<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 30, 1997
----------------------------------------------------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (zip code)
(612) 941-8687
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 3/30/97
- ----- ----------------------
Common Stock, $.01 par value 14,333,907
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
March 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 951,748 $ 90,851
Accounts receivable, less allowance for doubtful
accounts and sales returns of $2,030,000 and
$2,475,000, respectively 12,609,949 12,563,112
Inventory 17,272,394 13,524,314
Income tax receivable 400,781
Other current assets 3,007,361 2,783,784
Deferred income taxes 3,304,000 3,304,000
----------- -----------
TOTAL CURRENT ASSETS 37,145,452 32,666,842
PROPERTY AND EQUIPMENT, NET 4,104,778 5,099,560
CAPITALIZED SOFTWARE, less accumulated amortization
of $5,736,236 and $3,636,979, respectively 3,354,632 4,150,913
DEFERRED INCOME TAXES 4,108,000 2,546,000
ACQUIRED TECHNOLOGY, PATENTS AND LICENSES, less
accumulated amortization of $1,556,034 and
$1,000,154, respectively 1,905,187 2,081,649
----------- -----------
$50,618,049 $46,544,964
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 4,378,503 $ 5,381,037
Notes payable-related party 1,765,000
Current maturities of long-term debt 865,619 1,248,267
Accounts payable 13,007,314 16,682,191
Accrued payroll and payroll taxes 1,747,726 1,915,908
Income taxes payable 269,675
Other current liabilities 1,503,168 1,200,264
Deferred revenue 1,302,001 1,894,262
----------- -----------
TOTAL CURRENT LIABILITIES 23,074,006 30,086,929
CONVERTIBLE SUBORDINATED DEBENTURE 2,347,830
LONG-TERM DEBT, less current maturities 275,046 820,095
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 30,000,000
shares; 14,343,907 and 11,426,134 shares issued
and outstanding, respectively 143,439 114,261
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 29,855,429 17,430,555
Accumulated deficit (5,077,701) (1,906,876)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 24,921,167 15,637,940
----------- -----------
$50,618,049 $46,544,964
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LASERMASTER TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $19,384,538 $23,227,012 $65,433,477 $69,832,883
COST OF GOODS SOLD 14,282,880 15,800,516 44,552,341 43,969,533
----------- ----------- ----------- -----------
GROSS PROFIT 5,101,658 7,426,496 20,881,136 25,863,350
OPERATING EXPENSES:
Sales & Marketing 4,683,946 5,307,727 13,258,981 15,774,487
Research & Development 1,622,392 1,926,550 4,572,511 4,847,631
General & Administrative 2,267,320 2,960,760 7,046,726 8,445,094
----------- ----------- ----------- -----------
8,573,658 10,195,037 24,878,218 29,067,212
----------- ----------- ----------- -----------
OPERATING LOSS (3,472,000) (2,768,541) (3,997,082) (3,203,862)
OTHER INCOME (EXPENSE):
Interest Expense (319,428) (540,114) (1,069,737) (1,325,666)
Interest Income 32,125 2,476 146,108 11,383
Other Income (Expense) 102,771 ( 23,186) 187,886 (13,497)
----------- ----------- ----------- -----------
(184,532) (560,824) (735,743) (1,327,780)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (3,656,532) (3,329,365) (4,732,825) (4,531,642)
INCOME TAX BENEFIT 1,207,000 1,099,000 1,562,000 1,460,000
----------- ----------- ----------- -----------
NET LOSS $(2,449,532) $(2,230,365) $(3,170,825) $(3,071,642)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (.17) $ (.18) $ (.24) $ (.25)
Weighted average common and dilutive
common equivalent shares outstanding 14,295,763 12,141,231 13,474,379 12,149,456
</TABLE>
See notes to consolidated financial statements.
