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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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 number 0-18114
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LASERMASTER TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-1612861
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7090 Shady Oak Road
Eden Prairie, Minnesota 55344
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 941-8687
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
[COVER PAGE 1 OF 2]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of August 31, 1997 was $21,120,000 based on the last sale price
for the common stock as recorded by the National Association of Securities
Dealers on that date.
As of August 31, 1997, there were 14,532,462 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
[COVER PAGE 2 OF 2]
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PART I
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Item 1. BUSINESS.
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General
LaserMaster Technologies, Inc. (the "Company") designs, manufactures and markets
wide-format (up to 62" wide prints), high-resolution color inkjet printers,
chemical-free film imagers ("filmsetters"), and related image processing
equipment for professional printing applications through its newly renamed
operating subsidiary ColorSpan Corporation, LaserMaster Europe, Ltd. and
LaserMaster Asia/Pacific, Inc., to be known as ColorSpan Europe, Ltd. and
ColorSpan Asia/Pacific, Inc., respectively. In addition, the Company sells
related consumable products ("consumables") for its installed base of printers,
consisting primarily of ink, media (such as specialty papers, canvas, vinyl,
etc.), film, toner (ink-like powder) and process units (which facilitate
transfer of toner to the media surface). The Company's products combine advanced
computer technology with the Company's own sophisticated software, hardware and
proprietary printers ("engines") to produce professional-quality printed output
at an affordable cost.
The Company's HiRes 8-Color printer series (the newly introduced DisplayMaker
4000, 5000 and 6000) along with the DesignWinder/TM/ and the DisplayMaker/R/
Professional, DisplayMaker XL60 and DisplayMaker Express Big Color/R/ wide-
format, digital inkjet color printers, are designed to be cost-effective
solutions for the short-run digital computer printing of photo-realistic, wide-
format color posters, signs, and banners. The Company's Halon/R/ product
allows users to print digital files to various color laser copiers including
those produced by Canon, Kodak and Xerox. The PressMate/R/-FS, a proprietary
desktop chemical-free FilmSetter/TM/, is capable of film output generated
without the use of chemicals (dry film) typically associated with developing
film, with effective resolution of 2400 dots per inch. The ColorMark/R/ Pro 2000
Print Server is a raster image processor which is capable of supporting a
combination of DisplayMaker Professional, DesignWinder, DisplayMaker Express and
DisplayMaker HiRes 8-Color series printers, PressMate-FS Personal
FilmSetters/TM/, and Halon color laser copier interfaces simultaneously, as well
as offering time-saving features specifically designed for high-volume,
production environments. The RIPStation/TM/ is an entry-level print server
(raster image processor).
Until 1993, the Company's principal products were monochrome laser printers that
were based on printer hardware or "engines" manufactured by others but included
the Company's proprietary software (including "TurboRes/R/") and hardware
designed to generate significantly higher effective resolution. Print
resolution, commonly expressed in terms of "dots per inch" (the number of
digitally placed dots on a line), approached the resolution used in professional
typesetting previously dominated by photographic processes and was described as
"plain-paper typesetting." Although the Company believes that it was a market
leader in very high resolution laser printing and continued to enhance its
products, from 1991 through 1996, many of the Company's competitors, including
Hewlett-Packard/R/, increased the performance of their printer offerings,
impacting the volume and margins achieved on sales in the high resolution laser
printer marketplace. The Company focused its research and development efforts on
other sectors of the printing market during this period (specifically on the
development of proprietary printing hardware and related consumables) and ceased
actively promoting its plain-paper typesetting products entirely in the fourth
quarter of fiscal 1996, which resulted in a continuing decline in sales of
plain-paper typesetting products over the next four quarters.
The bulk of the decline in sales from plain-paper typesetting products during
this period was replaced by sales of new, wide-format color ink jet printers
developed by the Company. The Company introduced its wide-format (36 inch),
photo-realistic color printer, the DisplayMaker Professional, in 1993. Although
still based on a printer "engine" developed by others, the DisplayMaker
Professional integrates a high performance computer print server and the
Company's own software with a proprietary ink delivery system ("Big Ink/TM/")
to enhance speed, functionality and the quality of output to generate photo-
realistic, poster sized prints and banners. As the market grew and demand
increased, competitors have licensed the printer "engines" from the Company's
supplier and have introduced their own competing product, which has negatively
impacted the Company's margins.
As part of its longer term strategy to reduce its susceptibility to new market
entrants, maintain product differentiation and lengthen its product life cycles,
the Company began development of several proprietary printer "engines" in 1993
and has continued with this strategy through the present. The first of these
products was targeted for a niche in the laser typesetting market by eliminating
the need for the use of photographic processes and chemicals in creating an
image on a photographic film used to create a metal printing plate. In 1994, the
Company introduced a proprietary printer engine and associated software,
PressMate, that uses heat-sensitive film rather than photosensitive film that
allows dry process imaging on the desk-top rather than chemical development in
the darkroom. The Company enhanced this printer and
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introduced a reconfigured version as the "PressMate-FS" in August, 1995. During
the past three years, the Company has developed three new proprietary color
printer products using engine platforms to address the wide-format color
printing market. The first of these products, the DisplayMaker Express, is a 54
inch wide, photo-realistic roll-fed color printer that uses phase-change inks
(solid inks that are melted during the printing process), which was introduced
in 1995. The second color printer product developed during this time, the
DesignWinder, was introduced in September 1996. The DesignWinder is a drum-
based, 8 head, cut-sheet, printer that produces high-quality wide-format (36 by
48 inch) prints in as little as 6 minutes. Since 1994, the Company has also
introduced the ColorMark Pro Print Servers, RIPStations (raster image processing
stations), and the Halon copier interface to enhance and expand the utility,
functionality and applications for the color products.
In September 1997, the Company introduced its newest HiRes 8-Color proprietary
printing platform. The ColorSpan DisplayMaker 6000 was exhibited at the Print
'97 trade show in Chicago, Illinois and several other shows later that month.
The DisplayMaker 6000 is a 62" wide-format, roll-fed device with eight thermal
ink jet print heads. Also available in this series are the DisplayMaker 4000
(42" wide) and DisplayMaker 5000 (52" wide) printers with the same feature set.
In August 1997, the Company announced its intention to rename its primary
operating corporation. Effective August 1997, the Company renamed LaserMaster
Corporation (its primary operating subsidiary) to ColorSpan Corporation.
Subsequently, LaserMaster Europe Ltd. and LaserMaster Asia/Pacific, Inc. will
become ColorSpan Europe, Ltd. and ColorSpan Asia/Pacific, Inc., respectively.
The Company also intends to petition its shareholders during Fiscal 1998 to
change the name of the parent company, LaserMaster Technologies, Inc.
The name change is consistent with the Company's strategic business plan. As
early as June 1996 the Company had announced it intended to concentrate its
efforts in the wide-format color printing arena. The ColorSpan name change
reiterates the Company's focus on market opportunities in that area. In August
1997, the Company also announced it intended to sell wide-format inkjet media
for Encad, HP and other wide-format printers via the world wide web.
The primary users of the Company's products are commercial printers,
reprographic service bureaus, photo labs, quick printers, exhibit builders, in-
house print shops, printers, publishers, government and educational facilities,
and corporate marketing departments. Applications include point-of-purchase
signs, trade show exhibit graphics, banners, billboards, courtroom graphics,
pre-press positional proofing (proofs or other quick output to demonstrate
concepts for advertising or graphics layouts), digital photo imaging and backlit
signage.
The products are sold through a network of domestic resellers and international
value-added distributors. In the U.S./Canada, the Company uses a factory sales
team to assist the resellers in closing business.
The Company's domestic offices are in Eden Prairie, Minnesota. The Company's
European sales subsidiary is headquartered in Hoofddorp, The Netherlands, and
the Company's Asia/Pacific sales and technical support facility is located in
San Jose, California.
Market
According to Wide-Format Digital Color Printing, a November 1996 market survey
conducted by IT Strategies, a research and consultancy firm serving the digital
printing markets, the Large-Format Digital Printing market for hardware and
consumables is projected to grow from annual sales of approximately $554 million
in 1996 to approximately $3.4 billion in 2000. The rapid growth in this market
is being driven primarily by the increasing desire and need for customized,
large-format color graphics, as well as significant advances in short-run
printing and desktop publishing technologies. Traditional graphics printing
methods, consisting of photographic, screen and offset printing, do not meet the
requirements for production of short-run print jobs due to the time consuming,
multi-step processes and set-up costs involved. As a result, digital printing
has developed to fulfill the unmet demand of short-run users by allowing
graphics to be printed directly from desktop publishing systems with dynamic
interchange of data to print onto a variety of media.
There are a number of digital printing technologies, including inkjet, (piezo
and thermal), pen, electrostatic, and photographic that allow users to produce
wide-format output. Each of these technologies has specific qualities that can
be critical to any given application, including resolution, speed, accuracy,
color fill capability, fade resistance, reliability and cost.
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A combination of characteristics has made inkjet printing one of the fastest
growing technologies in the wide-format color printer market. The
characteristics of wide-format inkjet printers include relatively low cost, high
resolution, faster speed and the ability to print high-quality color. Inkjet
printers (using either thermal or piezo print head technology) typically form
images, lines and other characters by placing very small dots of ink as the
print head moves horizontally, called a raster scan, while the media is
typically scrolled vertically. Because inkjet print heads move above the media
and do not actually make contact with the media, there is less mechanical wear
and tear than experienced with other types of printing devices. Most inkjet
printers can print on a variety of media or other materials used for signage or
display.
Electrostatic printers generally are more expensive to purchase than inkjet
printers or thermal printers and require the use of special medias. They offer
certain advantages to users requiring low cost per square foot and high speed
printing characteristics. Thermal printer/plotters are similar to electrostatic
printers in that they require special paper, but also require ink ribbons to
take advantage of the thermal print head. Thermal printers are typically more
costly than comparable-size inkjet printers.
Other technologies that can be adapted to wide-format use include photographic
output, electrophotographic output and dot matrix printers. These printers have
disadvantages, including high costs, when compared to inkjet technology.
Strategy
The key elements of the Company's strategy are:
To maintain and enhance its position as a leading provider of affordable, high
quality, proprietary products and aftermarket consumables supplies to the
professional printing market. A growing portion of the Company's products are
proprietary printer architectures (the printer engine including ink and media
delivery systems) which were designed, manufactured, and marketed by the
Company. PressMate-FS and DisplayMaker Express were the first two proprietary
printer engines developed by the Company. In September 1996, the Company
introduced the first member of its HiRes 8-Color printer platforms, the
DesignWinder. The DesignWinder platform is also the basis for the Company's
first OEM partner. Agfa-Gevaert commenced selling its product, the AgfaJet
Atlas in July 1997. In September 1997, the Company, under its new ColorSpan
identity, introduced a family of HiRes 8-Color printers with printing widths
varying from 42" to 62". The Company's family of products is expected to grow
with the changing marketplace while meeting the needs of professional printing
applications.
To develop and produce value-added software which distinguish its printer
solutions. The Company has consistently taken market standards to a higher
level of performance. Management has been committed to continually enhancing
its products by adding features and options to its current family of devices
through software enhancements. These enhancements continually evolve with
products over their lives through increasing print speeds, allowing use of
additional media and inks for various applications, improving color matching and
print quality and continuing compatibility with other vendor's software and
operating systems.
To continue to develop a global reseller channel which utilizes the Company's
sales expertise. The Company has been successful developing its targeted
markets through direct mail and telemarketing efforts. The Company intends to
continue to enhance its global third party distribution channels while
continuing to focus on its core direct market development and user education
approach in partnership with its new reseller focus in the U.S. and Canada.
To develop additional media, ink and film for use with the Company's proprietary
print engines to enhance printing applications and market expansion. In
September 1996, the Company entered into a strategic alliance with Sihl-Zurich
Paper Mill on Sihl AG (Sihl), a leading European manufacturer of specialty paper
and related media, to enhance the development of unique and high-quality media
for use with the Company's print engines. Sihl is a primary vendor in the
Company's "Print and Hang" media offerings for outdoor use released during 1997.
The Company added 21 new inkjet medias during the year. Included in these
offerings are WaterFast Poly-Film, WaterFast Poster Paper and Banner Tyvek(R)
for outdoor applications. The release of specialty media for use with the
Company's DesignWinder added Artist Gloss Canvas and Artist Matte Canvas
offerings, along with FirstLook Proofing Paper and FineArtArchival Paper for use
in the fine art reproduction market. The Company also increased the number of
widths and lengths offered in a number of core media offerings.
These media are tuned to provide the highest quality output when used in
conjunction with LaserMaster/ColorSpan's ink and proprietary ColorMark color
matching capabilities available on the Company's hardware product line.
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In addition, the Company released multi-density ink offerings for its HiRes 8-
Color DesignWinder products in both dye-based (Ultra Wide Gamut) and pigmented
(Lightfast) versions.
To increase international sales. International sales have been a growing
percentage of LaserMaster/ColorSpan's core business. The Company is committed
to increasing its market share in Europe, Asia, Africa, Central and South
America through its physical presence in Europe as well as by building ongoing
relationships with its Value Added Distributors (VADs) throughout the world.
The Company has opened a new technical support and sales office in San Jose,
California to enhance the support of its Pacific Rim operations going forward.
To develop original equipment manufacturing (OEM) customers for the Company's
proprietary products. The Company announced the signing of its first
significant OEM relationship in August 1997. The Agfa-Gevaert group began
selling its AgfaJet Atlas imaging system in July 1997. The product is based on
the Company's HiRes 8-Color drum based DesignWinder platform. The Company is
actively exploring relationships which would result in additional OEM customers
for its various product offerings. The Company has plans to allow its
proprietary engines to be accessed by third-party print servers and color
management systems. Augmenting the Company's existing distribution channels with
high-quality OEMs could help gain market acceptance of the Company's products
and expand its customer base for after-market consumables sales.
To expand consumable sales by offering a line of consumables (primarily media)
to users of printers manufactured by others. In August 1997, the Company
announced the opening of its Media.By.Air business segment. The internet sales
model will market a line of inexpensive, high quality, commodity media and will
rely on electronic commerce for marketing, order acceptance and shipment. It
will partner with a number of third-party suppliers to offer overnight delivery
of printing supplies to inkjet supplies consumers.
ColorSpan Products
ColorSpan's five wide-format color inkjet printers, the DisplayMaker
Professional (initial shipments in June 1993), DisplayMaker Express (initial
shipments in December 1995), DesignWinder (introduced in September 1996), and
DisplayMaker XL60 (initial shipments in April, 1997) and the recently introduced
DisplayMaker HiRes 8-Color printer series (initial shipments in September 1997),
provide photo-realistic digital color output. These products are designed to be
cost-effective solutions for short-run digital printing of photo-realistic wide-
format color output. The printers work with most commercially available desktop
digital color manipulation and composition software applications. Using third-
party graphics and page-layout software applications that allow printed pages to
be "tiled", the DisplayMaker products can be used to create virtually unlimited
image sizes. The Company's Big Color products incorporate a number of
proprietary software advances, including ColorMark(R) color management and
SmoothTone image enhancement technologies. The DisplayMaker HiRes 8-Color
series adds features like AutoSet calibration which automatically adjusts
cartridge positions, AutoJet mapping which makes adjustments for misfiring jets,
AutoTune which allows users to calibrate in an unattended mode, and AutoInk
which allows users to switch between dye-based and pigment inks through
software. These features utilize a CCD camera to make calibrating the printer,
changing ink cartridges and unattended printing easier and more reliable.
ColorMark is the Company's color management system that ensures accurate and
consistent color from print to print. This technology allows the user to print
multiple copies of the same file and achieve near perfect matching of colors,
even after changing ink and media. SmoothTone is an image-enhancement
technology that significantly boosts the apparent resolution of the printing
engine to provide output with near continuous-tone quality.
The Company's ThermalRes(R) technology, for which three United States patents
have issued with additional U.S. and foreign patents pending, accomplishes an
even higher degree of resolution enhancement for text and line art in monochrome
and four-color pre-press printing applications. ThermalRes technology is used in
the Company's desktop chemical-free filmsetter product, PressMate-FS.
DisplayMaker Professional and DisplayMaker XL60. These Big Color printers are
4-head, 36-inch and 60-inch wide, photo-realistic, roll-fed, color inkjet
printers capable of printing poster-size images up to 36 inches wide and 60-
inches wide and, depending on the software application, up to 200 feet long.
The DisplayMaker Professional and the DisplayMaker XL60 are based on third-
party-supplied inkjet marking engines and the Company's patented Big Ink
Delivery System. The ColorMark color management system incorporated into the
ColorMark print server ensures consistent color quality from print to print.
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DisplayMaker Express. The Company's second proprietary printer is a 54-inch
wide, photo-realistic, high-speed, roll-fed, 4-color inkjet printer which
utilizes phase-change inks together with piezo printhead technologies for which
the Company has special marketing rights for certain wide-format applications.
The DisplayMaker Express prints over 100 square feet per hour, or an E-size (34
inches by 44 inches) print in approximately six minutes. DisplayMaker Express
is capable of producing prints 54 inches wide and in excess of 150 feet in
length. The DisplayMaker Express uses specially formulated ColorMark solid
pigmented ink pucks, rather than dye-based aqueous inks used by other inkjet
printers, which provides improved UV stability and water resistance. The
DisplayMaker Express requires the use of ColorMark qualified or certified media,
which ensures proper print functionality and quality.
DesignWinder. LaserMaster's third proprietary printer and first of the HiRes 8-
Color printer platforms is a 36-inch wide, drum-based, cut-sheet, color inkjet
printer which utilizes a revolutionary eight printhead design to produce high-
quality signs, photos and digital art and sets a new five minute benchmark for
producing E-size prints. The Company's first OEM supply agreement, signed in
August 1997, also uses this platform. DesignWinder is capable of producing
apparent 1200 dpi (dots per inch) resolution prints up to 35.5 inches by 47.25
inches in size utilizing its patent-pending multi-density printing technique
which uses additional inks to address more discreet colors within the color
gamut. The high-precision, spinning drum-based design provides superior dot
placement accuracy and repeatability, setting a new standard in Big Color print
quality, previously unattainable in traditional inkjet plotter devices (print
engines that use a moving print head traveling perpendicular to a moving web of
paper to attain print coverage).
PressMate-FS. In March 1995, the Company began shipping production quantities
of its PressMate desktop chemical-free filmsetter. PressMate, the Company's
first proprietary printer engine, is a desktop device that uses a dry process to
produce specially designed films necessary for making the printing plates used
in offset printing. Traditionally, these films were produced by photographic (or
wet process) type imagesetters or cameras, using chemicals and darkrooms to
develop the image to be reproduced. PressMate permits printing of text, line art
and images used for four-color separations, at resolutions considered by the
Company to be equivalent to 2400 dots per inch using a heat-sensitive, chemical-
free film. This fidelity was previously unavailable in a plain-paper or thermal
printing device. PressMate shipments were suspended in August 1995 to improve
registration tolerance across multiple layers of film required for the highest
quality, four-color separations desired by the Company's customers. In December
1995, the Company began shipping production quantities of PressMate-FS, which
incorporated these technical improvements. The PressMate-FS is a desktop unit
that is easily integrated into just about any office or computer network
environment.
Halon(R). The Halon Color Laser Copier interface provides users of the
ColorMark Pro color print server the option of printing their digital files to
any one of a variety of color laser copiers.
ColorMark Pro 2000. The DesignWinder printer, DisplayMaker printers, PressMate
filmsetter and Halon color laser copier interface are all driven by the
Company's ColorMark Pro 2000 print server, a raster image processor that is
based on a 200 MHz, 32-bit superscalar microprocessor. The ColorMark Pro 2000
features advanced file spooling (a queue method) for multiple users, "RIP
Saver/(R)/ (which stores processed files to avoid redundant rasterization), job
management and logging features that track ink and paper consumption for job-
costing, work-flow planning and other purposes. This device has connectivity
capacity to handle several devices simultaneously including one DesignWinder, up
to two DisplayMaker Professionals or XL60's, one DisplayMaker Express, one
DisplayMaker HiRes 8-Color printer, up to two PressMate-FS's, or up to two color
laser copiers with Halon interfaces.
RIPStation. The RIPStation is an entry-level color server alternative. It is
based on a 200 MHz, 32-bit microprocessor. It functions similarly to the
ColorMark Pro 2000 without the added advanced and multiple engine connectivity
features offered by the ColorMark Pro 2000.
Consumables. Color printing consumes significant quantities of inks and media.
ColorSpan products include a range of consumables, such as specialized dye-based
inks for indoor use and pigmented inks for outdoor use. The Company performs
qualification testing on these consumables before releasing them for customer
shipment. The specialized inks are created specifically for ColorSpan products
to optimize image quality and printer performance. The Company currently offers
a variety of media for its wide-format inkjet printers that include recent
introductions such as WaterFast PolyFilm, WaterFast Poster Paper and Banner
Tyvek for outdoor use with its roll-fed aqueous inkjet products. In the past
fiscal year, the Company has added specialty media for the DesignWinder product
that include Artist Gloss Canvas, Artist Matte Canvas, FineArt Archival Paper
and FirstLook Proofing Paper to take advantage of DesignWinder's unique printing
capabilities.
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The Company sells the consumables (inks, media and film) required for optimum
use of the printing products it sells. The Company offers various ColorMark
consumables for its Big Color printers, including a dye-based version and a
waterfast, lightfast pigment-based versions of 500 ml Big Ink packs for use with
the DisplayMaker HiRes 8-Color printer series, the DisplayMaker Professional,
DisplayMaker XL60 and DesignWinder, and uniquely configured 150 ml ColorMark
solid ink pucks required for the DisplayMaker Express. The Company introduced
dye-based and pigment-based ColorMark multi-density inks for use with
DesignWinder during 1997. In addition to the basic media offered for
DisplayMaker Express in the past (ColorMark Bond, ColorMark Vinyl and ColorMark
WaterFast Removable Tyvek), during 1997 the Company introduced ColorMark
WaterFast Durabanner/TM/, ColorMark Laminate Bond, to be used when encapsulation
of the output is desired, and two lower priced versions of previously released
media; ColorMark EconoVinyl and ColorMark EconoBond. The Company also offers a
variety of print media in various widths and lengths such as Coated Gloss paper,
PolyGloss(R), FineArt Canvas, matte, ClearFilm/TM/, and TransWhite/(R)/
translucent backlit film (used on back-lighted signs) for use with the
DisplayMaker Professional, DesignWinder, DisplayMaker XL60, and the DisplayMaker
HiRes 8-Color series of products.
As part of the ColorMark system, the 500 ml Big Ink packs, and 150 ml ColorMark
ink pucks ship with ColorMark profilers (recyclable circuit boards) that plug
into the printer, and provide information to ensure accurate, consistent color
output from print to print. The domestic price per dye-based Big Ink pack is
$199 per color. The price for pigment-based Big Ink packs is $299 per color.
The ColorSpan wide-gamut dye-based Big Ink packs sell for $249 each and the
pigmented versions sell for $299 each. The domestic price per ColorMark ink puck
is $175. The domestic prices of the ColorMark paper and other media range from
$65 to $450 per 100- to 150-foot, 36-inch wide rolls and from $119 to $1,159
per 40- to 175-foot, 60-inch wide rolls.
The Company's PressMate-FS Personal FilmSetter/TM/ requires specially developed
ThermalRes film rolls which are also supplied by the Company. This unique
specialty film is manufactured to the Company's specifications. The domestic
price is $295 for a 90-foot roll of ThermalRes film.
The Company's Unity/TM/ line of plain-paper typesetters require toner and
process units for operation. The domestic price for toner is $69 per unit, and
process units list for $699 per unit.
The Company's hardware products, which have suggested US list prices of
approximately $5,995 to $49,995/(1)/, include:
<TABLE>
<CAPTION>
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Product Distinguishing Features
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<S> <C>
DisplayMaker HiRes 8- Apparent resolution of 1200 DPI
Color series 8-Color 500ml/color dual installable Big
Ink Delivery System
AutoSet calibration
AutoJet mapping
AutoTune unattended printing
42", 52", and 62" wide roll-fed output
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DisplayMaker 500 ml/color Big Ink Delivery System
Professional 36" wide roll-fed output
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DisplayMaker Express 54" wide roll-fed output
150 ml ColorMark solid ink pucks
Print speed up to 6 inches per minute
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DesignWinder 8-Color 500 ml/color Big Ink Delivery System
36" wide precision drum design
E-Size prints in as little as 6 minutes
Apparent resolution of 1200 dpi
- ----------------------------------------------------------------------------
DisplayMaker XL60 500 ml/color dual installable Big Ink Delivery
System
60" wide roll-fed output
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</TABLE>
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<TABLE>
<S> <C>
- ----------------------------------------------------------------------------
PressMate-FS Personal
FilmSetter Apparent resolution of 2400 dpi
Chemical-free film processing
12" x 26" ThermalRes film output
500 MB Internal Storage
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Halon Color Laser Direct digital support for the Canon, Kodak
Copier Interface ColorEdge, Xerox MajestiK and Xerox Regal
color laser copiers.
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ColorMark Pro 2000 200MHz, 32-bit processor
Print Server 64 MB RAM
PostScript(R)-language compatible Level 2
3 GB storage
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RIPStation Print Server 200MHz, 32-bit processor with floating
point unit
32 MB RAM
PostScript-language compatible Level 2
2 GB storage
- ----------------------------------------------------------------------------
</TABLE>
/(1)/ Effective September 1, 1997.
Product Development
The Company's continued success depends on making ongoing investments in product
development to ensure the timely introduction of high-performance products in
response to changes in technology, market demands and customer requirements.
For certain important additional cautionary factors, risks and uncertainties,
refer to Exhibit 99 of this form 10-K. Accordingly, the Company is committed to
creating specialty printing products that yield performance superior to standard
marking engines, designing new engines and enhancing existing products to
achieve higher levels of performance. The Company is also committed to
designing and enhancing products to increase the Company's after-market
consumables business.
As of June 30, 1997, the Company employed approximately 60 people in product
development activities. The Company's product development organization consists
of multiple project teams based in three main product areas: drum-based
products, carriage-based products and consumable development and testing.
Staffing for these teams is flexible, allowing individual engineers to handle
multiple and sometimes overlapping development objectives. The Company's
software development group creates and enhances software technologies which
improve the usefulness, cost-effectiveness and productivity of printers offered
by the Company, and the quality of such printers' output. The Company's hardware
group works to enhance existing hardware components and products and works with
the software group to develop printer products for specialized applications and
markets. The consumables group creates and tests new product offerings for the
Company's installed base of printers.
Sales and Marketing
The Company sells its products primarily through its factory sales
professionals, partnered with its dealers in the U. S. and Canada, and value-
added distributors internationally. As of June 30, 1997, the Company employed a
67 person telemarketing sales force including sales professionals focused in
part on developing relationships with major national printing accounts and new
dealers and resellers. The Company changed its domestic distribution model in
February 1997 and now sells its color hardware products only through its
reseller, VAD and OEM network. The Company's sales efforts are supported by a
direct mail marketing program designed to achieve frequent contact with its
potential customers, including PostScript and reprographic service bureaus,
photo labs, quick printers, sign shops, exhibit houses and corporate marketing
departments. The Company complements its direct mail efforts by advertising in
trade journals and by exhibiting regularly at industry trade shows.
The Company invests significant resources in developing and training its sales
professionals and has implemented computerized sales management and sales
communications systems. Sales representatives participate in continuous
9
<PAGE>
training programs so that they understand product features and benefits as well
as customer applications and business requirements. Sales professionals are
compensated on a salary plus bonus and commission basis.
Domestic and Canadian Sales. The Company's domestic and Canadian sales and
marketing operations are based at its headquarters in Eden Prairie, Minnesota.
The products are sold through a network of domestic resellers and international
value-added distributors. In the U.S./Canada, the Company uses a factory sales
team to assist the resellers in closing business.
For its Big Color products, the Company has also established relationships with
independent copy shops and local service printers that have purchased Big Color
products. These Big Color Digital Printing Centers are provided cooperative
marketing support to promote Big Color printing services and products in their
area. The Company's sales professionals refer potential customers to these
local Big Color Digital Printing Centers or resellers to observe the use of the
Company's Big Color products. From time to time, the Company pays a fee to the
showcasing center or reseller following a sale. The Company believes that this
marketing approach permits the Company to price its Big Color products at
competitive levels.
OEM Sales. The Company signed its first significant OEM contract in August
1997. Pursuant to this agreement, the Company is selling its DesignWinder
product and Big Ink Deliery System for use with the DesignWinder to Agfa-Gevaert
for private labeling. Agfa began selling its AgfaJet Atlas imaging system in
July 1997. The Company is currently exploring other relationships which would
result in OEM customers for its various printer engines. The Company desires to
expand the market acceptance of its proprietary products and widen its
distribution network for both hardware and after-market consumables.
Relationships with quality OEM partners are a method of attaining this goal. The
Company has plans to allow its proprietary engines to be accessed by third-party
print servers and color management systems. Expanding the installed base of
ColorSpan hardware products will allow the Company an opportunity to sell more
consumables products.
International Sales. The Company currently sells its products in all of the
Western European nations and in the principal Eastern European, Latin American,
Pacific and Asian markets. The Company's European sales, support and warehouse
facility is located near Amsterdam, The Netherlands. The Company conducts sales
operations for Europe, the Middle East and Africa from its European
headquarters. Pacific and Asian markets are managed from the new technical
support and sales office in San Jose, California. All other international sales
are managed from its headquarters in the United States.
