<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended December 29, 1996
---------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________to______________________
Commission File No.: 0-18114
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LASERMASTER TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
- -------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 941-8687
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
-----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 12/29/96
- ----- -----------------------
Common Stock, $.01 par value 14,225,049
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
December 29, June 30,
1996 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,229,863 $ 90,851
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$2,184,000 and $2,475,000, respectively 15,012,079 12,563,112
Inventory 17,415,624 13,524,314
Income tax receivable 400,781
Other current assets 3,149,415 2,783,784
Deferred income taxes 3,304,000 3,304,000
----------- -----------
TOTAL CURRENT ASSETS 41,110,981 32,666,842
PROPERTY AND EQUIPMENT, NET 4,126,623 5,099,560
CAPITALIZED SOFTWARE, less accumulated
amortization of $4,707,015 and $3,636,979,
respectively 3,961,326 4,150,913
DEFERRED INCOME TAXES 2,901,000 2,546,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $1,355,406 and $1,000,154, respectively 1,971,953 2,081,649
----------- -----------
$54,071,883 $46,544,964
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Notes payable $ 3,627,030 $ 5,381,037
Notes payable-related party 1,765,000
Current maturities of long-term debt 1,055,611 1,248,267
Accounts payable 14,771,546 16,682,191
Accrued payroll and payroll taxes 1,732,037 1,915,908
Income taxes payable 299,874
Other current liabilities 1,213,638 1,200,264
Deferred revenue 1,474,497 1,894,262
----------- -----------
TOTAL CURRENT LIABILITIES 24,174,233 30,086,929
CONVERTIBLE SUBORDINATED DEBENTURE 2,347,830
LONG-TERM DEBT, less current maturities 400,379 820,095
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 14,225,049 and 11,426,134
shares issued and outstanding, respectively 142,250 114,261
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 29,635,360 17,430,555
Accumulated deficit (2,628,169) (1,906,876)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 27,149,441 15,637,940
----------- -----------
$54,071,883 $46,544,964
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- -------------------------
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
------------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES $24,596,638 $25,340,000 $46,048,939 $46,605,871
COST OF GOODS SOLD 16,747,460 15,441,860 30,269,461 28,169,017
----------- ----------- ----------- -----------
GROSS PROFIT 7,849,178 9,898,140 15,779,478 18,436,854
OPERATING EXPENSES:
Sales and Marketing 4,472,868 5,065,279 8,575,035 10,466,760
Research and Development 1,516,550 1,624,430 2,950,119 2,921,081
General and Administrative 2,424,654 2,610,273 4,779,406 5,484,334
----------- ----------- ----------- -----------
8,414,072 9,299,982 16,304,560 18,872,175
----------- ----------- ----------- -----------
OPERATING (LOSS) PROFIT (564,894) 598,158 (525,082) (435,321)
OTHER INCOME (EXPENSE):
Interest expense (331,080) (445,103) (750,309) (785,552)
Interest income 104,060 4,428 113,983 8,907
Other income (expense) 72,120 (45,225) 85,115 9,689
----------- ----------- ----------- -----------
(154,900) (485,900) (551,211) (766,956)
----------- ----------- ----------- -----------
(LOSS) EARNINGS BEFORE INCOME TAXES (719,794) 112,258 (1,076,293) (1,202,277)
INCOME TAX BENEFIT (PROVISION) 237,000 (33,000) 355,000 361,000
----------- ----------- ----------- -----------
NET (LOSS) EARNINGS $ (482,794) $ 79,258 $ (721,293) $ (841,277)
=========== =========== =========== ===========
PER COMMON SHARE:
Net (Loss) Earnings $(.03) $.01 $(.06) $(.07)
Weighted average common and dilutive
common equivalent shares outstanding 14,198,535 12,181,825 13,063,688 12,133,851
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
December 29, December 31,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (721,293) $ (841,277)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,604,921 2,860,056
Amortization of deferred financing costs 110,693 63,141
Loss on sale of property and equipment 94,832 46,915
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (355,000)
Change in current assets and current liabilities:
Accounts receivable (2,467,682) 2,203,935
Inventory (2,474,645) 691,142
Other current assets (476,324) (664,797)
Income tax receivable 400,781 (67,232)
Accounts payable (188,617) (3,362,346)
Accrued payroll and payroll taxes (183,871) (403,966)
Other current liabilities 13,374 (70,301)
Income taxes payable 299,874 (201,768)
Deferred revenue (419,765) 684,687
----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (5,179,387) 938,189
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in notes receivable - related party (585,000)
Collection of notes receivable - related party 585,000
Additions to property and equipment (318,970) (1,048,992)
Additions to capitalized software costs (880,449) (1,486,823)
Proceeds from sale of property and equipment 17,443 26,988
Additions to patents and other assets (245,556) (686,007)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,427,532) (3,194,834)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 10,252,794 334,945
Net (payments) borrowing under revolving credit lines (894,491) 620,072
Proceeds from note payable to related party 1,765,000
Proceeds from long-term debt 159,003
Payments on long-term debt (612,372) (509,243)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,745,931 2,369,777
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,139,012 113,132
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 90,851 607,223
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 2,229,863 $ 720,355
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of presentation -
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of LaserMaster
Technologies, Inc. and subsidiaries (the "Company") for the year ended June
30, 1996. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods
ended December 29, 1996 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1997.
Effective July 1, 1996 the Company changed its accounting periods whereby
each quarter ends on the Sunday closest to the end of the quarter, except for
the fourth quarter which ends on June 30. As a result, information reported
for the second quarter of fiscal 1997 is as of December 29, 1996, and for the
three months and six months ended December 29, 1996. Management does not
believe this change has a material impact on comparability to prior periods.