3
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LASERMASTER TECHNOLOGIES INC., AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
March 30, March 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,170,825) $(3,071,642)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,420,531 4,457,016
Amortization of deferred financing costs 166,039 188,954
Loss on sale of property and equipment 85,138 46,520
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (1,562,000) (991,000)
Stock option tax benefit 226,000
Change in current assets and current liabilities:
Accounts receivable (65,552) 3,408,756
Inventory (2,331,415) 3,270,445
Other current assets (389,616) (1,416,563)
Income tax receivable 400,781 (413,390)
Accounts payable (1,952,849) (1,921,282)
Accrued payroll and payroll taxes (168,182) (372,705)
Other current liabilities 302,904 (139,952)
Income taxes payable 269,675 (201,768)
Deferred revenue (592,261) 764,722
----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (6,004,297) 3,834,111
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in notes receivable - related party (585,000)
Collection of notes receivable - related party 585,000
Additions to property and equipment (927,427) (1,234,205)
Additions to capitalized software costs (1,302,976) (2,144,937)
Proceeds from sale of property and equipment 71,679 34,173
Additions to patents and other assets (379,418) (1,048,464)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,538,142) (4,393,433)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 10,474,051 492,725
Net payments under revolving credit lines (143,018) (1,526,498)
Proceeds from note payable to related party 1,765,000
Proceeds from long-term debt 159,003
Payments on long-term debt (927,697) (780,600)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,403,336 109,630
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 860,897 (449,692)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 90,851 607,223
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 951,748 $ 157,531
=========== ===========
</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 and nine-month periods ended March 30, 1997, 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 third quarter of fiscal 1997 is as of March 30, 1997, and
for the three months and nine months ended March 30, 1997. Management does
not believe this change has a material impact on comparability to prior
periods.
2. Recent Accounting Standards -
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which is
effective for financial statements issued for the periods ending after
December 15, 1997. The Company has determined that adoption of the
standard will not have a material impact on the Company's financial
position or results of operations.
3. Inventory -
Inventory consists of the following:
March 30, June 30,
1997 1996
----------- -----------
Raw materials
Purchased printer engines $ 177,284 $ 469,870
Completed subassemblies 2,884,787 3,053,985
Raw materials 6,030,366 5,994,178
Work in process 225,512 436,753
Finished goods
Hardware/software 3,880,918 2,273,131
Consumables 4,073,527 1,296,397
----------- -----------
$17,272,394 $13,524,314
=========== ===========
5
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4. Supplemental disclosure of cash flow information and non-cash financing
activities -
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
March 30, March 31,
1997 1996
---------- ----------
<S> <C> <C>
The Company paid and received cash for the following items:
- -----------------------------------------------------------
Interest paid $ 929,816 $1,584,389
Income tax refunds received, net 670,456 79,842
Financing transactions not affecting cash:
Accounts payable converted to a note payable 859,516
Accounts payable converted to subordinated debenture 1,668,314
Note payable converted to subordinated debenture 859,516
Note payable to related party plus accrued interest offset
against note receivable from related party resulting from
stock sales plus accrued interest 1,818,715
Convertible subordinated debenture converted into
common stock 180,000
Capital lease obligations 152,405
</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"). 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, dependance 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 March 30, 1997 were $19.4 million compared
to $23.2 million for the same period one year ago. Net loss for the three
months ended March 30, 1997 was $2.5 million or $.17 per share compared to a net
loss of $2.2 million or $.18 per share for the three months ended March 31,
1996. Net sales for the nine months ended March 30, 1997 were $65.4 million
compared to $69.8 million for the same period one year ago. Net loss for the
nine months ended March 30, 1997 was $3.2 million or $.24 per share compared to
a net loss of $3.1 million or $.25 per share for the nine months ended March 31,
1996.
6
<PAGE>
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 Nine Months ended
--------------------- ---------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 73.7 68.0 68.1 63.0
------ ----- ----- -----
Gross profit 26.3 32.0 31.9 37.0
Operating expenses:
Sales and marketing 24.1 22.9 20.2 22.6
Research and development 8.4 8.3 7.0 6.9
General and administrative 11.7 12.7 10.8 12.1
------ ----- ----- -----
Total operating expenses 44.2 43.9 38.0 41.6
------ ----- ----- -----
Operating loss (17.9) (11.9) (6.1) (4.6)
Other income (expense):
Interest expense (1.6) (2.3) (1.6) (1.9)
Interest income 0.2 0.0 0.2 0.0
Other 0.5 (0.1) 0.3 0.0
------ ----- ----- -----
Loss before income taxes (18.8) (14.3) (7.2) (6.5)
Income tax benefit 6.2 4.7 2.4 2.1
------ ----- ----- -----
Net loss (12.6)% (9.6)% (4.8)% (4.4)%
====== ===== ===== =====
</TABLE>
Net Sales. During the March 1997 quarter, the Company recorded
hardware/software sales of $8.9 million or 46% of total net sales compared to
$13.4 million or 58% of total net sales in the same period one year ago.