In international markets, the Company sells its products through a network of
non-exclusive Value Added Distributors (VADs). VADs are granted the right to
purchase ColorSpan products at discounted prices from list price and distribute
those products within a specified territory outside the United States. VAD
agreements require the VAD to promote, market and support ColorSpan products and
are typically for a one year period with automatic one year renewals. Either
party may terminate the agreement with or without cause, with a 30 day written
notice. The Company may appoint other VADs and may sell directly to customers
inside these territories. For the year ended June 30, 1997, sales to customers
outside of the United States accounted for approximately 46% of the Company's
total revenues. See Note 14 of Notes to Consolidated Financial Statements for
additional information regarding international operations.
Service and Support
At June 30, 1997, the Company had 48 technical and customer support
representatives responding to telephone inquiries from customers and dealers.
The Company offers a limited warranty for all of the products it manufactures.
Under its limited warranty, the Company will repair or replace any defective
product on a factory-return or central depot basis for a period ranging from 90
days to one year following purchase. In addition to its factory warranty, the
Company offers its customers the option of on-site installation and maintenance
services in some markets, through third-party support organizations.
Manufacturing
The Company performs final assembly, functional testing and quality assurance
for essentially all of its products and related components, parts and
subassemblies at its facilities in Eden Prairie, Minnesota. For some of its
products the Company currently purchases fully assembled printer marking engines
directly from manufacturers and other components, parts and subassemblies from
outside sources. For its PressMate-FS, DisplayMaker Express, DesignWinder and
DisplayMaker HiRes 8-Color series products, the Company purchases components and
uses them to manufacture
10
<PAGE>
the printer engine. The Company designs controller boards and software for use
with these print engines and components. The Company utilizes a computerized
material requirements planning (MRP) and monitoring system to integrate its
purchasing, materials handling and inventory control functions.
Certain components used in the Company's products, including printer marking
engines, printheads and custom fabricated components, are currently available
only from sole sources, and certain other components are available from only a
limited number of sources. The Company has in the past experienced delays as a
result of the failure of certain suppliers to meet requested delivery schedules.
The Company sources ink cartridges from a supplier that also competes in the
wide-format digital printing market. Should the Company have problems obtaining
the inkjet cartridges for any reason, it will have a significant adverse impact
to the Company. In August 1996, the Company experienced a severe shortfall in
piezo head components due to a yield problem with one of its key vendors. That
shortfall caused a reduction in revenues for the DisplayMaker Express product
line in the September 1996 quarter. The Company worked through the process
problems with this vendor during the December 1996 quarter and is currently able
to obtain adequate supplies. The Company's potential inability to obtain
sufficient sole or limited source components, or to develop alternative sources,
could result in delays in product introductions, interruptions in product
shipments or the need to redesign products to accommodate substitute components,
any of which could have a material adverse effect on the Company's operating
results. For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.
In fiscal 1994, the Company made the strategic decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties and to focus on engine products designed and manufactured by the
Company. In fiscal 1995, the Company began active production of its first
proprietary print engine, PressMate, a chemical-free filmsetter. A production
line was also established for DisplayMaker Express which was released in
December 1995. The Company introduced another proprietary printer engine,
DesignWinder, in September 1996, and introduced its latest proprietary product
series, the DisplayMaker HiRes 8-Color 4000, 5000, and 6000 products in
September 1997. Production of proprietary engines has required the Company to
increase its inventory beyond historical levels, requiring the use of additional
working capital. The Company has also experienced increases in production and
overhead costs which have had a significant, negative impact on the overall
gross margins of the Company.
A portion of the total manufacturing cost of the Company's filmsetter and Big
Color products is represented by certain components, particularly dynamic random
access memory chips ("DRAMs"), the prices of which have fluctuated significantly
in recent years. Significant fluctuations in price or availability of DRAMs or
other components could have a material adverse effect on the Company's operating
results.
Because the Company normally fills orders within a few days of receipt, it
usually carries less than one month's backlog. In addition, customers may
generally cancel or reschedule orders without significant penalty. For these
reasons, the Company believes that backlog is not a meaningful indicator of
future sales. Manufacturing plans and expenditure levels are based primarily on
sales forecasts and historical trends where applicable. The absence of a
material backlog could contribute to unexpected fluctuations in operating
results.
Competition
The computer printer industry is intensely competitive and rapidly changing.
Some of the Company's existing competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than the
Company. For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.
The Company's Big Color inkjet printing products compete in the short-run, wide-
format, photo-realistic color printing market with photographic methods,
electrostatic and inkjet digital printers. In past years, some of the competing
manufacturers and vendors in this market include Hewlett-Packard Co., ENCAD,
Inc., Raster Graphics, Inc., Xerox Corp., Electronics for Imaging, Inc., Iris
Graphics, Inc., CalComp, Inc., Roland, Mutoh, Epson, Tektronics, Inc. and a
variety of competitors who purchase ENCAD's printer engines on an OEM or systems
integration basis. Xerox, Fuji and Canon are expected to or already have
released new products which will compete for market share in this industry this
year. In September 1997, the Company released a new family of HiRes 8-Color
printers that combine the quality and increased color gamut of the popular
DesignWinder HiRes 8-Color printer with the features of widely-accepted roll-fed
inkjet printers. The DisplayMaker HiRes 8-Color series printers utilize 8 inkjet
print heads using ColorSpan multi-density inks that simulate continuous tone
printing with an apparent 1200 dpi image resolution.
11
<PAGE>
Marketed as the DisplayMaker HiRes 8-Color series, this family of printers
includes three models: DisplayMaker 4000 for 42" wide prints, DisplayMaker 5000
for prints up to 52" wide, and DisplayMaker 6000 for prints up to 62" wide.
Competition in this market is generally based on equipment cost, printing
quality, production and printing speed, operating costs and the costs of
maintenance and upkeep. The traditional photographic approach, employed to
produce photo-realistic output one page at a time, is expensive, time-consuming
and labor-intensive, especially when an image includes text. This approach also
requires skilled personnel and special production facilities and creates
chemical wastes. Digital printers, used with software that permits manipulation
of images and text, can create photo-realistic output without the use of the
photographic process, eliminating the need for chemical production facilities.
The electrostatic printers that compete with the Company's Big Color products
are expensive costing from $50,000 to over $200,000, and can involve significant
maintenance and operating costs. They can also require controlled environments
and sophisticated front-end processing systems. Although electrostatic printers
provide significantly faster printing speeds and lower per-square-foot
consumables costs than those of the Company's products, the Company believes it
competes favorably with such devices on the basis of lower initial purchase
price, easier operation, higher quality output and lower ongoing maintenance and
environmental requirements.
While other vendors have introduced wide-format printers based on engineering
plotter engines, at prices comparable to or below those of some of the Company's
products, the Company believes that its software and hardware technologies,
including SmoothTone image enhancement, ColorMark color management and the
newly-released features of the DisplayMaker HiRes 8-Color product line which
include AutoSet calibration, AutoJet mapping, AutoTune unattended printing and
AutoInk swapping, offer it a competitive advantage in terms of higher printing
quality, easier operation and lower ongoing operating costs. In particular, with
issued United States patents on its Big Ink Delivery System and other patents
pending in the US and elsewhere, the Company believes it has a competitive
advantage in high-capacity, wide-format, closed-loop color graphics printing
using a unitary system.
The Company's chemical-free filmsetter, PressMate, competes with
phototypesetting equipment produced by a variety of manufacturers such as
Varityper, Inc., Linotype-Hell, Inc. and Agfa-Gevaert. Many of the competitive
imagesetting systems require a darkroom, other dedicated facilities for storing
chemicals required for processing the film, hazardous materials, special
insurance and handling capabilities, and strict adherence to OSHA requirements.
The Company's PressMate is chemical-free and does not require a special
environment for operation. This reduces the cost of operation for users as well
as time required to produce documents by allowing the user to control the film
production process without the use of chemicals. PressMate competes on the
basis of price, speed, creative control, convenience and environmental concerns.
Proprietary Rights
The Company's ability to compete effectively depends, in part, on its ability to
maintain the proprietary nature of its technologies through patents, trademarks,
copyrights and trade secrets. Important features of the Company's products are
represented by proprietary software, some of which is licensed from others and
some of which is owned by the Company. The Company attempts to protect its
proprietary software with a combination of copyrights, trademarks and trade
secrets, employee and third-party nondisclosure agreements and other methods of
protection. Despite these precautions, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to reverse-
engineer or obtain and use information that the Company regards as proprietary.
In addition, there can be no assurance that others will not independently
develop software products similar or superior to those developed or planned by
the Company. For certain important additional cautionary factors, risks and
uncertainties, refer to Exhibit 99 of this form 10-K.
The Company has been granted three United States patents for inventions related
to its TurboRes 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 patents relating to its ThermalRes approach
to enhancing vertical resolution of printheads which use thermal marking
engines, and one patent for VideoNet which is a high-speed communications method
for connecting print engines to print servers. Additional patent applications
are pending relating to the Company's TurboRes, FastPort, Big Ink Delivery, and
other imaging and image enhancement and wide-format print engine technologies
and techniques. There can be no assurance that patents will issue from any of
these pending applications. In addition, with regard to current patents or
patents that may issue, there can be no assurance that the claims allowed will
be sufficiently broad to protect the Company's technology or that issued patents
will not be challenged or invalidated. Applications to patent the basic
TurboRes, ThermalRes and Big Ink Delivery System approaches and related
technologies have been filed
12
<PAGE>
in selected foreign countries. Patent applications filed in foreign countries
are subject to laws, rules and procedures which differ from those of the United
States and thus there can be no assurance that any foreign patents will issue as
a result of these applications. Furthermore, even if these patent applications
result in the issuance of foreign patents, some foreign countries provide
significantly less patent protection than the United States.
Licenses
The Company licenses Pipeline Associates, Inc.'s PowerPage/(R)/ printer-language
software for enhancement and use in its products to provide support for and
compatibility with the PostScript page description language. PowerPage is used
in the majority of typesetter and all Big Color products. The license agreement
provides for a per unit royalty on printers shipped by the Company, subject to
minimum quarterly requirements.
The Company has a license to remanufacture inkjet cartridges used in its Big
Color printer products. The Company pays a related royalty based on the number
of inkjet cartridges purchased from Hewlett-Packard Corporation for resale.
The Company has licensed operating software from Novell, Inc. and Microsoft
Corporation for use in its Unity typesetters and Big Color products. These
license agreements provide for a per unit royalty on printers shipped by the
Company.
Employees
At June 30, 1997 the Company had a total of 350 employees. None of the
Company's employees are represented by a labor organization and the Company has
never experienced a work stoppage or interruption due to a labor dispute.
Management believes its relationship with employees is good.
Environmental Matters
The Company believes that it is in compliance with all material aspects of
applicable federal, state and local laws regarding the discharge of materials
into the environment. The Company does not believe that it will be required to
spend any material amount in compliance.
Item 2. PROPERTIES.
As of August 31, 1997 the Company leases an aggregate of 301,364 square feet of
office and warehouse space in Eden Prairie, Minnesota of which 172,792 square
feet is from a related party (see Item 13), pursuant to leases expiring at
various times through December 2010. The leases require payments of property
taxes, insurance and maintenance costs in addition to basic rent and contain
renewal options for periods ranging from one to three years. Management expects
the current facilities to be sufficient for fiscal 1998.
The Company also leases approximately 14,850 square feet of office and warehouse
for its European headquarters in Hoofddorp, outside of Amsterdam, The
Netherlands and 2,387 square feet of office space in San Jose, California for
its Asian sales and technical support staff.
Item 3. LEGAL PROCEEDINGS.
In October 1995, a shareholder of the Company (Becker) filed an action against
the Company and four of its officers and directors alleging violations of the
Securities and Exchange Act of 1934. In December 1995, two other similar suits
were filed by other shareholders and subsequently consolidated with the Becker
suit. The Becker claims have been pled as a class action including all
purchasers of the Company's stock during the period of December 3, 1993 through
December 8, 1994. In February 1996, one of the directors named in the suit was
dismissed from the case without prejudice. In August 1997, the Company announced
a settlement agreement with shareholder class representatives and preliminary
court approval of the settlement in the class action securities litigation.
Final court approval of the settlement is expected in October 1997. The Company
will contribute cash or stock, at its option, to the settlement valued at
$636,000. The settlement obligation is included in the special charges for the
quarter ended June 1997. Upon final approval of the
13
<PAGE>
settlement, the shareholder class will dismiss all claims against the Company
and its officers and directors. If the matter is not approved by the court in
October and a new settlement or final judgement within the limits and coverage
of the applicable Directors' and Officers' insurance reached, this litigation
could have a material adverse effect on the Company. See Exhibit 99 of this form
10-K for additional discussion of risk factors.
In October 1995, LaserMaster Corporation (LMC) filed suit against Sentinel
Imaging, a division of Sentinel Business System, Inc. The complaint alleges,
among other things, patent infringement, trademark infringement, Lanham Act
violations, misappropriation of trade secrets, and interference with contractual
relationships. This action is related to LaserMaster's Big Color product line
generally and, in particular, LaserMaster's Big Ink delivery system and
ColorMark color management system. Sentinel Imaging's counterclaims for false
advertising, patent misuse, and unfair competition by LaserMaster have been
dismissed. If the Company does not prevail in these proceedings, the outcome is
not expected to have a material adverse financial impact on the Company.
The Company is currently involved in a dispute regarding liability for the value
of certain components 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 involved in legal proceedings related to customers credit and
product warranty issues in the normal course of business. In certain
proceedings, the claimants have alleged claims for exemplary or punitive damages
which may not bear a direct relationship to the alleged actual incurred damages,
and therefore could have a material adverse effect on the Company. At this time
none of the proceedings is expected to have a material effect on the Company's
operations or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the shareholders of LaserMaster Technologies, Inc. was
held on April 24, 1997, pursuant to notice to all shareholders of record at the
close of business on March 18, 1997. As of the notice of the meeting there were
14,333,907 common shares outstanding.
The Board of Directors did not present any matters to the shareholders for a
vote at that meeting. No matters were brought before the meeting and, as a
result, no voting was done.
14
<PAGE>
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Dividends
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business and,
accordingly, does not anticipate paying any cash dividends in the foreseeable
future. Any payment of dividends in the future will depend upon the capital
requirements, earnings, and general business and financial condition of the
Company, as well as other factors which the Board of Directors may deem
relevant.
Market Information
Since July 17, 1990, the Company's Common Stock has traded on the Nasdaq
National Market System (Nasdaq symbol: LMTS). The following table sets forth
the high and low sale prices reported in the Nasdaq National Market System:
<TABLE>
<CAPTION>
Common Stock
------------
High Low
----- -----
<S> <C> <C>
Fiscal Year 1996
First Quarter............................ $7.63 $5.13
Second Quarter........................... 7.50 5.13
Third Quarter............................ 7.13 4.75
Fourth Quarter........................... 6.88 3.63
Fiscal Year 1997
First Quarter............................ 5.75 3.25
Second Quarter........................... 6.25 4.63
Third Quarter............................ 5.88 4.13
Fourth Quarter........................... 4.25 1.63
Fiscal Year 1998
First Quarter (through August 31, 1997).. 2.63 1.69
- ---------------------------
</TABLE>
As of August 31, 1997, the last reported sale price of the Common Stock was
$1.94 per share. As of such date, there were approximately 239 record holders
and 3,400 beneficial holders of the Common Stock.
15
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been derived from
the consolidated financial statements of the Company, which have been audited by
Deloitte & Touche, LLP, independent certified public accountants, for the years
ended June 30, 1997, 1996, 1995, 1994, and 1993. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and notes related thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------
(In thousands, except per share amounts) 1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales............................... $ 86,563 $ 93,592 $119,438 $105,849 $68,227
Cost of goods sold...................... 61,912(a) 64,379(b) 72,857 59,852 37,387
---------- -------- -------- -------- -------
Gross profit......................... 24,651 29,213 46,581 45,997 30,840
Operating expenses:
Sales and marketing................... 18,131 21,109 27,091 21,810 19,360
Research and development.............. 6,387 6,149 6,210 3,335 1,890
General and administrative............ 10,097 11,310 11,552 9,634 8,813
Restructuring and other special charges 4,936(a) 4,431(b)
---------- -------- -------- -------- -------
Operating (loss) profit.............. (14,900) (13,786) 1,728 11,218 777
Other expenses (primarily interest)..... (1,011) (1,823) (1,433) (1,160) (1,776)
---------- -------- -------- -------- -------
(Loss) earnings before income taxes....... (15,911) (15,609) 295 10,058 (999)
Income tax (provision) benefit............ (1,289)(a) 5,147 (89) (3,394) 289
---------- -------- -------- -------- -------
Net (loss) earnings................... $ (17,200) $(10,462) $ 206 $ 6,664 $ (710)
========== ======== ======== ======== =======
Per common share:
Net (loss) earnings.................... $ (1.25) $ (0.93) $ 0.02 $ 0.57 $ (0.07)
========== ======== ======== ======== =======
Weighted average common and dilutive
common equivalent shares outstanding.... 13,706 11,305 12,206 12,189 9,565
</TABLE>
/(a)/In June 1997, the Company incurred special pre-tax charges of $8.4
million. The charges were related to the phase out of two proprietary printer
products and settlement of litigation. $3.5 million was charged to cost of
goods sold and $4.9 million to operating expenses. In addition, the Company
recorded a special income tax provision charge of $6.5 million related to the
revaluation of deferred tax assets.
/(b)/In May 1996, the Company incurred special pre-tax charges of $9.9 million,
consisting of restructuring and other special charges of $4.4 million and a
special charge to cost of goods sold of $5.5 million related to a revised
business plan and technical problems in one of its products.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Working capital.......................... $ 9,732 $ 2,580 $13,708 $13,973 $ 5,869
Total assets............................. 32,631 46,545 59,161 47,401 29,008
Current liabilities...................... 18,298 30,087 30,933 21,042 12,898
Long-term debt, less current maturities.. 185 820 1,599 1,590 5,743
Stockholders' equity..................... 11,915 15,638 25,293 23,139 9,817
</TABLE>
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
(Tabular information: dollars in thousands, except per share and percentage
amounts)
Cautionary Statement
The statements in this Management's Discussion and Analysis that are forward-
looking involve numerous risks and uncertainties and are based on current
expectations. Actual results may differ materially. Refer to exhibit 99 of this
form 10-K for certain important cautionary factors, risks and uncertainties
related to "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act").
Overview
In fiscal 1994, the Company made the long-term decision to migrate away from
products based on standard marking engines manufactured by unrelated third
parties to relying on products designed and manufactured by the Company. The
decision to progressively integrate the process of developing proprietary
engines in-house was made in an effort to better distinguish its products.
Because these proprietary engines require the use of specially designed or
configured media or inks and achieve optimum performance when using complete,
ColorSpan-branded systems, the effect of this strategy has been to generate a
continuous after-market stream of revenue from the sale of ColorSpan-branded
consumables. This consumables strategy is expected to build an increasing base
of revenues for the Company as well as enhance gross profit margins above those
expected from hardware and software sales alone.
The implementation of this engine design and manufacture process has taken
longer and has been more costly than the Company had originally anticipated. The
Company has experienced higher than expected production costs during this period
which were associated with the startup of its first two proprietary printer
engine manufacturing lines, PressMate and DisplayMaker Express. The start up
costs of both products required substantial resources and the corresponding use
of working capital. In addition, the Company was unable to accurately forecast
demand for these products and as a result, incurred substantial charges in
fiscal 1997 for excess quantities of inventory components, rework and
obsolescence.
During the fourth quarter of fiscal 1996, the Company incurred special pre-tax
charges of $9.9 million as a result of a revised business plan intended to
accelerate the Company's migration away from total reliance on integration of
third-party-supplied engines.
During the fourth quarter of fiscal 1997, the Company incurred special pre-tax
charges of $7.8 million for the revaluation of inventory and intellectual
property related to its first two proprietary printers as their estimated lives
are now believed to be shorter than originally expected. The Company also
incurred a special pre-tax charge of $636,000 for the settlement of litigation
and a special income tax provision of $6.5 million related to the revaluation of
deferred tax assets.
The Company has developed and manufactured additional printer products beyond
PressMate and DisplayMaker Express that are expected to replace the revenue from
these first two products as the marketing resources devoted to PressMate and
DisplayMaker Express diminish in fiscal 1998.
17
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 71.5(a) 68.8(b) 61.0
----- ----- -----
Gross margin...................................................... 28.5 31.2 39.0
Expenses:
Sales and marketing.......................................... 20.9 22.5 22.7
Research and development..................................... 7.4 6.6 5.2
General and administrative................................... 11.7 12.1 9.7
Restructuring and other special charges...................... 5.7(a) 4.7(b) 0.0
----- ----- -----
Total operating expenses.......................................... 45.7 45.9 37.6
------ ----- -----
Operating (loss)profit............................................ (17.2) (14.7) 1.4
Other (expense) income:
Interest expense............................................. (1.6) (1.9) (1.1)
Other........................................................ .4 (0.1) (0.1)
----- ----- -----
(Loss) earnings before income taxes............................... (18.4) (16.7) 0.2
Income tax (provision)benefit..................................... (1.5)(a) 5.5 0.0
----- ----- -----
Net (loss) earnings............................................... (19.9)% (11.2)% 0.2%
===== ===== =====
</TABLE>
/(a)/In June 1997, the Company incurred special pre-tax charges of $8.4 million
related to the revised estimates of the net realizable value of certain assets
associated with the Company's first two proprietary printers along with the
Company's obligation for the settlement of litigation. In addition, the Company
incurred a special income tax provision of $6.5 million for the revaluation of
deferred tax assets. The impact of the special charges on cost of goods sold,
operating expenses and income tax provision was 4.0%, 5.7% and 7.5% of net
sales, respectively.
/(b)/In May 1996, the Company incurred special pre-tax charges of $9.9 million
related to the Company's revised business plan and technical problems in one of
its products. The impact on cost of goods sold and operating expenses was 5.9%
and 4.7% of net sales, respectively.
Net Sales
Net sales were $86.6 million, $93.6 million and $119.4 million in fiscal 1997,
1996 and 1995, respectively. The decrease in net sales of 7.5% in fiscal 1997
was the result of a 23.7% decrease in hardware sales, partially offset by a
15.5% increase in sales of consumables. The decrease in hardware sales included
a 64.1% decrease in plain-paper typesetting products, an 18.7% decrease in
PressMate, an 18.9% decrease in DisplayMaker Express and a 41.5% decrease in
DisplayMaker Professional. The decrease in sales of plain-paper typesetting
products and PressMate are primarily related to a reduction in marketing
resources devoted to these products. The decrease in sales of DisplayMaker
Express is primarily the result of lower average selling prices in fiscal 1997
as unit sales were only slightly lower in fiscal 1997 than fiscal 1996. The
decrease in sales of DisplayMaker Professional is due to the fiscal 1997
introduction of DesignWinder, the Company's third proprietary printer.
DesignWinder replaced DisplayMaker Professional as the Company's leader in
volume shipments. In fiscal 1997, the Company sold $44.6 million (52% of net
sales) of consumables consisting primarily of ink, media and film, along with
maintenance contracts and spare parts compared to $37.2 million (40% of net
sales) in 1996 and $27.1 million (23% of net sales) in 1995. The increase in
consumables sales is due to an increased installed base of Big Color printers
and expanded product lines of inks and media.
18
<PAGE>
The decrease in total net sales of 21.6% in fiscal 1996 compared to fiscal 1995
was attributable to decreases in plain-paper typesetting products and price
competition in the Big Color printer market. These decreases were somewhat
offset by DisplayMaker Express (DME), which was introduced in fiscal 1996, and
increased consumables revenues.
The Company believes that the loss of revenues from products that have
experienced declines in sales over the past two years will be replaced with
revenues from future product releases expected in fiscal 1998, particularly the
Company's three new DisplayMaker HiRes 8-Color printers, and an increasing base
of consumables sales.
The following table sets forth net sales by product line expressed in thousands
and as a percent of net sales:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------------------
Net Sales 1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consumables.............. $44,566 51.5% $37,174 39.7% $ 27,148 22.7%
Big Color................ 32,030 37.0 35,190 37.6 37,525 31.4
Plain-paper Typesetting.. 4,951 5.7 13,834 14.8 41,123 34.4
PressMate................ 4,871 5.6 6,028 6.4 7,375 6.2
WinPrint/OEM/Imaging..... 145 0.2 1,366 1.5 6,268 5.3
------- ----- ------- ----- -------- -----
Total net sales.......... $86,563 100.0% $93,592 100.0% $119,439 100.0%
======= ===== ======= ===== ======== =====
</TABLE>
International Sales
Japan, Asia/Pacific sales increased both as a percentage of total net sales and
in dollars from fiscal 1995 to fiscal 1997 as a result of increased penetration
of the Asian markets. The release of DesignWinder in fiscal 1997 and
DisplayMaker Express in fiscal 1996 generated significant sales in Asia.
Decreased sales in the European market in fiscal 1997 and 1996 are attributable
to increased competition in the plain-paper typesetting and Big Color product
lines as well as the Company's realignment of its European distribution
channels. These decreases in Europe were somewhat offset by sales of
DesignWinder and DME and also increases in consumables. The following table sets
forth international sales expressed as a percent of total net sales and in
thousands:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------------------
International Sales 1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Europe............... $17,410 20.1% $19,656 21.0% $23,022 19.3%
Japan, Asia/Pacific.. 14,382 16.6 13,235 14.1 12,235 10.2
Latin America........ 6,184 7.1 5,146 5.5 5,118 4.3
Canada............... 2,118 2.5 2,892 3.1 2,496 2.1
------- ---- ------- ---- ------- ----
Total net sales...... $40,094 46.3% $40,929 43.7% $42,871 35.9%
======= ==== ======= ==== ======= ====
</TABLE>
Gross Margin
Gross margins, expressed as a percent of net sales, were 28.5% (32.5% excluding
special charges), 31.2% (37.1% excluding special charges) and 39.0% for fiscal
1997, 1996 and 1995, respectively. Gross margin was negatively impacted
throughout fiscal 1997 from excess capacity related to lower than expected
hardware volumes on PressMate and DisplayMaker Express. In addition, gross
margin during fiscal 1997 was negatively impacted by aggressive pricing of
DisplayMaker Express, as lower-priced alternative products offered by the
Company and its competitors became available. Gross margin decreased in 1996
from 1995 primarily as a result of increased production costs associated with
the manufacture of proprietary engines. The Company's gross margins during all
three fiscal years were negatively affected by aggressive pricing of its plain-
paper typesetting products and, in fiscal 1997 and fiscal 1996, aggressive
pricing of some of its Big Color products developed as a systems integrator, in
an attempt to maintain market share against heavy discounting generated by broad
distribution from its third-party OEM supplier of the platform used in the
DisplayMaker Professional printer. In fiscal 1997, 1996 and 1995 the Company's
gross margins were favorably
19
<PAGE>
impacted by increasing sales of after-market consumables which typically have
higher gross margins than hardware sales alone.
Included in fiscal 1997 cost of goods sold is a special charge of $3.5 million
related to the revaluation of PressMate and DisplayMaker Express inventory. This
charge is based on the Company's estimate of the net realizable value of the
related inventory as of the time the charge was incurred.
Included in fiscal 1996 cost of goods sold is a special charge of $5.5 million
consisting of $4.2 million in inventory revaluation associated with the
transition from certain product lines developed as a systems integrator and $1.3
million to cover replacement costs, product returns, and inventory revaluation
related to the Company's older model PressMate product. These charges are based
on the Company's estimates of net realizable value of the related inventory and
for expected returns of older model PressMates as of the time the charges were
incurred.
Also included in cost of goods sold is amortization of capitalized software
development costs of $2.5 million, $2.7 million and $3.1 million for fiscal
1997, 1996 and 1995, respectively. In June 1997, the Company incurred a special
charge of $3.2 million to operating expenses related to the revaluation of
capitalized software development costs. This charge will reduce the amortization
of capitalized software development costs and in effect, increase gross margins
going forward. The Company does not expect amortization of capitalized software
development costs to be material in fiscal 1998.
Sales and Marketing
Sales and marketing expenses were $18.1 million, $21.1 million and $27.1 million
in fiscal 1997, 1996 and 1995, respectively. The decrease in expense of $3.0
million in 1997 from 1996 included decreased expenses related to sales of $2.4
million and marketing of $918,000, offset by increases in technical support of
$331,000. The decrease in expense of $6.0 million in 1996 from 1995 included
decreased expenses related to sales of $3.6 million and marketing of $2.5
million, offset by increases in technical support of $100,000. The decrease in
sales and marketing expense in fiscal 1997 and 1996 is primarily from reductions
directly related to lower sales volumes. The increase in technical support
expenses in fiscal 1997 can be attributed to an increasing installed base of
more sophisticated printers, particularly DisplayMaker Express.