2. Inventory -
Inventory consists of the following:
<TABLE>
<CAPTION>
December 29, June 30,
1996 1996
----------- -----------
<S> <C> <C>
Raw materials
Purchased printer engines $ 373,867 $ 469,870
Completed subassemblies 2,179,519 3,053,985
Raw materials 5,718,695 5,994,178
Work in process 700,864 436,753
Finished goods
Hardware/software 3,289,137 2,273,131
Consumables 5,153,542 1,296,397
----------- -----------
$17,415,624 $13,524,314
=========== ===========
</TABLE>
3. Supplemental disclosure of cash flow information and non-cash financing
activities -
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
December 29, December 31,
1996 1995
---------------- ------------
<S> <C> <C>
The Company paid and received cash for the following items:
Interest paid $ 709,935 $877,845
Income tax refunds received, net 700,655 92,000
Financing transactions not affecting cash:
Accounts payable converted to subordinated debenture 1,668,314
Note payable converted to subordinated debenture 859,516
Note payable to TMI plus accrued interest offset
against note receivable from TMI resulting from
stock sale plus accrued interest 1,818,715
Convertible subordinated debenture converted into
common stock 180,000
Capital lease obligations 152,405
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). These forward looking statements are subject to a number of risks,
including the Company's continuing need for additional cash, sensitivity of the
Company to technology changes in the computer printing industry and intense
competition in that industry, the Company's dependence on sales of newer
products with untested market acceptance, dependance on numerous product
components that are available from single sources, fluctuations in quarterly
operating performance, the strength of the Company's intellectual property
protection, the costs of pending litigation, and the size of the Company's
international operations. These and other factors which are set forth in
Exhibit 99 to this Form 10-Q have caused wide fluctuations in the market price
of the Company's common stock and can be expected to cause similar fluctuations
in the future. Refer to Exhibit 99 of this Form 10-Q for certain important
cautionary factors, risks and uncertainties related to forward-looking
statements.
RESULTS OF OPERATIONS
Net sales for the three months ended December 29, 1996 were $24.6 million
compared to $25.3 million for the same period one year ago. Net loss for the
three months ended December 29, 1996 was $483,000 or $.03 per share compared to
net income of $79,000 or $.01 per share for the three months ended December 31,
1995. Net sales for the six months ended December 29, 1996 were $46.0 million
compared to $46.6 million for the same period one year ago. Net loss for the
six months ended December 29, 1996 was $721,000 or $.06 per share compared to
$841,000 or $.07 per share for the six months ended December 31, 1995.
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------- --------------------------------
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.1 60.9 65.7 60.4
----- ----- ----- -----
Gross profit 31.9 39.1 34.3 39.6
Operating expenses:
Sales and marketing 18.2 20.0 18.6 22.4
Research and development 6.2 6.4 6.4 6.3
General and administrative 9.8 10.3 10.4 11.8
----- ----- ----- -----
Total operating expenses 34.2 36.7 35.4 40.5
----- ----- ----- -----
Operating (loss) profit (2.3) 2.4 (1.1) (0.9)
Other income (expense):
Interest expense (1.3) (1.8) (1.6) (1.7)
Interest income .4 0.0 .2 0.0
Other .3 (0.2) .2 0.0
----- ----- ----- -----
(Loss) earnings before income taxes (2.9) 0.4 (2.3) (2.6)
Income tax benefit provision 0.9 (0.1) .8 0.8
----- ----- ----- -----
Net (loss) earnings (2.0)% 0.3% (1.5)% (1.8)%
===== ===== ===== =====
</TABLE>
Net Sales. During the December 1996 quarter, the Company recorded
hardware/software sales of $12.4 million or 50.4% of total net sales compared to
$15.8 million or 62.5% of total net sales in the same period one year ago and
$11.8 million or 55.0% of total net sales in the quarter ended September 29,
1996.
The decrease in hardware/software sales from the previous year is primarily
attributed to significant decreases in sales of the Company's plain paper
typesetting products and PressMate(R), a proprietary chemical-free imagesetter
which was introduced by the Company in 1994. In addition, sales of DisplayMaker
Professional(R) also decreased
6
<PAGE>
from the previous year. These decreases were partially offset by $3.1 million in
sales of DesignWinder(TM). DesignWinder is the Company's third proprietary
printer which began shipping in production quantities in the December 1996
quarter. Hardware/software sales increased from the September 1996 quarter as a
result of DesignWinder revenues despite decreases in sales in all of the
Company's other hardware products during the quarter.
The Company expects that sales of plain-paper typesetting products, PressMate,
and DisplayMaker Professional will continue to decline throughout the next
several quarters as the Company reduces its marketing efforts for these products
in favor of more heavily promoting its proprietary Big Color(R) printers,
particularly DesignWinder.
During the December 1996 quarter, the Company recorded consumables sales,
consisting primarily of ink, media, film, maintenance contracts and spare parts,
of $12.2 million or 49.6% of total net sales compared to $9.5 million or 37.5%
of total net sales in the same period one year ago and $9.7 million or 45.0% of
total net sales in the quarter ended September 29, 1996.
The increase in consumables sales from the prior year is primarily due to an
increase in the installed base of Big Color printers, including DisplayMaker
Professional, DisplayMaker Express and DesignWinder. The increase in consumables
sales from the September 1996 quarter is primarily due to the introduction of
new ink and media offerings designed for outdoor use and the initial consumables
orders with DesignWinder shipments.
The Company expects that consumables sales will continue to increase over the
long-term as the installed base of printers increases and new consumable
products are introduced. Consumables revenue may fluctuate from quarter to
quarter however, depending on the timing of new product introductions and
shifting marketing emphasis to proprietary engine platforms made by the Company.
During the December 1996 quarter, the Company retrofitted the majority of the
installed base of DisplayMaker Express printers with the new FloTek(TM) Jetting
System that is designed to improve the functionality and to simplify startup
procedures of the machine. The FloTek Jetting System is a software and hardware
change to assist in clearing ink jets as part of the start-up procedure. These
upgrades were made by the Company at no charge to the installed base. In
conjunction with this upgrade, the Company introduced Print & Hang(TM) media for
the DisplayMaker Express that is designed for outdoor use without expensive
overlaminates. The upgrade and additional media were well received and have
resulted in improved field performance of the machine and additional revenue
opportunities for the Company's customers.
