<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 28, 1997
-----------------------------------------------------
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 No.: 0-18114
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LASERMASTER TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
- ----------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
- ----------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 941-8687
- ----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 9/28/97
- ----- ----------------------
Common Stock, $.01 par value 14,532,462
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
-------------
September 28, June 30,
1997 1997
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 460,841 $ 484,106
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$2,034,000 and $1,987,000, respectively 9,521,160 12,129,091
Inventory 8,887,379 9,184,671
Other current assets 1,864,155 2,158,833
Deferred income taxes 4,073,000 4,073,000
----------- ------------
TOTAL CURRENT ASSETS 24,806,535 28,029,701
PROPERTY AND EQUIPMENT, NET 3,135,396 3,570,662
DEFERRED INCOME TAXES 693,000 693,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $791,909 and $743,284, respectively 294,661 337,570
----------- ------------
$28,929,592 $ 32,630,933
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 2,083,986 $ 2,781,468
Current maturities of long-term debt 434,930 636,665
Convertible subordinated debenture 2,050,320
Accounts payable 9,770,808 10,232,865
Accrued payroll and payroll taxes 1,230,766 1,623,558
Other current liabilities 1,406,056 1,649,062
Deferred revenue 1,335,826 1,374,447
------------ ------------
TOTAL CURRENT LIABILITIES 18,312,692 18,298,065
CONVERTIBLE SUBORDINATED DEBENTURE 2,233,414
LONG-TERM DEBT, less current maturities 113,641 184,729
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 14,532,462 and 14,432,462
shares issued and outstanding, respectively 145,325 144,325
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 31,110,339 30,876,964
Accumulated deficit (20,752,405) (19,106,564)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,503,259 11,914,725
------------ ------------
$ 28,929,592 $ 32,630,933
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 28, September 29,
1997 1996
-------------- --------------
<S> <C> <C>
NET SALES $15,305,599 $21,452,300
COST OF GOODS SOLD 9,721,829 13,522,000
----------- -----------
GROSS PROFIT 5,583,770 7,930,300
OPERATING EXPENSES:
Sales & Marketing 2,763,316 4,102,172
Research & Development 1,552,858 1,433,566
General & Administrative 2,627,964 2,354,750
----------- -----------
6,944,138 7,890,488
----------- -----------
OPERATING (LOSS) PROFIT (1,360,368) 39,812
OTHER INCOME (EXPENSE):
Interest Expense (261,745) (419,227)
Interest Income 6,604 9,922
Other (Expense) Income (30,332) 12,994
----------- -----------
(285,473) (396,311)
----------- -----------
LOSS BEFORE INCOME TAXES (1,645,841) (356,499)
INCOME TAX BENEFIT 118,000
----------- -----------
NET LOSS $(1,645,841) $ (238,499)
=========== ===========
NET LOSS PER COMMON SHARE $ (.11) $ (.02)
Weighted average common
and dilutive common
equivalent shares
outstanding 14,473,018 11,928,840
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 28, September 29,
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,645,841) $ (238,499)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 501,889 1,266,583
Amortization of deferred financing costs 51,843 55,346
Loss on sale of property and equipment 50,710 39,051
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (118,000)
Change in current assets and current liabilities:
Accounts receivable 2,607,931 (410,223)
Inventory 297,292 (516,668)
Other current assets 242,835 144,099
Income tax receivable 400,781
Accounts payable (410,776) 44,135
Accrued payroll and payroll taxes (392,792) (142,518)
Other current liabilities (243,006) 109,436
Income taxes payable 301,474
Deferred revenue (38,621) (224,744)
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,021,464 (706,412)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (70,514) (128,277)
Additions to capitalized software costs (401,742)
Proceeds from sale of property and equipment 2,296 6,080
Additions to patents and other assets (6,206) (116,709)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (74,424) (640,648)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 3,801,777
Net payments under revolving credit lines (697,482) (1,396,101)
Payments on long-term debt (272,823) (303,472)
----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (970,305) 2,102,204
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (23,265) 755,144
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 484,106 90,851
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 460,841 $ 845,995
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation -
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of LaserMaster
Technologies, Inc. and subsidiaries (the "Company") for the year ended June
30, 1997. 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 28,
1997 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1998.