The decrease in hardware/software sales from the previous year is primarily
attributed to significant decreases in sales of the Company's plain-paper
typesetting products and DisplayMaker/(R)/ Express. DisplayMaker Express
experienced its first full quarter of production in the March 1996 quarter. In
addition, sales of DisplayMaker Professional also decreased from the previous
year. These decreases were partially offset by sales of DesignWinder/TM/, the
Company's third proprietary printer, which began shipping in fiscal 1997.
DesignWinder sales were below Management's expectations for the March 1997
quarter partially due to sales which Management believes were temporarily
delayed or lost as a result of the Company's decision in mid-February to evolve
and expand its sales model. Under this new sales model, the Company will no
longer sell DesignWinder to domestic end users but will instead refer these
sales leads to LaserMaster Authorized Resellers. The Company has historically
sold a significant percentage of its domestic hardware directly to end users who
had responded to the Company's direct marketing advertising campaigns.
During the March 1997 quarter, the Company recorded consumables sales,
consisting primarily of ink, media, film, maintenance contracts and spare parts,
of $10.5 million or 54% of total net sales compared to $9.8 million or 42% of
total net sales in the same period one year ago and $12.2 million or 49% of
total net sales in the quarter ended December 29, 1996.
The increase in consumables sales from the prior year is primarily due to an
increase in the installed base of Big Color/(R)/ printers, including
DisplayMaker Professional, DisplayMaker Express and DesignWinder along with an
expanded offering of ink and media products. The decrease in consumables sales
from the December 1996 quarter was in part due to usability and maintenance
issues with the initial formulation of new aqueous pigmented inks. The Company
has reformulated the pigmented ink product to improve jet-ability and cartridge-
life performance and expects sales levels of this product to return to, or
increase from, previous levels.
7
<PAGE>
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 Nine months ended
----------------------------- ------------------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $3,463 17.9% $ 5,120 22.0% $13,034 19.9% $14,306 20.5%
Japan, Asia/Pacific 3,185 16.4 3,377 14.6 11,585 17.7 9,101 13.0
Latin America 1,658 8.5 1,243 5.4 4,956 7.6 3,446 4.9
Canada 457 2.4 684 2.9 1,452 2.2 2,287 3.3
------ ---- ------- ---- ------- ---- ------- ----
Total international sales $8,763 45.2% $10,424 44.9% $31,027 47.4% $29,140 41.7%
====== ==== ======= ==== ======= ==== ======= ====
</TABLE>
Increases in sales in Japan, Asia/Pacific and Latin America markets for the nine
months ended March 30, 1997 are primarily due to increased sales of Big Color
products, particularly DisplayMaker Express and DesignWinder, along with related
consumables. In the nine months ended March 31, 1996, a greater percentage of
the Company's revenues came from sales of plain-paper typesetting equipment
which was not as successful in these markets as the Company's Big Color products
are in fiscal 1997. 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 26.3% in
the quarter ended March 30, 1997 compared to 32.0% in the same period one year
ago. Gross profit was negatively impacted in the March 1997 quarter in the
amount of $600,000, or 3.1% of net sales, as a result of the writedown to
estimated net realizable value for certain PressMate-related assets which are
comprised primarily of capitalized software development costs. While management
still believes that PressMate is a viable product, its estimated market
potential has been revised downward. Gross profit was also negatively impacted
in the March 1997 quarter from excess capacity due to lower than expected
volumes.
Operating Expenses. Sales and Marketing expenses for the three months ended
March 30, 1997 were $4.7 million compared to $5.3 million in the same period one
year ago. Marketing expenses decreased approximately $422,000 in the March 1997
quarter compared to the same period one year ago primarily as a result of the
Company's reduction in marketing of plain-paper typesetting and PressMate
products.
Research and Development expenditures, including amounts expensed and
capitalized, were $2.0 million in the three months ended March 30, 1997,
compared to $2.6 million in the same period one year ago. Research and
development expenditures capitalized for the three months ended March 30, 1997
were $423,000 compared to $658,000 in the same period one year ago.
General and Administrative expenses were $2.3 million for the three months ended
March 30, 1997, compared to $3.0 million in the same period one year ago. The
decrease in expenditures is primarily the result of cost reduction programs
implemented in fiscal 1996.
Other. Interest expense was $319,000 for the three months ended March 30, 1997
compared to $540,000 in the same period one year ago. Interest income was
$32,000 for the three months ended March 30, 1997 compared to $2,000 in the same
period one year ago.
The Company's effective tax rate was 33% in the March 1997 and March 1996
quarters.