International Sales. The following table sets forth international sales by
region expressed in thousands and as a percentage of total net sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $ 5,033 20.5% $ 5,172 20.4% $ 9,571 20.8% $ 9,186 19.7%
Japan, Asia/ Pacific 4,647 18.9 3,093 12.2 8,400 18.2 5,724 12.3
Latin America 1,912 7.8 1,287 5.1 3,298 7.2 2,203 4.7
Canada 1,296 5.2 849 3.4 1,643 3.6 1,603 3.4
------- ---- ------- ---- ------- ----- ------ ----
Total international sales $12,888 52.4% $10,401 41.1% $22,912 $49.8% 18,716 40.1%
======= ==== ======= ==== ======= ===== ====== ====
</TABLE>
Increases in sales in Japan, Asia/Pacific and Latin America markets are
primarily due to greater sales of Big Color products, particularly DisplayMaker
Express and DesignWinder, along with related consumables. In the six months
ended December 31, 1995, a greater percentage of the Company's revenues came
from sales of plain-paper typesetting equipment which was not as successful in
these markets as the Company's Big Color products are in fiscal 1997. A
majority of the foreign transactions occur in U.S. dollars, and as a result
foreign currency risk is not expected to be a significant risk factor.
Gross Profit. Gross profit, expressed as a percent of net sales, was 31.9% in
the quarter ended December 29, 1996 compared to 39.1% in the same period one
year ago and 37.0% (30.4% excluding the effects of the benefit from a warranty
claim and settlement with one of the Company's suppliers) in the September 1996
quarter. Gross profit was negatively impacted in the December 1996 quarter
primarily from lower average selling prices on DisplayMaker Professional due to
competitive price erosion, and on DisplayMaker Express due to price breaks for
distribution and demonstration sites. Costs incurred to upgrade the installed
base of DisplayMaker Express units with the new FloTek Jetting System also had a
negative short term impact on gross profit margins.
7
<PAGE>
Operating Expenses. Sales and marketing expenses for the three months ended
December 29, 1996 were $4.5 million compared to $5.1 million in the same period
one year ago. The $600,000 decrease in sales and marketing expenses is primarily
related to reductions in sales expenses achieved with the consolidation of
certain sales offices in the June 1996 quarter.
Research and development expenditures, including amounts expensed and
capitalized, were $2.0 million in the three months ended December 29, 1996
compared to $2.4 million in the same period one year ago. The decrease in
expenditures is primarily a result of cost reduction programs implemented in
fiscal 1996. Research and development expenditures capitalized for the three
months ended December 29, 1996 were $479,000 compared to $728,000 in the same
period one year ago.
General and administrative expenses were $2.4 million for the three months ended
December 29, 1996 compared to $2.6 million in the same period one year ago.
Other. Interest expense was $331,000 for the three months ended December 29,
1996 compared to $445,000 in the same period one year ago. Interest income was
$104,000 for the three months ended December 29, 1996 compared to essentially no
interest income in the same period one year ago. The $218,000 decrease in net
interest expense from the same period one year ago, is primarily attributable to
$12 million in equity financing completed in the September 1996 quarter of which
a portion of the proceeds was used to pay down revolving credit lines and a
portion was invested in interest bearing instruments.
The Company's effective tax rate was 33% in the December 1996 quarter compared
to 29% in the same period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended December 29,
1996 was $5.2 million compared to net cash provided from operating activities of
$938,000 in the same period one year ago. Cash flow was negatively affected by
an increase in accounts receivable of $2.5 million in the six months ended
December 29, 1996. This increase in accounts receivable is primarily attributed
to a longer collection period for sales of DisplayMaker Express. The Company
extended payment terms and furnished some free supplies while it worked through
the program for field upgrades related to the DisplayMaker Express FloTek
Jetting System. The Company expects the collection period for future
DisplayMaker Express sales to decrease as machine performance and customer
satisfaction improve for this product. The Company also increased its inventory
by $3.9 million in the six months ended December 29, 1996. The increase in
inventory is primarily related to increases in consumables. In fiscal 1997, the
Company received $1.4 million in process units and toner cartridges in a product
quality settlement with one of its suppliers. In addition, the Company has
increased its Big Color consumables, primarily with new products, including
DesignWinder wide-gamut inks, new pigmented inks for DisplayMaker Professional
and DesignWinder and Print & Hang media, all of which were introduced in fiscal
1997.
Net cash used in investing activities was $1.4 million during the six months
ended December 29, 1996 compared to $3.2 million in the same period one year
ago. Investment in capital equipment was $319,000 in the six months ended
December 29, 1996 compared to $1.0 million in the same period one year ago.
Investment in intellectual property was $246,000 in the six months ended
December 29, 1996 compared to $686,000 in the same period one year ago. The
Company capitalized $880,000 of software development costs in the six months
ended December 29, 1996 compared to $1.5 million in the same period one year
ago.
Net cash provided by financing activities was $8.7 million in the six months
ended December 29, 1996 compared to $2.4 million in the same period one year
ago. Net repayments under revolving credit lines were $894,000 in the six
months ended December 29, 1996 compared to net borrowings of $620,000 in the
same period one year ago. The Company received approximately $10 million, net
of transaction costs, from the issuance of common stock in a series of private
placements completed in the December quarter of fiscal 1997. An additional $1.8
million from the issuance of common stock in a private placement to TimeMasters,
Inc. (TMI) was used to offset a $1.765 million term loan and $35,000 in accrued
interest owed by LaserMaster Corporation to TMI, a related party, in a non-cash
transaction.
Based on the results of operations for the first half of fiscal 1997, the
successful introduction of DesignWinder, and the Company's business plan to
expand DesignWinder distribution for the remainder of the fiscal year,
management expects that the proceeds from the private placements of common stock
will be sufficient to fund operations throughout fiscal 1997. The Company also
has additional credit available on the existing line of credit.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In prior reports on Form 10-Q and the Form 10-K, the Company has reported on a
consolidated lawsuit originally filed by a shareholder, John Becker, alleging
violations of the Securities and Exchange Act of 1934. The suit alleges that
the Company and the named individual officers and directors knew of material,
negative, non-public information and withheld such information from the public
so as to intentionally cause a fraud on the market. The suit further alleges
that the individual defendants personally benefitted by selling shares of
Company common stock over a one year period. The three defendants may have the
right to indemnification from the Company for their defense and any liability
costs. The Company does not believe it has insurance coverage for the claims
alleged against it in this suit; however, the officers and directors may have
coverage for certain claims which have been alleged under the Directors' and
Officers' insurance policies in effect at the relevant time. The case is in the
early stages of discovery and the plaintiffs' total damage claim has not been
articulated. On December 5, 1996, the court issued an order certifying the
class as purchasers of common stock between December 2, 1993, and December 8,
1994 who claim to have suffered damages. The Company believes the suit is
without merit and continues to vigorously defend the matter. If the lawsuit is
not resolved by settlement or a final judgement within the limits and coverage
of the applicable Directors' and Officers' insurance, this matter could have a
material adverse effect on the financial condition of the Company.
