to be received from these transactions to repayment of LMC's
indebtedness to TMI by direct payment or by offset. The warrants issued to TMI
and Sihl have a term of eight years and may be exercised at any time.
In September 1996, the Company also privately placed 410,256 shares of its
common stock at a purchase price of $4.875 per share for a total of $2 million.
The shares were issued to General Electric Capital Corporation, the
9
<PAGE>
Company's senior lender, together with warrants to purchase an additional
471,286 shares at an exercise price of $6.79 per share.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In prior reports on Form 10-Q and the Annual Report on Form 10-K for the year
ending June 30, 1996, the Company has reported on a consolidated lawsuit
originally filed by a shareholder, John Becker, alleging violations of the
Securities and Exchange Act of 1934. The suit alleges that the Company and the
named individual defendants knew of material, negative, non-public information
and withheld such information from the public so as to intentionally cause a
fraud on the market. The suit further alleges that the individual defendants
personally benefitted by selling shares of Company common stock over a one year
period. One named director was dismissed from the suit without prejudice in
February, 1996. The three remaining defendants may have the right to
indemnification from the Company for their defense and any liability costs. The
Company does not believe it has insurance coverage for the claims alleged
against it in this suit; however, the officers and directors may have coverage
for certain claims which have been alleged under the Directors' and Officers'
insurance policies in effect at the relevant time. The case is in the early
stages of discovery and the plaintiffs' total damage claim has not been
articulated. The Company believes the suit is without merit and continues to
vigorously defend the matter. On October 4, 1996, the Court heard plaintiffs'
motion to certify the matter as a class action wherein all purchasers of the
Company's stock during the period from December 3, 1993 through December 8, 1994
define the class membership. The Court has not yet ruled on this motion. If the
lawsuit is not resolved by settlement or a final judgement within the limits and
coverage of the applicable Directors' and Officers' insurance, this matter could
have a material adverse effect on the financial condition of the Company.
In the Company's report on Form 10-Q for the quarter ending September 30, 1995
the Company first reported on the suit filed by LaserMaster Corporation (LMC)
against Sentinel Imaging, a division of Sentinel Business Systems, Inc. LMC has
alleged, among other things, patent infringement, trademark infringement, Lanham
Act violations, misappropriation of trade secrets, and state unfair competition
claims related to LaserMaster's patented Big Ink delivery system and ColorMark
color management system. Sentinel Imaging has counterclaimed for false
advertising, patent misuse and unfair competition by LaserMaster. On August 27,
1996, the federal magistrate assigned to the matter issued a Report and
Recommendation supporting the motion of Sentinel to dismiss patent infringement
claims against one of two Sentinel products. LMC filed its objections and the
Court has not yet ruled on the motion. The case is currently in the final stages
of discovery and is expected to be scheduled for trial sometime after January 1,
1997. If LMC does not prevail on its claims and Sentinel does prevail on the
counter claims it has alleged, the outcome of these proceedings could have a
material adverse effect on the Company.
The Company is currently pursing a claim of approximately $400,000 arising out
of the loss during shipment to the Company of certain components prior to
delivery. At this time there is no assurance that the Company will be successful
in recovering the loss from any of the parties involved in the transaction, the
freight carrier, or the insurers for the Company.
The Company is also involved in legal proceedings related to customer credit and
product warranty and performance 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. If a claimant were successful in their claim for punitive damages, such
damages could have a material adverse effect on the financial position of the
Company. At this time none of the proceedings or claims are expected to have a
material effect on the Company's financial position.
See Exhibit 99, attached, for additional discussion of risks factors related to
legal proceedings.
10
<PAGE>
ITEM 2: CHANGES IN SECURITIES
Nothing to report.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5: OTHER INFORMATION
In accordance with the purchase agreement for the sale of the convertible
subordinated debenture to Marubeni International Electronics Corp., the Company
filed a Registration Statement in October 1996, relating to the resale of the
stock acquired upon conversion of the debenture. The Registration Statement was
declared effective on November 6, 1996. Pursuant to the debenture purchase
agreement and the Registration Statement, no more than 30,000 shares of stock
may be sold by Marubeni in any calendar week.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
-------------------
99. Cautionary Factors Under Private Securities Litigation Reform Act
of 1995.
(b) Reports on Form 8-K
-------------------
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LASERMASTER TECHNOLOGIES, INC.
/s/Melvin L. Masters
- --------------------
Melvin L. Masters
Chief Executive Officer
/s/Timothy N. Thurn
- -------------------
Timothy N. Thurn
Treasurer
Dated: November 13, 1996
12
<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 a lack of sales or significant returns of
existing products, 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 existing
or new products, regardless of materiality, or any other actual or perceived
problems with the Company's products could have a material adverse effect on
market acceptance of such new 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
<PAGE>
market acceptance. The 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 competitor's 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, which may result in a competitive
advantage. 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, 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 to achieve customer satisfaction with their products
offering better pricing or other competitive features.
The Company's PressMate/tm/-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
unanticipated 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 certain operational problems
which the Company believes it has addressed. However, there can be no assurance
that the Company has completely 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
2
<PAGE>
or operational problems with the DisplayMaker Express printer or 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, the need to redesign
products to accommodate substitute components or the need to substitute
alternative components which may not have the same performance capabilities, 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. While
the Company has taken strong corrective measures in dealing with this supplier,
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
3
<PAGE>
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, 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 and 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.
Returns Reserves. The Company has established reserves for the return of
merchandise. The amount of the returns reserve is based on historical data
regarding returns of products. For new products there may be insufficient
information to accurately predict return rate and therefore the required reserve
may not be sufficient. Additionally, there is no assurance that there will not
be an unknown or unanticipated problem with a product or any component thereof,
or a defect or shortage of repair components or the consumable media or inks
that are needed to use the product which could cause the actual returns to
exceed the reserves. Returns of a product which exceed reserves could have an
adverse effect on the financial operations and results of the Company.
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, but not limited to: 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
4
<PAGE>
customers. To the extent sales of the Company's consumables are reduced because
its customers are unsuccessful in marketing their own printing services, or
customers 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, product quality issues, 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.
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, or
that others will not be able to design products which circumvent any patents
relied upon 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 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.
Additionally, patent, copyright and trademark protection has not been sought, or
may not be available in all foreign countries. 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
5
<PAGE>
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 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. If the
company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on such patents or in
bringing suits to protect the Company's patents against infringement, which
could adversely affect the Company's financial condition or results. If the
outcome of any such litigation is adverse to the Company, the Company's business
and financial results 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 has 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
6
<PAGE>
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, differing trade and business laws, unexpected changes in applicable
laws, rules, regulatory requirements or 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. 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.
7
<PAGE>
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.
8
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 845,995
<SECURITIES> 0
<RECEIVABLES> 12,973,335
<ALLOWANCES> 2,032,000
<INVENTORY> 15,457,647
<CURRENT-ASSETS> 35,165,316
<PP&E> 4,587,380
<DEPRECIATION> 14,795,440
<TOTAL-ASSETS> 48,496,452
<CURRENT-LIABILITIES> 26,216,728
<BONDS> 2,527,830
<COMMON> 141,634
0
0
<OTHER-SE> 19,059,584
<TOTAL-LIABILITY-AND-EQUITY> 48,496,452
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<TOTAL-REVENUES> 21,452,300
<CGS> 13,522,000
<TOTAL-COSTS> 13,522,000
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 419,227
<INCOME-PRETAX> (356,499)
<INCOME-TAX> 118,000
<INCOME-CONTINUING> (238,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (238,499)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