Research and Development
The Company capitalized software development costs of $1.6 million, $2.7 million
and $3.5 million in fiscal 1997, 1996 and 1995, respectively, as required by
FASB No. 86 (see Note 1 of Notes to Consolidated Financial Statements). The
decrease in capitalized software development in 1997 and 1996 from previous
years reflects the Company's focus on developing proprietary printer engines
compared to a much greater reliance on the systems integrator type of products
as was done in the past. Research and development expenditures, including
amounts expensed and capitalized, were $7.9 million, $8.8 million and $9.7
million in fiscal 1997, 1996 and 1995, respectively. As a percent of overall
sales, these expenditures represented 9.2%, 9.1% and 8.1% in fiscal 1997, 1996,
and 1995, respectively. The decrease in gross R&D expenditures in 1997 and 1996
compared to prior years is attributable to reductions in personnel and other
resources allocated to this area as a result of increased efficiency in the
Company's development activities and lower sales volume. The future success of
the Company depends on continually developing new and better products for the
markets it serves. As a result, the Company does not anticipate a material
change in the rate it invests in this area. Software development costs
capitalized during these periods relate primarily to DisplayMaker Professional,
DisplayMaker Express, PressMate, Unity, and DesignWinder. In June 1997, the
Company incurred a special charge of $3.2 million to operating expenses related
to the revaluation of capitalized software development costs. The Company does
not expect capitalized software development costs to be material in fiscal 1998
and as a result, although research and development expenditures as a percentage
of net sales are expected to remain relatively constant, the amount charged to
research and development expense is expected to increase as a percentage of net
sales.
General and Administrative
General and administrative expenses were $10.1 million, $11.3 million and $11.6
million in fiscal 1997, 1996 and 1995, respectively. The decreases in 1997 and
1996 from prior years are the result of reductions in the infrastructure
necessary to handle lower sales volumes, offset in part by costs associated with
the defense of the shareholder lawsuit (see "Legal Proceedings" for further
details) and higher than normal bad debt expense as a percent of net sales which
was in part, negatively impacted by product reliability issues related to new
engines.
20
<PAGE>
Restructuring and Other Special Charges
In June 1997, the Company incurred special charges of $4.9 million consisting of
$4.3 million related to the revaluation of intellectual property and $636,000
related to the settlement of the shareholder's lawsuit. The revaluation of
intellectual property was primarily the result of a change in the estimated net
realizable value of capitalized software development costs associated with the
Company's proprietary products.
In May 1996, the Company incurred $4.4 million in restructuring and other
special charges as a result of its revised business plan which was intended to
accelerate the Company's migration from a systems integrator to a manufacturer
of proprietary printing engines. Included in the $4.4 million charge is $3.3
million for the revaluation of intellectual property tied to certain
technologies and contract rights and $282,000 for severance related to workforce
reductions. The charge also includes $443,000 for expected losses on the
disposal of property and equipment and $403,000 in commitments under non-
cancelable leases as a result of consolidating foreign sales offices and certain
domestic operations. At June 30, 1997, approximately $766,000 of the $4.4
million charge remains in current liabilities.
Interest Expense
Interest expense was $1.4 million, $1.8 million and $1.3 million in fiscal 1997,
1996 and 1995, respectively. The decrease in interest expense in 1997 is
attributable to a decrease in average debt levels with the addition of $12
million in equity in September 1996 and also as the Company's operations and
related borrowing capabilities have decreased. The increase in interest expense
in 1996 is attributable to an overall increase in average debt levels and costs
associated with obtaining new financing.
Income Taxes
The effective income tax rate was (8.1%), 33.0% and 30.1% in fiscal 1997, 1996
and 1995, respectively. In June 1997, the Company incurred a special charge to
income taxes of $6.5 million related to the revaluation of deferred tax assets.
The revaluation was done as a result of a change in the estimated net realizable
value of deferred tax assets. At June 30, 1997, after the revaluation, the
Company had approximately $4.8 million in net deferred tax assets. Realization
of $4.8 million in net deferred tax assets will require the Company to generate
future taxable income of approximately $14 million within the next 15 years to
receive full taxable benefit. See Note 12 of Notes to Consolidated Financial
Statements for further disclosures relating to income taxes.
Liquidity and Capital Resources
Liquidity needs during the year ended June 30, 1997 were satisfied primarily by
the issuance of common stock and warrants. Liquidity needs during the two years
ended June 30, 1996 were satisfied primarily by cash flows from operations and
short-term borrowings.
Operating activities consumed cash of $4.0 million in 1997 and provided cash of
$6.2 million and $4.4 million in 1996 and 1995, respectively. The decrease in
cash provided from operations in 1997 is the result of a $17.2 million net loss
incurred by the Company. The increase in cash provided from operations in 1996
compared to 1995 is due principally to lower levels of inventory resulting from
increased efficiencies in forecasting and planning. In addition, accounts
payable to suppliers increased in proportion to inventory levels compared to
prior years.
Cash used in investing activities was $3.0 million, $6.3 million and $8.0
million in fiscal 1997, 1996 and 1995, respectively. The decrease in cash used
in investing activities in 1997 compared to 1996 is the result of lower
expenditures for property and equipment, capitalized software development costs
and other intellectual property. The decrease in cash used in investing
activities in 1996 compared to 1995 consists of decreased expenditures on
property and equipment and capitalized software development costs offset
somewhat by increases in intellectual property. The Company does not expect
significant increases in expenditures for property and equipment or capitalized
software development costs in fiscal 1998.
21
<PAGE>
Cash provided by financing activities was $7.4 million in 1997 compared to cash
used in financing activities of $365,000 in 1996 and cash provided by financing
activities of $2.0 million in 1995. In order to meet the cash shortfall in
September 1996, the Company privately placed 2,285,715 shares of its common
stock for a purchase price of $4.375 per share, together with warrants to
purchase an additional 2,285,715 shares with an exercise price of $7.00 per
share, for an aggregate consideration of $10 million. Of such shares, 1,371,429
shares were sold to Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation
("Sihl"), for $6 million. Sihl conditioned its investment on an investment of $4
million by the Company's Chief Executive Officer or an entity with which he is
affiliated. In satisfaction of such condition, TimeMasters Inc. and affiliates
(TMI or the "TimeMasters Group") purchased 914,286 shares for $4 million and
received warrants to purchase an additional 914,286 shares at $7.00 per share.
The warrants issued to TMI and Sihl have a term of eight years and may be
exercised at any time. The agreement pursuant to which such shares and warrants
were issued provides for both incidental and demand registration rights for a
period of ten years from the closing date of the transaction. Additionally, it
provides to Sihl, but not to the TimeMasters Group, a right of first refusal to
purchase a pro-rata portion (based on the ratio of number of shares Sihl owns or
has the right to purchase to all shares of the Company that are outstanding or
subject to options, warrants or convertible securities), of any securities
(subject to certain exceptions) that the Company proposes to issue until Sihl's
percentage ownership declines below 10%. A portion of the proceeds from the
private placement of common stock to TMI was offset against ColorSpan's
indebtedness to TMI for a demand note in the principal amount of $1.765 million,
as permitted by the subordination and forbearance agreement.
In September 1996, the Company also privately placed 410,256 shares of its
common stock for a purchase price of $4.875 per share, together with warrants to
purchase an additional 471,286 shares with an exercise price of $6.79 per share,
for an aggregate consideration of $2 million. The shares and warrants were
issued to General Electric Capital Corporation ("GE"), the Company's senior
lender. The Stock Purchase Agreement provides for both incidental and demand
registration rights. The GE investment does not carry with it the preemptive
stock purchase rights granted to Sihl as described above.
In September 1996, the Company also entered into a series of agreements with one
of its largest trade creditors and their supplier, converting approximately $1.7
million of trade payables and a promissory note of $859,516 into a $2.5 million
convertible subordinated debenture. The debenture contains voluntary, automatic
and mandatory conversion provisions. Under the voluntary conversion provision,
the debenture is convertible in whole or in part into common stock of the
Company at $6.00 per share at any time that the market price of the Company's
common stock is less than $6.00 per share. The debenture is automatically
converted at the rate of 30,000 shares a week at the market price of the common
stock at any time that the market price equals or exceeds $6.00 per share. The
automatic conversion provision contains limited price protection under certain
circumstances. Under the mandatory conversion provision, the debenture will be
converted on a quarterly basis at market prices and in share quantities equal to
specified threshold amounts, less any shares converted under the other
provisions. The mandatory provision is effective for the quarter ending March
31, 1997 and continues until the debenture is fully converted. The debenture
contains certain registration rights and also limits the number of shares that
may be sold in the open market in any one week. A related agreement required the
supplier to provide approximately $1.5 million in inventory to the Company in
resolution of quality issues with the product previously supplied by the trading
partner.
In the first quarter of fiscal 1996, ColorSpan Corporation borrowed $1,765,000
from TMI with a demand note to cover a short-term cash shortfall. In January
1996, ColorSpan replaced the operating line of credit that it maintained through
a commercial bank with a new, three-year credit agreement with a commercial
financing company. The new agreement allows ColorSpan to borrow up to $10
million based on availability equal to 60% of net eligible accounts receivable
and 25% of net eligible inventory. The agreement expires January 17, 1999 and
requires the borrower to meet various financial covenants involving capital
expenditures, additions to capitalized software and intellectual property,
minimum debt service coverage ratio, and maintenance of a minimum net worth. The
agreement also requires ColorSpan to meet various non-financial covenants. As
part of this agreement, the commercial finance company required that the loan
from TMI be subordinated to the rights and security interest of the lender, and
that a forbearance agreement restrict repayment of the TMI debt to permit
repayments of specified amounts only if certain financial conditions were met,
or upon the sale of common stock. In consideration for agreeing to such
subordination and forbearance, TMI was issued a warrant to purchase 277,953
shares of the Company's common stock at an exercise price of $6.35 per share.
The warrant and note to TMI were approved by shareholders at the Company's
annual meeting in May 1996.
Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.
22
<PAGE>
The Company does not have any current significant commitments for capital
expenditures however, it does expect to incur substantial expenditures for the
ramp up of its new family of DisplayMaker HiRes 8-Color printers expected to be
in production quantities in October 1997. Management expects to finance the ramp
up of production and sales of these new printers through a reduction of
receivables, tighter controls over inventory, extension of credit from new and
existing vendors and/or the sale of certain lines of business. Management
expects to finance operations throughout the remainder of fiscal 1998 through
cash flow from profitable operating activities. 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 sale of
certain lines of business or revise its business plan or further restructure its
capitalization.
The Company's Senior Debt Agreement, which is secured by substantially all of
the Company's assets, 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.
Foreign Currencies
In general, the impact of foreign currency gains/losses are immaterial to the
Company as a whole. LaserMaster Europe, Ltd. (LME) extends credit in the normal
course of business in five relatively stable European currencies. In addition,
LME's financing agreement allows it to factor those receivables and receive
Dutch Guilders in which it pays its expenses. The impact of this is to
effectively hedge the Company's exposure to foreign currency risk. Essentially
all other transactions are in U.S. dollars.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
See Financial Statements and Supplementary Data attached.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None
23
<PAGE>
<TABLE>
<CAPTION>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
The following table sets forth information, as of August 31, 1997, concerning
the directors of the Company:
Year
Became
Name, Age, Positions, Principal Occupations, Directorships Director
- ----------------------------------------------------------------------------------------
<S> <C>
Directors whose terms expire in 1997
Lawrence J. Lukis; age 49; Mr. Lukis co-founded LaserMaster in February, 1989
1986 and was Chief Technical Officer of the Company from May 1989 to
September 1997. Currently, Mr. Lukis has the title of Chief Engineer. Mr.
Lukis
has indicated that he does not intend to stand for re-election to the board of
directors in 1998.
Jean-Louis Gassee; age 53; Since 1990, Mr. Gassee has been Chairman 1990
and Chief Executive Officer of Be, Inc. of Menlo Park, California. That
company is involved in personal computer technology. From August of
1988 until September, 1990, Mr. Gassee was President of the Apple Products
Division of Apple Computer, Inc. Prior to that time he held the offices of
Senior Vice President of Research and Development (1987 to August 1988)
and Vice President of Product Development of Apple Computer, Inc. from
1985 to 1987. Mr. Gassee is also a director of Electronics for Imaging of San
Bruno, California and 3COM, Sunnyvale, California.
Directors whose terms expire in 1998
Melvin L. Masters; age 43; Mr. Masters co-founded LaserMaster in February 1989
1986 and has been Chairman, Chief Executive Officer and President of the
Company since May 1989. Mr. Masters also owns TimeMasters, Inc. a
company established for the purpose of property management which also
has investments in the fields of wireless voice and data communications
and in personal motorsports products.
Ralph D. Rolen; age 43; Mr. Rolen is Senior Vice President and Manager of 1989
the Retail Credit Division of First Tennessee National Bank of Memphis,
Tennessee, a position he has held since January, 1989.
</TABLE>
The Board of Directors met two times during the fiscal year ended June 30, 1997.
All directors attended each meeting. The Board of Directors has: (i) an Audit
Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen, (ii) a Stock Option
Committee composed of Mr. Gassee and Mr. Rolen, and (iii) a Compensation
Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen. The Board of
Directors has no standing nominating committee.
The following table sets forth information, as of August 31, 1997, regarding the
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Positions
- -------------------- --- -------------------------------------------------------------
<S> <C> <C>
Melvin L. Masters 43 Chief Executive Officer, President and Chairman of the Board
Lawrence J. Lukis 49 Chief Engineer
Robert J. Wenzel 46 Chief Operating Officer and President, ColorSpan Corporation
James E. Retterath 36 Secretary and Vice President, Research & Development
Timothy N. Thurn 41 Treasurer
</TABLE>
24
<PAGE>
Thomas D. Ryan 39 Executive Vice President, LaserMaster Technologies,
Inc., and ColorSpan Corporation
James H. Horstmann 36 Chief Financial Officer
Mr. Wenzel has been Chief Operating Officer of the Company since October 1991
and President of ColorSpan Corporation, the Company's principal operating
subsidiary, since October 1989. He joined ColorSpan as General Manager of the PC
Division in May 1989 and became Executive Vice President shortly thereafter.
Prior to joining ColorSpan, Mr. Wenzel was employed by CPT Corporation, a
company specializing in the manufacture and sale of word processing systems,
where he served as General Manager of a computer products division from January
1988 through April 1989, and in other capacities before that time.
Mr. Retterath has been Secretary of the Company since March 1994. He joined the
Company in June 1990 and has held a variety of management positions in Research
and Development most recently serving as Vice President which position he has
held since December 1992. From July 1986 to June 1990, Mr. Retterath was a
Senior Design Engineer for Printware, Inc. of Mendota Heights, Minnesota.
Mr. Thurn has been Treasurer of the Company since June 1989 and of ColorSpan
Corporation since March 1987. Mr. Thurn has experience as both a public and
private accountant. Mr. Thurn is a Certified Public Accountant (CPA) and
Certified Management Accountant (CMA).
Mr. Ryan has been Managing Director of LaserMaster Europe, Ltd. since January
1995 and assumed the Executive Vice President position for the Company and
ColorSpan Corporation in May 1996. Prior to working for the Company, Mr. Ryan
worked for Mentor Corporation as Vice President and General Manager of its
Minnesota operations.
Mr. Horstmann has been Chief Financial Officer of the Company since May 1997. He
joined the Company in April 1994 as Controller. Prior to joining the Company Mr.
Horstmann worked for Boulay, Heutmaker, Zibell and Co. PLLP, a public accounting
firm in Minneapolis, Minnesota. Mr. Horstmann is a Certified Public Accountant
(CPA).
Officers of the Company are elected annually by the Board of Directors. All of
the current officers as of September 29, 1997 are expected to be re-elected to
serve in the same positions for the coming year.
25
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each of the
last three fiscal years awarded to or earned by the Chief Executive Officer of
the Company and the four other most highly compensated executive officers of the
Company whose salary and bonus earned in the fiscal year ended June 30, 1997
exceeded $100,000 for services rendered.
<TABLE>
<CAPTION>
===============================================================================================================================
Annual compensation Long term compensation
------------------------------------------------------------------------
Awards
-----------------------
Other Payouts/ All other
annual Restricted LTIP compen
Name and principal Year Salary ($) Bonus compens stock Options/ payouts -sation
position ($) ation award(s) SARs (#) ($) ($)
($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Melvin Masters 1997 $208,333 $ 7,536/1/
Chief Executive Officer 1996 246,875 6,736/1/
1995 250,000 6,016/1/
- -------------------------------------------------------------------------------------------------------------------------------
Robert Wenzel 1997 $208,333
Chief Operating Officer 1996 203,125 220,000
1995 165,625 $35,000
- -------------------------------------------------------------------------------------------------------------------------------
James E. Retterath 1997 $208,333
Secretary 1996 203,125 $34,100/2/ 240,000
1995 161,667 35,000
- -------------------------------------------------------------------------------------------------------------------------------
Larry Lukis 1997 $177,083 $11,578/1/
Chief Engineer 1996 150,000 10,908/1/
1995 250,000 9,898/1/
- -------------------------------------------------------------------------------------------------------------------------------
Thomas D. Ryan 1997 $175,000
Executive Vice 1996 131,458 $16,500 40,000
President 1995 *
===============================================================================================================================
</TABLE>
*Became executive officer during fiscal 1996.
/1/Premiums for life insurance where the Company is not the beneficiary.
/2/Expenses paid by the Company on behalf of the employee.
Stock Options
The Company maintains a Stock Option Plan pursuant to which executive officers,
other employees and certain non-employees providing services to the Company may
receive options to purchase the Company's common stock.
There were no grants of stock options during fiscal 1997 to the Chief Executive
Officer and the Executive Officers named in the Summary Compensation Table.
26
<PAGE>
The following table summarizes exercises of stock options during fiscal 1997 by
the Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
==========================================================================================
Number of Value of unexercised in-
unexercised the-money options/SARs
options/SARs at FY- at FY-end ($)
Shares acquired Value end (#) exercisable/ exercisable/
Name on realized unexercisable unexercisable (1)
exercise (#) ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Melvin L. Masters -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------
Robert J. Wenzel 20,000 83,400 36,250/228,750 $2,513/$10,050
- ------------------------------------------------------------------------------------------
James E. Retterath 15,000 46,875 40,000/275,000 $0/$0
- ------------------------------------------------------------------------------------------
Lawrence J. Lukis -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------
Thomas D. Ryan -0- -0- 60,000/60,000 $0/$0
==========================================================================================
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on June 30, 1997 and the exercise price of the options.
Long-Term Incentive Plan Awards
Other than the Stock Option Plan reported on above, the Company does not
maintain any long-term incentive plans.
Director Compensation
For fiscal year 1997, there was no plan for compensation to non-employee
directors. All directors were reimbursed for their expenses incurred in
attending meetings. Jean-Louis Gassee also acted as a consultant to the Company.
An additional $12,000 of consulting fees was incurred for services provided by
Mr. Gassee during fiscal 1997. Jean-Louis Gassee has significant expertise in
the personal computer industry and in the management of research and development
of hardware and software products. His expertise in the trends and issues in
this industry was not available within the Company and could only be obtained
through a relationship with a specialized consultant or highly compensated
employee, if one could be identified and retained. Mr. Gassee consulted with the
Company on a number of issues including industry trends, and product development
issues. The consulting fees paid to Mr. Gassee were determined and set based on
anticipated consulting services and the market cost therefor. The Company
believes that the consulting fees paid to Mr. Gassee represent the approximate
market value for the consulting services performed and that which might be
obtained from similar arrangements with non-affiliates.
Employment Agreements
At June 30, 1997, the Company had Employment Agreements with Messrs. Masters,
Lukis, Wenzel, Ryan and Retterath. Those agreements renew automatically on an
annual basis unless terminated by either party by written notice 60 days before
the renewal date. Mr. Lukis' agreement lapsed on July 1, 1997 and a revised
agreement was approved by the executive compensation committee. The agreements
provide for continuation payments equal to 36 months pay for Mr. Masters and 12
months pay for Mr. Wenzel, Mr. Ryan and Mr. Retterath, upon termination of
employment in certain circumstances, including change of control. As of June 30,
1997 minimum annual salary levels of $250,000 were set for each of Messrs.
Masters, Wenzel and Retterath. Mr. Ryan's minimum annual salary level is set at
$200,000. Mr. Lukis' salary, per his new employment agreement, is currently set
at the greater of the market value of his services or $175,000.
Effective May 1, 1996, Mr. Masters, Mr. Lukis, Mr. Wenzel and Mr. Retterath
voluntarily agreed to decrease their salaries by $25,000 each, and Mr. Ryan
agreed to a $19,000 salary decrease, until Company performance improved. On
March 12, 1997, Mr. Masters, Mr. Lukis, Mr. Wenzel and Mr. Retterath voluntarily
offered to decrease their salaries from $225,000 to $175,000 until Company
performance improved, or as may be agreed upon with the Executive Compensation
27
<PAGE>
Committee. The compensation decreases were effective during the pay period in
which the offers to decrease salaries was made. The Company also has employment
agreements with other members of its management.
Compensation Committee Interlocks and Insider Participation
The Chief Executive Officer of the Company, Melvin L. Masters, is a member of
the Compensation Committee. Mr. Masters' compensation is set by the Board of
Directors as a whole with Mr. Masters abstaining.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 31, 1997, certain information with
respect to beneficial share ownership by the directors, individually; by all
persons known to management to own more than 5% of the Company's outstanding
Common Stock, individually; and by all executive officers and directors as a
group. Except as otherwise indicated, the shareholders listed below have sole
investment and voting power with respect to their shares.
<TABLE>
<CAPTION>
Number of
Beneficially Owned Percent of Shares
Name of Beneficial Owner Shares Outstanding
- --------------------------------------- ------------------ -------------------
<S> <C> <C>
Sihl-Zurich Paper Mill on Sihl AG (1) 2,742,858 15.8%
Melvin L. Masters (2) 2,550,525 14.7%
3213 South Duluth Avenue
Sioux Falls, SD 57105
Lawrence J. Lukis (3) 2,189,531 12.63%
3250 Fox Street
Long Lake, MN 55356
Jean-Louis Gassee (4) 85,000 *
Robert J. Wenzel (5) 59,300 *
James E. Retterath (6) 40,000 *
Thomas D. Ryan (7) 67,000 *
All officers and directors
as a group (10 persons) (8) 5,017,045 29.3%
</TABLE>
* Less than 1%
(1) Includes warrants to purchase 1,371,429 shares.
(2) Includes 411,428 shares and warrants to purchase 963,667 shares owned by
TMI; 274,286 shares owned by GRAMPI; 228,572 shares and warrants to
purchase 228,572 shares owned by GRAMPI #2.
(3) Includes shares owned by Donna Lukis, Mr. Lukis' spouse. Includes 173,000
shares held by the Lukis Foundation, of which Mr. Lukis is a director. Mr.
Lukis disclaims beneficial ownership both of Ms. Lukis' shares and those
held by the Lukis Foundation.
(4) Includes 60,000 shares issuable to Mr. Gassee under options which are
exercisable.
28
<PAGE>
(5) Includes 47,500 shares issuable to Mr. Wenzel under options which are
exercisable or will become exercisable within 60 days. Also includes shares
held as trustee for four education trusts.
(6) Includes 40,000 shares issuable to Mr. Retterath under options which are
exercisable or will become exercisable within 60 days.
(7) Includes 60,000 shares issuable to Mr. Ryan under options which are
exercisable or will become exercisable within 60 days.
(8) Includes 243,900 shares issuable under options which are exercisable or
will become exercisable within 60 days and warrants to purchase 1,192,239
shares.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has the following arrangements with certain of its directors,
executive officers or five percent shareholders;
(1) The Company leases space it currently occupies in Shady View I & II, with
Grandchildren's Realty Alternative Management Partnership I (GRAMPI), a
Minnesota limited partnership. The general partner of GRAMPI is
TimeMasters, Inc., a Minnesota corporation which is owned by Melvin L.
Masters. One of the limited partners of GRAMPI is the Masters Trust I, of
which Ralph Rolen, a director of the Company, was Trustee at the time of
the negotiations. The Company retained the services of an outside law firm
as well as an independent commercial real estate brokerage firm in
negotiating the lease. The Company leases 172,792 square feet of space
under this agreement which has a term of fifteen years and a monthly base
rate as of August 31, 1997, of $89,694. The base rate escalates
periodically over the term of the lease. The Company is also required to
pay its pro-rata share of property taxes, utilities and essentially all
other operating expenses. There is no renewal option. Rent expense under
this lease was $1,525,000 in fiscal 1997 of which $178,388 had not been
paid as of June 30, 1997.
(2) Under a Use Indemnification Agreement and certain related Board of
Directors' actions, the Company has the right to sponsor business and
business-related occasions at facilities owned by Masters Trust I and/or
Melvin L. Masters and/or TimeMasters, Inc and/or GRAMPI and/or GRAMPI #2.
In addition, the Company occasionally uses an airplane that is owned by a
Company controlled by Mr. Masters, for business-related travel. The Company
indemnifies the owners against loss or damage, reimburses out-of-pocket
expenses and pays a usage charge based on market rates. In the fiscal year
ended June 30, 1997 charges totalled $88,240.
(3) The Company has installed a campus-wide TimeMasters, Inc. wireless voice
system in its Eden Prairie facility. There are no monthly call operating
charges for unlimited use of that system. The system hardware was acquired
in fiscal 1995 for $211,000 based on competitive proposals for two other
comparable systems. Upgrades to the system amounted to $49,075 in fiscal
1997. TimeMasters, Inc. is a Minnesota corporation wholly-owned by Melvin
L. Masters.
(4) During September and October 1995, ColorSpan Corporation's (CSC's) cash
needs exceeded available cash. To cover short-term cash needs, CSC borrowed
$1,765,000 under a demand note from TimeMasters, Inc. (TMI), a corporation
controlled by the Company's Chief Executive Officer. The note had stated
interest at prime rate plus 1.75% and was satisfied in full in December
1996 through an offset of a note receivable from TMI arising from the sale
of common stock by the Company (see item (5) below). In consideration for
providing financing to CSC and executing a subordination and forbearance
agreement with the Company's senior lender, TMI was issued a warrant for
the purchase of 277,953 shares of the Company's common stock at an exercise
price of $6.35 per share. This transaction was submitted to and approved by
the shareholders at the Company's annual meeting in May 1996.
(5) In September 1996, the Company issued 914,286 shares of restricted common
stock in a private placement to TimeMasters, Inc., GRAMPI and GRAMPI #2
(together as a group known as the TimeMasters group), which is controlled
by Melvin L. Masters, the Company's CEO. The shares were issued at the
market price of $4.375
29
<PAGE>
per share for a total of $4 million. The TimeMasters group was also
issued a warrant for the purchase of an additional 914,286 shares at
$7.00 per share with an expiration date of September 16, 2004. The
TimeMasters group has the right to require the Company to effect up to
five demand registrations under the Securities Act within ten years of
the closing date of the transaction. The agreement also provides for
incidental registration rights during this same period. In addition,
shares acquired by TimeMasters upon the exercise of the warrant or
conversion right, obtained pursuant to the $1,765,000 demand note
discussed in item (4) above, have preferential incidental registration
rights expiring September 2006. The Company offset a portion of the
proceeds from this sale with CSC's indebtedness to TMI (see item (4)
above).
(6) In addition, Mel Masters, the Company's CEO, borrowed $585,000 from the
Company in November 1996. The amount borrowed was repaid in December
1996 together with interest at 10%.
Each of the foregoing transactions was approved by a disinterested majority of
the Board of Directors of the Company, by shareholders, or by both. The Company
believes that each such transaction is on terms at least as favorable to the
Company as could have been obtained from an unaffiliated entity.
(7) The Company purchases certain inventory from Sihl-Zurich Paper Mill on
Sihl AG, a greater than 5% shareholder of the Company. Total purchases
in fiscal 1997 from Sihl were $1,569,844.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) 1. Financial Statements
--------------------
Consolidated Financial Statements of LaserMaster Technologies, Inc. and
Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Operations for the fiscal years ended June
30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
------------------------------
LaserMaster Technologies, Inc. and Subsidiaries
Schedule I -- Condensed Financial Information of the Registrant
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are either
not applicable or required information has been given in the
consolidated financial statements or notes thereto.
(a) 3. Listing of Exhibits
--------------------
Exhibit
Number Description
- -------- -----------
10.1 Amendment No. 2 to Credit Agreement dated January 31, 1997 between
ColorSpan Corporation and General Electric Capital Corporation.
10.2 First Industrial, L.P., Industrial Building Lease.
30
<PAGE>
11.1 Per share earnings calculation.
27.1 Financial Data Schedule.
99. Cautionary Factors Under Private Securities Litigation Reform Act of 1995.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: September 26, 1997
LASERMASTER TECHNOLOGIES, INC.
By /s/ Melvin L. Masters
----------------------
Melvin L. Masters, President,
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/Melvin L. Masters President, Chief Executive Officer
- -------------------- and Chairman of the Board
Melvin L. Masters (Principal Executive Officer)
/s/Lawrence J. Lukis Director and Chief Engineer
- --------------------
Lawrence J. Lukis
/s/Ralph D. Rolen Director
- -----------------
Ralph D. Rolen
/s/Jean-Louis Gassee Director
- ----------------------
Jean-Louis Gassee
/s/James H. Horstmann Chief Financial Officer
- ---------------------
James H. Horstmann
/s/Mark Pederson Controller
- ----------------
Mark Pederson
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
LaserMaster Technologies, Inc. and
Subsidiaries
Eden Prairie, Minnesota
We have audited the consolidated balance sheets of LaserMaster Technologies,
Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997 and financial statement schedules
listed in the index at Item 14(a)(2). These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of LaserMaster
Technologies, Inc. and subsidiaries as of June 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements, taken as
a whole, present fairly in all material respects the information therein set
forth.