In the quarter ending December 31, 1995, LMC filed a suit against Sentinel
Imaging, a division of Sentinel Business Systems, Inc. LMC has alleged, among
other things, patent infringement, trademark infringement, Lanham Act
violations, misappropriation of trade secrets, and state unfair competition
claims related to LaserMaster's patented Big Ink delivery system and
ColorMark(R) color management system. Sentinel Imaging has counterclaimed for
false advertising, patent misuse and unfair competition by LaserMaster. On
December 4, 1996 the court held that the Sentinel Color Key Ink Delivery System
does not infringe LaserMaster's patent on the Big Ink Delivery System, thereby
eliminating a claim in the suit. This order may be appealed upon final
disposition of the case. LaserMaster and Sentinel have brought cross motions for
summary judgment on remaining claims which are scheduled to be heard in March
1997. The case is expected to be scheduled for trial sometime after May 1, 1997.
If LMC does not prevail on its claims and Sentinel does prevail on the counter
claims it has alleged, the outcome of these proceedings could have a material
adverse effect on the Company.
The Company is involved in a dispute arising out of the loss of approximately
$400,000 of certain inventory components during transit prior to delivery to the
Company. At this time there is no assurance that the loss will be recovered
from any of the parties involved in the transaction, the supplier, the freight
carrier, the insurers for third parties or the insurers for the Company.
The Company is also involved in legal proceedings related to customer credit and
product warranty and performance issues in the normal course of business. The
Company believes that some of the alleged claims are precluded by the terms of
sales and warranty documents. In certain proceedings the claimants have alleged
claims for exemplary or punitive damages which may not bear a direct
relationship to the alleged actual incurred damages. If a claimant were
successful in their claim for punitive damages, such damages could have a
material adverse effect on the financial position of the Company. At this time
none of the proceedings or claims are expected to have a material effect on the
Company's financial position.
See Exhibit 99, attached, for additional discussion of risks factors related to
legal proceedings.
9
<PAGE>
ITEM 2: CHANGES IN SECURITIES
Nothing to report.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5: OTHER INFORMATION
Effective January 31, 1997, Edward Suchma, formerly the interim Chief Financial
Officer, is no longer employed by the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
-------------------
10.1 Amendment to lease between Grandchildren's Realty Alternative
Management Program I Limited Partnership and LaserMaster
Corporation
27 Financial Data Schedule
99. Cautionary Factors Under Private Securities Litigation Reform
Act of 1995.
(b) Reports on Form 8-K
-------------------
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LASERMASTER TECHNOLOGIES, INC.
/s/Melvin L. Masters
- --------------------------------------
Melvin L. Masters
Chief Executive Officer
/s/Timothy N. Thurn
- --------------------------------------
Timothy N. Thurn
Treasurer and Principal Financial Officer
/s/Mark Pederson
- --------------------------------------
Mark Pederson
Controller
Dated: February 10, 1997
11
<PAGE>
GRANDCHILDREN'S REALTY ALTERNATIVE
MANAGEMENT PROGRAM I LIMITED PARTNERSHIP
c/o Time Masters, Inc.
6425 Beach Road
Eden Prairie, Minnesota 55344
Phone (612) 943-3334
Fax (612) 942-8911
October 4, 1996
LaserMaster Corporation
Attn: Michael Knight, Esq.
General Counsel
7156 Shady Oak Road
Eden Prairie, Minnesota 55344
Re: Amended and Restated Lease Agreement dated as of December 31, 1995 by
and between Grandchildren's Realty Alternative Management Program I
Limited Partnership and LaserMaster Corporation (the "LEASE")
(capitalized terms utilized in this correspondence shall have the
meanings ascribed to them in the Lease unless separately defined
herein)
Gentlemen:
The purpose of this correspondence is to reduce to writing the agreements
between Landlord and Tenant to amend the Lease. Set forth below is an outline of
such agreements, which shall constitute an amendment to the Lease:
1. Lease Term shall mean the period from the Commencement Date through
and including December 31, 2010.
2. Commencing on October 1, 1996 with respect to each installment the
Base Rent due under the Lease through and including the installment of Base Rent
due on October 1, 2001, Tenant shall pay to Landlord an additional monthly
amount of $7,000 (the "RENOVATION INSTALLMENT").
3. Provided no Event of Default has occurred and is continuing, Landlord
shall, to the extent of the first $315,000 of Renovation Installments at its
sole cost and expense and not as an Operating Expense, complete the Renovation
Work prior to January 1, 1998 on a lien free basis, using duly licensed and
qualified contractors, in accordance with all Legal Requirements, in a good and
workmanlike manner, pursuant to plans and specifications reasonably approved by
Tenant within thirty (30) days following receipt thereof by Tenant from
Landlord, and with minimal interference with the operations of Tenant at the
Project. In connection with the performance by Landlord of the Renovation Work,
Tenant shall act
<PAGE>
LaserMaster Corporation
October 4, 1996
Page 2
reasonably and in good faith to avoid interference with Landlord's performance
of the Renovation Work.
4. For purposes of this Agreement the term "Renovation Work" shall mean
those items generally described on Exhibit "1" attached hereto.
5. LaserMaster hereby agrees to pay all filing fees and deed taxes
related to the sale/leaseback transaction on Shady View office center between
First Industrial LP and Grandchildren's Realty Alternative Management Program I
Limited Partnership. The deed tax is approximately $24,585.00 and payable to
Hennepin County.