2. Inventory -
Inventory consists of the following:
<TABLE>
<CAPTION>
September 28, June 30,
1997 1997
------------- -----------
<S> <C> <C>
Raw materials $3,973,826 $4,178,139
Work in process 196,814 123,664
Finished goods
Hardware 1,018,158 2,824,753
Consumables 3,698,581 2,058,115
---------- ----------
$8,887,379 $9,184,671
========== ==========
</TABLE>
3. Supplemental disclosure of cash flow information and non-cash financing
activities -
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
September 28, September 29,
1997 1996
------------- -------------
<S> <C> <C>
The Company paid and received
cash for the following items:
- --------------------------------
Interest paid $190,428 $365,233
Income tax refunds received, net 702,255
Financing transactions not affecting cash:
Convertible subordinated debenture and
accrued interest converted to common stock 234,375
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>
5
<PAGE>
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"). These forward looking statements are 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 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.
RESULTS OF OPERATIONS
Net sales for the three months ended September 28, 1997 were $15.3 million
compared to $21.5 million for the same period one year ago. Net loss for the
three months ended September 28, 1997 was $1.6 million or $.11 per share
compared to a net loss of $238,000 or $.02 per share for the three months ended
September 29, 1996.
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 28, September 29,
1997 1996
-------------- --------------
<S> <C> <C>
Net sales..................... 100.0% 100.0%
Cost of goods sold............ 63.5 63.0
------ -----
Gross profit................ 36.5 37.0
Operating expenses:
Sales and marketing......... 18.1 19.1
Research and development.... 10.1 6.7
General and administrative.. 17.2 11.0
------ -----
Total operating expenses.... 45.4 36.8
------ -----
Operating (loss) income....... (8.9) 0.2
Other income (expense):
Interest expense............ (1.7) (2.0)
Other....................... (0.2) 0.1
------ -----
Loss before income taxes...... (10.8) (1.7)
Income tax benefit............ 0.6
-----
Net loss...................... (10.8)% (1.1)%
====== =====
</TABLE>
Net Sales. During the September 1997 quarter, the Company recorded hardware
sales of $4.9 million or 32% of total net sales compared to $11.8 million or 55%
of total net sales in the same period one year ago. The $6.9 million decrease
in hardware revenues in the September 1997 quarter compared to the prior year
consists of a $1.4 million decrease in sales of the black-and-white thermal film
device, PressMate(R), a $1.1 million decrease in black-and-white
6
<PAGE>
plain-paper typesetting sales and a $4.4 million decrease in sales of the
Company's first generation 4-Color printers, DisplayMaker(R) Professional
and DisplayMaker Express. An additional $1.4 million decrease in print server
hardware sales related to the 4-Color printers was offset by a $1.4 million
increase in sales of its HiRes 8-Color DesignWinder(R)-based products. The
Company anticipates a continued decrease in revenues from its 4-Color
printers, and expects the increase in demand for HiRes 8-Color technology,
including the Company's recently introduced DisplayMaker series of printers at
widths of 42", 52" and 62", to increase both hardware and consumables revenue
for the balance of the fiscal year.
As of November 2, 1997 the Company had a backlog of over $2 million primarily
from its new HiRes 8-Color DisplayMaker series of printers. After commencing
production shipments in October 1997, the Company expects to ramp up
DisplayMaker 8-Color series production to meet demand during the December
quarter. The Company did not have a material backlog at September 29, 1996.
During the September 1997 quarter, the Company recorded consumables sales,
consisting primarily of ink, media, film, maintenance contracts and spare parts,
of $10.4 million or 68% of total net sales compared to $9.7 million or 45% of
total net sales in the same period one year ago and $12.3 million or 58% of
total net sales in the quarter ended June 30, 1997. The decrease in consumables
revenue in the September 1997 quarter compared to the June 1997 quarter is
primarily the result of seasonal changes in demand in the digital printing
market. Consumables revenues are expected to continue to build from the
September quarter level for the remainder of the fiscal year.
