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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, 1998
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
VIRTUALFUND.COM, INC. (FORMERLY 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, 1998 was $53,278,000 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, 1998, there were 15,778,866 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
Pursuant to shareholder approval received at its annual meeting on April 2,
1998, LaserMaster Technologies, Inc. changed its name to VirtualFund.com, Inc.
("the Company"). The name change highlights the Company's intention to diversify
and expand its product and growth strategy around two business units: The
Digital Graphics Business Unit and the Internet/Software Business Unit. The
Internet/Software Business Unit is in the development stage and expects initial
products to include business to business electronic commerce ("E-Commerce")
software marketed under the brand E-Com Tools(TM). This business unit is also in
the process of identifying Information Technology ("IT") Consulting companies as
potential acquisitions and intends to grow through the acquisition process in
the beginning stages of its operations. The Company has contracted an investment
banking firm to assist in acquisition activities. The unit's business plan calls
for the cross-selling of services and software to its customers. Establishing
recurring service revenues from the installation and service of the E-Com Tools
software is considered a major priority of the business unit. Throughout fiscal
1998 and the first quarter of fiscal 1999, the Company has invested personnel
resources in developing this new business unit. Revenue from this business unit
is not material at this time and as a result all references to "the Company"
will refer to the Digital Graphics Business Unit.
The Company's Digital Graphics Business Unit, which is comprised of the
Company's primary operating company, ColorSpan Corporation and its subsidiaries,
ColorSpan Europe, LTD., ColorSpan Asia/Pacific, Inc., ColorSpan Latin America,
Inc. and the newly acquired Kilborn Photo Products, Inc., designs, manufactures
and markets wide-format (up to a recently introduced 72" wide prints),
high-resolution color inkjet printers, chemical-free film imagers
("filmsetters"), and related image processing equipment for professional
printing applications. 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 DisplayMaker 4000, 5000, 6000
and 7000 or "DMX"), along with the Giclee PrintmakerFA(TM), DesignWinder(R) and
the DisplayMaker(R) Professional, DisplayMaker XL60 and DisplayMaker Express Big
Color(R) wide-format, digital inkjet printers, are designed to be a
cost-effective solution for short-run computer printing of photo-realistic,
posters, signs, and banners. 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 3000 Print
Server is a raster image processor ("RIP") which is capable of supporting a
combination of Giclee PrintMakerFA, DisplayMaker Professional, DesignWinder,
DisplayMaker Express, DisplayMaker HiRes 8-Color series printers and
PressMate-FS Personal FilmSetters(TM) simultaneously, as well as offering
time-saving features specifically designed for high-volume, production
environments. The RIPStation(TM) is an entry-level raster image processor print
server.
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" (dpi--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 high resolution laser printing and continued to enhance its products,
from 1991 through 1996, many of the Company's competitors, including
Hewlett-Packard(R) (HP), 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.
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The bulk of the decline in sales from plain-paper typesetting products during
this period was replaced by sales of new, wide-format color inkjet printers
developed by the Company. The Company introduced its wide-format (36 inch),
photo-realistic color printer, the DisplayMaker in 1993 followed later that year
by the DisplayMaker Professional. Although still based on a printer "engine"
developed by others, the DisplayMaker 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 size prints and banners. As the
market has grown and demand increased, competitors have licensed the printer
"engines" from the Company's supplier and have introduced their own competing
products, which have 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 targeted 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,
which uses heat-sensitive film rather than photosensitive film that allows dry
process imaging on the desktop rather than chemical image development in the
darkroom. The Company enhanced this printer and introduced a reconfigured
version as the "PressMate-FS" in August, 1995. During the past four years, the
Company has developed three new proprietary color printer products using
different 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). It 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, eight head,
cut-sheet printer that produces high-quality wide-format (36 by 48 inch) prints
in as little as six minutes. Since 1994, the Company has also introduced the
ColorMark Pro Print Servers, RIPStations (raster image processing computers),
and the Halon(TM) 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 architecture. 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 inch wide, roll-fed device with eight
thermal inkjet printheads. Also available in this series are the DisplayMaker
4000 (42" wide) and DisplayMaker 5000 (52" wide) printers with the same feature
set. During fiscal 1998, this product series was enhanced to add two additional
versions of each printer length. The DisplayMaker 4100, 5100 and 6100 series
printers were introduced in December 1997. This product was designed to be
driven by third-party RIPs and opened up a sales channel not previously
available to the Company. A customer that already possesses a wide-format
printing solution is now able to add the productivity and quality features of
the DisplayMaker series without purchasing a separate, dedicated RIP to drive
the printer, thus saving money. The Company signed an OEM agreement with Ilford
Imaging to distribute the product and signed a number of system integration
agreements with well known third-party RIP developers such as Onyx Graphics
Corp. and ScanVec Ltd. In April 1998, the Company released the DisplayMaker
4200, 5200 and 6200 versions of the product. This product, which comes with a
RIP embedded into the printer hardware, addresses many entry level concerns by
reducing the entry level price point for a relatively cost-conscious customer.