6. Except as hereby amended, the Lease remains unmodified and in full
force and effect.
If the foregoing accurately reflects our agreement, please so indicate by
executing the enclosed copy of this correspondence and return the same to the
undersigned.
Should you have any questions, please do not hesitate to contact the
undersigned.
Very truly yours,
GRANDCHILDREN'S REALTY ALTERNATIVE
MANAGEMENT PROGRAM I LIMITED
PARTNERSHIP
By TimeMasters, Inc.
Its General Partner
By /s/ Melvin L. Masters
-----------------------------------
Melvin L. Masters
Its President
Agreed and accepted as of
the date first set forth above.
LASERMASTER CORPORATION
By_________________________
Its_____________________
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *INTERNAL
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 2,229,863
<SECURITIES> 0
<RECEIVABLES> 15,012,079
<ALLOWANCES> 2,184,000
<INVENTORY> 17,415,624
<CURRENT-ASSETS> 41,110,981
<PP&E> 4,126,623
<DEPRECIATION> 15,182,332
<TOTAL-ASSETS> 54,071,883
<CURRENT-LIABILITIES> 24,174,233
<BONDS> 0
0
0
<COMMON> 142,250
<OTHER-SE> 27,007,191
<TOTAL-LIABILITY-AND-EQUITY> 54,071,883
<SALES> 46,048,939
<TOTAL-REVENUES> 46,048,939
<CGS> 30,269,461
<TOTAL-COSTS> 30,269,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 750,309
<INCOME-PRETAX> (1,076,293)
<INCOME-TAX> 355,000
<INCOME-CONTINUING> (721,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (721,293)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
LaserMaster desires to take advantage of the new "safe harbor" provisions
contained in the Private Securities Litigation Reform Act of 1995 (the "Act").
Contained in this Form 10-Q are statements which are intended as "forward-
looking statements" within the meaning of the Act. The words or phrases
"expects", "will continue", "is anticipated", "management believes", "estimate",
"projects", "hope" or expressions of a similar nature denote forward-looking
statements. Those statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on forward-looking statements. Readers
should also be advised that the factors listed below have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not ship when
expected or may contain technical difficulties; uncertain demand for new or
existing products; the impact of competitor's advertising, products or pricing;
availability or reliability of component parts, including sole source parts;
manufacturing limitations; availability of sources of financing; economic
developments, both domestically and internationally; new accounting standards;
and, the impact of the initiation, defense and resolution of litigation.
Other factors include the following:
Cash Needs. Although the Company has a credit agreement with a commercial
finance company that has adequately financed its cash requirements in the past,
net operating losses in fiscal 1996 and fiscal 1997 and manufacturing and
inventory requirements for current and new printer engines have resulted in a
need for additional financing. In September 1996, projected cash requirements
in excess of available sources required the issuance of private placements of
common stock and warrants to purchase common stock in the Company. There can be
no assurances that cash availability under the credit agreement and proceeds
from the private placements will be adequate, or that other sources of financing
would be available to the Company on favorable terms, or at all, if the
Company's operations are further affected by declining revenue from a lack of
sales or significant returns of existing products, introduction difficulties
with new product lines, or by market conditions in general. In addition, there
can be no assurance that the Company can achieve profitability on a quarterly or
annual basis in the future.
Product Development and Technological Change. The pre-press and wide-format
color printing industries are highly competitive and are characterized by
frequent technological advances and new product introductions and enhancements.
Accordingly, the Company believes that its future success depends upon its
ability to enhance current products, to develop and introduce new and superior
products on a timely basis and at acceptable pricing, to respond to evolving
customer requirements, and to design and build products which achieve general
market acceptance. Any quality, durability or reliability problems with
existing or new products, regardless of materiality, or any other actual or
perceived problems with the Company's products could have a material adverse
effect on market acceptance of such new products. There can be no assurance
that such problems or perceived problems will not arise with respect to any
existing products or that even in the absence of such problems, the Company's
products will achieve market acceptance. In addition, the market anticipation
or the announcement of new products and technologies could cause customers to
defer purchases of the Company's existing products, which could have a material
adverse effect on the Company's business and financial condition. The Company
is currently undertaking a number of development projects and introduced a new
product, DesignWinder, during the second quarter of fiscal 1997. Although the
Company has had successes introducing new products, some products have
experienced limited market acceptance, the introductions of some products have
been delayed, and the quality and reliability reputation of certain products may
unfavorably affect new products. There can be no assurance that the Company
will be successful with the DesignWinder or future product introductions, that
future market introductions will be timely and
<PAGE>
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.
Various potential actions by any of the Company's competitors, especially those
with a substantial market presence, could have a material adverse effect on the
Company's business, financial condition and results of operations. Such actions
may include reduction of product price, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways, product
bundling or other competitive actions. Additionally, a competitor's entry into
the wide-format market in such ways as to compete more directly and effectively
with the Company's products could adversely affect operational results.
Competition. The computer printer industry is intensely competitive and rapidly
changing. Some of the Company's existing competitors, as well as a number of
potential new competitors, have longer operating histories, greater technical
resources, more established and larger sales and marketing organizations,
greater name recognition, larger customer bases and significantly greater
financial resources than the Company, which may result in a competitive
advantage. Suppliers of large-format print engines and systems compete on the
basis of print quality, color, print time, print size, product features,
including ease of use, service, and price. Competitive product sales practices
such as price reductions, increased promotion, product giveaways and bundling,
or announcement or accelerated introduction of new or enhanced products could
have a material adverse effect on the sales and financial condition of the
Company. New product introductions and changes in pricing structure by
competitors have had, and can be expected to continue to have, a significant
impact on the demand for the Company's products. In particular, the high-
resolution laser printer market in which the Company's plain-paper typesetters
compete has become increasingly competitive as the resolution of commodity laser
printers sold for general purpose business printing, such as those manufactured
by Hewlett-Packard, has improved. The Company anticipates decreasing demand for
its products in this market and decreasing revenue from sales of plain-paper
typesetting products. In addition, the manufacturer of the printing engine for
the Company's DisplayMaker Professional sells its own branded products in direct
competition with the Company's products and continues to sell its engines to
other systems integrators and distributors that compete directly with the
Company. It is possible that the Company's sales of certain products will
compete with, or displace sales of other products sold by the Company. Also,
it is possible that the companies that supply the Company with consumable
products such as ink and media will compete with the Company by selling directly
to users or sell to competitors who may offer the products to the users.