International Sales. The following table sets forth international sales by
region expressed in thousands and as a percentage of total net sales:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
September 28, September 29,
1997 1996
-------------- -------------
<S> <C> <C> <C> <C>
Europe..................... $3,193 20.9% $ 4,538 21.1%
Japan, Asia/Pacific........ 1,537 10.0 3,753 17.5
Latin America.............. 1,169 7.6 1,386 6.5
Canada..................... 550 3.6 347 1.6
------ ---- ------- ----
Total international sales.. $6,449 42.1% $10,024 46.7%
====== ==== ======= ====
</TABLE>
The decrease in sales in Europe compared to the previous year is consistent with
the overall decrease in the Company's sales of black-and-white products and
first generation 4-Color products. The decrease in sales in Japan, Asia/Pacific
was greater than in other geographic areas as a result of a 95% decrease in
sales of DisplayMaker Express compared to the same period one year ago. The
Company believes sales of DisplayMaker Express have decreased in Asia/Pacific as
a result of changes in training and distribution channel issues. While the
Company is working to resolve these issues and does not anticipate sales of
DisplayMaker Express to return to previous levels, it does expect overall sales
in this region to increase from current levels with the introduction of its new
HiRes 8-Color DisplayMaker series of printers. A majority of the foreign
transactions occur in U.S. dollars, and, as a result, foreign currency risk is
not expected to be a significant risk factor.
Gross Profit. Gross profit, expressed as a percent of net sales, was 36.5% in
the quarter ended September 28, 1997 compared to 37.0% in the same period one
year ago. Included in the Company's results for the September 1996 quarter is a
$1.4 million reduction in cost 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%. Excluding
the effects of this benefit, gross profit as a percent of net sales increased in
the September 1997 quarter compared to the same period one year ago. The
increase in gross profit as a percent of net sales is partially attributed to a
reduction in amortization of capitalized software development costs and other
overhead reductions resulting from cost reduction programs implemented in the
fourth quarter of fiscal 1997. In addition, gross profit was positively
impacted in the September 1997 quarter compared to the previous year as a result
of a greater portion of sales coming from consumables which generally have a
higher gross profit than hardware sales.
7
<PAGE>
Operating Expenses. Sales and Marketing expenses for the three months ended
September 28, 1997 were $2.8 million compared to $4.1 million in the same period
one year ago. Marketing expenses decreased approximately $854,000 in the
September 1997 quarter compared to the same period one year ago primarily as a
result of the Company's reduction in direct-marketing activity. Marketing
activity is expected to increase in the second quarter of fiscal 1998 and
subsequent quarters as the Company's new HiRes 8-Color DisplayMaker series of
printers become available in production quantities. Sales expenses decreased
approximately $485,000 primarily as a result of lower sales volumes.
Research and Development expenditures, including amounts expensed and
capitalized, were $1.6 million in the three months ended September 28, 1997,
compared to $1.8 million in the same period one year ago. Research and
development expenditures capitalized for the three months ended September 29,
1996 were $401,000. Due to the change in the Company's focus from a systems'
integrator to a manufacturer of proprietary printer engines over the past three
years, the R&D expenditures for software development have significantly
decreased both in gross dollars and as a percent of total R & D expenditures.
As a result, no research and development expenditures were capitalized in the
September 1997.
General and Administrative expenses were $2.6 million for the three months ended
September 28, 1997, compared to $2.4 million in the same period one year ago.
The increase in general and administrative expenses in the September 1997
quarter compared to the previous year is primarily the result of a $263,000
increase in allowances for doubtful accounts generally related to receivables
from certain foreign customers.
Other. Interest expense was $262,000 for the three months ended September 28,
1997 compared to $419,000 in the same period one year ago. The decrease in
interest expense is the result of lower average outstanding borrowings in the
September 1997 quarter compared to the previous year.
The Company does not anticipate a tax benefit from the losses incurred in the
September 1997 quarter. The Company's effective tax rate was 33% in the
September 1996 quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the three months ended
September 28, 1997 was $1.0 million compared to net cash used in operating
activities of $706,000 in the same period one year ago. Cash flow was positively
affected by a decrease in accounts receivable of $2.6 million in the three
months ended September 28, 1997.
Net cash used in investing activities was $74,000 during the three months ended
September 28, 1997 compared to $641,000 in the same period one year ago.
Investment in capital equipment was $71,000 in the three months ended September
28, 1997 compared to $128,000 in the same period one year ago. Investment in
intellectual property was $6,000 in the three months ended September 28, 1997
compared to $518,000 in the same period one year ago for intellectual property
and capitalized software development costs.
Net cash used in financing activities was $970,000 in the three months ended
September 28, 1997 compared to net cash provided by financing activities of $2.1
million in the same period one year ago. Net repayments under revolving credit
lines were $697,000 in the three months ended September 28, 1997 compared to
$1.4 million in the same period one year ago. The Company received approximately
$3.8 million, net of transaction costs, from the issuance of common stock in the
September 1996 quarter which included a series of private placements totaling
$12 million in fiscal 1997.