Deloitte & Touche, LLP
Minneapolis, Minnesota
August 8, 1997
F-1
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 484,106 $ 90,851
Accounts receivable, less allowance for doubtful
accounts and sales returns of $1,987,000 and
$2,475,000, respectively (Note 5) 12,129,091 12,563,112
Inventory (Notes 3 and 5) 9,184,671 13,524,314
Income tax receivable 400,781
Other current assets 2,158,833 2,783,784
Deferred income taxes (Note 12) 4,073,000 3,304,000
------------ -----------
TOTAL CURRENT ASSETS 28,029,701 32,666,842
PROPERTY AND EQUIPMENT, NET
(Notes 4, 7 and 13) 3,570,662 5,099,560
CAPITALIZED SOFTWARE, less accumulated
amortization of $3,636,979 in 1996 (Note 5) 4,150,913
DEFERRED INCOME TAXES (Note 12) 693,000 2,546,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $743,284 and $1,000,154, respectively (Note 5) 337,570 2,081,649
------------ -----------
$ 32,630,933 $46,544,964
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Notes 5 and 13) $ 2,781,468 $ 5,381,037
Note payable - related party (Note 6) 1,765,000
Current maturities of long-term debt (Notes 7 and 13) 636,665 1,248,267
Accounts payable (Note 13) 10,232,865 16,682,191
Accrued payroll and payroll taxes 1,623,558 1,915,908
Other current liabilities (Note 13) 1,649,062 1,200,264
Deferred revenue 1,374,447 1,894,262
------------ -----------
TOTAL CURRENT LIABILITIES 18,298,065 30,086,929
CONVERTIBLE SUBORDINATED DEBENTURE (Note 8) 2,233,414
LONG-TERM DEBT, less current maturities (Notes 7 and 13) 184,729 820,095
COMMITMENTS AND CONTINGENCIES (Notes 11 and 16)
STOCKHOLDERS' EQUITY: (Notes 6, 8, 9, 10, 12 and 16)
Common stock, $.01 par value; authorized
30,000,000 shares; 14,432,462 and 11,426,134 shares issued
and outstanding, respectively 144,325 114,261
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 30,876,964 17,430,555
Accumulated deficit (19,106,564) (1,906,876)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 11,914,725 15,637,940
------------ -----------
$ 32,630,933 $46,544,964
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 14) $ 86,563,422 $ 93,592,044 $119,438,719
COSTS OF GOODS SOLD (Notes 2 and 13) 61,912,116 64,378,882 72,857,356
------------ ------------ ------------
GROSS PROFIT 24,651,306 29,213,162 46,581,363
OPERATING EXPENSES
Sales and marketing 18,131,483 21,108,559 27,091,414
Research and development 6,387,642 6,148,919 6,210,006
General and administrative (Note 13) 10,096,910 11,310,135 11,552,092
Restructuring and other special charges (Notes 2 and 16) 4,935,563 4,431,273
------------ ------------ ------------
39,551,598 42,998,886 44,853,512
------------ ------------ ------------
OPERATING (LOSS) PROFIT (14,900,292) (13,785,724) 1,727,851
OTHER INCOME (EXPENSE)
Interest expense (Note 13) (1,388,247) (1,784,365) (1,331,139)
Interest income (Note 13) 154,559 17,728 26,846
Other income (expense) 223,292 (56,173) (128,084)
------------ ------------ ------------
(1,010,396) (1,822,810) (1,432,377)
------------ ------------ ------------
(LOSS) EARNINGS BEFORE INCOME TAXES (15,910,688) (15,608,534) 295,474
INCOME TAX (PROVISION) BENEFIT (Note 12) (1,289,000) 5,147,000 (89,000)
------------ ------------ ------------
NET (LOSS) EARNINGS $(17,199,688) $(10,461,534) $ 206,474
============ ============ ============
NET (LOSS) EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ (1.25) $ (.93) $ .02
============ ============ ============
Weighted average common shares in 1997 and
1996 and weighted average common and common
equivalent shares in 1995 13,705,609 11,305,232 12,206,280
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Retained
Common Stock Additional Earnings
--------------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1994 10,945,916 $109,459 $14,681,047 $8,348,184 $23,138,690
Issuance of common stock -
Stock options exercised (Note 10) 230,466 2,305 410,906 413,211
Stock option tax benefit (Note 12) 1,535,000 1,535,000
Net earnings 206,474 206,474
----------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1995 11,176,382 111,764 16,626,953 8,554,658 25,293,375
Issuance of common stock -
Stock options exercised (Note 10) 249,752 2,497 577,602 580,099
Stock option tax benefit (Note 12) 226,000 226,000
Net loss (10,461,534) (10,461,534)
----------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1996 11,426,134 114,261 17,430,555 (1,906,876) 15,637,940
Issuance of common stock -
Private placements (Note 9) 2,695,971 26,960 11,810,376 11,837,336
Conversion of debentures (Note 8) 105,000 1,050 361,763 362,813
Stock options exercised (Note 10) 180,357 1,804 339,520 341,324
Services rendered 25,000 250 99,750 100,000
Litigation settlement (Note 16) 636,000 636,000
Stock option tax benefit (Note 12) 199,000 199,000
Net loss (17,199,688) (17,199,688)
----------- -------- ----------- ------------ -----------
BALANCES, JUNE 30, 1997 14,432,462 $144,325 $30,876,964 $(19,106,564) $11,914,725
=========== ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(17,199,688) $(10,461,534) $ 206,474
Adjustments to reconcile net (loss) earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 5,526,593 5,859,577 6,302,444
Amortization of deferred financing costs 221,385 240,335 96,127
Revaluation of acquired technology, patents and licenses 1,024,374 2,582,840
Revaluation of capitalized software 3,214,690 768,059
Loss on sale of property and equipment 149,395 528,840 131,113
Gain on settlement of product quality issues (1,416,665)
Litigation settlement 636,000
Deferred income taxes 1,084,000 (4,318,000) (1,606,000)
Stock option tax benefit 199,000 226,000 1,535,000
Change in current assets and current liabilities:
Accounts receivable 415,306 4,541,241 (1,175,687)
Inventory 5,789,962 8,085,173 (8,038,448)
Other current assets 403,566 (571,353) (784,152)
Income tax receivable 400,781 (400,781)
Accounts payable (4,049,438) (1,027,772) 6,342,131
Accrued payroll and payroll taxes (292,350) (191,625) 221,415
Income taxes payable 273,273 (201,768) (220,911)
Other current liabilities 175,525 (185,849) 703,858
Deferred revenue (519,815) 698,622 638,591
------------ ------------ -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (3,964,106) 6,172,005 4,351,955
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related party (585,000)
Collection of notes receivable - related party 585,000
Additions to property and equipment (1,058,108) (1,660,716) (2,654,705)
Additions to capitalized software costs (1,557,931) (2,660,717) (3,535,312)
Proceeds from sale of property and equipment 82,357 53,968 16,363
Additions to patents and other assets (500,596) (2,056,156) (1,793,993)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (3,034,278) (6,323,621) (7,967,647)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowing under revolving credit lines (1,740,053) (1,918,979) 2,002,144
Proceeds from note payable to related party 1,765,000
Proceeds from notes payable 271,149 111,345
Repayments of notes payable (293,550) (103,429)
Proceeds from long-term debt 307,514 470,938
Payments on long-term debt (1,246,968) (1,075,989) (864,966)
Issuance of common stock 10,378,660 580,099 413,210
------------ ------------ -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,391,639 (364,756) 2,029,242
------------ ------------ -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 393,255 (516,372) (1,586,450)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 90,851 607,223 2,193,673
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 484,106 $ 90,851 $ 607,223
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
LaserMaster Technologies, Inc. (the Company) designs, manufactures, markets
and sells wide-format color, chemical-free filmsetting, plain-paper
typesetting, and direct-to-plate printing systems for graphic arts, pre-
press, and desktop publishing professionals.
Credit Risk
The Company sells its products on a prepaid basis, on a COD basis, through
nonrecourse third-party leasing arrangements and by extending credit in the
normal course of business. Its customer base is comprised primarily of
resellers and end users in the graphic arts, prepress and desktop
publishing industries throughout the world. Credit risk is spread across a
significant number of customers and geographic areas such that no material
credit risk resides with one or a small number of customers or in a given
geographic area. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
Consolidation
The consolidated financial statements include the accounts of LaserMaster
Technologies, Inc. and its subsidiaries, Digital Typeface Corporation (DTC)
and LaserMaster Corporation (LMC), and LMC's subsidiaries, LaserMaster
Export Corporation, LaserMaster Europe, Ltd. (LME), LaserMaster
Asia/Pacific (LMA), and ColorMasters, Inc. (CMI). All significant
intercompany balances and transactions have been eliminated in
consolidation.
Revenue recognition and warranties
Product sales are recorded on shipment. Reserves are established for
anticipated returns of product and bad debts. The Company offers extended
maintenance agreements with revenue from these agreements recognized
ratably over the contract period. The Company provides a warranty for labor
and materials on certain products sold. No other stock balancing programs
or product rebate programs exist outside of the terms of the limited
warranty. The estimated warranty liability is included in other current
liabilities in the consolidated balance sheets.
Cash equivalents
All highly liquid cash investments with a maturity of three months or less
at the date of purchase are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out (FIFO) basis.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets of two to seven years.
Capitalized software
Software development costs incurred subsequent to establishment of the
software's technological feasibility are capitalized. Capitalization ceases
when the software is available for general release to customers. The
recoverability of capitalized software development costs is continually
evaluated, and provisions for estimated losses are recorded in the period
such losses are determined. Amortization of capitalized software
development costs is provided at the greater of the amount computed using
(a) the ratio of current gross revenues from a product to the total of
current and anticipated future gross revenues from the product or (b) the
straight-line method over the remaining estimated economic life of the
product. Generally, an original estimated economic life of three years is
assigned to capitalized software development costs. Amortization of
capitalized software development costs, included in cost of goods sold,
aggregated $2,494,154, $2,732,829 and $3,124,616 for the fiscal years
ended June 30, 1997, 1996, and 1995, respectively. Provisions for
impairment losses totaled $3,214,690 and $768,059 for the years ended June
30, 1997 and 1996, respectively. These provisions reduced the Company's
capitalized software costs to zero at June 30, 1997.
Acquired technology, patents, and licenses
Acquired technology, patents, and licenses are amortized using the
straight-line method over the estimated useful lives of the assets,
generally from three to five years. Amortization of acquired technology,
patents and
F-6
<PAGE>
licenses included in general and administrative expenses, aggregated
$710,838, $596,277 and $371,903 for the fiscal years ended June 30, 1997,
1996, and 1995, respectively. The recoverability of these assets is
continually evaluated by comparing the remaining unamortized cost to the
estimated future cash flows of the associated assets. Provisions for
estimated losses are recorded in the period such losses are determined and
totaled $1,533,837 and $2,582,840 for the years ended June 30, 1997 and
1996, respectively.
Accounts payable
Accounts payable include $1,243,101 and $389,860 at June 30, 1997 and 1996,
respectively, related to issued checks which had not cleared the Company's
bank accounts reduced by deposits in transit and cash on deposit in the
Company's depository banks.
Fair value of financial instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. Cash and cash equivalents, accounts
receivable, short-term debt, accounts payable, and accrued liabilities are
reflected in the financial statements at their estimated fair value. The
carrying amount of the Company's long-term debt approximated its fair value
at June 30, 1997 and 1996 due to the debt agreements containing market
interest rates.
Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes."
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to the
differences between the financial statement and tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled.
Research and development
The Company is involved in the development of new products and improvement
of existing products. Research and development costs are charged to expense
as incurred.
Advertising
The Company expenses the costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits.
Direct-response advertising consists of printing, postage, and mailing list
costs relating to direct mail advertising. The capitalized costs of the
advertising are amortized over the period during which the benefits of the
mailings are expected, up to two months following the mailing date.
At June 30, 1997, $7,000 of advertising was included in other current
assets as compared with $333,000 at June 30, 1996. Advertising expense was
$6,298,000, $7,343,000 and $9,519,000 for the fiscal years ended June 30,
1997, 1996, and 1995, respectively.
Net (loss) earnings per common share
Net (loss) earnings per common share is based on the weighted average
number of common and dilutive common equivalent shares outstanding. Common
stock equivalents included in the calculation reflect the dilutive effect
of outstanding stock options and warrants. During fiscal years 1997 and
1996, common equivalent shares are excluded from the calculation because
they are anti-dilutive.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue following the guidance of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees and has adopted the
disclosure provisions of SFAS No. 123 in fiscal year 1997.
Liquidity
During 1997 and 1996, the Company incurred losses and special charges
aggregating $17.2 million and $10.5 million, respectively, and as of June
30, 1997, had an accumulated deficit in stockholders' equity totaling $19.1
million. During this period, management has taken several steps to improve
cash flows and return the Company to profitability. These included
reducing operating expenses through workforce reductions and consolidating
international sales offices, transitioning out of certain products, and
developing new products to be released during early fiscal 1998.
Management believes these changes will allow the Company to meet its
obligations and return to profitability in 1998. If revenues from the new
products expected to be released in fiscal 1998 are significantly less than
planned, additional expense reductions will be necessary.
F-7
<PAGE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Significant Accounting Estimates
The Company's reserves against inventories are based on the Company's best
estimates of product sales prices and customer demand patterns, and/or its
plans to transition its products. However, the Company participates in a
highly competitive industry that is characterized by aggressive pricing
practices, downward pressures on gross margins, frequent introductions of
new products, short product life cycles, rapid technological advances, and
continual improvement in product price/performance characteristics. As a
result of the industry's ever-changing and dynamic nature, it is at least
reasonably possible that the estimates used by the Company to determine its
reserves against inventories will be materially different from the actual
amounts or results. These differences could result in materially higher
than expected inventory reserve costs, which could have a materially
adverse effect on the Company's results of operations and financial
condition in the near term.
The Company's warranty and related accruals are based on the Company's best
estimates of product failure rates and unit repair costs. However, the
Company is continually releasing new and ever-more complex and
technologically advanced products. As a result, it is at least reasonably
possible that product could be released with certain unknown quality and/or
design problems. Such an occurrence could result in materially higher than
expected warranty and related costs, which could have a materially adverse
effect on the Company's results of operations and financial condition in
the near term.
New 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 not determined if adoption of the
standard will have a material impact on the Company's financial position or
results of operations.
2. RESTRUCTURING AND OTHER SPECIAL CHARGES
In June 1997, the Company incurred pre-tax charges of $7.8 million related
to the revaluation of intellectual property and inventory and $636,000 for
settlement of the shareholders' lawsuit (Note 16). Of this amount, $3.5
million was charged to cost of sales and $4.9 million was charged to
operating expenses. The special charges were incurred primarily as a result
of a change in the estimated net realizable values of the Company's
PressMate and DisplayMaker Express products. These two products represent
the Company's first two proprietary printers developed and manufactured in-
house.
In May 1996, the Company incurred pre-tax charges of $9.9 million,
consisting of restructuring and other special charges of $4.4 million and a
special charge to cost of sales of $5.5 million related to its revised
business plan and technical problems in one of its products. The revised
business plan is intended to complete the Company's transition from a
systems integrator to a manufacturer of proprietary printing engines which
utilize the Company's consumable products.
Included in the $4.4 million charge is $3.3 million for the revaluation of
intellectual property tied to certain technologies and contract rights
associated with the transition from a systems integrator to a manufacturer
of printing engines. The charge also includes a $1.1 million provision for
severance related to workforce reductions, expected losses on the sale of
tangible assets and expenses under non-cancelable leases as a result of
consolidating foreign sales offices and certain domestic operations. At
June 30, 1996, approximately $1.3 million of the total $4.4 million charge
remains in current liabilities. At June 30, 1997, approximately $766,000 of
the total $4.4 million charge remains in current liabilities.
Included in the $5.5 million charge to cost of sales is $4.2 million in
inventory revaluation associated with the transition from certain product
lines developed as a systems integrator. In addition, the charge includes
$1.3 million to cover replacement costs, product returns, and inventory
revaluation related to the Company's older model PressMate product.
F-8
<PAGE>
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Raw materials $ 4,178,139 $ 9,518,033
Work in process 123,664 436,753
Finished goods:
Consumables 2,824,753 1,296,397
Hardware 2,058,115 2,273,131
------------- -------------
$ 9,184,671 $ 13,524,314
============= =============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Life Used
for Depreciation June 30, 1997 June 30, 1996
---------------- ------------- -------------
<S> <C> <C> <C>
Computer equipment 2 - 5 years $ 10,416,254 $ 10,358,217
Trade show computer equipment 2 - 5 years 470,007 600,475
Capitalized tooling 3 years 263,693 234,206
Furniture and fixtures 5 - 7 years 4,359,607 4,245,907
Purchased software 3 years 1,065,817 961,970
Vehicles 5 years 264,171 420,706
Leasehold improvements 5 years 2,918,862 2,577,253
------------- -------------
19,758,411 19,398,734
Accumulated depreciation and amortization 16,187,749 14,299,174
------------- -------------
$ 3,570,662 $ 5,099,560
============= =============
</TABLE>
Property and equipment includes assets under capital leases as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Computer equipment and purchased software $ 237,085 $ 212,085
Furniture and fixtures 709,774 740,319
Vehicles 10,499
------------- -------------
946,859 962,903
Accumulated amortization 426,308 248,368
------------- -------------
$ 520,551 $ 714,535
============= =============
</TABLE>
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Note payable under revolving
line of credit (1) $ 1,708,956 $ 3,529,459
Note payable under revolving
line of credit (2) 1,072,512 972,977
Promissory note from trading partner (3) 859,516
Other 19,085
------------- -------------
$ 2,781,468 $ 5,381,037
============= =============
Weighted average interest rate 8.48% 10.15%
============= =============
</TABLE>
F-9
<PAGE>
(1) On January 17, 1996, LMC entered into a credit agreement with a
commercial finance company. The agreement allows LMC to borrow up to
$10,000,000 based on availability equal to 60% of the net eligible accounts
receivable and 25% of the net eligible inventory. Borrowings are secured by
inventory, accounts receivable, and general intangibles and bear interest
at a defined bank reference rate (prime) plus 2.0% (10.5% at June 30, 1997)
with a 0.5% unused line fee. At June 30, 1997, approximately $2,606,000 of
eligible financing was unused under this credit line. Availability under
this credit line fluctuates daily. The agreement expires January 17, 1999
and requires the borrower to meet various financial covenants involving
capital expenditures, additions to capitalized software and intellectual
property, minimum debt service coverage ratio, and maintenance of a minimum
net worth. The agreement also requires LMC to meet various non-financial
covenants (Note 13).
(2) LME, a subsidiary of the Company's LMC subsidiary, maintains a
receivables financing arrangement, which has no stated expiration, with a
commercial finance company whereby LME may borrow up to 70% of eligible
accounts receivable, with a maximum advance of $2,500,000. At June 30,
1997, approximately $262,000 was unused under this credit line. Borrowings
are due in Dutch Guilders on demand and bear interest at the Promissory
Note Discount Rate of the Dutch Central Bank plus 2.5% (5.25% at June 30,
1997). Borrowings in U.S. Dollars are due on demand and bear interest at a
rate that fluctuates with the market (8.5% at June 30, 1997).
(3) In November 1995, LaserMaster Corporation converted $859,516 of
accounts payable into a promissory note. In September 1996, the promissory
notes along with approximately $1.7 million in trade payables were
converted into a $2.5 million convertible subordinated debenture (Note 8).
6. NOTE PAYABLE - RELATED PARTY
During September and October 1995, LMC borrowed $1,765,000 under a demand
note from TimeMasters, Inc. (TMI), a corporation controlled by the
Company's Chief Executive Officer. In January 1996, LMC obtained a new line
of credit with a commercial finance company that required the indebtedness
to TMI be subordinated to the line of credit and not be repaid unless
certain financial covenants were achieved. In return for such subordination
and for the significant restrictions on repayment, the Company issued to
TMI a warrant to purchase 277,953 shares of common stock. The warrant is
exercisable at $6.35 per share through January 17, 2002. In December 1996,
the principal balance of $1,765,000, along with $53,715 in accrued
interest, was offset against a similar amount due from TMI related to an
equity investment in the Company (Note 9).
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Note payable to a finance company, payments,
including principal and interest at 8.53%, of $59,427
due monthly through August 1997, secured by certain
domestic property and equipment (Note 13) $117,599 $ 789,260
Notes payable to a finance company, with monthly
payments aggregating $24,504, including interest at the
"One-Month" Commercial Paper rate plus 4.0%
(9.61% at June 30, 1997), expiring January 1998
through May 1999, secured by certain domestic
property and equipment (Note 13) 267,599 527,151
Note payable to bank, with interest at prime
plus .5% (9.0% at June 30, 1997), final
payment due December 1997 2,922 8,405
Obligations under capital leases for equipment,
payable in monthly installments (Note 11) 433,274 743,546
-------- ----------
821,394 2,068,362
Less current maturities 636,665 1,248,267
-------- ----------
$184,729 $ 820,095
======== ==========
</TABLE>
F-10
<PAGE>
Maturities of long-term debt at June 30, 1997, excluding capital lease
obligations, are as follows:
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1998 $327,824
1999 60,296
--------
$388,120
========
</TABLE>
8. CONVERTIBLE SUBORDINATED DEBENTURE
In September 1996, the Company entered into a series of agreements with one
of its largest trade creditors, converting approximately $1.7 million of
trade payables and a promissory note of $859,516 into a $2.5 million
convertible subordinated debenture. The debenture is due September 12, 1998
together with accrued interest at an annual rate of 8.0%. The debenture
contains voluntary, automatic and mandatory conversion provisions. Under
the voluntary conversion provision, the debenture is convertible in whole
or in part into common stock of the Company at $6.00 per share at any time
that the market price of the Company's common stock is less than $6.00 per
share. The debenture is automatically converted at the rate of 30,000
shares a week at the market price of the common stock at any time that the
market price equals or exceeds $6.00 per share. The automatic conversion
provision contains limited price protection under certain circumstances.
Under the mandatory conversion provision, the debenture will be converted
on a quarterly basis at market prices and in share quantities equal to
specified threshold amounts, less any shares converted under the other
provisions. The mandatory provision is effective for the quarter ending
March 31, 1997 and continues until the debenture is fully converted. The
debenture contains certain registration rights and also limits the number
of shares that may be sold in the open market in any one week. As of June
30, 1997, 105,000 shares had been converted aggregating $362,813. The
principal balance outstanding at June 30, 1997 is $2,233,414.
9. STOCKHOLDERS' EQUITY
In September 1996, the Company privately placed 2,695,971 shares of its
common stock, together with warrants to purchase an additional 2,757,000
shares, for $12 million ($11.8 million, net of transaction costs) to three
separate groups. Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation,
was issued 1,371,429 shares and warrants to purchase an additional
1,371,429 shares, at an exercise price of $7.00 per share, for an aggregate
$6 million. TimeMasters, Inc. and affiliates, which are controlled by the
Company's Chief Executive Officer, were issued 914,286 shares and warrants
to purchase an additional 914,286 shares, at an exercise price of $7.00 per
share, for an aggregate $4 million. The Company received $2.2 million from
TimeMasters and affiliates and offset the remaining $1.8 million against a
note payable and accrued interest due to TimeMasters. General Electric
Capital Corporation, the Company's senior lender, was issued 410,256 shares
and warrants to purchase an additional 471,285 shares at an exercise price
of $6.79 per share, for an aggregate $2 million.
10. STOCK OPTIONS AND WARRANTS
On May 23, 1996, the stockholders approved the adoption of the "LaserMaster
Technologies, Inc. 1996 Stock Incentive Plan". The aggregate number of
shares of the Company's common stock which may be issued pursuant to the
plan is 1,500,000. Under the plan, incentive stock options and non-
statutory stock options may be granted to key employees, directors, and
consultants of the Company at exercise prices not less than 100 percent of
the fair market value of the common stock at the date of grant and 110
percent for incentive stock options granted to individuals owning 10
percent or more of the Company's common stock. The plan is administered by
a Stock Option Committee appointed by the Board of Directors. The committee
establishes all terms and conditions of each grant, except that, in the
case of incentive options, the term may not exceed 10 years. The Company
also has a 1990 Restated Stock Option Plan with 3,513,309 shares
authorized.
F-11
<PAGE>
Warrant activity and activity under the stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Warrants Warrant Price Options Option Price
Outstanding Per Share Outstanding Per Share
---------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1994 15,000 $5.50 2,095,569 $ 2.76
Granted 544,000 6.04
Exercised (230,466) 1.81
Forfeited (268,417) 5.06
--------- ---------
Balance, June 30, 1995 15,000 5.50 2,140,686 3.38
Granted 277,953 6.35 1,322,000 4.29
Exercised (249,752) 2.32
Forfeited (449,824) 4.18
Repriced* (1.23)
--------- ---------
Balance, June 30, 1996 292,953 6.31 2,763,110 3.54
Granted 2,757,000 6.96 954,381 4.07
Exercised (180,357) 1.89
Forfeited (729,024) 4.37
Repriced** (0.55)
--------- ---------
Balance, June 30, 1997 3,049,953 6.90 2,808,110 3.38
========= =========
Exercisable, June 30, 1997 3,049,953 $6.90 779,308 $ 2.65
========= =========
</TABLE>
*The Company's Board of Directors approved the repricing of 249,250 non-
statutory stock options to the closing Nasdaq price on July 3, 1995 ($5.40 per
share). These options had original exercise prices ranging from $5.63 to $8.50
per share with an average exercise price of $6.75 per share. The Company's Board
of Directors approved the repricing of 210,000 non-statutory stock options to
the closing Nasdaq price on April 23, 1996 ($4.00 per share). These options had
original exercise prices ranging from $5.00 to $5.40 per share with an average
exercise price of $5.09 per share.
** The Company's Board of Directors approved the repricing of 929,250 non-
statutory stock options to the closing Nasdaq price on July 17, 1996 ($3.63 per
share). These options had original exercise prices ranging from $4.00 to $6.50
per share with an average exercise price of $4.18 per share.
Pro Forma Information:
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, since options have been issued with exercise prices at or
above market value of the Company's stock, no compensation expense has been
recognized for the stock option plans. Had compensation expense for the
Company's two stock option plans been determined based on the fair value at the
grant date for awards in fiscal 1997 and fiscal 1996 consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts reflected in the following table:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------- --------------
<S> <C> <C>
Reported net loss $(17,199,688) $(10,461,534)
Pro forma net loss (17,545,997) (10,482,957)
Reported net loss per share (1.25) (.93)
Pro forma net loss per share (1.28) (.93)
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net income (loss) for future years
because options vest over several years and additional awards generally are made
each year. The fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997 and fiscal 1996:
F-12
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Expected dividend yield $ - $ -
Expected stock price volatility 60% 60%
Risk-free interest rate 6.22% 6.22%
Expected life of options (years) 4.5 4.5
</TABLE>
The following table summarizes information about the Company's stock option
plans at June 30, 1997:
<TABLE>
<CAPTION>
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices June 30, 1997 Contractual Life Exercise Price June 30, 1997 Exercise Price
------ ------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ .34 to 2.00 87,943 44 months $1.18 52,693 $ .78
2.01 to 3.00 763,317 74 months 2.28 490,765 2.30
3.01 to 4.00 1,563,250 107 months 3.71 226,250 3.63
above 4.00 393,600 109 months 4.69 9,600 7.42
----------- ---------
2,808,110 779,308
</TABLE>
11. COMMITMENTS
Leases
The Company leases certain equipment under leases which meet the criteria
for capital lease classification. These agreements have been capitalized at
the lesser of fair market value of the equipment or the present value of
the future minimum lease payments. The Company also leases other equipment
under operating leases. In addition, the Company leases its office and
warehouse facilities under operating leases which expire at various dates
through December 2010. The leases require payments of property taxes,
insurance, and maintenance costs in addition to basic rent and contain
renewal options for periods ranging from one to three years.
Certain of the facilities leases are under a 15-year commercial lease with
Grandchildren's Realty Alternative Management Program I ("GRAMPI"), a
Minnesota limited partnership controlled by the Company's Chief Executive
Officer, for space it currently occupies in Shady View I & II. The Shady
View space is approximately 50% of all space leased by the Company. GRAMPI
purchased the real estate in April 1995, after the Company's Board of
Directors declined to do so. GRAMPI sold the property in October 1996 in a
sale-leaseback transaction and remains the lessor to the Company. The
Company's Board of Directors retained services of an outside commercial
real estate brokerage firm and outside legal counsel to negotiate the lease
with the landlord's outside legal counsel. Management and the outside
brokerage firm and legal counsel believe that the lease is at market rate.
Rent expense under all equipment and facilities operating leases (including
property taxes, insurance, and maintenance costs) was as follows:
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
GRAMPI $1,525,000 $1,355,000 $ 198,000(a)
Other parties 1,104,000 1,211,000 1,996,000
---------- ---------- ----------
Total $2,629,000 $2,566,000 $2,194,000
========== ========== ==========
</TABLE>
(a) Two months rent following April 1995 purchase.