Further, a number of competitors have introduced consumables which they allege
to be compatible with the Company's products and have priced the consumables
below the LaserMaster-branded consumables. Although the Company believes that
its Big Color products possess certain advantages over the competitors'
products, the increased competition has impacted sales volumes and margins and
may continue to impact volumes and margins in the future. The Company has
generally competed in these markets by introducing technologically advanced
products that create new market demand and products which offer optimum
performance characteristics. There can be no assurance that the Company will be
able to continue to innovate to the extent necessary to maintain a competitive
advantage in these markets or that other competitors will not achieve sufficient
product performance to achieve customer satisfaction with their products
offering better pricing or other competitive features.
The Company's PressMate(TM)-FS, DisplayMaker Express and DesignWinder products
are based on relatively new technology, are complex and must be reliable and
durable to achieve market acceptance and enhance revenue opportunities.
Development and production of new, complex technologies and products often have
associated difficulties and delays. Consequently, customers may experience
unanticipated reliability and durability problems that arise only as the product
is subjected to extended use over a prolonged period of time. The Company and
certain DisplayMaker Express users have encountered certain operational problems
which the Company believes it has addressed with the FloTek Jetting System
retrofitting. However, there can be no assurance that the Company has completely
2
<PAGE>
resolved these operational problems or that the Company will successfully
resolve any future problems in the manufacture or operation of the DisplayMaker
Express printers or any new product. Failure by the Company to resolve
manufacturing or operational problems with the DisplayMaker Express printer or
any new product in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Component Availability and Costs. Certain components used in the
Company's current and planned products, including printer marking engines and
other printer components, are currently available from sole sources, and certain
other components are available from only a limited number of sources. The
Company has in the past experienced delays as a result of the failure of certain
suppliers to meet requested delivery schedules and standards of product
performance and quality. In addition, recent losses from operations of the
Company have restricted cash availability and the ability to keep supplier debt
current or within the established credit limits. The requirement to bring
certain component suppliers' debt obligations current, or other restrictions in
credit terms of such component suppliers, could result in an inability to
manufacture certain product lines and thereby adversely affect the financial
performance of the Company. The Company's inability to obtain sufficient
supply of components, or to develop alternative sources, could result in delays
in product introductions, interruptions in product shipments, the need to
redesign products to accommodate substitute components or the need to substitute
alternative components which may not have the same performance capabilities, any
of which could have a material adverse effect on the Company's operating
results. A substantial portion of the total manufacturing cost of the Company's
typesetting and Big Color products is represented by certain components,
particularly dynamic random access memory chips ("DRAMs"), the prices of which
have fluctuated significantly in recent years. Significant increases or
decreases in the price or reductions in the availability of DRAMs or other
components, could have a material affect on the Company's operating results.
In addition, the Company is dependent upon a third-party supplier for the inkjet
engine used in its DisplayMaker Professional product. The Company believes that
it will be able to purchase adequate inventory of current and future versions of
the supplier's print engines to meet its requirements for integration into the
DisplayMaker product line. Nevertheless, there can be no assurances that the
supplier will make its print engines available on the same terms as the current
print engine or that the Company will be able to successfully integrate product
revisions into the Company's product line in the time frame required to minimize
competitive sales pressures in the marketplace.
The Company is also dependent on a sole source supplier for the printheads used
in DisplayMaker Express. The Company has experienced availability and quality
issues with this supplier that have affected shipping schedules and customer
satisfaction and have negatively impacted operating results in the past. While
the Company has taken strong corrective measures in dealing with this supplier,
there can be no assurance that this supplier will be able to meet the Company's
production requirements in the future or that the quality of the product will be
acceptable.
The Company sells consumable print media and inks for use with its Big Color
product line, and film used with the PressMate-FS. The Company depends on the
availability of consumable products to support its installed base of print
engines. There is no assurance that the suppliers of these consumables will
continue to offer their products to the Company, or that the consumable products
will continue to be available to the company at the same quarterly, pricing and
terms. The unavailability of consumable products or negative changes in quality
could adversely impact the market acceptance of the Company's new and existing
products, and may adversely affect sales of consumables.
Uncertainty Regarding Development of Wide-Format Market; Uncertainty Regarding
Market Acceptance of New Products. The Wide-Format market is relatively new and
evolving. The Company's future financial performance will depend in large part
on the continued growth of this market and the continuation of present large-
format printing trends such as use and customization of large-format
3
<PAGE>
advertisements, use of color, transferring of color images onto a variety of
substrates, point-of-purchase printing, in-house graphics design and production
and the demand for limited printing runs of less than 200 copies. The failure of
the Wide-Format market to achieve anticipated growth levels or a substantial
change in large-format printing customer preferences could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, in a new market, customer preferences can change
rapidly and new technology can quickly render existing technology obsolete.
Failure by the Company to respond effectively to changes in the Wide-Format
market, to develop or acquire new technology or to successfully conform to
industry standards could have a material adverse effect on the business and
financial condition and results of operations of the Company.
The Company's products currently target the high-performance production segment
of the Wide-Format printing market. The future success of the Company will
likely depend on its ability to develop and market new products that provide
superior performance at acceptable prices within this segment. In addition, the
Company's future success will likely depend on the Company's ability to
successfully introduce lower-cost products aimed at a broader segment of the
Wide-Format market. Any quality, durability or reliability problems with such
new products, regardless of materiality, or any other actual or perceived
problems with new Company products, could have a material adverse effect on
market acceptance of such products. There can be no assurance that such
problems or perceived problems will not arise, or that even in the absence of
such problems, new Company products will receive market acceptance. In
addition, the announcement by the Company of new products and technologies could
cause customers to defer purchases of the Company's existing products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Returns Reserves. The Company has established reserves for the return of
merchandise. The amount of the returns reserve is based on historical data
regarding returns of products. For new products there may be insufficient
information to accurately predict return rate and therefore the required
reserve may not be sufficient. Additionally, there is no assurance that there
will not be an unknown or unanticipated problem with a product or any component
thereof, or a defect or shortage of repair components or the consumable media or
inks that are needed to use the product which could cause the actual returns to
exceed the reserves. Returns of a product which exceed reserves could have an
adverse effect on the financial operations and results of the Company.