Management expects that revenues will increase significantly in the December
1997 quarter compared to the September 1997 quarter as a result of the shipment
of production quantities of its new HiRes 8-Color DisplayMaker series of
printers and related consumables. Management expects to finance the ramp up of
its new products and operations for the remainder of fiscal 1998 through
existing short-term borrowing arrangements and cash flow from operations. If
sales are less than expected or reasonably priced sources of alternative
financing are not available, the Company may be required to accept less
favorable terms for its planned sales of certain lines of business or revise its
business plan or further restructure its capitalization.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM I: LEGAL PROCEEDINGS
In prior reports on Form 10-Q and the Annual Report on Form 10-K for the year
ending June 30, 1997, the Company has reported on a class action lawsuit
originally filed by a shareholder, John Becker, alleging violations of the
Securities and Exchange Act of 1934. In August 1997, the Company announced a
settlement agreement with shareholder class representatives and preliminary
court approval of the settlement. Final court approval of the settlement was
received in October 1997. As part of the settlement of this action, the Company
will be required to contribute $636,000 in cash or a similar dollar value of
stock during the March 1998 quarter. The settlement was previously recognized
in the Company's June 1997 financial statements.
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., and
Brian Haberstroh, a former LaserMaster and Sentinel employee. LMC alleged
misappropriation of trade secrets related to LaserMaster's Big Ink Delivery
System and customer information and breach of a confidentiality agreement with
Haberstroh. In October 1997, the Company announced that it had prevailed in its
two year old suit against Sentinel and was awarded damages of $2.17 million
against Sentinel by a jury in U.S. Federal District Court. The Company believes
the awarded damages may be difficult to collect. The Company intends to seek
injunctive relief to prevent Sentinel from using the ink data and customer
information which the jury found Sentinel to have misappropriated.
The Company is currently involved in a dispute regarding liability for the value
of certain components totaling approximately $400,000 which were lost by a
carrier prior to delivery to the Company. At this time, the liability of the
shipper, the carrier, or the insurers of the shipper, the carrier and the
Company has not been determined.
The Company is also involved in various 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 or 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 the Company is not aware of any proceedings
or claims which are expected to have a material effect on the Company's
operations or financial position.
See Exhibit 99, attached, for additional discussion of risks factors related to
legal proceedings.
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
Nothing to report.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
10.1 Amendment No. 3 to Credit Agreement dated May 14, 1997
between ColorSpan
9
<PAGE>
Corporation and General Electric Capital Corporation.
10.2 Amendment No. 4 to Credit Agreement dated October 14, 1997
between ColorSpan Corporation and General Electric Capital
Corporation.
99. Cautionary Factors Under Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K
none
10
<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/James H. Horstmann
- -------------------------
James H. Horstmann
Chief Financial Officer
/s/Mark Pederson
- -------------------------
Mark Pederson
Controller
Dated: November 11, 1997
11
<PAGE>
Exhibit 10.1
AMENDMENT NO. 3 TO CREDIT AGREEMENT
-----------------------------------
This AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment") is entered
into as of this 14th day of May, 1997 by and between LASERMASTER CORPORATION, a
Minnesota corporation ("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a
New York corporation as Agent and Lender ("Agent"). Unless otherwise specified
herein, capitalized terms used in this Amendment shall have the meanings
ascribed to them by the Credit Agreement (as hereinafter defined).
RECITALS
--------
WHEREAS, Borrower and Agent have entered into that certain Credit
Agreement, dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement, dated as of May 15, 1996 (as further amended,
supplemented, restated or otherwise modified from time to time, the ("Credit
Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain amendments to
the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein and
other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedules.
------------------------------------------------
Schedule H to the Credit Agreement is amended as follows:
----------
(i) clause (c) is amended and restated to read in its entirety as follows:
(c) Minimum Net Worth. Borrower and its Subsidiaries (other than
LaserMaster Europe) on a consolidated basis shall maintain from March 31,
1997 through June 30, 1997 Net Worth equal to or greater than $1,930,000,
and a Net Worth equal to greater than $2,500,000 at all times thereafter.
(ii) clause (d) is amended and restated as to read in its entirety as
follows:
(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 Month, a Debt Service Coverage Ratio
for the 12-month period then ended (or for the Fiscal Months ending on or
before June 30, 1997, the period of July 1, 1996 to such date) of not
less than .23 to 1.0 with respect to the Fiscal Months ending March 31,
1997, April 30, 1997 and May 31, 1997 and not less than 1.0 to 1.0 with
respect to each Fiscal Month ending thereafter.