Liquidity and Capital Resources
Net cash used in operating activities during the nine months ended March 30,
1997 was $6.0 million compared to net cash provided from operating activities of
$3.8 million in the same period one year ago. Cash flow was negatively affected
by
8
<PAGE>
an increase in inventory of $3.7 million in the nine months ended March 30,
1997. The Company has increased its inventory of Big Color consumables,
primarily with new products, including DesignWinder wide-gamut inks, new
pigmented inks for DisplayMaker Professional and DesignWinder Print & Hang(TM)
media, all of which were introduced in fiscal 1997. In addition, the inventory
of finished goods hardware/software increased as DesignWinder production
exceeded shipments during the March 1997 quarter.
Net cash used in investing activities was $2.5 million during the nine months
ended March 30, 1997 compared to $4.4 million in the same period one year ago.
Investment in capital equipment was $927,000 in the nine months ended March 30,
1997 compared to $1.2 million in the same period one year ago. Investment in
intellectual property was $379,000 in the nine months ended March 30, 1997
compared to $1.0 million in the same period one year ago. The Company
capitalized $1.3 million of software development costs in the nine months ended
March 30, 1997, compared to $2.1 million in the same period one year ago.
Net cash provided by financing activities was $9.4 million in the nine months
ended March 30, 1997 compared to $110,000 in the same period one year ago. Net
repayments under revolving credit lines were $143,000 in the nine months ended
March 30, 1997 compared to $1.5 million in the same period one year ago. The
Company received approximately $10 million, net of transaction costs, from the
issuance of common stock in a series of private placements completed in the
December quarter of fiscal 1997. An additional $1.8 million from the issuance of
common stock in a private placement to TimeMasters, Inc. (TMI) was used to
offset a $1.765 million term loan and $35,000 in accrued interest owed by
LaserMaster Corporation to TMI, a related party, in a non-cash transaction.
As a result of the losses incurred during the nine months ended March 30, 1997
and a lower volume of DesignWinder shipments than expected during this time
period, cash flow and available short-term financing options have diminished.
Management has taken steps to reduce inventories and accounts receivable which,
along with on-going cost reduction efforts, are expected to provide enough cash
to meet the Company's short-term business plan.
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, 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 case has since been certified as a
class action. The Company and the three named defendants have reached an
agreement in principal with the class representative plaintiffs for the
settlement of the case, subject to execution of settlement documents and
preliminary and final approval of the settlement by the court. The proposed
settlement is to be funded primarily by proceeds of a Directors' and Officers'
insurance policy, with the Company contributing common stock, or cash at the
Company's election, to the settlement. The financial impact of the settlement
obligation of the Company is not reflected in the financial statements and is
not expected to have a material cash impact to the Company. If the lawsuit is
not resolved by a settlement funded primarily by 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 January 7,
1997 the court adopted the report and recommendation of the federal magistrate
finding that the Sentinel ink delivery system does not infringe on the Company's
patent. The parties have filed counter motions for summary judgment which, if
granted, would eliminate or further limit the remaining claims in the case. A
decision on those motions or summary judgment has not been rendered. 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.
9
<PAGE>
The Company was previously pursuing a claim of approximately $400,000 arising
out of the loss during shipment to the Company of certain components prior to
delivery. The insurers for the component supplier have satisfied the loss. The
Company does not believe there is a material risk that a claim for recovery of
the loss will be asserted against the Company or its insurers.
The Company has undertaken retrofitting the installed base of DisplayMaker
Express printers with a new FloTek Jetting System designed to improve the
functionality of the machine. In addition, the Company is aware of intermittent
customer issues with the performance and formulation of the inks used in the
DisplayMaker Express. 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(R)-FS. The Company has experienced availability and quality issues
with 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.
The Company is also 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 is also involved in various legal proceedings related to customer
credit and product warranty and performance issues. Product performance claims
requiring return of products and refunds of the purchase amount could have a
material impact on the financial performance of the Company and could affect
future sales potential for the product. The Company is addressing product
performance issues raised by customers, but there can be no assurance that
certain customers will not demand to return products and request a full refund
of the purchase price. In certain proceedings the claimants have alleged claims
for consequential and exemplary or punitive damages which may not bear a direct
relationship to the alleged actual incurred damages. If a claimant were
successful in their claims for consequential or punitive damages, such damages
could have material adverse effect on the financial position of the Company. The
license agreements and other sales documents used by the Company expressly
disclaims consequential damages. 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 financial position.