In August 1998, the Company introduced new 72 inch versions called the 7000,
7100 and 7200. The 7200 version is expected to begin shipping in October 1998.
The 7000 and the 7100 began shipping in August 1998. On August 25, 1998, the
Company announced its newest product, the Giclee PrintMakerFA.
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 the sales process. In August 1997, the Company
began selling wide-format inkjet media for HP, Encad and other wide-format
printers via the world wide web.
The Company's domestic offices are in Eden Prairie, Minnesota. The Company's
European sales subsidiary is headquartered in Hoofddorp, The Netherlands. The
Company's Asia/Pacific sales and technical support facility is
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located in San Jose, California and its Latin America sales facility is located
in Miami, Florida. In addition, the Company has opened a research and
development office in Santa Clara, California and a small business development
office in San Jose, California. Kilborn Photo Products, Inc., a media coating
facility, is located in Cedar Rapids, Iowa.
MARKET
According to WORLDWIDE PRINTER & SUPPLIES MARKET REPORT, a March 1998 market
survey commissioned by the Information Management Institute and conducted by IT
Strategies, a research and consultancy firm serving the digital printing
markets, the Color Wide-Format Graphics Printing market for color inkjet
hardware and consumables is projected to grow from annual sales of approximately
$6.2 billion in 1997 to approximately $14.3 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. With the growth
in computing power and the associated reduction in the cost of memory and other
components, 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.
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 printhead technology) typically form
images, lines and other characters by placing very small dots of ink as the
printhead moves horizontally (called a raster scan) while the media is typically
scrolled vertically. Because inkjet printheads 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 media. 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 printhead. 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:
INTERNET/SOFTWARE BUSINESS UNIT
DESIGN, DEVELOP AND MARKET A SERIES OF BUSINESS TO BUSINESS AND BUSINESS TO
CUSTOMER SOFTWARE PRODUCTS CENTERED AROUND ELECTRONIC COMMERCE AND THE INTERNET
WHICH OFFER BUSINESS SOLUTIONS FOR MIDDLE AND SMALL MARKET CUSTOMERS. The
Internet/Software Business Unit has been established and has identified this
market as fragmented and very dynamic. As a result, the Company believes
opportunities exist to service the small to medium sized companies desiring to
expand their business to include E-commerce. This Business Unit has been
developing software products it intends to sell under the brand name of E-Com
Tools. The Business Unit expects initial shipments and implementations of its
products to occur in the fall of 1998.
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BUILD AN INFORMATION TECHNOLOGY CONSULTING BUSINESS THROUGH ACQUISITIONS. The
business plan of the Internet/Software Business Unit is dependent on identifying
and acquiring the IT consulting resources necessary to implement and service the
E-Com Tools customers. In addition, the Company believes there is significant
untapped revenue potential in these areas that can be accessed by a marketing
program to cross-sell and cross-market goods and services to the customers of
this Business Unit.
DIGITAL GRAPHICS BUSINESS UNIT
TO MAINTAIN AND ENHANCE ITS POSITION AS A LEADING PROVIDER OF AFFORDABLE, HIGH
QUALITY, PROPRIETARY, CUSTOMER FOCUSED 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 August 1997. In September 1997, the Company, under its new ColorSpan
brand, introduced a family of HiRes 8-Color printers with printing widths
varying from 42 inches to 62 inches. During fiscal 1998, additional product
features were developed and in August 1998, a 72 inch version of the product was
released. 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 DISTINGUISHES 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 vendors' software and operating systems.
TO CONTINUE TO DEVELOP A GLOBAL RESELLER CHANNEL WHICH UTILIZES THE COMPANY'S
SALES EXPERTISE. The Company has been successfully 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 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(TM)" media offerings for outdoor use released during
1997. The Company added 21 new inkjet media offerings during fiscal 1997.
Included in these offerings are WaterFast PolyFilm, 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(TM) Proofing Paper and
FineArt(TM)Archival 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 ColorSpan's ink and proprietary ColorMark(R) color matching
capabilities available on the Company's hardware product lines. 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(TM) )
versions. In July 1998, the Company purchased Kilborn Photo Products, Inc. for
600,000 shares of the Company's common stock. Kilborn is a media coater and
research center that will provide additional inkjet media offerings for the
Company.