<PAGE>
SECTION 2. Representations and Warranties.
------------------------------
2.1 Borrower. Borrower represents and warrants that:
--------
(a) the execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary corporate action and this
Amendment is a legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in the Credit
Agreement is true and correct in all material respects on and as of the date
hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this Amendment
nor the consummation of the transactions contemplated hereby does or shall
contravene, result in a breach of, or violate (i) any provision of Borrower's
certificate or articles of incorporation or bylaws, (ii) any law or regulation,
or any order or decree of any court or government instrumentality or (iii)
indenture, mortgage, deed of trust, lease, agreement or other instrument to
which Borrower or any of its Subsidiaries is a party or by which Borrower or any
of its Subsidiaries or any of their property is bound, except in any such case
to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof; and
(d) no Default or Event of Default will exist or result after giving
effect hereto.
SECTION 3. Reference to and Effect Upon the Credit Agreement.
-------------------------------------------------
(a) Except as specifically amended above, the Credit Agreement and the
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of Agent or any Lender
under the Credit Agreement or any Loan Document, nor constitute a waiver of any
provision of the Credit Agreement or any Loan Document, except as specifically
set forth herein. Upon the effectiveness of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of similar import shall mean and be a reference to the Credit Agreement as
amended hereby.
SECTION 4. Costs and Expenses. As provided in Section 11.3 of the
Credit Agreement, Borrower agrees to reimburse Agent for all fees, costs and
expenses, including the fees, costs and expenses of counsel or other advisors
for advice, assistance, or other representation in connection with this
Amendment.
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SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS.
SECTION 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 purposes.
SECTION 7. Counterparts. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
[signature pages follow]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
and year first above written.
LASERMASTER CORPORATION
By:_________________________
Title:________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL CORPORATION
Commitment: $10,000,000 as Agent
By:_________________________
Title:________________________
4
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Exhibit 10.2
AMENDMENT NO. 4 TO CREDIT AGREEMENT
-----------------------------------
This AMENDMENT NO. 4 TO CREDIT AGREEMENT (this "Amendment") is entered
into as of this _____ day of October, 1997 by and between COLORSPAN CORPORATION
(f/k/a LaserMaster Corporation), a Minnesota corporation ("Borrower"), and
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, as Agent and
Lender ("Agent"). Unless otherwise specified herein, capitalized terms used in
this Amendment shall have the meanings ascribed to them by the Credit Agreement
(as hereinafter defined).
RECITALS
--------
WHEREAS, Borrower and Agent have entered into that certain Credit
Agreement dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement dated as of May 15, 1996, that Second Amendment to
Credit Agreement dated as of January 31, 1997, that Third Amendment to Credit
Agreement dated as of May 14, 1997 (as further amended supplemented, restated or
otherwise modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain amendments to
the Credit Agreement, all as more fully set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein and
other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedules.
Schedule H to the Credit Agreement is amended as follows:
----------
(i) Clause (c) is amended and restated to read in its entirety as
follows:
c) Minimum Net Worth. Borrower and its Subsidiaries (other than
LaserMaster Europe) on a consolidated basis shall maintain Net Worth
equal to or greater than the following respective amounts measured
as of the last day of the following respective quarters:
Fiscal Quarter Ending Minimum Net Worth
--------------------- -----------------
June 30, 1997 ($5,441,000)
September 30, 1997 ($7,767,000)
December 31, 1997 ($7,636,000)
March 31, 1998 ($7,660,000)
June 30, 1998 ($7,083,000)
<PAGE>
(ii) Clause (d) is amended and restated to read in its entirety as
follows:
(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 Month, a Debt Service Coverage
Ratio for the 12-month period then ended (or for the Fiscal Months
ending on or before June 30, 1997, for the period of July 1, 1996 to
such date) of not less than .23 to 1.0 with respect to the Fiscal
Months ending March 31, 1997, April 30, 1997 and May 31, 1997, and
not less than the following ratios for the following respective
periods:
Period Ratio
------ -----
Twelve months ended June 30, 1997 (4.74)
Three months ended September 30, 1997 (2.20)
Six months ended December 31, 1997 .12
Nine months ended March 31, 1998 .68
Twelve months ended June 30, 1998 and as of
the last day of each Fiscal Month thereafter 1.43
SECTION 2. Representations and Warranties.