F-13
<PAGE>
Future minimum lease payments under capital and operating leases in effect at
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Capital ----------------------------
Year ending June 30: Leases GRAMPI Other
-------- ----------- ----------
<S> <C> <C> <C>
1998 $338,125 $ 1,076,000 $ 874,000
1999 126,211 1,076,000 724,000
2000 3,821 1,199,000 674,000
2001 1,321,000 339,000
2002 1,266,000 314,000
Thereafter (2003 through 2010) 11,415,000 1,597,000
-------- ----------- ----------
468,157 $17,353,000 $4,522,000
=========== ==========
Less interest (34,883)
--------
Present value of net minimum lease payments $433,274
========
</TABLE>
Employment agreements
The Company has employment agreements with eleven of its officers and executives
which renew automatically on an annual basis. Three of the agreements provide
continuation payments equal to 36 months pay upon termination of employment in
certain circumstances, including change of control. The other eight agreements
provide for 12 months notice of termination, other than for cause, or payment in
lieu of notice. Three of the agreements also provide for acceleration of option
vesting in the event of a change in control or termination without cause. As of
June 30, 1997, minimum annual salary levels set for the eleven individuals was,
in aggregate, $3,280,000.
Employee benefit plan
The Company has a qualified defined contribution 401(k) plan covering
substantially all employees. The plan offers an employee savings feature and
discretionary Company matching contributions. There were no employer
contributions to the plan for the years ended June 30, 1997, 1996, and 1995.
12.INCOME TAXES
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal $ (193,000) $ 835,000 $(1,626,000)
State (12,000) (6,000) (69,000)
----------- ---------- -----------
(205,000) 829,000 (1,695,000)
Deferred, primarily federal (1,084,000) 4,318,000 1,606,000
----------- ---------- -----------
$(1,289,000) $5,147,000 $ (89,000)
=========== ========== ===========
</TABLE>
A reconciliation of the expected federal income tax (provision) benefit at the
statutory rates of 35% with the (provision) benefit for income taxes is as
follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Tax benefit (provision)
computed at statutory rates $ 5,569,000 $5,463,000 $(103,000)
State income tax, net of
federal benefit 288,000 283,000 (6,000)
Graduated tax bracket
(provision) benefit (159,000) (156,000) 5,000
Increase in valuation allowance (7,339,000) (821,000)
Other 352,000 378,000 15,000
----------- ---------- ---------
$(1,289,000) $5,147,000 $ (89,000)
=========== ========== =========
</TABLE>
F-14
<PAGE>
Under FAS No. 109, deferred tax assets and liabilities are classified as
current and noncurrent on the basis of the classification of the related
asset or liability for financial reporting. Deferred taxes are recorded for
temporary differences between the bases of assets and liabilities for
financial reporting purposes and tax purposes.
<TABLE>
<CAPTION>
Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are
as follows:
June 30, 1997 June 30, 1996
------------------------------------------ ---------------
Assets Liabilities Total Total
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns $ 676,000 $ 676,000 $ 773,000
Inventory costs 2,782,000 2,782,000 2,383,000
Acquired technology 304,000 304,000
Litigation settlement 216,000 216,000
Accrued vacation 182,000 182,000 228,000
Other 208,000 $ (295,000) (87,000) (80,000)
----------- ----------- ----------- ---------------
Current 4,368,000 (295,000) 4,073,000 3,304,000
Research and development costs (1,411,000)
Property and equipment basis 594,000 594,000 343,000
Net operating loss carryforwards 6,162,000 6,162,000 2,646,000
Research and development credit
carryforwards 1,773,000 1,773,000 1,775,000
Alternative minimum tax credits 225,000 225,000 225,000
Other 99,000 99,000 (211,000)
----------- ----------- ----------- ---------------
Noncurrent 8,853,000 8,853,000 3,367,000
----------- ----------- ----------- ---------------
Gross 13,221,000 (295,000) 12,926,000 6,671,000
Valuation allowance (8,160,000) (8,160,000) (821,000)
----------- ----------- ----------- ---------------
Net $ 5,061,000 $ (295,000) $ 4,766,000 $5,850,000
=========== =========== =========== ===============
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1997 is
$8,160,000. The net change in the total valuation allowance for the year
ended June 30, 1997 was an increase of $7,339,000.
At June 30, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $16.3 million which are
available to offset future taxable income, if any, through 2012. The
Company also has alternative minimum tax credit carryforwards of
approximately $225,000 available to reduce future federal income taxes, if
any, over an indefinite period and research and development credit
carryforwards of approximately $1.3 million available to reduce future
federal income tax, if any, through 2011.
The Company recognized income tax benefits of $199,000, $226,000, and
$1,535,000 in 1997, 1996, and 1995, respectively, pertaining to the
exercise of stock options, which are reflected in additional paid-in
capital.
13. RELATED PARTY TRANSACTIONS
The Company is involved in various transactions with TimeMasters, Inc., a
corporation controlled by the Company's Chief Executive Officer. The
Company also purchases certain inventory from a greater than 5% shareholder
and maintains its employee 401(k) plan investments with an affiliate of its
senior lender. The Company's senior lender is also a shareholder.
Transactions with related parties are as follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest expense (Notes 5 and 7) $ 513,226
Interest expense (Note 6) 83,696 $ 139,398
Interest income (a) 38,882
Rent expense (Note 11) 1,525,000 1,355,000 $ 198,000
Operating expenses (b) 88,240 30,788 63,128
Equipment purchases (c) 49,075 47,853 211,362
Inventory purchases 1,569,844
Balances outstanding with related parties are as follows: June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Notes payable (Notes 5 and 7) $2,094,154
Note payable (Note 6) $1,765,000
Accrued interest 2,722 14,507
Accrued rent 178,388 119,765
Accounts payable 67,667 35,845
</TABLE>
(a) In September 1996, the Company issued 914,286 shares of common stock and
warrants to purchase an additional 914,286 shares of common stock to a group
affiliated with TimeMasters, Inc. in exchange for promissory notes aggregating
$4 million (Note 9). In addition, Mel Masters, the Company's CEO, borrowed
$585,000 from the Company in November 1996. The amount borrowed was repaid in
December 1996 together with interest at 10%.
(b) Under a Use Indemnification Agreement and certain related Board of
Director's actions, the Company has the right to sponsor business and business-
related occasions at facilities owned by Masters Trust I and/or Melvin L.
Masters and/or TimeMasters, Inc. In addition, the Company occasionally uses an
airplane that is owned by a Company controlled by Mr. Masters for business-
related travel. The Company indemnifies the owners against loss or damage
beyond available insurance, reimburses out-of-pocket and operating expenses, and
pays a usage charge based on what management believes are market rates.
(c) The Company has installed a campus-wide TimeMasters, Inc. wireless voice
system in its Eden Prairie facility. There are no monthly call operating
charges for unlimited use of that system. The system hardware was acquired in
1995 for $211,362 based on competitive proposals for two other comparable
systems. The Company acquired additional hardware in 1997 and 1996.
14. INTERNATIONAL OPERATIONS
Financial information by geographic location is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
North America and other $ 54,771,696 $ 60,701,808 $ 84,181,438
Europe 17,410,002 19,655,566 23,021,944
Japan, Asia, Pacific 14,381,724 13,234,670 12,235,337
------------ ------------ ------------
Total sales $ 86,563,422 $ 93,592,044 $119,438,719
============ ============ ============
Operating (loss) profit:
North America and other $(20,396,052) $(17,227,577) $ (1,963,763)
Europe 2,115,152 (106,343) 303,028
Japan, Asia, Pacific 3,380,608 3,548,196 3,388,586
------------ ------------ ------------
(14,900,292) (13,785,724) 1,727,851
Interest expense and other (1,010,396) (1,822,810) (1,432,377)
------------ ------------ ------------
(Loss) earnings before
income taxes $(15,910,688) $(15,608,534) $ 295,474
============ ============ ============
Assets:
North America $ 23,195,621 $ 38,383,859 $ 49,641,247
Europe 4,589,271 4,828,561 7,901,241
Japan, Asia, Pacific 4,846,041 3,332,544 1,618,784
------------ ------------ ------------
Total assets $ 32,630,933 $ 46,544,964 $ 59,161,272
============ ============ ============
</TABLE>
F-16
<PAGE>
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
The Company paid cash for the following items:
Interest paid $1,246,358 $2,001,050 $1,243,051
Income tax (received) paid, net (668,054) (452,451) 380,911
Financing transactions not affecting cash:
Accounts payable converted to note payable 859,516
Accounts payable converted to convertible
subordinated debenture 1,668,314
Note payable converted to convertible
subordinated debenture 859,516
Convertible subordinated debenture converted
to common stock 362,813
Note payable to related party offset against note
receivable from related party 1,765,000
Accrued interest offset against note receivable
from related party and interest receivable 53,715
Common stock issued for services 100,000
Litigation settlement in exchange for common stock 636,000
Capital lease obligations 228,374 599,236
</TABLE>
16. LITIGATION
In October 1995, a shareholder of the Company (Becker) filed an action
against the Company and four of its officers and directors alleging
violations of the Securities and Exchange Act of 1934. In December 1995,
similar claims filed by other shareholders were consolidated into the
Becker claim as a class action to include all purchasers of the Company's
stock during the period of December 3, 1993 through December 8, 1994. In
February 1996, one of the directors named in the suit was dismissed from
the case without prejudice. The basic allegation is that the Company and
the named defendants knew of material, negative, non-public information and
withheld such information from the market so that they could personally
benefit by selling shares of common stock at an inflated price. A
preliminary settlement in this case has been reached between the Company
and the plaintiffs. The proposed settlement includes an amount from the
Company's insurance carrier and $636,000 from the Company. The Company's
portion of the proposed settlement may be paid in cash or common stock at
the Company's discretion and is due in January 1998. If the Company elects
to pay its share in common stock then the number of shares issued will be
determined based on the market price on the date payment is due. Final
approval of the settlement is expected in October 1997. The Company has
recorded its $636,000 share of the proposed settlement as expense and
additional paid in capital as of June 30, 1997.
In October 1995, LMC filed suit against Sentinel Imaging, a division of
Sentinel Business Systems, Inc. The complaint alleges, among other things,
patent infringement, trademark infringement, and other violations relating
to the Company's Big Color product line. Sentinel Imaging's counterclaims
for false advertising, patent misuse, and unfair competition by LaserMaster
have been dismissed.
In addition, in the ordinary course of its business the Company experiences
various types of claims which sometimes result in litigation or other legal
proceedings. The Company does not anticipate that any of these proceedings
will have a material effect on the Company's operations or financial
position.
F-17
<PAGE>
17. QUARTERLY RESULTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------- Fiscal
Sept. 29 Dec. 29 Mar. 30 June 30 Year
--------- ---------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Fiscal 1997:
Net sales $21,452 $24,597 $19,384 $ 21,130 $ 86,563
Gross profit 7,930 7,849 5,102 3,770/(a)/ 24,651/(a)/
Net (loss) (238) (483) (2,450) (14,029)/(b)/ (17,200)/(b)/
Net (loss) per share (.02) (.03) (.17) (.97) (1.25)
Quarter Ended
---------------------------------------------------------- Fiscal
Sept. 30 Dec. 31 Mar. 31 June 30 Year
-------- ------- ------- -------------- ---------------
Fiscal 1996:
Net sales $21,266 $25,340 $23,227 $ 23,759 $ 93,592
Gross profit 8,539 9,898 7,426 3,350/(c)/ 29,213/(c)/
Net earnings (loss) (921) 79 (2,230) (7,390)/(d)/ (10,462)/(d)/
Net earnings (loss) per share (.08) .01 (.18) (.65) (.93)
</TABLE>
(a) Includes a special pre-tax charge to cost of sales of $3.5 million related
to the Company's revised estimates of net realizable value of two of its
products.
(b) Includes pre-tax special charges of $4.3 million and a special pre-tax
charge to cost of sales of $3.5 million related to the Company's revised
estimates of net realizable value of two of its products, $636,000 related to
the settlement of litigation, and a special provision for income taxes of $6.5
million related to the revaluation of deferred tax assets.
(c) Includes a special pre-tax charge to cost of sales of $5.5 million related
to the Company's revised business plan and technical problems in one of its
products.
(d) Includes pre-tax restructuring and other special charges of $4.4 million
and a special pre-tax charge to cost of sales of $5.5 million related to the
Company's revised business plan and technical problems in one of its products.
F-18
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
June 30, June 30,
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 329,993 $ 33,932
Accounts receivable 1,463 21,932
Receivable from subsidiary 8,604,283 4,648,498
Income tax receivable 400,781
Other current assets 112,981 60,030
------------ -----------
TOTAL CURRENT ASSETS 9,048,720 5,165,173
PROPERTY AND EQUIPMENT, NET 649,563 805,965
INVESTMENT IN SUBSIDIARIES 5,484,595 10,563,097
------------ -----------
$ 15,182,878 $16,534,235
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 589,455 $ 652,005
Accrued payroll 151,481 182,559
Accrued expenses 1,313 31,823
Income taxes payable 273,273
Current maturities of long-term debt 8,830 10,691
------------ -----------
TOTAL CURRENT LIABILITIES 1,024,352 877,078
CONVERTIBLE SUBORDINATED DEBENTURE 2,233,414
LONG-TERM DEBT, less current maturities 10,387 19,217
STOCKHOLDERS' EQUITY:
Common stock 144,325 114,261
Additional paid-in capital 30,876,964 17,430,555
Accumulated deficit (19,106,564) (1,906,876)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 11,914,725 15,637,940
------------ -----------
$ 15,182,878 $16,534,235
============ ===========
</TABLE>
See notes to condensed financial information of registrant on page F-21.
F-19
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I
(Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years ended June 30,
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
REVENUES (management fees from subsidiaries) $ 4,200,000 $ 4,200,000 $4,200,000
OPERATING EXPENSES 5,418,186 4,653,138 4,547,489
------------ ------------ ----------
(LOSS) BEFORE INCOME TAXES AND EQUITY
IN (LOSS) EARNINGS OF SUBSIDIARIES (1,218,186) (453,138) (347,489)
EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES (9,844,502) (10,157,396) 449,963
INCOME TAX (PROVISION) BENEFIT (6,137,000) 149,000 104,000
------------ ------------ ----------
NET (LOSS) EARNINGS (17,199,688) (10,461,534) 206,474
(ACCUMULATED DEFICIT) RETAINED EARNINGS
AT BEGINNING OF YEAR (1,906,876) 8,554,658 8,348,184
------------ ------------ ----------
(ACCUMULATED DEFICIT) RETAINED EARNINGS
AT END OF YEAR $(19,106,564) $ (1,906,876) $8,554,658
============ ============ ==========
</TABLE>
See notes to condensed financial information of registrant on page F-21.
F-20
<PAGE>
(Continued)
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Years Ended June 30,
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(17,199,688) $(10,461,534) $ 206,474
Adjustments to reconcile net (loss) earnings to net
cash used in operating activities:
Equity in loss (earnings) of subsidiaries 9,844,502 10,157,396 (449,963)
Depreciation and amortization 345,493 368,828 504,519
Litigation settlement 636,000
Stock option tax benefit 199,000 226,000 1,535,000
(Gain) loss on sale of property and equipment (14,250) 402 (186)
Net change in operating current assets
and liabilities (3,714,392) (712,331) (1,843,912)
------------ ------------ -----------
NET CASH USED IN OPERATING
ACTIVITIES (9,903,335) (421,239) (48,068)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (224,023) (146,461) (366,221)
Proceeds from sale of property and equipment 55,450 2,629
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (168,573) (146,461) (363,592)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 10,378,660 580,099 413,210
Payments on long-term debt (10,691) (8,466) (4,571)
Net (payments) borrowing under short-term debt (41,485) 7,916
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,367,969 530,148 416,555
------------ ------------ -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 296,061 (37,552) 4,895
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 33,932 71,484 66,589
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 329,993 $ 33,932 $ 71,484
============ ============ ===========
</TABLE>
NOTES: See consolidated financial statements for details of and changes in
stockholders' equity. See Note 8 to consolidated financial statements
for information regarding the convertible subordinated debenture.
Capital lease obligations of $25,000 were incurred during the year ended
June 30, 1996.
No cash dividends have been paid to LaserMaster Technologies, Inc. by
the subsidiaries.
F-21
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Balance Charged Balance
beginning to costs Accounts at
of and written end of
Description period expenses off period
- ----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts
and sales returns $2,475,479 $ 764,333 $1,252,729 $1,987,083
1996:
Allowance for doubtful accounts
and sales returns $2,051,485 $1,471,654/(a)/ $1,047,660 $2,475,479
1995:
Allowance for doubtful accounts
and sales returns $1,890,000 $ 441,006 $ 279,521 $2,051,485
</TABLE>
/(a)/ Includes special charge of $1 million to cover product returns related to
the Company's older model PressMate product.
F-22
<PAGE>
Exhibit 10.1
AMENDMENT NO. 2 TO CREDIT AGREEMENT
-----------------------------------
This AMENDMENT NO. 2 TO CREDIT AGREEMENT (this Amendment") is entered
---------
into as of this 31st day of January, 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 execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedules.
-------------------------------------------------
(a) The following definitions in Schedule A to the Credit Agreement are
hereby amended and restated to read in their entirety as follows:
"Cumulative Net Income" shall mean (a) the cumulative amount of posotive
---------------------
net income of Borrower and its Subsidiaries (other than LaserMaster Europe)
on a consolidated basis, between July 1, 1996 and any date of determination
multiplied by (b) .50.
"Cumulative Net Income Capex/Restricted Payment Basket" shall mean, at any
-----------------------------------------------------
time, (a) Cumulative Net Income minus (b) the sum of additional Capital
-----
Expenditures made as permitted under clause (a)(i) of Schedule H and
----------
additional capitalized software costs made as permitted under clause (b)(i)
of Schedule H between July 1, 1996 and any date of determination.
----------
"Free Cash Flow" shall mean, without duplication, with respect to Borrower
--------------
and its Subsidiaries (other than LaserMaster Europe) for any period,
EBITDA, minus Capital Expenditures (including the principal portion of
Capital Lease obligations, minus taxes paid in cash, minus additions to
----- -----
capitalized software costs, patents and other capitalized assets; cash
contributions to the capital of Borrower of up to $2,000,000 prior to
December 31, 1996 (if during the applicable measuring period); loans repaid
and advances returned or otherwise transferred from LaserMaster Europe to
Borrower during such period; Restricted Payments made as permitted under
clause (iii) of Section 6.14 of the Agreement and payments of the principal
amount of Subordinated Debt during such period, less amounts loaned,
advanced or otherwise transferred from Borrower to Laser Master Europe
during such period.
<PAGE>
(b) Section 6.14 of the Credit Agreement is amended and restated to read
in its entirety as follows:
6.14 Restricted Payments. Borrower shall not, nor shall it cause or
-------------------
permit any Subsidiary thereof to, make any Restricted Payment, other than
(i) payments necessary to enable Holdings to satisfy its Federal state and
local income tax obligations to the extent such obligations are the result
of the net consolidated income of Borrower and its Subsidiaries being
attributed to Holdings for tax purposes which are directly related to the
operations of Borrower and its Subsidiaries, (ii) payments to Holdings to
pay for the actual incurrence by Holdings of necessary legal accounting and
other fees and expenses which are directly related to the operations of
Borrower and its Subsidiaries, and (iii) other Restricted Payments to
Holdings not to exceed in the aggregate the Cumulative Net Income
Capex/Restricted Payment Basket; provided however that in no event shall
-------- -------
the payments permitted under clause (iii) above exceed $550,000 in any
month.
(c) Schedule H to the Credit Agreement is amended and restated to
----------
read in its entirety as set forth in Schedule H as attached hereto.
----------
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;
hereto.
(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.
<PAGE>
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.
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.
SECTION 8. Effectiveness.
-------------
8.1 This Amendment. This Amendment shall become effective as of December
--------------
31, 1996 only upon delivery to Agent of signature pages for this Amendment
signed by Borrower on or prior to February 15, 1997.
[signature pages follow]
<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:_______________________
<PAGE>
SCHEDULE H (SECTION 6.11)
------------
TO
CREDIT AGREEMENT
----------------
FINANCIAL COVENANTS
-------------------
Borrower shall not breach or fail to comply with any of the following
financial covenants, each of which shall be calculated in accordance with GAAP
consistently applied:
(a) Maximum Capital Expenditures. Borrower and its Subsidiaries
-----------------------------
(other than LaserMaster Europe) oconsolidated basis shall not make Capital
Expenditures during the following periods that exceed in the aggregate the
amounts set forth opposite each of such periods:
Period Maximum Capital Expenditures per Period
------ ---------------------------------------
Closing Date through June 30, 1996 $1,300,000
Fiscal Year 1997 $2,800,000
Fiscal Year 1998 $3,300,000
Two Fiscal Quarters ending 12/31/98 $2,000,000
; provided, however, that the amount of permitted Capital Expenditures
-------- -------
referenced above will be increased in any Fiscal Year by the following amounts
(less the amount of any such increases during prior Fiscal Years spent for
----
Capital Expenditures):
(i) increased by the net amount of (A) Cumulative Net Income, less (B)
---------
the sum of Restricted Payments made as permitted under clause (iii) of Section
-------
6.14 of the Europe Agreement and additional capitalized software and other costs
- ----
incurred as permitted under clause b(i) of this Schedule H, in each case between
July 1, 1996 and any date determination; andSubsidiaries
(ii) increased by the net amount of (A) cash contributions to the capital
---------
of Borrower during the period of July 1, 1996 through any date of determination,
plus (B) the principal amount of Subordinated Debt advanced to Borrower during
- ----
such period, plus (C) loans repaid and advances returned or otherwise
----
transferred from LaserMaster Europe to Borrower during such period; less (D)
----
Restricted Payments made as permitted under clause (iii) of Section 6.14 of the
------------
Agreement during such period, less (E) payments of the principal amount of
----
Subordinated Debt during such period, less (F) amounts loaned, advanced or
----
otherwise transferred~Ted from Borrower to LaserMaster Europe during such
period.
(b) Maximum Additions to Capitalized Software Costs. Patents and
------------------------------------------------------------
Other Capitalized Assets. Borrower and its Subsidiaries (other than LaserMaster
- ------------------------
Europe) on a consolidated basis should not make or otherwise incur additions to
capitalized software costs, patents and other capitalized assets during the
following periods that exceed in the aggregate the amounts set forth opposite
each of such periods:
<PAGE>
Period Maximum Amount Paid
------ -------------------
Closing Date through June 30, 1996 $2,700,000
Fiscal Year 1997 $5,000,000
Fiscal Year 1998 $5,800,000
Two Fiscal Quarters ending 12/31/98 $3,000,000
; provided, however, that the amounts referenced above will be increased in any
-------- -------
Fiscal Year by the following amounts (less the amount of any such increases in
----
prior Fiscal Years so expended):
(i) by the net amount of (A) Cumulative Net Income, less (B) the sum of
Restricted Payments made as permitted under clause (iii) of Section 6 14 of the
Agreement and additional Capital Expenditures made as permitted under clause
(a)(i) of this Schedule H in each case, between July 1, 1996, and any date of
----------
determination; and
(ii) increased by the net amount of (A) cash contributions to the
---------
capital of Borrower during the period of July 1, 1996 through any date of
determination, plus (B) the principal amount of Subordinated Debt advanced to
Borrower during such period, plus (C) loans repaid and advances returned or
----
otherwise transferred from LaserMaster Europe to Borrower during such period;
less (D) Restricted Payments made as permitted under clause (iii) of Section
- ---- -------
6.14 of the Agreement during such period, less (E) payments of the principal
- ---- ----
amount of Subordinated Debt during such period, less (F) amounts loaned,
----
advanced or otherwise transferred from Borrower to LaserMaster Europe during
such period
(c) Minimum Net Worth. Borrower and its Subsidiaries (other than
-----------------
LaserMaster Europe) on a consolidated basis shall maintain at all times Net
Worth equal to or greater than $2,500,000.
(d) Minimum Debt Service Coverage Ratio. Borrower and its
-----------------------------------
Subsidiaries (other than LaserMaster Europe) on a consolidated basis shall have
at the end of each Fiscal Quarter, a Debt Service Coverage Ratio for the 12-
month period then ended (or for the Fiscal Quarters ending on or before June 30,
1997, the period of July 1, 1996 to such date) of not less than 1.0 to 1.0 with
respect to the Fiscal Quarter ending December 31, 1996 and each Fiscal Quarter
thereafter.
(e) Maximum Debt to Accounts and Inventory. LaserMaster Europe shall
--------------------------------------
have and maintain at all times from and after the Closing Date a ratio of (i)
the aggregate amount of Indebtedness of LaserMaster Europe (other than the
intercompany payable owing to Borrower) outstanding at any date of determination
to (ii) the aggregate amount of Accounts and Inventory of LaserMaster Europe at
any date of determination, of not greater than 1.30 to 1.0.
(f) Maximum Intercompany Receivables Balance. Borrower shall
----------------------------------------
maintain at all times an intercompany receivables balance (net of tax) owing to
Borrower from LaserMaster Europe with respect to the sale or transfer of
inventory by Borrower to LaserMaster Europe in an aggregate amount not to exceed
at any time the sum of (i) the sum of (A) $4,800,000 plus (B) the amount of any
----
new cash equity received by Borrower and which is invested in LaserMaster Europe
through an intercompany loan by Borrower to LaserMaster Europe plus (ii) an
amount equal to (A) Excess Availability at such time multiplied by (B) 1.5 (but
-------------
in no event shall the product of clause (A) and (B) exceed $2,500,000) plus
----
(iii) the cumulative amount of any net income, if positive, of LaserMaster
Europe from and after January I, 1996.
<PAGE>
(g) Maximum Increase to Investments, Capital Expenditures and
---------------------------------------------------------
Receivables Balance. The aggregate amount of (i) loans and Investments made by
- -------------------
Borrower pursuant to Section 6..2(c)(B) plus (ii) the aggregate amount of
------------------
Capital Expenditures incurred pursuant to clause (i) set forth in clause (a) of
Schedule H plus (iii) the aggregate amount of additions to capitalized software
- ----------
costs, patents and other capitalized assets incurred under clause (i) set forth
in clause (b) of Schedule H plus (iv) the aggregate amount of Restricted
----------
Payments made by Borrower pursuant to Section 6.14(iii) shall not exceed at any
-----------------
time 75% of the Cumulative Net Income from and after July 1, 1996 determined in
accordance with GAAP. The aggregate amount of (i) the aggregate amount of
Capital Expenditures incurred pursuant to clause (ii) set forth in clause (a) of
Schedule H plus (ii) the aggregate amount of additions to capitalized software
- ---------- ----
costs, patents and other capitalized assets incurred pursuant to clause (ii) set
forth in clause (b) of Schedule H plus (iii) the aggregate amount of loans and
---------- ----
Investments made by Borrower pursuant to Section 6.2(c)(C) plus (iv) the
-----------------
aggregate amount of advances made by Borrower pursuant to Section 6.2(a)(iii)(B)
----------------------
shall not exceed at any time (A) cash contributions to the capital of Borrower
during the period of July 1, 1996 through any date of determination, plus (B)
----
the principal amount of Subordinated Debt advanced to Borrower during such
period, plus (C) loans repaid and advances returned or otherwise transferred
----
from LaserMaster Europe to Borrower during such period, less (D) Restricted
----
Payments made as permitted under clause (iii) of Section 6.14 of the Agreement
------------
during such period, less (E) payments of the principal amount of Subordinated
----
Debt during such period, less (F) amounts loaned, advanced or otherwise
----
transferred from Borrower to LaserMaster Europe during such period.
<PAGE>
Exhibit 10.2
FIRST INDUSTRIAL. L.P.
----------------------
STANDARD FORM - INDUSTRIAL BUILDING LEASE
--------------- -------------------------
(TRIPLE NET SINGLE TENANT)
SECTION 1: BASIC TERMS
-----------
This Section I contains the Basic Terms of this Lease between Landlord and
Tenant, named below. Other Sections of the Lease referred to in this Section I
explain and define the Basic Terms and are to be read in conjunction with the
Basic Terms.
1.1 Date of Lease: March 31.1997
--------------
1.2 Landlord: First Industrial. L.P.. a Delaware limited partnership
------------------------------------------------------
1.3 Tenant: LaserMaster Corporation
-----------------------
1.4 Premises: See Exhibit"A"
--------------
1.5 Lease Term: ten (10) years zero (0) months ("Term"), commencing
-------- --------
Simultaneous w/ successful closing of 6900 Shady Oak Rd.
--------------------------------------------------------
("Commencement Date") and ending Ten years from commencement date
--------------------------------
("Expiration Date").
1.6 Permitted Uses: (See Section 4) Office/Warehouse
----------------
1.7 Tenant's Guarantor: (if none, so state) None
----
1.8 Brokers: (See Section 22; if none, so state)
(A) Tenant's Broker: None
-----
(B) Landlord's Broker: First Industrial Realty Trust. Inc.
-----------------------------------
1.9 Security Deposit: (See Section 4) $17,802.00
----------
1.10 Rent Payable by Tenant: See Exhibit "B", with option period.
------------------------------------
1.11 Riders to Lease: The following riders are attached to and
made a part of this Lease. (If none, so state) Exhibit A, B, C, D,
-------------------
E and F.
-------
SECTION 2: LEASE OF PREMISES; RENT
2.1 LEASE OF PREMISES FOR LEASE TERM. Landlord hereby leases the
--------------------------------
Premises to Tenant, and Tenant hereby rents the Premises from Landlord, for the
Term and subject to the conditions of this Lease.