TO INCREASE INTERNATIONAL SALES. International sales have been an important part
of ColorSpan's core business. The Company is committed to increasing its market
share in Europe, Asia, Africa and 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 opened a new
technical support and sales office in San Jose, California to enhance the
support of its Pacific Rim operations going forward and has opened a sales
office in Miami, Florida to focus on the Latin American market.
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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 August 1997. The product is based on the
Company's DesignWinder platform. During fiscal 1998, the Company signed an
agreement with Ilford Imaging to sell the DMX product under the Ilford name. 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. During fiscal 1998, the Company signed agreements with
third-party RIP providers such as Onyx Graphics, ScanVec, LTD and Colorbus.
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 Mediao Byo Air division. This internet sales model
markets a line of inexpensive, high quality, commodity media and relies on
electronic commerce for marketing, order acceptance and shipment. It partners
with a number of third-party suppliers to offer overnight delivery of printing
supplies to inkjet supplies consumers. During 1998, the Company expanded this
division and renamed it Supplieso Byo Air ("SBA"). SBA has expanded its internet
profile to include multiple language support and an enhanced E-commerce enabled
web site which is the first implementation of the Company's E-Com Tools software
packages.
COLORSPAN PRODUCTS
ColorSpan's six wide-format Big Color inkjet printer lines, DisplayMaker
Professional (initial shipments in December 1993), DisplayMaker Express (initial
shipments in December 1995), DesignWinder (introduced in September 1996),
DisplayMaker XL60 (initial shipments in April, 1997), DisplayMaker HiRes 8-Color
printer series (initial shipments in September 1997) and Giclee PrintMakerFA
(initial shipments in September 1998), 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 color management and SmoothTone(TM) image enhancement
technologies. The DisplayMaker HiRes 8-Color series adds features like
AutoSet(TM) calibration which automatically adjusts cartridge positions,
AutoJet(TM) mapping which makes adjustments for misfiring jets, AutoTune(TM)
which allows users to calibrate in an unattended mode, and AutoInk(TM) which
allows users to load two separate ink types and switch between two dye-based ink
products and one pigmented ink product 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. This product is the subject of one OEM agreement and
three technology support agreements in which third-party RIP vendors have agreed
to support the DMX product as a printing solution with their customers.
Suggested list prices for the Company's printer products range from $13,995 to
$34,995. The RIP Print Server prices range from $4,495 to $10,995.
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, 4-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.
DisplayMaker Professional and DisplayMaker XL60 are based on
third-party-supplied inkjet marking engines and the Company's patented Big
Ink(TM) 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.
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.
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. DisplayMaker Express
requires the use of ColorMark qualified or certified media, which ensures proper
print functionality and quality.
DESIGNWINDER. The Company's third proprietary printer and first of the HiRes
8-Color printer platforms is a 36-inch wide, drum-based, cut-sheet, 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 roll fed inkjet plotter devices
(print engines that use a moving printhead traveling perpendicular to a moving
web of paper to attain print coverage).
GICLEE PRINTMAKERFA. This product combines the outstanding color attributes of
eight color printing with the accuracy of drum-based architecture to produce
output with an apparent resolution of 1800 dpi. The product targets a portion of
the Fine Art reproduction market which, according to market research presented
by the International Association of Fine Art Digital Printers (IAFADP), is
estimated to be a $160 million market currently and growing at a rate of 60% per
year.
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 office or computer network environments.
COLORMARK PRO 3000. The DisplayMaker printers, DesignWinder, Giclee PrintMakerFA
and PressMate are all driven by the Company's ColorMark Pro 3000 print server, a
raster image processor that is based on a 300 MHz, 32-bit microprocessor. The
ColorMark Pro 3000 features advanced file spooling (a queue method) for multiple
users, "RIP Saver(R) (which stores processed files to avoid redundant
rasterization) and job management and logging features that track ink and paper
consumption for job-costing and work-flow planning, among other things. This
device has connectivity capacity to handle several devices simultaneously
including one DesignWinder or Giclee PrintMaker FA, up to two DisplayMaker
Professional or XL60, one DisplayMaker Express, one DisplayMaker HiRes 8-Color
printer, and up to two PressMate-FS.