------------------------------
2.1 Borrower. Borrower represents and warranties that:
--------
(a) the execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary corporate action and this
Amendment is a legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in the Credit
Agreement is true and correct in all material respects on and as of the date
hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this Amendment
nor the consummation of the transactions contemplated hereby does or shall
contravene, result in a breach of, or violate (i) any provision of Borrower's
certificate or articles of incorporation or bylaws, (ii) any law or regulation,
or any order or decree of any court or government instrumentality or (iii)
indenture, mortgage, deed of trust, lease, agreement or other instrument to
which Borrower or any of its Subsidiaries is a party or by which Borrower or any
of its Subsidiaries or any of their property is bound, except in any such case
to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof; and
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(d) no Default or Event of Default will exist or result after giving
effect hereto.
SECTION 3. Conditions to Effectiveness.
---------------------------
This Amendment will be effective upon satisfaction of the following
conditions:
(a) Execution and delivery of four counter-parts of this Amendment by
each of the parties hereto.
(b) Payment to the Agent of an Amendment Fee in the amount of $50,000,
which amount Agent is authorized to charge to the outstanding balance of the
Revolving Loan upon execution and delivery of this Amendment by Borrower.
SECTION 4. Reference to and Effect Upon the Credit Agreement.
-------------------------------------------------
(a) Except as specifically amended above, the Credit Agreement and the
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver or any right, power or remedy of Agent or any Lender
under the Credit Agreement or any Loan Document, nor constitute a waiver of any
provision of the Credit Agreement or any Loan Document, except as specifically
set forth herein. Upon the effectiveness of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of similar import shall mean and refer to the Credit Agreement as amended
hereby.
SECTION 5. Waiver. In consideration of the foregoing, Borrower
hereby waives, and covenants not to sue Agent with respect to, any and all
claims it may have against Agent, whether known or unknown, arising in tort, by
contract or otherwise prior to the date hereof.
SECTION 6. Costs and Expenses. As provided in Section 11.3 of the
Credit Agreement, Borrower agrees to reimburse Agent for all fees, costs and
expenses, including the fees, costs and expenses of counsel or other advisors
for advice, assistance, or other representation in connection with this
Amendment.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS.
SECTION 8. 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 purposes.
3
<PAGE>
SECTION 9. Counterparts. This Amendment may be executed in any
number of counterparts, each of which when so executed shall be deemed an
original but all such counterparts shall constitute one and the same instrument.
[signature pages follow]
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date and year first above written.
COLORSPAN CORPORATION
By:_____________________________
Title:___________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL
Commitment: $10,000,000 CORPORATION, as Agent
By:_____________________________
Title:___________________________
5
<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 fiscal 1997 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 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.
The Company's Senior Debt Agreement includes financial covenants which the
Company must meet. The financial performance of the Company in the period the
Agreement has been in place has made it necessary for the Company to renegotiate
the financial covenants prior to being declared in violation of the covenants by
GE. If future financial performance does not improve and the Company is unable
to renegotiate its loan covenants at that time, it could be forced to seek
replacement financing at prices which may not be favorable to the Company. If
adequate sources of financing are not available, the Company may be required to
sell certain product lines or technologies on less than favorable terms.
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
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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. Any quality problems with components could
result in "epidemic" failures of the products in the field causing return and
refund requests that would likely have a material effect on the financial
results of the Company and future sales potential. 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, whether offered by the
Company or its competitors, 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 and
introduced a new family of printers, the DisplayMaker HiRes 8-Color series,
during September 1997. 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 the new
DisplayMaker series or 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 Company's inability to achieve market acceptance, for technological or other
reasons, could have a material adverse effect on the Company's financial
condition.
The Company is aware of intermittent customer issues with the performance and
formulation of certain inks used in the Company's printers. The Company is
taking steps to address the ink issues. However, failure to address ink
functionality issues, or some other failure of the product to perform as
expected by the customer may result in customer requests for compensatory
supplies or other requests which could have a material adverse effect on the
Company's financial performance.
The Company is dependent on a sole source supplier for the printheads for the
PressMate-FS. The Company has experienced availability and quality consistency
issues from this supplier. If the Company is unable to resolve the availability
and quality issues, the Company's production and product quality requirements
will be adversely affected.
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 wide-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
2
<PAGE>
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. It is possible that the Company's sales of certain
products will compete with, or displace sales of, other products sold by the
Company.