Should sole source suppliers related to PressMate heads or DisplayMaker Express
heads and ink fail to adequately address product quality and consistency issues
to the satisfaction of the Company, the Company may institute legal proceedings
for recovery against either or both suppliers. Such action could result in
counter-claims by these suppliers.
On-going cost reduction programs are expected to include significant workforce
reductions which could have the effect of employment-related claims being
asserted against the Company. The Company does not believe that workforce
reductions will result in material or meritorious claims.
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.
10
<PAGE>
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
-------------------
99. Cautionary Factors Under Private Securities Litigation Reform Act
of 1995.
(b) Reports on Form 8-K
-------------------
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
/s/Mark Pederson
- -------------------------
Mark Pederson
Controller
Dated: May 14, 1997
12
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-30-1997
<CASH> 951,748
<SECURITIES> 0
<RECEIVABLES> 12,609,949
<ALLOWANCES> 2,030,000
<INVENTORY> 17,272,394
<CURRENT-ASSETS> 37,145,452
<PP&E> 4,104,778
<DEPRECIATION> 15,720,728
<TOTAL-ASSETS> 50,618,049
<CURRENT-LIABILITIES> 23,074,006
<BONDS> 0
<COMMON> 143,439
0
0
<OTHER-SE> 24,777,728
<TOTAL-LIABILITY-AND-EQUITY> 50,618,049
<SALES> 65,433,477
<TOTAL-REVENUES> 65,433,477
<CGS> 44,552,341
<TOTAL-COSTS> 44,552,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,069,737
<INCOME-PRETAX> (4,732,825)
<INCOME-TAX> 1,562,000
<INCOME-CONTINUING> (3,170,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,170,825)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
<PAGE>
Exhibit 99
Cautionary Factors Under the
Private Securities Litigation Reform Act of 1995
LaserMaster desires to take advantage of the new "safe harbor" provisions
contained in the Private Securities Litigation Reform Act of 1995 (the "Act").
Contained in this Form 10-Q are statements which are intended as "forward-
looking statements" within the meaning of the Act. The words or phrases
"expects", "will continue", "is anticipated", "management believes", "estimate",
"projects", "hope" or expressions of a similar nature denote forward-looking
statements. Those statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on forward-looking statements. Readers
should also be advised that the factors listed below have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not ship when
expected or may contain technical difficulties; 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 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. 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 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.
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<PAGE>
The Company is currently undertaking a number of development projects and
introduced a new product, DesignWinder, during the second quarter of fiscal
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 DesignWinder 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 has undertaken retrofitting the installed base of DisplayMaker
Express printers with a new FloTek Jetting System designed to improve the
functionality of the machine. In addition, the Company is aware of intermittent
customer issues with the performance and formulation of the inks used in the
DisplayMaker Express. 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 issues with quality
consistency 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 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. It is
2
<PAGE>
possible that the Company's sales of certain products will compete with, or
displace sales of other products sold by the Company. 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. 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 with the FloTek Jetting System
retrofitting. 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 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
3
<PAGE>
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 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, large-
format printing trends such as use and customization of large-format
advertisements, use of color, transferring of color images onto a variety of
substrates, point-of-purchase printing, in-house graphics design and production
and the demand for limited printing runs of less than 200 copies. The failure of
the Wide-Format market to achieve anticipated growth levels or a substantial
change in large-format printing customer preferences could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, in a new market, 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.
4
<PAGE>
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 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
5
<PAGE>
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 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,
6
<PAGE>
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. During the second quarter of fiscal 1997 the court held that the
competitor's ink delivery system does not infringe on the Company's patent on
the Big Ink delivery system. Although the Company does not believe any of its
practices violate applicable trade or anti-trust laws, there is no assurance
that claims or actions will not be commenced by customers, competitors or
governmental authorities based on trade or anti-trust claims which could affect
the Company's operations and cash position.
The Company is also engaged in various actions related to transactional matters,
customers credit and product quality and/or warranty issues. Some of these
actions include claims against the Company for punitive, exemplary or multiple
damages. An award of punitive damages may not bear a direct relationship to the
actual or compensatory damages claimed from the Company. Although the Company
does not believe there are any actions pending or threatened against the Company
which would have a material adverse impact on the financial position of the
company, there is no assurance that there will not be an adverse award of
multiple punitive or exemplary damages which could adversely affect the cash
position of the company.
Any litigation which the Company is involved 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 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
7
<PAGE>
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.
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.
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