2.2 TYPES OF RENTAL PAYMENTS. Tenant shall pay rents of (a) net
--------------------------
base rent payable in monthly installments as set forth in Exhibit "B" attached
hereto (the "Net Base Rent"), in advance, on the first day of each and every
calendar month during the term of this Lease; (b) all costs, expenses and
charges of every nature relating to, or incurred in connection with, the
ownership and operation of the Premises and that are attributable to, or become
due, during the Term ("Additional Rent"); and (c) in the event that any monthly
installment of Net Base Rent is not paid within ten (10) days of the date when
due, a late charge in an amount equal to five percent (5%) of the then-
delinquent installment of Net Base Rent (the "Late Charge"; the Net Base Rent,
Additional Rent and Late Charge shall collectively be referred to as "Rent").
All Rent shall be paid to Landlord c/o First Industrial, L P., P.O. Box 75631,
Chicago, 60675-5631 (or to such other entity designated as Landlord's management
agent, if any, and if Landlord so appoints such a management agent, the
"Agent"), or pursuant to such other directions as Landlord shall designate in
this Lease or otherwise.
2.3 COVENANTS CONCERNING RENTAL PAYMENTS. Tenant shall pay the Rent
------------------------------------
promptly when due, without notice or demand, and without any abatement,
deduction or setoff, except as may otherwise be expressly and specifically
provided in this Lease. No payment by Tenant, or receipt or acceptance by Agent
or Landlord, of a lesser amount than the correct Rent shall be deemed to be
other than a payment on account, nor shall any endorsement or statement on any
check or letter accompanying any payment be deemed an accord or satisfaction,
and Agent or Landlord may accept such payment without prejudice to its right to
recover the balance due or to pursue any other remedy available to Landlord. If
the Commencement Date occurs on a day other than the first day of a calendar
month, the Rent due for the partial calendar months occurring at the
commencement and the expiration of the Term shall be prorated on a per diem
basis. It is intended that the Rent provided in this Lease shall be an
absolutely net return to Landlord throughout the Term and any renewals or
extensions thereof.
2.4 INSURANCE PREMIUMS. Tenant shall pay, as Additional Rent, all
------------------
premiums for insurance that Landlord procures in the event of a default of
Tenant pursuant to Section 10.2 herein. With respect to the insurance premiums,
if Tenant fails to procure and maintain insurance for the Premises according to
the items of this Lease, Landlord shall have the right to procure and maintain
coverages for the Premises, and such insurance coverage and units shall be no
greater than that required to be carried by the Tenant pursuant to the terms and
conditions described in "Exhibit D hereof.
---------
2.5 PAYMENT OF MANAGEMENT FEES. Tenant shall pay to Landlord as
--------------------------
"Additional Rent", a property management fee to Landlord, with each installment
of Net Base Rent (other than the first installment), an amount equal to three
percent (3%) of the installment of Net Base Rent due in the immediately
preceding calendar month (the "Property Management Fee"), it being understood
that such Property Management Fee and payable in arrears; and therefore, upon
the expiration or earlier termination of this Lease, Tenant shall immediately
pay to Landlord any accrued and unpaid Property Management Fee (including such
fees that are applicable to the month in which this Lease is terminated or
expires).
1
<PAGE>
SECTION 3: TAXES AND ASSESSMENTS; ASSOCIATION DUES
---------------------------------------
3.1 TAXES. Tenant agrees to pay as "Additional Rent" for the
-----
Premises (i) all governmental taxes, assessments, fees, penalties and charges of
every kind or nature (other than Landlord's income taxes), whether general,
special, ordinary or extraordinary, due at any time, or from time to time,
during the Term and any extensions thereof, in connection with the ownership,
leasing or operation of the Premises or of tho personal property and equipment
located therein or in connection therewith and (ii) any expenses incurred by
Landlord in contesting such taxes or assessments and/or the assessed value of
the Premises (the "Taxes"). All such Taxes shall be paid by Tenant before they
become delinquent. The Taxes for the first and last years of the Term and any
extension thereof will be appropriately prorated. If any special assessments
levied against the Premises are payable in installments, Tenant shall be
responsible only for those installments that are attributable to the period
during which Tenant has possession of the Premises. For purposes hereof, Taxes
for any year shall be Taxes that are due for payment or paid in that year,
rather than taxes that are assessed or become a lien or accrue during such year.
If at any time during the Term, the methods of taxation prevailing on the date
hereof shall be altered, such additional or substitute tax, assessment, levy,
charge or imposition shall be deemed to be included within the term "Taxes" for
the purposes hereof(Pounds) Landlord shall notify Tenant within a reasonable
time after Landlord is notified, in writing, of any proposed change in the
Taxes. If Tenant desires to contest or challenge a change in the Taxes, or
desires to appeal an adverse decision regarding tho same (collectively a "Tax
Challenge"), Tenant shall so notify Landlord in writing. If, within thirty (30)
days of ! Landlord's receipt of such notice from Tenant, Landlord notifies
Tenant in writing that Landlord does not desire to pursue Tax Challenge, Tenant
shall have the right to pursue a Tax Challenge. If Landlord fails to respond to
Tenant's notice within such 30-day period, Landlord shall be deemed to consent
to Tenants' pursuit of a Tax Challenge. Both Landlord and Tenant shall
reasonably cooperate with actions taken by the other party with respect to a
Tax.
3.2 ASSOCIATION DUES. If, at any time or from time to time during
----------------
the Term and any extensions thereof, the Premises are or shall be subject to
dues or assessments levied by an owners' association involving the Premises and
other nearby or contiguous real property, Tenant shall pay, before delinquent
and as Additional Rent, all such dues and assessments until the termination of
the Term and/or any extension of this Lease. If such dues and assessments
related to specific periods of time, Tenant will be responsible for any such
dues and assessments due during the Term and any extensions thereof.
SECTION 4: USE OF PREMISES: SECURITY DEPOSIT
---------------------------------
4.1 USE OF PREMISES. The Premises shall be used for the purpose(s)
---------------
set forth in Section 1.6 above and for no other purpose whatsoever. Tenant shall
not, at any time, use or occupy, or suffer or permit anyone to use or occupy,
the Premises, or do or permit anything to be done in the Premises, in any manner
that may (a) violate any Certificate of Occupancy for the Premises; (b) cause,
or be liable to cause, injury to the Premises or any equipment, facilities or
systems therein; (c) constitute a violation of the laws and requirements of any
public authority or the requirements of insurance bodies or the rules and
regulations of the Premises; (d) impair or tend to impair the character,
reputation or appearance of the Premises as a first-class property; and (e)
impair or tend to impair the proper and economic maintenance, operation, and
repair of the Premises and its equipment, facilities or systems.
4.2 SIGNAGE. Tenant may erect any sign permitted by applicable
-------
zoning ordinances and other applicable laws or regulations. Tenant shall remove
all signs of Tenant upon the expiration or earlier termination of this Lease and
immediately repair any damage to the Premises caused by, or resulting from, such
removal. Landlord agrees that it will not erect any signs on the Premises other
than to advertise the lease or sale of the Premises during the last 90 days of
the Lease Term.
4.3 SECURITY DEPOSIT. Landlord acknowledges receipt of the sum of
----------------
seventeen thousand eight hundred two dollars ($17,802.00) as set forth in
Section 1.9 above, in cash (the "Security"), representing security for the
performance by Tenant of the covenants and obligations hereunder. The Security
shall be held by Landlord or Agent, without interest, in favor of Tenant;
provided, however, that no trust relationship shall be deemed created thereby
and the Security may be commingled with other assets of Landlord. If Tenant
defaults in the performance of any of its covenants hereunder, Landlord or Agent
may, without notice to Tenant, apply the whole or any part of the Security, to
the extent required for the payment of any Rent or other sums due from Tenant
hereunder, in addition to any other remedies available to Landlord. In the event
Landlord or Agent shall so apply the Security, Tenant shall, upon demand,
immediately deposit with Landlord or Agent a sum equal to the amount so used.
Tenant's failure to do so shall constitute a default under this Lease. If Tenant
fully and faithfully complies with all the covenants hereunder, the Security (or
any balance thereof) shall be returned to Tenant within thirty (30) days after
the last to occur of (i) the date the Term expires or terminates, (ii) delivery
to Landlord of possession of the Premises and (iii) Landlord's or Agent's
inspection of the Premises and determination that all obligations of Tenant
under this Lease have been fully satisfied. Landlord may deliver the Security to
any purchaser of Landlord's interest in the Premises [or any Successor Landlord
(defined below), if applicable], and thereupon Landlord and Agent shall be
discharged from any further liability with respect to the Security. Each time
the Rent is increased, Tenant shall deposit additional funds with Landlord
sufficient to increase the Security to an amount which bears the same
relationship to the increased rent as the initial Security bore to the initial
Rent.
SECTION 5: CONDITION AND DELIVERY OF PREMISES
5.l CONDITION OF PREMISES. Tenant agrees that Tenant is familiar
---------------------
with the condition of the Premises, and Tenant hereby accepts the Premises on an
"AS-IS," "WHERE-IS" basis. Tenant acknowledges that neither Landlord nor Agent
nor any representative of Landlord has made any representation as to the
condition of the Premises or the suitability of the Premises for Tenant's
intended use. Tenant represents and warrants that Tenant has made its own
inspection of the Premises and is not relying on any representation of Landlord
with respect thereto. Neither Landlord nor Agent shall be obligated to make any
repairs, replacements or improvements of any kind or nature to the Premises
(whether structural or nonstructural and whether or not involving the roof of
the Building the Building's HVAC (defined below) system, the Premises' parking
lot, or any other component of the Premises) in connection with, or in
consideration of, this Lease, except (a) as set forth in Section 17 and 13.3,
and (b) with respectt to any repairs and improvements expressly and specifically
described in Exhibit "C" attached hereto ("Work Items"). Landlord agrees to
enforce, or cause Agent to enforce, upon Tenant's request, all manufacturer's or
contractor's warranties, if any, given in connection with the Work Items.
5.2 DELAY IN COMMENCEMENT. Landlord shall not be liable to
---------------------
Tenant if Landlord does not deliver possession of the Premises to Tenant on the
Commencement Date. The obligations of Tenant under the Lease shall not thereby
be affected, except that the Commencement Date shall be delayed until Landlord
delivers possession of the Premises to Tenant, and the Lease Term shall be
extended by a period equal to the number
2
<PAGE>
of days of delay in delivery of possession of the Premises to Tenant, plus the
number of days necessary to end the Lease Term on the last day of a month.
SECTION 6: SUBORDINATION: NOTICES TO SUPERIOR LESSORS AND MORTGAGEES:
----------------------------------------------------------
ATTORNMENT
----------
6.1 SUBORDINATION OF LEASE. This Lease, and all rights of Tenant
----------------------
hereunder, are subject and subordinate to all ground leases of the Premises now
or hereafter existing and to all mortgages or trust deeds or deeds of trust (all
of which are hereafter referred to collectively as "Mortgages"), that may now or
hereafter affect or encumber all or any portion of Landlord's interest in the
Premises. This subordination shall apply to each and every advance made, or to
be made, under such Mortgages; to all renewals, modifications, replacements and
extensions of such Mortgages; and to "spreaders" and consolidations of such
Mortgages. This Section 6.1 shall be self-operative and no further instrument of
subordination shall be required; however, in confirmation of such subordination,
Tenant shall from time to time execute, acknowledge and deliver any instrument
that Landlord may from time to time reasonably require in order to evidence or
confirm such subordination. If Tenant fails to execute, acknowledge or deliver
any such instrument within twenty (20) days after request therefor, Tenant
hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-
fact, which appointment is coupled with an interest, to execute and deliver any
such instruments for and on behalf of Tenant. Tenant acknowledges that this
Lease has been (and, in the future, may be) assigned by Landlord to a Superior
Mortgagee (defined below) as additional collateral security for the loans
secured by the Superior Mortgage (defined below) held by such Superior
Mortgagee. Any ground lease to which this Lease is subject and subordinate is
hereinafter referred to as a "Superior Lease," the lessor under a Superior Lease
is hereinafter referred to as a "Superior Lessor," and the lessee thereunder, a
"Superior Lessee"; and any Mortgage to which this Lease is subject and
subordinate is hereinafter referred to as a "Superior Mortgage," and the holder
of a Superior Mortgage is hereinafter referred to as a "Superior Mortgagee."
Notwithstanding the foregoing, this Lease may be made senior to the lien of any
Superior Mortgage, if and only if the Superior Mortgagee thereunder so requests.
6.2 NOTICE IN THE EVENT OF DEFAULT. In the event that Landlord
------------------------------
breaches or otherwise fails to timely perform any of its obligations under this
Lease, Tenant shall give written notice of such alleged breach or default to
Landlord and to each Superior Mortgagee and Superior Lessor whose name and
address shall previously have been furnished, in writing, to Tenant, whereupon
any or all of Landlord, a Superior Mortgagee or Superior Landlord or may remedy
or cure such breach or default within thirty (30) days following the giving of
such notice; provided, however, that said thirty (30)-day cure period shall be
automatically extended in the event that the breach or default cannot, by its
nature, be cured within thirty (30) days and one or more of Landlord, the
Superior Mortgagee or the Superior Lessor is diligently proceeding to cure said
default.
6.3 SUCCESSOR LANDLORD. If any Superior Lessor or Superior
------------------
Mortgagee shall succeed to the rights of Landlord hereunder, then, at the
request of such party (hereinafter referred to as "Successor Landlord"), Tenant
shall attorn to and recognize each Successor Landlord as Tenant's landlord under
this Lease and shall promptly execute and deliver any instrument such Successor
Landlord may reasonably request to further evidence such attornment. Tenant
hereby acknowledges that in the event of such succession, then from and after
the date on which the Successor Landlord acquires Landlord's rights and interest
under this Lease (the "Succession Date"), the rights and remedies available to
Tenant under this Lease with respect to any obligations of any Successor
Landlord shall be limited to the equity interest of the Successor Landlord in
the Premises; and the Successor Landlord shall not (a) be liable for any act,
omission or default of Landlord or other prior lessor under this Lease if and to
the extent that such act, omission or default occurs prior to the Succession
Date; (b) except as required under Sections 13.3 and 17 of this Lease, be
required to make or complete any tenant improvements or capital improvements, or
to repair, restore, rebuild or replace the Premises or any part thereof in the
event of damage, casualty or condemnation; (c) except as may be required to
satisfy the obligations of Landlord under Section 13.3 and 27 regarding
adjustment for payments for the Roof Repair if Tenant properly and timely
exercises its option to purchase the Project (pursuant to Section 27) prior to
the time Landlord has completed the Roof Replacement, be required to pay any
amounts to Tenant that are due and payable, under the express terms of this
Lease, prior to the Succession Date. Additionally, from and after the Succession
Date, Tenant's obligation to pay Rent (as provided in Sections 2 and 3 hereof)
shall not be subject to any abatement, deduction, act-off or counterclaim
against the Successor Landlord that arises as a result of, or due to, a default
of Landlord or any other lessor that occurs prior to the Succession Date.
Moreover, no Successor Landlord shall be bound by any advance payments of Rent
made prior to the calendar month in which the Succession Date occurs, nor by any
Security that is not actually delivered to, and received by, the Successor
Landlord, The Successor Landlord shall, subject to the terms and conditions
contained in this Lease, be bound by the terms and conditions of this Lease,
including, but not limited to the right of the Tenant to purchase the Project or
assign that right, and the right of the Tenant to renew this Lease pursuant to
Section 26 herein.
SECTION 7: QUIET ENJOYMENT
Subject to the provisions of this Lease, so long as Tenant pays all of
the Rent and performs all of its other obligations hereunder, Tenant shall not
be disturbed in its possession of the Premises by Landlord, Agent or any other
person lawfully claiming through or under Landlord. This covenant shall be
construed as a covenant running with the land of the Premises and is not a
personal covenant of Landlord.
SECTION 8: ASSIGNMENT. SUBLETTING AND MORTGAGING
8.1 SUBLETTING AND ASSIGNMENT. Tenant acknowledges that this
-------------------------
Lease and the Rent due under this Lease have been agreed to by Landlord in
reliance upon Tenant's reputation and creditworthiness and upon the continued
operation of the Premises by Tenant. Tenant shall not, without the prior written
consent of Landlord, which shall not be unreasonably withheld, (i) transfer,
pledge, mortgage or assign its rights under this Lease or any interest
hereunder; (ii) permit any assignment of this Lease by voluntary act, operation
of law or otherwise; (iii) sublet the Premises or any part thereof; or (iv)
permit the use of the Premises by any parties other than Tenant and its
affiliates, agents and employees. If Tenant desires to so sublet or assign its
right under the Lease, Tenant shall first seek such written consent of Landlord
by a written request therefor, setting forth such information as Landlord may
deem necessary, which request shall not be less than thirty (30) days, prior to
the proposal or desired effective date of such sublet or assignment. Tenant's
notice shall include the term of the proposed sublease and shall state the name
and address of the proposed assignee or subtenant. Landlord will not
unreasonably withhold its consent to Tenant's assignment of the lease or
subletting such space to the party identified in Tenant's notice so long as the
proposed Tenant meets the requires of Section 8.2 hereof and such assignee or
subtenant conducts operations that are compatible with the Premises.
3
<PAGE>
Further, any subletting or assignment shall not release or discharge Tenant of
or from any liability or obligation, whether part, present or future, under this
Lease, and Tenant shall continue to be fully liable thereunder. The subtenant(s)
or assignee(s) shall agree, in a form satisfactory to the Landlord to be
obligated for, comply with, and be bound by all of the terms, covenants,
conditions, provisions, and agreements of this Lease to the extent of the space
sublet or assigned, and Tenant shall deliver to Landlord promptly after
execution an executed copy of an agreement, in a form reasonably acceptable to
landlord, of compliance executed by each subtenant or assignee. Consent by
Landlord to any assignment of this Lease, or to any subletting of the Premises
shall not be deemed a waiver of Landlord's rights under this Section as to any
subsequent assignment or subletting.
8.2 PERMITTED TRANSFERS. A change of control or management to an
-------------------
entity that controls, is controlled by, or is under common control with Tenant
shall not be deemed a sublet or assignment under this Lease. The consent of the
Landlord to a transfer may not be unreasonably withheld if (a) as of the
effective date of the proposed sublet or assignment, the successor to Tenant has
a reputation, creditworthiness and net worth (computed in accordance with
generally accepted accounting principles), at least equal to the reputation,
creditworthiness and net worth of Tenant as of the Commencement Date of this
Lease, or Tenants (other than LaserMaster Corporation or a related entity)
occupying comparable premises in other buildings owned or operated by Landlord
in the same metropolitan area as the Premises and (b) proof satisfactory to
---
Landlord or such net worth and creditworthiness shall have been delivered to
Landlord at least ten (10) days prior to the effective date of any such
transaction. Any such permitted transferee shall execute and deliver to
Landlord any an all documentation reasonably required by Landlord in order to
evidence assignee's assumption of all obligations of Tenant hereunder.
SECTION 9: COMPLIANCE WITH LAWS
--------------------
If any license or permit is required for the conduct of Tenant's
business in the Premises, Tenant, at its expense, shall procure such license
prior to the Commencement Date, and shall maintain in good standing and renew
such license or permit. Tenant shall give prompt notice to Landlord of any
notice it receives of the violation of any law or requirement of any
governmental or administrative authority with respect to the Premises or the use
or occupation thereof. Tenant shall, at Tenant's expense, comply with all laws
and requirements of any governmental or administrative authorities that impose
any duty on Landlord, Agent or Tenant arising from Tenant's actions regarding
its business operations or use of the Premises, and Tenant shall pay all
expenses, fines and damages that are imposed upon any or all of Landlord, Agent,
any Superior Lessee, Superior Lessor or Superior Mortgagee, by reason or arising
out of Tenant's failure to fully and promptly comply with and observe the
provisions of this Section.
SECTION 10: INSURANCE
---------
10.1 TENANT ACTIVITIES. Tenant shall not violate, or permit the
-----------------
violation of, any condition imposed by any insurance policy issued in respect of
the Premises and shall not do, or permit anything to be done, or keep or permit
anything to be kept in the Premises, that would: (a) subject any or all of
Landlord, Agent, any Superior Lessor, any Superior Lessee or any Superior
Mortgagee to any liability or responsibility for personal injury or death or
property damage; (b) result in insurance companies of good standing refusing to
insure (or imposing special conditions on insuring) any or all of the Premises
or the property therein, in amounts reasonably satisfactory to Landlord; or (c)
result in the cancellation of (or the assertion of any defense by the insurer ,
in whole or in part, to claims under) any policy of insurance with respect to
any or all of the Premises or the property therein.
10.2 INSURANCE TO BE MAINTAINED BY TENANT. Tenant shall, at its
------------------------------------
sole cost and expense, at all times during the Term (and any extensions thereof)
obtain and pay for and maintain in full force and effect the insurance policy or
policies described in Exhibit D attached hereto. Certified copies of all
---------
insurance policies required pursuant to this Lease (or certificates thereof, in
form and substance acceptable to Landlord), shall be delivered to Landlord not
less than ten (10) days prior to the Commencement Date. If Tenant fails to
submit such policies or certificates to Landlord within the specified time, or
otherwise fails to obtain and maintain insurance coverages in accordance with
this Section 10.2, then Landlord, at Landlord's sole option, may, but shall not
be obligated to, procure such insurance set forth in Exhibit D, or some portion
thereof, on behalf of, and at the expense of, Tenant. Tenant shall reimburse
Landlord for such amounts upon demand, it being understood that set forth in
Exhibit D, or some portion thereof any such sums for which Tenant is required to
reimburse Landlord shall constitute Additional Rent.
SECTION 11: ALTERATIONS
-----------
11.1 PROCEDURAL REQUIREMENTS. Tenant may, from time to time, at its
-----------------------
expense, make alterations or improvements in and to the Premises (hereinafter
collectively referred to as "Alterations"), provided that Tenant first obtains
the written consent of Landlord in each instance. Landlord's consent to
Alterations shall not be unreasonably withheld, provided that: (a) the
Alterations are non-structural and the structural integrity of the Premises
shall not be affected; (b) the Alterations are to the interior of the Premises;
(c) the proper functioning of the mechanical, electrical, heating, ventilating,
air-conditioning ("HVAC"), sanitary and other service systems of the Premises
shall not be affected and the usage of such systems by Tenant shall not be
increased; (d) Tenant shall have appropriate insurance coverage reasonably
satisfactory to Landlord regarding the performance and installation of the
Alterations; (e) the Alterations shall conform with all other requirements of
this Lease; and (f) Tenant shall have provided Landlord with detailed plans (the
"Plans") for such Alterations in advance of requesting Landlord's consent.
Additionally, after obtaining Landlord's preliminary consent to the Plans, but
before proceeding with any Alterations, Tenant shall, at its expense, obtain all
necessary governmental permits and certificates for the commencement and
prosecution of Alterations and shall submit to Agent, for Landlord's written
approval, working drawings, plans and specifications, and all permits for the
work to be done and Tenant shall not proceed with such Alterations until it has
received said approval. After obtaining Landlord's approval to the Alterations,
Tenant shall give Landlord at least twenty 920) days prior written notice of the
commencement of any Alterations at the Premises, and Landlord may elect to
record and post notices of non-responsibility at the Premises.
11.2 PERFORMANCE OF ALTERATIONS. Tenant shall cause the
---------------------------
Alterations to be performed in compliance with all applicable permits, laws and
requirements of public authorities, and with Landlord's reasonable rules and
regulations or any other restrictions that Landlord or Agent may impose on the
Alterations. Tenant shall cause the Alterations to be diligently performed in a
good and workmanlike manner, using new materials and equipment at least equal in
quality and class to the standards for the Premises established by Landlord or
Agent. Alterations shall be performed by contractors first approved by landlord,
and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees
shall work in harmony, and not interfere with, Landlord and its agents and
contractors (if any). Tenant shall obtain all necessary permits and certificates
for final governmental approval of the Alterations and shall provide Landlord
with "as built" plans, copies of all construction contracts, governmental
permits and certificates and proof of payment for all labor and materials,
including, without limitation, copies of paid invoices and final lien waivers.
4
<PAGE>
11.3 LIEN PROHIBITION. Tenant shall pay when due all claims for
----------------
labor and material furnished to the Premises in connection with the Alterations.
Tenant shall not permit any mechanics or materialmen's liens to attach to the
Premises or Tenant's leasehold estate. Tenant, at its expense, shall procure the
satisfaction or discharge of record of all such liens and encumbrances within
fifteen (15) days after the filing thereof. In the event Tenant has not so
performed, Landlord may, at its option, pay and discharge such liens and Tenant
shall be responsible to reimburse Landlord, on demand, for all costs and
expenses incurred in connection therewith, together with interest thereon at the
rate set forth in Section 21.3 below, which expenses shall include reasonable
fees of attorneys of Landlord's choosing, and any costs in posting bond to
effect discharge or release of the lien as an encumbrance against the Premises.
Any sums due from Tenant pursuant to the preceding sentence shall constitute
Additional Rent under this Lease.
SECTION 12: LANDLORD'S AND TENANT'S PROPERTY
--------------------------------
12.1 LANDLORD'S PROPERTY. Subject to Section 12.2 below, all
-------------------
fixtures, machinery, equipment, improvements and appurtenances attached to, or
built into, the Premises at the commencement of, or during the Term, whether or
not placed there by or at the expense of Tenant, shall become and remain a part
of the Premises; shall be deemed the property of Landlord (the "Landlord's
Property"), without compensation or credit to Tenant; and shall not be removed
by Tenant unless Landlord requests their removal. Further, any personal property
in the Premises on the Commencement Date, movable or otherwise, unless installed
and paid for by Tenant, shall be and shall remain the property of Landlord and
shall not be removed by Tenant. In no event shall Tenant remove any of the
following materials or equipment without Landlord's prior written consent: any
power wiring or power panels, lighting or lighting fixtures, wall or window
coverings, carpets or other floor coverings, heaters, air conditioners or any
other heating or air conditioning equipment, fencing or security gates, or other
similar building operating equipment and decorations.
12.2 TENANT'S PROPERTY. All movable non-structural partitions,
-----------------
business and trade fixtures, machinery and equipment, communications equipment
and office equipment, whether or not attached to, or built into, the Premises,
which are installed in the Premises by, or for the account of, Tenant without
expense to Landlord and that can be removed without structural damage to the
Premises, and all furniture, furnishings and other articles of movable personal
property owned by Tenant and located in the Premises (collectively, the Tenant's
Property") shall be and shall remain the property of Tenant and may be removed
by Tenant at any time during the Term, provided Tenant repairs or pays the cost
of repairing any damage to the Premises resulting from the installation and/or
removal thereof.
12.3 REMOVAL OF TENANT'S PROPERTY. At or before the Expiration
----------------------------
Date, or the date of any earlier termination, Tenant, at its expense, shall
remove from the Premises all of Tenant's Property (except such items thereof as
Landlord shall have expressly permitted, in writing, to remain, which property
shall become the property of Landlord), and Tenant shall repair any damage to
the Premises resulting from any installation and/or removal of Tenant's
Property. Any other items of Tenant's Property that shall remain in the Premises
after the Expiration Date, or following an earlier termination date, may, at the
option of Landlord, be deemed to have been abandoned, and in such case, such
items may be retained by Landlord as its property or be disposed of by Landlord,
in Landlord's sole and absolute discretion and without accountability, at
Tenant's expense. Notwithstanding the foregoing, if Tenant is in default under
the terms of this Lease, it may remove Tenant's Property from the Premises only
upon the express written direction of Landlord.
SECTION 13: REPAIRS AND MAINTENANCE
13.1 TENANT REPAIRS AND MAINTENANCE. Tenant shall, at its expense,
------------------------------
throughout the Term, maintain and preserve, in first-class condition, the
Premises, the fixtures and appurtenances therein. Tenant shall also be
responsible for all structural and non-structural repairs and replacements,
interior and exterior, ordinary and extraordinary, in and to the Premises and
the facilities and systems thereof (including, but not limited to, the roof, the
Premises' parking lot, and the electrical, mechanical, HVAC, and plumbing
systems). Tenant shall enter into a preventative maintenance and service
contract with a reputable service provider for maintenance of the HVAC systems
of the Premises. Without limiting the generality of the foregoing, Tenant, at
its expense, shall promptly replace or repair all scratched, damaged, or broken
doors and glass in and about the Premises and floor coverings in the Premises
and repair and maintain all sanitary and electrical fixtures therein; provided,
however, that all replacement materials and methods of replacement shall be
approved in writing by Landlord prior to installation. Any repairs or
replacements required to be made by Tenant to the mechanical, electrical,
sanitary, HVAC, or other systems of the Premises shall be performed by
appropriately licensed contractors approved by Landlord, which approval shall
not be unreasonably withheld. All such repairs or replacements shall be subject
to the supervision and control of Landlord or Agent, and all repairs and
replacements shall be made with materials of equal or better quality than the
items being repaired or replaced.
13.2 TENANT EQUIPMENT. Tenant shall not place a load upon any
----------------
floor of the Premises that exceeds either the load per square foot that such
floor was designed to carry or that which is allowed by law. Business machines
and mechanical equipment belonging to Tenant that cause noise or vibrations that
may be transmitted to the structure of the Premises to such a degree as to be
objectionable or of concern to Landlord shall, at Tenant's expense, be placed
and maintained by Tenant in settings or cork, rubber or spring-type vibration
eliminators sufficient to eliminate such noise or vibration.