Fluctuations in Quarterly Operating Results. The Company's quarterly results of
operations have fluctuated and are expected to continue to fluctuate
significantly. These fluctuations have been caused by various factors,
including, but not limited to: The timing of new product announcements; product
introductions and price reductions by the Company and its competitors; the
availability and cost of key components and materials for the Company's
products; fluctuations and availability in customer financing; the relative
percentages of sales of consumables and printer architectures; risks related to
international sales and trade; and general economic conditions. In addition, the
Company's operating results are influenced by the seasonal buying patterns of
its customers, which have in the past generally resulted in reduced revenues and
earnings during the Company's first fiscal quarter. Further, the Company's
customers typically order products on an as-needed basis, and virtually all of
the Company's sales in any given quarter result from orders received in that
quarter. Certain products require significant capital expenditures, causing
some customers to delay their purchasing decision. Delays in purchases of low
volume, high-cost printers may cause significant fluctuations in the sales
volume for a given period. Also, the Company's manufacturing plans, sales
staffing levels and marketing expenditures are primarily based on sales
forecasts. Accordingly, deviations from these sales forecasts may cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses. Historically, a
large percentage of orders have been received and shipped near the end of each
month. If anticipated sales and shipments do not occur, expenditure and
inventory levels may be disproportionately high and operating results could be
adversely affected.
4
<PAGE>
Dependence on Consumables Revenues. The Company anticipates it will derive an
increasing percentage of its revenues and operating income from the sale of ink,
paper, film and other consumables to its customers. To the extent sales of the
Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, or customers substitute third-party
consumables for those of the Company, the Company's results of operations could
be adversely affected. Further, although the Company's consumables are
manufactured specifically to operate with its printing products to produce
optimum results, there can be no assurances that other manufacturers of printing
inks and papers will not develop products that can be sold and compete with the
Company's printing products, or that other products will not produce results
which are satisfactory to the customer at a lower cost. The Company alleges
that at least one manufacturer has improperly used the Company's trade secrets
to commence such competition. Although the Company has commenced legal action
against such manufacturer for misappropriation of trade secrets, there can be no
assurances that other manufacturers will not independently and legitimately
develop competing consumable products. In addition, product quality issues,
limitations in the availability of sole source consumables or changes in credit
or trade terms from sole sources could adversely affect the sales of
consumables.
Intellectual Property and Proprietary Rights. The Company's ability to compete
effectively will depend, in part, on its ability to maintain the proprietary
nature of its technologies through patents, copyrights and trade secrets.
Important features of the Company's products are incorporated in proprietary
software, some of which is licensed from others and some of which is owned by
the Company. The Company attempts to protect its proprietary software with a
combination of patents, copyrights, trademarks and trade secrets, employee and
third-party nondisclosure agreements and other methods of protection. Despite
these precautions, it may be possible for unauthorized third parties to copy
certain portions of the Company's products or to reverse-engineer or obtain and
use information that the Company regards as proprietary. Further, the Company's
intellectual property may not be subject to the same level of protection in all
countries where the products are sold. There can be no assurance that the
measures taken by the Company will be adequate to protect the intellectual
property or that others will not independently develop or patent products
similar or superior to those developed, patented or planned by the Company, or
that others will not be able to design products which circumvent any patents
relied upon by the Company.
The Company has been granted three United States patents for inventions related
to its TurboRes(R) approach to enhancing the vertical resolution of conventional
laser printer engines and three United States patents relating to the Company's
Big Ink Delivery System. Additional patent applications are pending relating to
the Company's TurboRes, ThermalRes(TM), FastPort(TM), Big Ink Delivery System,
oversized A3 printing, high-resolution imaging and image enhancement and wide-
format printing technologies and techniques. There can be no assurance that
patents will be issued from any of these pending applications, although the
ThermalRes process and mechanical aspects of the PressMate engine received U.S.
patent coverage during May 1996. With regard to current patents or patents that
may be issued, there can be no assurance that the claims allowed will be
sufficiently broad to protect the Company's technology or that issued patents
will not be challenged, invalidated or violated, requiring expenditures of cash
to pursue and enforce the Company's rights in the patented technology.
Applications to patent the basic TurboRes, ThermalRes and Big Ink Delivery
System approaches and related technologies have been filed in selected foreign
countries. Patent applications filed in foreign countries are subject to laws,
rules and procedures which differ from those of the United States, and there can
be no assurance that foreign patents will be granted as a result of these
applications. Furthermore, even if these patent applications result in the
issuance of foreign patents, some foreign countries provide significantly less
patent protection than the United States.
Additionally, patent, copyright and trademark protection has not been sought, or
may not be available in all foreign countries. Although the Company has not
received any notices from third parties alleging intellectual or proprietary
property infringement, there can be no assurance that third parties will not
assert infringement claims against the Company in the future or that any such
assertion will not require
5
<PAGE>
the Company to expend funds defending such claims or
requiring the Company to enter into royalty arrangements on such terms as may be
available, which may adversely affect financial performance of the company. Any
claim that the Company's current or future products or manufacturing processes
infringes on the proprietary rights of others, with or without merit, could
result in costly litigation which could adversely affect the financial
performance of the company.
The Company is actively pursuing development of new and unique print solutions
and processes, media and inks. Although the research and development process
involves an analysis of protected proprietary rights in any technology that is
being pursued, there is no assurance that competitors or others will not
interpret any such products or processes developed by the Company as violating
protected intellectual rights and pursue legal action, which could be costly and
may affect the financial performance of the Company. In addition, although the
Company does not have any knowledge of violations of its intellectual property
rights, there can be no assurance that the Company will not be forced to take
action to protect its intellectual property portfolio. Such enforcement
activity could require the expenditure of significant cash resources and could
affect the financial performance of the Company.