RIPSTATION. The RIPStation is an entry-level raster image processor color
server. It is based on a 200 MHz, 32-bit microprocessor. It functions similarly
to the ColorMark Pro 3000 without the added advanced and multiple engine
connectivity features offered by the ColorMark Pro 3000.
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. The
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Company sells over 100 different media options and has almost 200 different ink
products. During fiscal 1998, the Company tested and released Perma-Chrome(TM)
LightFast Pigmented ink and Endura-Chrome(TM) LightFast Dye ink products to
increase the variety of printing solutions available from ColorSpan related
products. 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 version of 500 ml Big Ink packs for use
with the DisplayMaker HiRes 8-Color printer series, DisplayMaker Professional,
DisplayMaker XL60 and DesignWinder. The Company also sells 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 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 $229 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.
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 aftermarket consumables
business.
As of June 30, 1998, the Company employed approximately 70 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 ("VAD") internationally. As of June 30, 1998, the Company
employed an 81
9
<PAGE>
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 networks. The Company's sales efforts are supported by a
direct mail marketing program designed to achieve frequent contact with its
potential customers, including PostScript(R) 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 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 the sales process.
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 Delivery System for use with the DesignWinder to Agfa-Gevaert for
private labeling. Agfa began selling its AgfaJet Atlas imaging system in August
1997. In February 1998, the Company signed an OEM agreement with Ilford Imaging
to market and distribute a version of the Company's new DMX series printers. 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. The Company signed three agreements during fiscal 1998 to
allow third-party vendors to support the Company's HiRes 8-Color product line.
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, while Latin America is served
from the sales office located in Miami, Florida. 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 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, 1998, sales to customers outside of the United
States accounted for approximately 42% of the Company's total revenues. See Note
14 of Notes to Consolidated Financial Statements for additional information
regarding international operations.
10
<PAGE>
SERVICE AND SUPPORT
At June 30, 1998, 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 most 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, Giclee PrintMakerFA and DisplayMaker HiRes 8-Color series
products, the Company purchases components and uses them to manufacture 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. Certain other components are available from only a
limited number of sources. The Company has experienced delays in the past 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. During fiscal 1998, revenues based on the
components supplied by this competitor accounted for approximately 67% of the
Company's total revenue. 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 a proprietary printer engine,
DesignWinder, in September 1996, and introduced another proprietary product
series, the DisplayMaker HiRes 8-Color 4000, 5000, and 6000 products in
September 1997 and 7000 in August 1998. The Giclee PrintMakerFA was also
introduced in August 1998. 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 whose prices have fluctuated
significantly in recent years. Significant fluctuations in price or availability
of certain 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.
11
<PAGE>
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 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. 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.
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.
The Company's new Internet/Software Business Unit will compete in markets that
it considers highly fragmented and diverse. Competition in those markets is also
very intense. The IT Consulting Business will compete for acquisitions with many
competitors who have more experience and resources and can apply more capital to
the acquisition process. Substantially all of the Big 5 Accounting firms,
General Electric, USWeb and a large number of smaller firms are competing to
locate, hire or purchase resources in this area. The Business Unit's software
products will also compete with some of the same competitors listed above. There
can be no assurance that the Company will be able to locate and acquire the
resources necessary to implement its strategy for this new Business Unit. For
important additional cautionary factors, risks and uncertainties, refer to
Exhibit 99 of this form 10-K.
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<PAGE>
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 non-disclosure 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. In addition, the Company's products compete in a
market in which much intellectual property has been developed and patented by
competitors of the Company. Although the Company performs patent searches and
employs both outside and inside patent counsel, there can be no assurance a
competitor will not dispute the uses or methods employed by the Company's
products. For important additional cautionary factors, risks and uncertainties,
refer to Exhibit 99 of this Form 10-K.
The Company has been granted four United States patents for inventions related
to its TurboRes approach to enhancing the vertical resolution of conventional
laser printer engines, four 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(R) 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 System,
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 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 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, 1998 the Company had a total of 404 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.
13
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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 with these laws.
ITEM 2. PROPERTIES.
- - ------- -----------
As of August 31, 1998 the Company leases an aggregate of 314,077 square feet of
office and warehouse space in Eden Prairie, Minnesota of which 168,034 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.
The Company leases approximately 15,867 square feet of office and warehouse for
its European headquarters in Hoofddorp, outside of Amsterdam, The Netherlands.