13.3 ROOF REPLACEMENT: REIMBURSEMENT OF LANDLORD'S ROOF EXPENSES.
-----------------------------------------------------------
Notwithstanding anything to the contrary contained herein, during months 25-36
of the Lease Term, Landlord agrees that it shall cause the roof of the Premises
to be replaced (the "Roof Replacement"). To the reimburse Landlord for the cost
and expense of replacing the roof, Tenant shall annually pay to landlord
(throughout the Lease Term and any extensions thereof), as Additional Rent, the
sum of $0.49 per square foot of rentable space in the Premises (which sum has
been based upon a fifteen (15) year amortization schedule at an interest rate of
11%, payable in equal monthly installments in addition to and with the Net Base
Rent set forth on Exhibit B of this Lease. Tenant acknowledges and agrees that
---------
Landlord's obligation pursuant to this Section 13.3 extends only to replacement
of the roof, it being acknowledged and agreed that all responsibility for the
maintenance and repair of the roof (both before and after the replacement
thereof) remain solely with Tenant, at its sole cost and expense.
5
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SECTION 14: UTILITIES
---------
14.1 PURCHASING UTILITIES. Tenant shall purchase all utility
--------------------
services from the utility or municipality providing such service; shall provide
for scavenger, cleaning and extermination services; and shall pay for such
services when payments are due. Tenant shall be solely responsible for the
repair and maintenance of any meters necessary in connection with such services.
Further, upon execution of the Lease, Tenant agrees that it shall deliver to
Landlord, the sum of $1367.15, which sum shall be for delinquent utility charges
that have accrued prior to the Commencement Date.
14.2 USE OF ELECTRICAL ENERGY BY TENANT. Tenant's use of electrical
----------------------------------
energy in the Premises shall not, at any time, exceed the capacity of (i) any of
the electrical conductors and equipment in or otherwise servicing the Premises;
or (ii) the Premises' heating, ventilating and air-conditioning ("HVAC")
systems.
SECTION 15: LANDLORD'S RIGHTS
-----------------
15.1 LANDLORD'S RIGHTS OF ACCESS. Landlord and its authorized
---------------------------
representative shall have the right to enter the Premises (a) upon prior notice
to Tenant at all reasonable times to inspect the Premises or the show the
Premises to prospective purchasers or tenants, provided any such entry is done
in a manner such as to avoid interference with the operations and use of the
Premises, and at the request of Tenant occurs in the presence of a
representative of Tenant, and (b) in the event of the existence of an Event of
Default with respect to Tenant's duty to repair or rebuild the Premises
hereunder, to make repairs, alterations, improvements or additions as Landlord
may reasonably deem necessary, including those to be performed by Tenant,
without the same constituting an eviction of Tenant in whole or in part, and
rent shall not abate a result of such entry. In such event, Landlord or its
agent shall be allowed to take all materials into and upon the Premises that may
be required in connection therewith without any liability to Tenant. Nothing
herein shall imply any duty upon the part of Landlord to do any work and shall
not be deemed a waiver of Tenant's default in failing to perform it. Landlord
may, in case of emergency, enter by master key, or may forcibly enter, without
rendering Landlord liable therefor. During the three (3) month period prior to
the expiration of the Lease Term, Landlord may place upon the Premises "For
Rent" signs and similar notices indicating the availability of the Premises.
15.2 OTHER LANDLORD RIGHTS. Landlord and Agent shall have the
---------------------
following rights exercisable, without notice and without liability to Tenant,
for damage or injury to persons, property or business and without being deemed
an eviction or disturbance of Tenant's use or possession of the Premises or
giving rise to any claim for setoff or abatement of Rent: (i) to designate
and/or approve, prior to installation, all types of signs ; (ii) to sell or
otherwise transfer the Premises and assign and pass through all of Landlord's
obligations hereunder to the new owner; (iii) to have pass keys, access cards,
or both, to the Premises; and (iv) to decorate, remodel, repair, alter or
otherwise prepare the Premises for reoccupancy at any time after Tenant vacates
or abandons the Premises for more than thirty (30) consecutive days or with no
intention of reoccupying the Premises.
SECTION 16: NON-LIABILITY AND INDEMNIFICATION
16.1 NON-LIABILITY. None of Landlord, Agent, Landlord Affiliates,
-------------
any other managing agent, Superior Parties, or their respective affiliates,
owners, partners, directors, officers, agents and employees shall be liable to
Tenant for any loss, injury, or damage, to Tenant or to any other person, or to
its or their property, irrespective of the cause of such injury, damage or loss,
unless caused by, or resulting from, the gross negligence of Landlord, Agent or
their respective agents, servants or employees in the operation or maintenance
of the Premises (subject, however, to the doctrine of comparative negligence in
the event of negligence on the part of Tenant or any of its contractors).
Further, none of Landlord, Agent, any other managing agent, Superior Parties, or
their respective partners, directors, officers, agents and employees shall be
liable (a) for any such damage caused by other persons in, upon or about the
Premises, or caused by operations in construction of any private, public or
quasi-public work; or (b) with respect to matters for which Landlord is liable,
for consequential or indirect damages purportedly arising out of any loss of use
of the Premises or any equipment or facilities therein by Tenant or any person
claiming through or under Tenant.
16.2 TENANT INDEMNIFICATION. Tenant hereby indemnifies, defends,
----------------------
and holds Landlord and all Landlord Affiliates harmless from and against any and
all claims, judgments, liens, causes of action, liabilities, damages, costs,
losses and expenses (including, but not limited to reasonable legal, engineering
and consulting fees of engineers, attorneys and consultants selected by
Landlord) arising from or in connection with (a) the conduct or management of
the Premises or any business therein, or any work or Alterations done, or any
condition created (other than by Landlord) in or about the Premises during
either or both of the Term and the period of time, if any, prior to the
Commencement Date that Tenant may have been given access to the Premises,
including any and all mechanics and other liens and encumbrances; (b) any act,
omission or negligence of Tenant or any of its subtenants or licensees or their
partners, directors, officers, agents, employees, invitees or contractors; (c)
any accident, injury or damage whatsoever (unless caused by Landlord's gross
negligence) occurring in, at or upon the Premises; (d) any breach or default by
Tenant in the full and prompt payment and performance of Tenant's obligations
under this Lease; (e) any breach by Tenant of any of its warranties and
representations under this Lease; and (f) any actions necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding or other
proceeding under the Bankruptcy Code. In case any action or proceeding is
brought against Landlord or any Landlord Affiliate by reason of any such claim,
Tenant, upon notice from any or all of Landlord, Agent or any Superior Party,
shall resist and defend such action or proceeding by counsel reasonably
satisfactory to, or selected by, Landlord or such Superior Lessor or Superior
Mortgagee. Tenant's obligations under this Section 16.2 shall survive the
termination of this Lease for any reason.
16.3 FORCE MAJEURE. The obligations of Tenant hereunder shall not
-------------
be affected, impaired or excused, and Landlord shall have no liability
whatsoever to Tenant, with respect to any act, event or circumstance arising out
of (a) Landlord's failure to fulfill, or delay in fulfilling any of its
obligations under this Lease by reason of labor dispute, governmental preemption
or property in connection with a public emergency or shortages of fuel,
supplies, or labor, or any other cause, whether similar or dissimilar, beyond
Landlord's reasonable control; or (b) any failure or defect in the supply,
quantity or character of utilities furnished to the Premises, or by reason of
any requirement, act or omission of any public UTILITY OR OTHERS SERVING THE
PREMISES BEYOND LANDLORD'S REASONABLE CONTROL. TENANT SHALL NOT HOLD LANDLORD OR
AGENT LIABLE FOR ANY LATENT DEFECT
6
<PAGE>
in the Premises, nor shall landlord be liable for injury or damage to person or
property caused by fire, or theft, ore resulting from the operation of heating
or air conditioning or lighting apparatus, or from falling plaster, or from
steam, gas electricity, water, rain, snow, ice or dampness, that may leak or
flow from any part of the Premises, or from the pipes, appliances or plumbing
work of the same. Tenant agrees that under no circumstances shall Landlord or
Agent be liable to Tenant or any third party for any loss of, destruction of,
damage to or shortage of any property; including, but not limited to, Tenant's
Property.
16.4 LIMITATION OF LIABILITY. Notwithstanding anything to the
-----------------------
contrary contained in this Lease, the liability of Landlord (and of any
Successor Landlord hereunder) to Tenant shall be limited to the fair market
value of the Premises as of the date of such default. In addition, Tenant
acknowledges that Agent is acting solely in its capacity as agent for Landlord
and, shall not be liable for any obligations, liabilities, losses or damages
arising out of or in connection with this Lease, all of which are expressly
waived by Tenant.
SECTION 17: DAMAGE OR DESTRUCTION
---------------------
17.1 NOTIFICATION. Tenant shall give prompt notice to Landlord and
------------
Agent of (a) any occurrence in or about the Premises for which Landlord or Agent
might be liable, (b) any fire or other casualty in the Premises, (c) any damage
to, or defect in, the Premises, for the repair of which Landlord or Agent might
be responsible, and (d) any damage to or defect in any part or appurtenance of
the Premises' sanitary, electrical. HVAC, elevator or other systems located in
or passing through the Premises or any part thereof.
17.2 REPAIR PROVISIONS. Subject to the provisions of Section 17.4
-----------------
below, if the Premises are damaged by fire or other insured casualty, Landlord
shall repair or cause Agent to repair the damage and restore and rebuild the
Premises (except for Tenant's Property) with reasonable dispatch after (a)
notice to it of the damage or destruction and (b) the collection of the
insurance proceeds attributable to such damage, and Tenant shall repair the
damage to and restore and repair Tenant's Property, with reasonable dispatch
after such damage or destruction. Such work by Tenant shall be deemed
Alterations for the purposes of this Lease.
17.3 RENTAL ABATEMENT. If (a) the Premises are damaged by fire or
----------------
other casualty thereby causing the Premises to be inaccessible or (b) the
Premises are partially damaged by fire or other casualty, the Rent shall be
abated during the period after the loss and until such repairs are reasonably
complete to the extent that the Premises are not reasonably tenantable by
Tenant.
17.4 TOTAL DESTRUCTION. If the Premises shall be totally destroyed
-----------------
by fire or other casualty, or if the Premises shall be so damaged by fire or
other casualty that (in the opinion of a reputable contractor or architect
designated by Landlord, or in the event the Landlord does not act in a
reasonable period of time, in the opinion of a reputable contractor or architect
designated by Tenant) (i) its repair or restoration requires more than ninety
(90) days to complete from and after Landlord receives insurance proceeds
attributable to such damage, or (ii) such repair or restoration requires the
expenditure of more than thirty percent (30%) of the full insurable value of the
Premises immediately prior to the casualty or (iii) the damage is less than the
amount stated in (ii) above, but occurs during the last two (2) years of Lease
Term, Landlord and Tenant shall each have the option to terminate this Lease
within five (5) days after said contractor or architect delivers written notice
of its opinion to Landlord and Tenant, but in all events prior to the
commencement of any restoration of the Premises by Landlord. In such event, the
termination shall be effective as of the date on which the casualty occurs. If
(A) any Superior Party or other party entitled to the insurance proceeds fails
to make such proceeds available to Landlord in an amount sufficient for
restoration of the Premises, or (B) the issuer of any casualty insurance
policies on the Premises fails to make available to Landlord sufficient proceeds
for restoration of the Premises, then Landlord may, at Landlord's sole option,
terminate this Lease, effective as of the date of such casualty, by giving
Tenant written notice to such effect within one hundred eighty (180) days after
the date of the casualty. For purposes of this Section 17.4 only, "full
insurable value" shall mean replacement cost, less tho cost of footings,
foundations and other structures below grade.
17.5 REPAIR OR RESTORATION. Subject to the provisions of Section
---------------------
17.4 above, Tenant shall not be entitled to terminate this Lease and no damages,
compensation or claim shall be payable by Landlord for purported inconvenience,
loss of business or annoyance arising from any repair or restoration of any
portion of the Premises pursuant to this Section. Landlord or Agent shall use
its diligent, good faith efforts to make such repair or restoration promptly and
in such manner as not to unreasonably interfere with Tenant's use and occupancy
of the Premises, but Landlord or Agent shall not be required to do such repair
or restoration work except during normal business hours of business days.
17.6 LIABILITY OF TENANT. Notwithstanding any of the foregoing
-------------------
provisions of this Section, if by reason of any act or omission on the part of
Tenant or any of its subtenants or its or their partners, directors, officers,
servants, employees, agents or contractors, Landlord, any Superior Party, or
other appropriate party shall be unable to collect all of the insurance proceeds
(including, without limitation, rent insurance proceeds) applicable to damage or
destruction of the Premises by fire or other casualty (the "Insurance
Proceeds"), then, without prejudice to any other remedies that may be available
against Tenant, there shall be no abatement or reduction of the Rent
notwithstanding lack of usability. Further, and to the extent that, as a result
of or due to or because of any act or omission by any or all of Tenant, its
agents, employees, invitees and representatives, Landlord, any Superior Party or
any other appropriate party is unable to collect all of the Insurance Proceeds,
then Tenant shall be liable to Landlord for the payment of an amount equal to
that portion of the Insurance Proceeds that Landlord, any Superior Party or any
other appropriate party is unable to collect.
SECTION 18: EMINENT DOMAIN
--------------
18.1 TOTAL CONDEMNATION. If, in Landlord's opinion, the whole of
------------------
the Premises, or if any part of the Premises that materially affects Tenant's
use and occupancy of the Premises, shall be taken by condemnation or in any
other manner for any public or quasi-public use or purpose, this Lease and the
term and estate hereby granted shall terminate as of the date of vesting of
title on such taking (herein called "Date of the Taking"), and the Rent shall be
prorated and adjusted as of such date.
7
<PAGE>
18.2 AWARD. Landlord shall be entitled to receive the entire award
-----
or payment in connection with any taking; provided, however, Tenant shall have
the right to separately pursue, against the condemning authority, an award in
respect of the loss, if any, to leasehold improvements or other interest of
Tenant in the Premises paid for by Tenant, without any credit or allowance from
Landlord and further provided that such separate award does not diminish or
interfere with Landlord's pursuit of its own award.
18.3 COMPENSATION TO TENANT FOR TEMPORARY USE. If the temporary
----------------------------------------
use or occupancy of all or any part of the Premises shall be taken by
condemnation or in any other manner for any public or quasi-public use or
purpose during the Term, Tenant shall be entitled, except as hereinafter set
forth, to receive that portion of the award or payment for such taking which
represents compensation for the use and occupancy of the Premises, for the
taking of Tenant's Property and for moving expenses, and Landlord shall be
entitled to receive that portion that represents reimbursement for the cost of
restoration of the Premises. This Lease shall be and remain unaffected by such
taking, and Tenant shall continue to be responsible for all of its obligations
hereunder insofar as such obligations are not affected by such taking and shall
continue to pay, in full, the Rent when due. If the period of temporary use or
occupancy shall extend beyond the Expiration Date, that part of the award that
represents compensation for the use and occupancy of the Premises (or a part
thereof) shall be prorated between Landlord and Tenant so that Tenant shall
receive so much thereof as represents the period up to and including such
Expiration Date and Landlord shall receive so much thereof as represents the
period after such Expiration Date. All monies paid as, or as part of, an award
for temporary use and occupancy for a period beyond the date to which the Rent
have been paid shall be received, held and applied by Landlord as a trust fund
for payment of the Rent becoming due.
18.4 PARTIAL OR TEMPORARY TAKING. Subject to the rights of any
----------------------------
Superior Mortgagee or Superior Lessor, and other parties having rights to
condemnation proceeds, in the event of any taking of less than the whole of the
Premises, which taking does not result in termination of this Lease, or in the
event of a taking for a temporary use or occupancy of all or any part of the
Premises, or other partial taking of the Premises, that does not result in a
termination of this Lease: (a) Landlord, at its expense, and provided that a
condemnation award or awards shall be sufficient for the purpose, shall proceed
with reasonable diligence to repair the remaining parts of the Premises (other
than those parts of the Premises that are Tenant's Property) to substantially
their former condition, to the extent that the same is feasible (subject to
those changes which Landlord reasonably deems desirable, and to building and
other governmental codes and regulations) and so as to constitute a complete and
tenantable Premises, and (b) Tenant, at its expense, and whether or not any
award or awards shall be sufficient for the purpose, shall proceed with
reasonable diligence to repair Tenant's Property, to substantially its former
condition, to the extent feasible, subject to such reasonable changes as
Landlord and Tenant shall agree upon, in writing. Such work by Tenant shall be
deemed Alterations. Furthermore, in the event of a partial taking of the
Premises that does not result in a termination of this Lease, the Base Rent due
hereunder shall be reduced in a proportionate amount, based upon the proportion
that the area that has been taken bears to the total area of the Premises. Such
reduction shall be effective from the date on which the partial taking occurs
until the date, if any, on which the partial taking terminates and the Premises
have been restored in accordance with the terms of this Lease.
SECTION 19: SURRENDER AND HOLDOVER
----------------------
On the last day of the Term, or upon any earlier termination of this
lease, or upon any re-entry by Landlord upon the Premises, (a) Tenant shall quit
and surrender the Premises to Landlord "broom-clean" and in good order,
condition and repair, except for ordinary wear and tear and such damage or
destruction as Landlord is required to repair or restore under this Lease, and
(b) Tenant shall remove all of Tenant~s Property therefrom, except as otherwise
expressly provided in this Lease. The obligations imposed under the preceding
sentence shall survive the termination or expiration of this Lease. If Tenant
remains in possession after the Expiration Date hereof or after any earlier
termination date of this Lease or of Tenant's right to possession: (a) Tenant
shall be deemed a tenant-at-will; (b) Tenant shall pay one hundred fifty percent
(150%) of the Rent last prevailing hereunder, and also shall pay all direct
damages sustained by Landlord, by reason of such remaining in possession after
the expiration or termination of this Lease; (c) there shall be no renewal or
extension of this Lease by operation of law; and (d) the tenancy-at-will may be
terminated upon thirty (30) days' notice from Landlord; or, at the sole option
of Landlord expressed by written notice to Tenant, but not otherwise, such
holding over shall constitute a renewal of this Lease for a period of one (1)
year on the same terms and conditions as provided in this Lease. The provisions
of this Section 19 shall not constitute a waiver by Landlord of any re-entry
rights of Landlord provided hereunder or by law.
SECTION 20: EVENTS OF DEFAULT
-----------------
20.1 BANKRUPTCY OF TENANT. It shall be a default by Tenant under
---------------------
this Lease if Tenant makes an assignment for the benefit of creditors, or files
a voluntary petition under any state or federal bankruptcy or insolvency law, or
an involuntary petition alleging an act of bankruptcy or insolvency is filed
against Tenant under any state or federal bankruptcy or insolvency law, or
whenever a petition is filed by or against Tenant under the reorganization
provisions of the United States Bankruptcy Code or under the provisions of any
law or like import, and not dismissed or set aside within 20 days thereafter, or
whenever a petition shall be filed by Tenant under the arrangement provisions of
the United States Bankruptcy Code or similar law, or whenever a receiver of
Tenant, or of, or for, the property of Tenant shall be appointed, or Tenant
admits it is insolvent or is not able to pay its debts as they mature.
20.2 DEFAULT PROVISIONS. Each of the following shall constitute
------------------
a default by Tenant under this Lease: (a) if Tenant fails to pay Rent or any
other payment when due hereunder; or (b) if Tenant fails, whether by action or
inaction, to timely comply with, or satisfy, any or all of the obligations
imposed on Tenant under this Lease for a period of thirty (30) days after
Landlord's delivery to Tenant of written notice of such default under this
subsection 20.2(b); provided, however, that if the default cannot, by its
nature, be cured within such thirty (30) day period, but Tenant commences and
diligently pursues a cure of such default promptly within the initial thirty
(30) day cure period, then Landlord shall not exercise its remedies under
Section 21 unless such default remains uncured for more than sixty (60) days
after Landlord's initial delivery to Tenant of notice of such default.
8
<PAGE>
SECTION 21: REMEDIES
--------
21.1 LANDLORD'S CURE RIGHTS UPON DEFAULT OF TENANT. If Tenant
---------------------------------------------
defaults in the performance of any of its obligations under this Lease,
Landlord, without thereby waiving such default, may (but shall not be obligated
to) perform the same for the account, and at the expense of, Tenant, upon
compliance with any notice requirements and cure periods set forth in Subsection
20.2.
21.2 LANDLORD'S REMEDIES. In the event of any default by Tenant
-------------------
under this Lease, Landlord, at its option, and after the proper notice and cure
period, if any, as provided in Section 20.2 has expired, without further notice
or demand to Tenant, may, in addition to all other rights and remedies provided
in this Lease, or otherwise at law or in equity; (a) terminate this Lease and
Tenant's right of possession of the Premises, and recover all damages to which
Landlord is entitled under law, specifically including, without limitation,
accelerated Rent attributable to the balance of the Term, and all Landlord's
expenses of reletting the Premises (including repairs, alterations,
improvements, additions, decorations, legal fees and brokerage commissions), or
(b) or terminate Tenant's right of possession of the Premises without
terminating this Lease; provided, however, that Landlord shall use its
reasonable efforts, whether Landlord elects to proceed under Subsections (a) or
(b) above, to relet the Premises, or any part thereof for the account of Tenant,
for such rent and term and upon such terms and conditions as are acceptable to
Landlord. If Landlord shall elect to pursue its rights and remedies under
Subsection (b), then Landlord shall at any time have the further right and
remedy to rescind such election and pursue its rights and remedies under
Subsection (a), including but not limited to such time as Landlord has obtained
a tenant to relet the Premises, which, in Landlord's reasonable judgment, is a
suitable tenant. For purposes of such reletting, Landlord is authorized to
decorate, repair, alter and improve the Premises to the extent deemed necessary
by Landlord, in its sole and absolute discretion. If Landlord fails to relet the
Premises or if the Premises are relet and a sufficient sum is not realized
therefrom, after payment of all Landlord's expenses of reletting (including
repairs, alterations, improvements, additions, decorations, legal fees and
brokerage commissions), to satisfy the payment, when due, of Rent reserved under
this Lease for any monthly period, then Tenant shall pay to Landlord a sum equal
to the accelerated amount of Rent due under this Lease attributable to the
balance of the Term, or if the Premises have been relet, Tenant shall pay any
such deficiency monthly. Tenant agrees that Landlord may file suit to recover
any sums due to Landlord hereunder from time to time and that such suit or
recovery of any amount due Landlord hereunder shall not be any defense to any
subsequent action brought for any amount not theretofore reduced to judgment in
favor of Landlord. In the event Landlord elects, pursuant to Subsection (b) of
this Section 21.2, to terminate Tenant's right of possession only, without
terminating this Lease, Landlord may, at Landlord's option, enter into the
Premises, remove Tenant's Property, Tenant's signs and other evidences of
tenancy, and take and hold possession thereof as provided in Section 19 hereof;
provided, however, that such entry and possession shall not terminate this Lease
or release Tenant, in whole or in part, from Tenant's obligation to pay the Rent
reserved hereunder for the full Term, or from any other obligation of Tenant
under this Lease. Any and all property that may be removed from the Premises by
Landlord pursuant to the authority of the Lease or of law, to which Tenant is or
may be entitled, may be handled, removed or stored by Landlord at the risk, cost
and expense of Tenant, and in no event or circumstance shall Landlord be
responsible for the value, preservation or safekeeping thereof. Tenant shall pay
to Landlord, upon demand, any and all expenses incurred in such removal and all
storage charges against such property so long as the same shall be in Landlord's
possession or under Landlord's control. Any such property of Tenant not retaken
from storage by Tenant within thirty (30) days after the end of the Term however
terminated, shall be conclusively presumed to have been conveyed by Tenant to
Landlord under this Lease as in a bill of sale, without further payment or
credit by Landlord to Tenant. Tenant hereby grants to Landlord a first lien upon
the interest of Tenant under this Lease to secure the payment of moneys due
under this Lease, which lien may be enforced in equity; and Landlord shall be
entitled as a matter of right to have a receiver appointed to take possession of
the Premises and relet the same under order of court.
21.3 ADDITIONAL RIGHTS OF LANDLORD. Any and all costs, expenses
------------------------------
and disbursements, of any kind or nature, incurred by Landlord or Agent in
connection with the enforcement of any and all of the terms and provisions of
this Lease, including reasonable attorneys' fees (through all appellate
proceedings), shall be due and payable (as Additional Rent) upon Landlord's
submission of an invoice therefor. All sums advanced by Landlord or Agent on
account of Tenant under this Section, or pursuant to any other provision of this
Lease, and all Rent, if delinquent or not paid by Tenant and received by
Landlord when due hereunder, shall bear-interest at the rate of five percent
(5%) per annum above the "prime" or "reference" or "base" rate of interest
publicly announced as such, from time to time, by The First National Bank of
Chicago, from the due date thereof until paid, and such interest shall be and
constitute Additional Rent and be due and payable upon Landlord's or Agent's
submission of an invoice therefor. Suit or suits for the recovery of such
damages, or any installments thereof, may be brought by Landlord from time to
time at its election, and nothing contained herein shall be deemed to require
Landlord to postpone suit until the Expiration Date, nor limit or preclude
recovery by Landlord against Tenant of any sums or damages to which, in addition
to the damages particularly provided above, Landlord may lawfully be entitled by
reason of any default hereunder by Tenant. The various rights, remedies and
elections of Landlord reserved, expressed or contained herein are cumulative and
no one of them shall be deemed to be exclusive of the others or of such other
rights, remedies, options or elections as are now or may hereafter be conferred
upon Landlord by law. Landlord is hereby granted a valid security interest to
secure payment of all Rent becoming due hereunder and to secure payment of any
loss or damage due to any default by Tenant hereunder upon all of Tenant's
Property and any other personal property of Tenant that may now or hereafter be
installed or placed in the Premises and upon Landlord's request, Tenant shall
provide such UCC statements as Landlord may require.
21.4 EVENT OF BANKRUPTCY. In addition to, and in no way limiting
-------------------
the other remedies set forth herein, Landlord and Tenant agree that if Tenant
ever becomes the subject of a voluntary or involuntary bankruptcy,
reorganization, composition, or other similar type proceeding under the federal
bankruptcy laws, as now enacted or hereinafter amended, then:
(a) "Adequate assurance of future performance" by Tenant and/or
any assignee of Tenant pursuant to Bankruptcy Code Section 365 will
include (but not be limited to) payment of an additional/new security
deposit in the amount of three (3) times the ten- current Rent payable
hereunder.
(b) Any person or entity to which this Lease is assigned
pursuant to the provisions of the bankruptcy Code, shall be deemed,
without further act or deed, to have assumed all of the obligations of
Tenant arising under this Lease on and after the effective date of
such assignment. Any such assignee shall, upon demand by Landlord,
execute and deliver to Landlord an instrument confirming such
assumption of Liability.
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(c) Notwithstanding anything in this Lease to the contrary, all
amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated as "Rent", shall
constitute "rent" for the purposes of Section 502(b)(6) of the
Bankruptcy Code.
(d) If this Lease is assigned to any person or entity pursuant
to the provision of the Bankruptcy Code, any and all monies or other
considerations payable or otherwise to be delivered to Landlord or
Agent (including Rent and other amounts hereunder), shall be and
remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the bankruptcy estate of Tenant. Any and all
monies or other considerations constituting Landlord's property under
the preceding sentence not paid or delivered to Landlord or Agent
shall be held in trust by Tenant or Tenant's bankruptcy estate for the
benefit of Landlord and shall be promptly paid to or turned over to
Landlord.
SECTION 22: BROKER
------
Tenant covenants, warrants and represents that the broker set forth in
Section 1.8(A) was the only broker to represent Tenant in the negotiation of
this Lease ("Tenant's Broker"). Landlord covenants, warrants and represents that
the broker set forth in Section 1.8(B) was the only broker to represent Landlord
in the negotiation of this Lease ("Landlord Broker"). Landlord shall be solely
responsible for paying the commissions of Landlord's Broker. Each party agrees
to and hereby does defend, indemnify and hold the other harmless against and
from any brokerage commissions or finder's fees or claims therefor by a party
(other than Tenant's Broker and Landlord's Broker) claiming to have dealt with
the indemnifying party and all costs, expenses and liabilities in connection
therewith, including, without limitation, reasonable attorneys' fees and
expenses, for any breach of the foregoing. The foregoing indemnification shall
survive the termination of this Lease for any reason.
SECTION 23: ESTOPPEL CERTIFICATES
---------------------
Tenant shall, from time to time and within ten (10) days after any
request by Landlord, execute and deliver to Landlord (and to any existing or
prospective mortgage lender, ground lessor, or purchaser designated by
Landlord), a statement: (i) certifying that this Lease is unmodified and in full
force and effect (or if there have been modifications, that the same is in full
force and effect as modified and stating the modifications); (ii) certifying the
dates to which the Rent has been paid; (iii) stating whether Landlord is in
default in performance of any of its obligations under this Lease, and, if so,
specifying each such default; (iv) stating whether any event has occurred which,
with the giving of notice or passage of time, or both, would constitute such a
default, and, if so, specifying each such event; and (v) stating whether any
rights of Tenant (e.g. options) have been waived. Any such statement delivered
pursuant hereto shall be deemed a representation and warranty to be relied upon
by the party requesting the certificate and by others with whom Landlord may be
dealing, regardless of independent investigation. Tenant also shall include in
any such statements such other information concerning this Lease as Landlord or
Agent may reasonably request including, but not limited to, the amount of Rent
under this Lease, and whether Landlord has completed all (if any) improvements
to the Premises required under this Lease.