The Company's PressMate(TM)-FS, DisplayMaker Express, DesignWinder and
DisplayMaker HiRes 8-Color series 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. There can be no assurance that the
Company has completely resolved operational problems that have occurred in the
past or that the Company will successfully resolve any future problems in the
manufacture or operation of the Company's existing printers or any new
product. Failure by the Company to resolve manufacturing or operational
problems with its existing printers 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.
Also, it is possible 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.
Additionally, OEM private label ink products that may be used in the Company's
own products may compete with ColorSpan products. 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 ColorSpan-
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.
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 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
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<PAGE>
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.
The Company is dependent on a sole source supplier for the printheads and hot
melt ink 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 on-
going product supply 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, Wide-
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 Wide-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
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<PAGE>
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 component 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 customers substitute third-party or
private label 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 is involved in
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
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<PAGE>
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, three United States patents relating to the Company's Big
Ink Delivery System and three United States patents relating to ThermalRes.
Additional patent applications are pending relating to the Company's TurboRes,
ThermalRes, FastPort, 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. 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 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
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<PAGE>
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.
Although a preliminary settlement has been reached in this case, there can be no
assurance that final approval will be granted and that the Company will not
incur additional substantial costs for this matter.
The Company has instituted action against a competitor for patent infringement,
misappropriation of trade secrets and other causes of action. The competitor
had counter-claimed for false advertising, patent misuse, and unfair competition
by LaserMaster. The counterclaims have been dismissed. 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,
employee 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 in 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 of 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 Engineer. 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
7
<PAGE>
has certain non-compete and continuation contracts with 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.
Tax Liability. The Company sells its products from its offices in Eden Prairie,
Minnesota and reports sales and income tax liability based on sales occurring at
that location. It is possible that one or more state or local taxing
authorities could determine that there have been taxable transactions occurring
within their jurisdiction and seek recovery of taxes for current and/or past
periods. In addition, it is possible that local, state or federal taxing
authorities will take issue with the reporting or determination of tax liability
and seek additional taxes for current and/or past periods. The Company
currently has a net operating loss ("NOL") carry forward that may be used to
offset future federal taxable income. However, there is no assurance that the
NOL will continue to be available as an offset against future federal taxable
income or that there will be sufficient taxable income to fully utilize the NOL.
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.
Brand Awareness. The Company has changed the name of its principal operating
subsidiary from
8
<PAGE>
LaserMaster Corporation to ColorSpan Corporation. The Company has significant
brand awareness associated with its LaserMaster trade names. If the market is
unable to accept or delays the acceptance of the name change, the Company's
financial performance and sales may be negatively impacted.
Industry Consolidation. As a growth industry, the wide-format digital printing
market has generated many new entrants into the fragmented market with new
products and new technologies. As the market matures, and the industry's growth
rate slows, companies with technological or manufacturing efficiency advantages
will emerge as the market leaders maintaining or increasing their market share.
Those companies without a marketable advantage will face significant pressure on
revenue growth and gross margins. In order to remain competitive, the smaller
companies may have to seek merger or consolidation opportunities with other
companies.
Technological Advancements. The digital color printing market is rapidly moving
to two distinct technologies for the placement of ink on a substrate: thermal
inkjet cartridges and piezo-electric print heads. Any company without a secure,
economical source of these products will face serious competitive pricing and
margin pressures going forward. The Company currently has a license to
remanufacture specific Hewlett-Packard Corporation 300 dpi inkjet cartridges for
use in its wide-format color printers. Hewlett-Packard has introduced a new
inkjet cartridge with a visual resolution of 600 dpi. In addition, Lexmark is
believed to have developed a 600 dpi inkjet cartridge. Both companies are
competitors in the wide-format color market. Should the market for wide-format
color demand the increased resolution provided by these new products and the
Company be unable to secure adequate supplies at reasonable prices or develop a
reasonably priced substitute from other sources, the Company's sales of printer
engines and the related gross margins could be negatively impacted.
The Company's products target the market for high quality printing output.
Hardware and software technological advances have enhanced actual and perceived
resolution. There is no assurance that other companies will not achieve actual
or apparent resolution with less expensive printers and supplies and therefore
capture the market held by higher cost printers.
9
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERNAL
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FINANCIAL STATEMENTS.
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<PERIOD-START> JUL-01-1997
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<CGS> 9,721,829
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