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company to
enter into a royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. If the
company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on such patents or in
bringing suits to protect the Company's patents against infringement, which
could adversely affect the Company's financial condition or results. If the
outcome of any such litigation is adverse to the Company, the Company's business
and financial results could be adversely affected.
Litigation and Litigation Costs. The Company and three of its officers are
currently subject to various claims in a securities lawsuit relating to a
decline in the market price of the Company's common stock in December 1994. The
Company is vigorously contesting the action against itself and its officers.
The Company is obligated to indemnify its officers for the costs of their
defense and to advance such costs prior to final disposition to the extent that
such indemnification is requested and to the extent certain statutory
requirements are met.
Further, the Company has instituted action against a competitor for patent
infringement, misappropriation of trade secrets and other causes of action. The
competitor has counter-claimed for false advertising, patent misuse, and unfair
competition by LaserMaster. The Company believes these counter-claims are
without merit. Such competitor has also published an allegation that the
Company's consumables sales practices are in violation of trade and antitrust
laws. During the second quarter of fiscal 1997 the court held that the
competitor's ink delivery system does not infringe on the Company's patent on
the Big Ink delivery system. Although the Company does not believe any of its
practices violate applicable trade or anti-trust laws, there is no assurance
that claims or actions will not be commenced by customers, competitors or
governmental authorities based on trade or anti-trust claims which could affect
the Company's operations and cash position.
The Company is also engaged in various actions related to transactional matters,
customers credit and product quality and/or warranty issues. Some of these
actions include claims against the Company for punitive, exemplary or multiple
damages. An award of punitive damages may not bear a direct
6
<PAGE>
relationship to the actual or compensatory damages claimed from the Company.
Although the Company does not believe there are any actions pending or
threatened against the Company which would have a material adverse impact on the
financial position of the company, there is no assurance that there will not be
an adverse award of multiple punitive or exemplary damages which could adversely
affect the cash position of the company.
Any litigation which the Company is involved in may have an adverse impact on
the Company's operations and may result in a distraction or diversion of
management's attention, thereby adversely affecting the operations by the
Company.
International Operations. The Company expects that international revenues will
continue to represent a substantial portion of its total revenues. International
operations are subject to various risks, including exposure to currency
fluctuations, political and economic instability, differing economic conditions
and trends, differing trade and business laws, unexpected changes in applicable
laws, rules, regulatory requirements or tariffs, difficulty in staffing and
managing foreign operations, longer customer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences and
varying degrees of intellectual property protection. Fluctuations in currency
exchange rates could result in lower sales volume reported in U.S. dollars.
Fluctuations in foreign exchange rates are unpredictable and may be substantial.
From time to time the Company has engaged in limited foreign currency hedging
transactions. There can be no assurance that the Company will be successful if
it engages in such practices to a significant degree in the future.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon certain key personnel, including Mr. Masters, its Chief Executive
Officer and President, and Mr. Lukis, its Chief Technical Officer. The loss of
either of these individuals, or other key management or technical personnel,
could adversely affect the Company's business. The Company maintains key person
life insurance in the amount of $2,000,000, payable to the Company, on each of
Mr. Masters and Mr. Lukis. In addition, the Company has certain non-compete and
continuation contracts with key personnel, which are currently under review by
the Company's Board of Directors in an effort to recruit and retain key
personnel. The Company also depends on its ability to attract and retain highly
skilled personnel. Competition for employees in this market is high and there
can be no assurance that the Company will be able to attract and retain the
employees needed. In addition, past financial performance of the Company may
limit the ability to hire and retain management professionals.
Environmental. The Company is subject to local and federal laws and regulations
regarding the use, storage and disposition of inks used with the Company's
print products. Although the Company believes it is in compliance with all such
laws and regulations, and the Company is not aware of any notice or complaint
alleging any violation of such laws or regulations, there can be no assurance
that there will not be some accidental contamination, disposal or injury from
the use, storage, or disposition of inks or other materials used in the
Company's operations. In the event of such accident, the Company could be held
liable for any damages that result and any such liability could have a material
adverse effect on the Company's financial condition. In addition, there can be
no assurance that the Company will not be required to comply with environmental
claims, laws, or regulations in the future which could result in significant
costs which could materially adversely affect the Company's financial condition.
Tax Liability. The Company sells its products from its offices in Eden Prairie,
Minnesota and reports sales and income tax liability based on sales occurring at
that location. It is possible that one or more state or local taxing
authorities could determine that there have been taxable transactions occurring
within their jurisdiction and seek recovery of taxes for current and/or past
periods. In addition, it is possible that local, state or federal taxing
authorities will take issue with the reporting or determination of tax liability
and seek additional taxes for current and/or past periods. The Company
currently has a net operating loss ("NOL") carryforward 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
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federal taxable income or that there will be sufficient taxable income to fully
utilize the NOL.
Volatility of Stock Price. The trading price of the Company's common stock is
subject to wide fluctuations in response to variations in operating results,
changes in the laws or regulations to which the company may be subject,
announcements of new products or technological innovations by the Company or its
competitors, overall economic conditions and indicators, market conditions
unrelated to Company performance, and general conditions in the industry.
Factors such as quarterly variation in actual or anticipated operating results,
changes in earnings estimates by analysts, and analysts' reactions to Company
statements and actions also contribute to stock price fluctuations. In addition,
the prices of securities of many high technology companies have experienced
significant volatility in recent years for reasons frequently unrelated to the
operating performance of the specific companies. These fluctuations may
materially affect the market price of the Company's common stock.
One time in the past, following fluctuations in the market price of the
Company's stock, a securities action was commenced alleging that the Company and
certain insiders had knowledge of certain material, adverse information about
the Company prior to the time that such information allegedly caused a drop in
the market price of the stock. Because the Company's stock has historically
fluctuated significantly, it is possible that following a significant change in
the market price of the stock another securities action could be commenced
against the company. Such action, whether commenced by one or more individuals,
or by a class of securities holders, could result in substantial costs and
diversion of management's attention and resources and thereby cause an adverse
effect on the business and financial performance of the Company.
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