SECTION 24: HAZARDOUS SUBSTANCES
--------------------
24.1 DEFINITIONS. For purposes of this Section 24, "Hazardous
-----------
Substance" means any matter regulated under the Resources Conservation Recovery
Act ("RCRA"), 42 U.S.C. Section 6901 et seq., the Comprehensive Environmental
-- ---
Response, Compensation and Liability Act ("CERCLA"), 52 U.S.C. Section 9601 et
--
seq., applicable state or local law, or any substance or matter giving rise to
- ---
liability under common law theory based on nuisance or strict liability (the
foregoing laws being referred to herein as "Environmental Laws"). Tenant shall
not bring into or knowingly permit the existence of any Hazardous Substance on
the Project (as defined in Section 27 herein) other than as permitted by
applicable Environmental Laws. If Tenant discovers the presence of any Hazardous
Substance on or in the Project (as defined in Section 27 herein) which is in
violation of any Environmental Laws, Tenant shall promptly give Landlord notice
thereof. If, during Tenant's occupancy, or at any time throughout the Lease
Term, the existence of a Hazardous Substance is discovered, (a) Tenant shall
remove such Hazardous Substance and dispose of it as required by any and all
applicable Environmental Laws, or (b) Landlord, if it is advised to remove such
Hazardous Substance itself to protect or minimize against any liability to
Landlord as a result of the presence of any Hazardous Substance by no less than
ten (10) days' notice to Tenant, may elect to remove any Hazardous Substance and
dispose of it as required by any Environmental Laws, in which case Tenant shall
pay the entire cost of such disposal within twenty (20) days after receipt of a
statement for such cost by Landlord, such amount to be treated as Additional
Rent. If any governmental authority and/or any other regulatory agency having
authority or jurisdiction over the Premises ("Governmental Authority"), shall
require any remedial action or other response with respect to the Project as the
result of any Hazardous Substance brought into or permitted by Tenant on or in
the Premises, Tenant shall notify Landlord of such action or response and shall,
with the prior written approval of Landlord, be responsible for satisfying the
requirements of the applicable Governmental Authority.
24.2 TENANT INDEMNITY. Tenant hereby indemnifies, defends, protects
----------------
and holds Landlord, its partners, and the officers and directors of such
partners, harmless from any and all claims, causes of action, damages,
penalties, costs and expenses (including attorneys' fees, consultant fees and
related expenses) which may be asserted against or incurred by Landlord, at any
time and from time to time, resulting from the failure by Tenant to fulfill its
obligations under Section 24 hereof. Tenant's duty to indemnify, defend, protect
and hold harmless includes, but is not limited to, proceedings or actions
commenced by any Governmental Authority.
24.3 SURVIVAL. The foregoing covenants and indemnifications shall
--------
be deemed continuing covenants and indemnifications for the benefit of Landlord,
Tenant and their respective successors and assigns and shall survive the
expiration of the Lease Term or earlier termination of this Lease.
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SECTION 25: MISCELLANEOUS
25.1 MERGER. All prior understandings and agreements between the
------
parties are merged in this Lease, which alone fully and completely expresses the
agreement of the parties. No agreement shall be effective to modify this Lease,
in whole or in part, unless such agreement is in writing, and is signed by the
party against whom enforcement of said change or modification is sought.
25.2 NOTICES. Any notice required to be given by either party
-------
pursuant to this Lease, shall be in writing and shall be deemed to have been
properly given, rendered or made only if personally delivered or if sent by
Federal Express or other comparable commercial overnight delivery service,
addressed to the other party at the addresses set forth below (or to such other
address as Landlord or Tenant may designate to each other from time to time by
written notice), and shall be deemed to have been given, rendered or made on the
day so delivered or on the first business day after having been deposited with
the courier service:
If to Landlord: First Industrial, L.P.
150 North Wacker Drive, Suite 150
Chicago, Illinois 60606
Attn: Michael W. Brennan
With copies to: First Industrial, L.P.
7615 Golden Triangle Drive. Suite N
Eden Prairie, MN 55344
Attn: Duane Lund
Barack, Ferrazzano, Kirschbaum & Perlman
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Attn: Howard Nagelberg and Suzanne Bessette-Smith
If to Tenant: LaserMaster Corporation
6900 Shady Oak Road
Eden Prairie, MN 55344
Attn: Melvin Masters
25.3 NON-WAIVER. The failure of either party to insist, in any one
----------
or more instances, upon the strict performance of any one or more of the
obligations of this Lease, or to exercise any election herein contained, shall
not be construed as a waiver or relinquishment for the future of the performance
of such one or more obligations of this Lease or of the right to exercise such
election, but the Lease shall continue and remain in full force and effect with
respect to any subsequent breach, act or omission. The receipt and acceptance by
Landlord or Agent of Rent with knowledge of breach by Tenant of any obligation
of this Lease shall not be deemed a waiver of such breach.
25.4 LEGAL COSTS. Any party in breach or default under this Lease
-----------
(the "Defaulting Party") shall reimburse the other party (the "Nondefaulting
Party") upon demand for any costs or expenses that the Nondefaulting Party
incurs in connection with the breach or default, regardless whether suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, in the event of litigation, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as attorneys' fees and costs, which sum shall be paid by the losing party.
Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection
with Tenant's request for Landlord's consent under provisions of this Lease
governing assignment and subletting, or in connection with any other act which
Tenant proposes to do and which requires Landlord's consent.
25.5 PARTIES BOUND. Except as otherwise expressly provided for
-------------
in this Lease, this Lease shall be binding upon, and inure to the benefit of,
the successors and assignees of the parties hereto. Tenant hereby releases
Landlord named herein from any obligations of Landlord for any period subsequent
to the conveyance and transfer of Landlord's ownership interest in the Premises.
In the event of such conveyance and transfer, Landlord's obligations shall
thereafter be binding upon each transferee (whether Successor Landlord or
otherwise). No obligation of Landlord shall arise under this Lease until the
instrument is signed by, and delivered to, both Landlord and Tenant.
25.6 RECORDATION OF LEASE. Tenant shall not record or file this
--------------------
Lease (or any memorandum hereof) in the public records of any county or state.
25.7 SURVIVAL OF OBLIGATIONS. Upon the expiration or other
-----------------------
termination of this Lease, neither party shall have any further obligation or
liability to the other except as otherwise expressly provided in this Lease and
except for such obligations as, by their nature or under the circumstances, can
only be, or by the provisions of this Lease, may be performed after such
expiration or other termination. Tho provisions of Sections 2, 3, 12, 16, 19,
22, and 24 shall survive any termination of this Lease.
25.8 GOVERNING LAW; CONSTRUCTION. This Lease shall be governed by
---------------------------
and construed in accordance with the laws of the state in which the Premises are
located. If any provision of this Lease shall be invalid or unenforceable, the
remainder of this Lease shall not be affected but shall be enforced to the
extent permitted by law. The captions, headings and titles in this Lease are
solely for convenience of reference and
11
<PAGE>
shall not affect its interpretation. This Lease shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Lease to be drafted. Each covenant, agreement, obligation, or other
provision of this Lease to be performed by Tenant, shall be construed as a
separate and independent covenant of Tenant, not dependent on any other
provision of this Lease. All terms and words used in this Lease, regardless of
the number or gender in which they are used, shall be deemed to include any
other number and any other gender as the context may require.
25.9 TIME. Time is of the essence of this Lease. If the time for
----
performance hereunder falls on a Saturday, Sunday or a day that is recognized as
a holiday in the state in which the Premises are located, then such time shall
be deemed extended to the next day that is not a Saturday, Sunday or holiday in
said state.
25.10 AUTHORITY OF TENANT. If Tenant is a corporation,
-------------------
partnership, association or any other entity, it shall deliver to Landlord,
concurrently with the delivery to Landlord of an executed Lease, certified~ed
resolutions of Tenant's directors or other governing person or body (i)
authorizing execution and delivery of this Lease and the performance by Tenant
of its obligations hereunder and (ii) certifying the authority of the party
executing the Lease as having been duly authorized to do so.
25.11 JOINT AND SEVERAL LIABILITY. All parties signing this
---------------------------
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant hereunder.
25.12 COUNTERPART EXECUTION. This Lease may be executed in
---------------------
counterpart and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument.
25.13 RIDERS. All Riders and Exhibits attached hereto and executed
------
(or initialed) both by Landlord and Tenant shall be deemed to be a part hereof
and hereby incorporated herein.
25.14 WAIVER OF TRIAL BY JURY. THE LANDLORD AND THE TENANT, TO THE
-----------------------
FULLEST EXTENT THAT THEY MAY LAWFULLY DO SO, HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION OR PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY COURT ACTION BROUGHT BY
ANY PARTY TO THIS LEASE WITH RESPECT TO THIS LEASE, THE PREMISES, OR ANY OTHER
MATTER RELATED TO THIS LEASE OR THE PREMISES.
SECTION 26: OPTION TO RENEW
---------------
The Lease Term may be extended once, at the option of Tenant, for the
period up to and including December 31, 2010 (the "Extended Term"), upon the
following terms and conditions:
(a) Such option to extend shall be exercised, if at all, by
Tenant's delivery of written notice to Landlord (an "Extension Notice") on or
before, but not later than, the date that is ninety (90) days prior to the
Expiration Date.
(b) The Extended Term shall be on the same terms, covenants and
conditions of this Lease and Tenant shall continue to pay Net Base Rent and
Additional Rent, as such terms are defined in this Lease. Tenant shall not be
permitted to extend this Lease beyond the Extended Term. In the event that this
Lease is terminated during the original Term, for any reason whatsoever, Tenant
shall have no further rights with respect to this Section 26 and the Extended
Term.
(c) It shall be a condition of Tenant's right to exercise Tenant's
option to extend the Term of this Lease that, at the time that Tenant delivers
an Extension Notice and upon the commencement of the Extended Term, Tenant is
not in default under (nor has any event occurred which, with the passage of time
or the giving of notice, or both, shall constitute a default under) any terms,
covenants or conditions of this Lease.
(d) In the event Tenant timely and properly exercises Tenant's
option under this Section 26, then within thirty (30) days of Landlord's
request, Tenant shall execute and deliver to Landlord a Lease amendment in form
and substance satisfactory to Landlord confirming the applicable Net Base Rent
during the Extended Term and setting forth the applicable commencement and
expiration dates of the Extended Term within (30) days after such request.
SECTION 27: PURCHASE OPTION
---------------
27.1 OPTION. Landlord hereby irrevocably, absolutely and
------
unconditionally grants, conveys and transfers unto Tenant the exclusive right,
option and privilege (the "Option"), which Option shall expire on the Option
Deadline, to purchase the land, buildings, structures, improvements commonly
known as 6900 Shady Oak Road, Eden Prairie, Minnesota, and more particularly
described on Exhibit F attached hereto (collectively, the "project") from
---------
Seller, upon the terms and conditions hereinafter set forth in this Section 27.
27.2 EXERCISE OF OPTION. The Option may only be exercised, if at
------------------
all, by Tenant, if on or before the last day of the sixtieth (60th) month of
the Lease Term (the "Option Deadline"), Tenant notifies Landlord in writing of
its election to exercise the Option (the "Option Notice"). In the event Tenant
fails to properly exercise the Option, as above provided, the Option shall
thereupon immediately, automatically and irrevocably terminate. If Tenant
delivers an Option Notice, but then fails to consummate its acquisition of the
Project for any reason other than a default by Landlord under this Section 27 or
the occurrence of any materially adverse change affecting the Project after the
delivery of the Option Notice and prior to Closing, then Tenant shall
automatically be deemed to have irrevocably and unconditionally waived the
Option.
12
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27.3 CLOSING. The consummation of the purchase and sale of the
-------
Project pursuant to the Option in accordance with this Section 27 (the
"Closing") shall be held and occur on a date no later than thirty (30) days from
the date of the Option Notice, or at such earlier time as may be mutably agreed
upon by Landlord and Tenant in writing (the "Closing Date"). The Closing shall
take place at the offices of Tenant's counsel in Minneapolis, Minnesota, or at
such other location mutually agreed to by Landlord and Tenant in writing.
27.4 OPTION PRICE. If Tenant timely delivers the Option Notice on
------------
or before the Option Deadline, at Closing, Tenant shall pay to Landlord the
amount of Two Million Three Hundred Thousand and No/100 Dollars ($2,300,000.00),
together with any Net Base Rent and Additional Rent due and unpaid as of the
Closing Date, in immediately available funds (the "Option Price").
27.5 LEASE TERMINATION FEE. In the event that Tenant delivers the
---------------------
Option Notice on or before the last day of the thrity-six (36th) month of the
Lease Term, contemporaneous with Closing, Tenant shall terminate this Lease by
paying to Landlord, in immediately available funds, a termination fee in the
aggregate amount of Three Hundred Thousand and No/100 Dollars ($300,000.00),
plus an amount equal to that portion of the total cost of the Roof Replacement
that, as of the Closing Date (based on a fifteen (15) year amortization schedule
at an interest rate of 11%), has not been paid to Seller as reimbursement
pursuant to Section 13.3 herein (the "36 Month Termination Fee"), which amounts
shall be paid to Landlord in addition to the Option Price due Landlord at
Closing. In the event that Tenant delivers the Option Notice after the
commencement of the thirty-seventh (37th) month of the Lease Term, but before
the Option Deadline, contemporaneous with Closing, Tenant shall terminate this
Lease by paying to Landlord, in immediately available funds, a termination fee
in the aggregate amount of Five Hundred and Ten Thousand No/100 Dollars
($510,000.00), plus an amount equal to that portion of the total cost of the
Roof Replacement that, as of the Closing Date (based on a fifteen (15) year
amortization schedule at an interest rate of 11%), has not been paid to Seller
as reimbursement pursuant to Section 13.3 herein (the "Post 36 Month Termination
Fee"), which amounts shall be paid to Landlord in addition to the Option Price
also due Landlord at Closing. Upon payment of the 36 Month Terminating Fee or
the Post 36 Month Termination Fee, as the case may be, and provided that the
Closing occurs, this Lease, and the obligations of Landlord and Tenant
hereunder, shall terminate and be of no further force and effect except for
those obligations, if any, which pursuant to this Lease expressly survive
termination of this Lease. If Landlord has not commenced replacement of the
roof pursuant to Section 13.3 at the time the Option Notice is delivered,
Landlord shall be obligated to either, at the election of Landlord, (i) return
all funds to Tenant paid pursuant to Section 13.3 for the Roof Replacement, and
not recover the unpaid amortized cost of the Roof Replacement from Tenant at
Closing, or (ii) commence replacement of the roof within 60 days of the Option
Notice and diligently work toward completion thereof. At Closing, Landlord
shall execute and deliver to Tenant such documents as Tenant may reasonably
request to evidence such termination.
27.6 PRORATIONS AND CLOSING COSTS. At Closing, Landlord shall pay
----------------------------
all applicable recording fees and state deed and transfer taxes on the deed
described in this Section 27. Landlord and Tenant shall share equally any
closing fee imposed by a title company to administer the Closing. All taxes,
rents, assessments, charges and other costs shall be prorated and adjusted
between Landlord and Tenant at Closing according to customary and ordinary
business practices for a transaction of this nature.
27.7 DOCUMENTS TO BE DELIVERED AT CLOSING. Provided Tenant shall
------------------------------------
have timely exercised the Option as provided in Section 27.2 herein, and
provided Tenant pays the applicable termination fees as set forth in Section
27.5 herein. Landlord shall, at Clsoing, execute and deliver (or cause the same
to be executed and delivered) to Tenant the following documents:
(a) A Limited Warranty Deed executed by Landlord conveying fee
simple title to the Project to Tenant, subject only to those matters affecting
title to the Project which (i) existed on Commencement Date, or (ii) were
created by Tenant, or (iii) were created by Landlord with the express consent of
Tenant, which consent shall not be unreasonably withheld or delayed.
(b) An Affidavit of Landlord certifying that (i) to Landlord's
knowledge, on the Date of Closing there are no parties in
possession of the Project; (ii) that there are no outstanding, unsatisfied
judgments, tax liens or bankruptcies against or involving Landlord; (iii) that
there has been no skill, labor or material furnished to the Project at
Landlord's insistence for which mechanic's liens could be filed; (iv) that, to
Landlord's knowledge, there are no unrecorded interests in the Project of any
kind except the Lease; and (v) that Landlord, under the penalty of perjury, is
not for federal income tax purposes, a nonresident alien, or a foreign
corporation, trust or estate.
(c) An Assignment, executed by Landlord, to Tenant of all right,
title and interest of Landlord and its agents in and to the intangible personal
property, if any (including, but not limited to, any governmental approvals.).
(d) Keys to all locks located in the Project.
(e) An Affidavit of Title (without warranty of title) and an ALTA
Statement, each executed by Landlord and in form and substance acceptable to
Tenant's title company and to Tenant.
(f) Any certificates or undertakings required in order to induce
Tenant's title company to insure over any "gap" period resulting from any delay
in recording of documents or later-dating the title insurance file.
(g) A closing statement confirming to the prorations and other
relevant provisions of this Lease.
(h) An Entity Transfer Certification confirming that Landlord is a
"United States Person" within the meaning of Section 1445 of the Internal
Revenue Code of 1986, as amended.
(i) Landlord's affidavit confirming that the sale of the Project to
Tenant hereunder is not subject to, and does not subject Tenant to, liability
for income tax, retail sales tax or bulk sales obligations under applicable
State law.
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SECTION 29: LEASE CONTINGENCY
-----------------
Landlord's performance under this Lease is expressly made subject to and
conditioned upon Landlord's ability to consummate the purchase of the Project
from The Prudential Insurance Company of America ("Prudential") no later than
May I, 1997 (the "Lease Contingency Date"). In the event that Landlord is
unable to consummate the closing of the acquisition of the Project from
Prudential on or before the Lease Contingency Date, this Lease shall
automatically be deemed terminated and this Lease shall become null and void
without further action of either party, and neither Landlord nor Tenant shall
have any rights or duties under the Lease, except as specifically provided under
the Lease.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the
day and year first above written.
LANDLORD: First Industrial,L.P.,
a Delaware limited partnership,
By: First Industrial Realty Trust, Inc.
a Maryland corporation, its general partner
By: _____________________________________
Its: Senior Regional Director
TENANT: LaserMaster Corporation,
a Minnesota corporation
By: _____________________________________
Its: Chief Executive Officer
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<PAGE>
LEASE EXHIBIT A
PREMISES
--------
Approximately 49,190 rentable square feet (16,540 square feet of office and
32,650 square feet of warehouse) in the Building located at 6900 Shady Oak Road,
Eden Prairie, Minnesota 55344.
15
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LEASE EXHIBIT B
RENTAL PAYMENTS
---------------
The term of the Lease shall be ten (10) years commencing April I, 1997. Monthly
Base Rent shall be as follows:
Months 1-36: $21,930.54 per month ($5.35 psf)
Months 37-60: $22,955.33 per month ($5.60 psf)
Months 61-120: $25,250.87 per month ($6.16 psf)
Monthly Base Rent for the Option Period shall be as follows:
Months 121-169: $27,660.38 per month ($6.75 psf)
16
<PAGE>
LEASE EXHIBIT C
LANDLORD'S REPAIRS AND IMPROVEMENTS
-----------------------------------
Tenant will take the Premises in its "as-is" condition.
17
<PAGE>
LEASE EXHIBIT D
REQUIRED INSURANCE
------------------
Tenant shall obtain, at Tenant's expense, and shall maintain through the Lease
Term the following insurance coverages:
(a) A policy of commercial general liability insurance (including "Insurance
Service Office'' (ISO) forms and endorsements or their equivalent) naming
Landlord, Tenant and any other party designated by Landlord as an additional
insured, to insure against injury to property, person or loss of life arising
out of the ownership, use, occupancy, or maintenance of the Premises with
limited of general liability of not less than a total of $5 million in
underlying and aggregate coverage for death and/or bodily injury, personal
injury, advertising injury and property damage. The policy shall contain
supplemental endorsements covering contractual liability as provided in an ISO
commercial general liability policy definition of an insured contract.
(b) A policy providing commercial policy insurance containing the insuring
agreement "Cause of Loss-Special Form" or its equivalent, together with such
endorsements as may be deemed advisable by Landlord to insure all buildings,
structures and improvements now located or hereinafter constructed on the
Project (as hereinafter defined), all fixtures and equipment attached thereto
(collectively the "Improvements"), and the Tenant's leasehold improvements,
merchandise, trade fixtures, furnishings, equipment and personal property, and
naming Landlord as an additional insured and loss payee. Such policy shall
provide coverage in an amount not less than the full replacement cost of the
Improvements. An "Agreed Amount Clause" waiving the coinsurance clause must be
included, as well as flood and earthquake insurance, to the extent available, at
limited equal to the maximum foreseeable loss at the Premises. Coverage must
also include an "Ordinances or Law Regulations" insuring agreement governing the
construction, use or repair of property. Such coverage must include the expense
of tearing down any property, including the cost of removing its debris.
Increased cost of construction coverage must be included.
(c) Tenant will obtain a policy of workers' compensation insurance that
provides the insurance benefits required by state law and includes coverage B,
Employer's Liability. The Employer's liability limits must be:
Bodily Injury by Accident: $1,000,000 each accident
Bodily Injury by Disease: $1,000,000 each employee
Bodily Injury by Disease: $1,000,000 policy limit
Landlord does not, by requiring such insurance or by any other act or event,
assume or undertake liability for any work related injuries or death to Tenant
or Tenant's employees.
(d) A policy of business interruption insurance with an "Extra Expense"
insuring agreement naming Landlord and any other party designated by Landlord or
Tenant as an additional insured, providing coverage of not less than twelve (12)
months of Net Base Rent, Additional Rent and other business income. Such policy
must include an endorsement providing an extended period of indemnity for 180
days.
(e) All other insurance, if any, customarily maintained by businesses of like
type, or required by any legal requirement to be carried or maintained by
Tenant, or as otherwise may be reasonably required by Landlord, including but
not limited to boiler and machinery coverage, automobile and garage-keepers
liability coverage, and service interruption coverage.
Insurance required under this section shall be written by companies duly
qualified to do business in the State of Minnesota and shall be reasonably
satisfactory in all respects to Landlord and the holder or any mortgage against
the Premises. The companies providing such insurance shall deliver to Tenant and
Landlord copies of such policies or certificates evidencing the existence and
amount of such insurance with loss payable clauses reasonably satisfactory to
Landlord, including, specifically, the holder of any mortgage on the Premises as
a loss payee. No such policy shall be cancelable or subject to reduction of
coverage limits or modification except after thirty (30) days prior written
notice to Landlord and such other persons designated by Landlord. At least five
(5) days prior to the expiration of such policies, Landlord may order such
insurance and charge the cost to Tenant as Additional Rent. Tenant shall not do
or knowingly permit anything to be done which will invalidate the insurance
policies furnished pursuant to this section or otherwise by Landlord and shall
comply with all requirements imposed by such insurers, unless such compliance is
expressly waived in writing by Landlord. Landlord may, from time to time,
reasonably require that the policy limits of any or all such insurance be
increased to reflect the effects of inflation and changes in normal commercial
insurance practices.
Mutual Waiver of Subrogation: Nothing in this Lease shall be construed so
as to authorize or permit any insurer of Landlord or Tenant to be subrogated to
any right of Landlord or tenant against the other party arising under this
Lease. Landlord and Tenant each hereby release the other to the extent of any
loss required to be insured against by either of the parties under the terms of
this Lease, whether or not such insurance has actually been secured, and to the
extent of their respective insurance coverage actually received for any loss or
damage caused by any such casualty, even if such incidents shall be brought
about by the fault or negligence of either party or persons for whose acts or
negligence the other party is responsible. Landlord and Tenant shall, to the
extent permitted by their respective insurers, each obtain appropriate waivers
of subrogation from their respective insurance carriers giving effect to this
section.
18
<PAGE>
LEASE EXHIBIT E
OPTION TO RENEW
---------------
Subject to the terms and conditions contained in Section 26 herein, and
providing Tenant is not in default of its Lease, Tenant shall have the option of
extending its Lease Term at the Monthly Base Rent stipulated in Lease Exhibit B
up through and including December 31, 2010.
19
<PAGE>
LEASE EXHIBIT F
LEGAL DESCRIPTION
-----------------
Lot 2, Block 1, Shady Oak Industrial Park Second Addition, according to the
recorded plat thereof, Hennepin County, Minnesota.
Abstract Property
20
<PAGE>
<TABLE>
<CAPTION>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Item 15(a)(3)
PER SHARE EARNINGS (LOSS) COMPUTATIONS Exhibit 11.1
Fiscal Years Ended June 30,
--------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
PRIMARY
-------
Net (loss) earnings $(17,199,688) $(10,461,534) $ 206,474
Add:
Interest on convertible subordinated debentures,
net of applicable income taxes 91,893
------------ ------------ -----------
Net (loss) earnings for primary earnings per share $(17,107,795) $(10,461,534) $ 206,474
============ ============ ===========
Weighted average number of common shares
outstanding 13,705,609 11,305,232 11,097,091
Add:
Common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of warrants and employee stock options 585,925 844,688 1,109,189
Common stock equivalents from assumed exercise of
convertible debentures 513,901
------------ ------------ -----------
Weighted average number of shares used in
the calculation of primary earnings per share 14,805,135 12,146,920 12,206,280
============ ============ ===========
Primary (loss) earnings per common and common
equivalent share $ (0.87) $ (0.86) $ 0.02
============ ============ ===========
FULLY DILUTED
-------------
Net (loss) earnings $(17,199,688) $(10,461,534) $ 206,474
Add:
Interest on convertible subordinated debentures,
net of applicable income taxes 91,893
------------ ------------ -----------
Net (loss) earnings for fully diluted earnings per share $(17,107,795) (10,461,534) 206,474
============ ============ ===========
Weighted average number of common shares
outstanding 13,705,609 11,305,232 11,097,191
Add:
Common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of warrants and employee stock options 652,662 1,020,376 1,216,355
Common stock equivalents from assumed exercise
of convertible debentures 513,901
------------ ------------ -----------
Weighted average number of shares used in
the calculation of fully diluted earnings per share 14,872,172 12,325,608 12,313,446
============ ============ ===========
------------ ------------ -----------
Fully diluted (loss) earnings per common and
common equivalent share $ (0.87) $ (0.85) $ 0.02
============ ============ ===========
</TABLE>
The calculation of fully diluted EPS uses the higher of the ending market price
for the period or the average market price.
For the years ended June 30, 1997 and 1996, the inclusion of common stock
equivalents in the primary and fully diluted earnings per share shown above have
an anti-dilutive effect on the per share loss reported. Consistent with the
provisions of Accounting Principles Board No. 15, the Company's earnings per
share reported on its statement of operations for the years ended June 30, 1997
and 1996, exclude common stock equivalents in the earnings per share amounts
reported. Accordingly, such per share amounts do not agree with the amounts
shown above.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from INTERNAL
FINANCIAL STATEMENTS and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> MAR-31-1997 JUL-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 0 484,106
<SECURITIES> 0 0
<RECEIVABLES> 0 12,129,091
<ALLOWANCES> 0 1,987,000
<INVENTORY> 0 9,184,671
<CURRENT-ASSETS> 0 28,029,701
<PP&E> 0 3,570,662
<DEPRECIATION> 0 16,187,749
<TOTAL-ASSETS> 0 32,630,933
<CURRENT-LIABILITIES> 0 18,298,065
<BONDS> 0 0
0 0
0 0
<COMMON> 0 144,325
<OTHER-SE> 0 11,770,400
<TOTAL-LIABILITY-AND-EQUITY> 0 32,630,933
<SALES> 21,129,943 86,563,422
<TOTAL-REVENUES> 21,129,943 86,563,422
<CGS> 17,359,775 61,912,116
<TOTAL-COSTS> 17,359,775 61,912,116
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 318,509 1,388,247
<INCOME-PRETAX> (11,177,864) (15,910,688)
<INCOME-TAX> 2,851,000 1,289,000
<INCOME-CONTINUING> (14,028,864) (17,199,688)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,028,864) (17,199,688)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99
Cautionary Factors Under the
Private Securities Litigation Reform Act of 1995
LaserMaster desires to take advantage of the new "safe harbor" provisions
contained in the Private Securities Litigation Reform Act of 1995 (the "Act").
Contained in this Form 10-K are statements which are intended as "forward-
looking statements" within the meaning of the Act. The words or phrases
"expects", "will continue", "is anticipated", "management believes", "estimate",
"projects", "hope" or expressions of a similar nature denote forward-looking
statements. Those statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on forward-looking statements. Readers
should also be advised that the factors listed below have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not ship when
expected or may contain technical difficulties; uncertain demand for new or
existing products; the impact of competitor's advertising, products or pricing;
availability or reliability of component parts, including sole source parts;
manufacturing limitations; availability of sources of financing; economic
developments, both domestically and internationally; new accounting standards;
and, the impact of the initiation, defense and resolution of litigation.
Other factors include the following:
Cash Needs. Although the Company has a credit agreement with a commercial
finance company that has adequately financed its cash requirements in the past,
net operating losses in fiscal 1996 and 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
1
<PAGE>
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
impact on the demand for the Company's products. In particular, the high-
resolution laser printer market in which the
2
<PAGE>
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
3
<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 with
4
<PAGE>
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 are
5
<PAGE>
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 while it attempts
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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 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
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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 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.
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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.
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