The Company leases 14,472 square feet of office space in San Jose, California
for its Asian sales and technical support staff and an advanced research and
technology center. The Company also leases 1,713 square feet of office space in
Miami, Florida for the ColorSpan Latin America sales staff and owns
approximately 25,000 square feet of office and production space in Cedar Rapids,
Iowa for its media coating operations.
Management expects to acquire additional facilities, most likely through
leasing, in fiscal 1999 to accommodate the anticipated growth in the
Internet/Software Business Unit.
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. The Becker claims have been pled as a class
action. In February 1996, one of the directors named in the suit was dismissed
from the case without prejudice. A class of plaintiffs was certified as
including all purchasers of the Company's stock during the period of December 3,
1993 through December 8, 1994. 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. In
October 1997 the court issued its final approval of the settlement and dismissed
all claims against the Company and its officers and directors. Pursuant to the
settlement the Company has contributed stock valued at $636,000. The settlement
obligation is included in the special charges for the quarter ended June 1997.
In October 1995, LaserMaster Corporation (LMC) filed suit against Sentinel
Imaging, a division of Sentinel Business System, Inc. ("Sentinel") and Brian
Haberstroh, an employee of Sentinel ("Haberstroh"). The complaint alleged, among
other things, misappropriation of trade secrets, and interference with
contractual relationships. The Company alleged that Sentinel misappropriated
trade secrets related to LaserMaster's Big Ink delivery system for the Big Color
product line and customer information related to customers and users of the Big
Ink product. In October 1997 the case was tried before a jury which found in
favor of LMC and against Sentinel and Haberstroh and awarded damages to LMC in
the amount of $2.174 million dollars. The court awarded interest on the verdict
and entered judgment in the amount of $2.363 million dollars. Sentinel appealed
from the judgement. In February 1998, ColorSpan Corporation ("CSC") filed
another suit against Sentinel alleging tortious interference with contract,
contributory copyright infringement, copyright infringement and unfair
competition related to CSC's software license for the ColorMark color management
software. Sentinel has counterclaimed alleging copyright misuse and unfair
competition. In March 1998, Sentinel filed for protection under chapter 11 of
the federal bankruptcy code. Since the bankruptcy filing, the Company acquired
Kilborn Photo Products, Inc., a media coating facility which is a supplier to
Sentinel and also has a claim in the approximate amount of $575,000 against
Sentinel for product supplied. The Company does not know whether the claims of
ColorSpan or Kilborn will be challenged. At this time a plan of reorganization
has not been filed in the case. It is uncertain whether a plan of bankruptcy
will be submitted and approved, and what, if anything, the Company may recover
from Sentinel in the bankruptcy. In addition, the creditors committee involved
in this case is considering a potential "preference" claim associated with
approximately $1.8 million in payments from Sentinel to Kilborn during the year
prior to the filing of the petition for bankruptcy.
14
<PAGE>
The Company's European subsidiary is involved in a dispute with a distributor
which alleges that the Company wrongly refused to enter into a distribution
agreement with the distributor. An adverse determination of the liability
aspects has been rendered against the Company's subsidiary, but there has been
no determination of damages that may be due to the distributor. The Company
believes that the amount of damages that the distributor may recover is not
expected to have a material effect on the financial condition of the Company.
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 VirtualFund.com, Inc. was held on
April 2, 1998, pursuant to notice to all shareholders of record at the close of
business on February 27, 1998. As of the notice of the meeting there were
14,877,533 common shares outstanding.
The following matters were presented for a vote of the security holders:
1. Election of director Jean Louis Gassee to a three year term.
Shareholders passed the resolution with 13,790,566 votes in favor and
83,915 votes against the proposal. There were no abstentions.
2. Election of director Rohan Champion to a three year term. Shareholders
passed the resolution with 13,788,466 votes in favor and 86,015 votes
against the proposal. There were no abstentions.
3. Election of director George Kline to a two year term. Shareholders
passed the resolution with 13,787,966 votes in favor and 86,515 votes
against the proposal. There were no abstentions.
4. A proposal to change the name of LaserMaster Technologies, Inc. to
VirtualFund.com, Inc. Shareholders passed the resolution with
13,516,116 votes in favor and 230,925 votes against the proposal. There
were 127,440 abstentions.
Mr. Kline subsequently resigned his position as a director in June 1998.
15
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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: VFND formerly LMTS). The following table
sets forth the high and low sale prices reported in the Nasdaq National Market
System:
Common Stock
------------
High Low
---- ---
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 ..................................... 3.63 1.69
Second Quarter..................................... 5.00 2.63
Third Quarter...................................... 5.25 3.50
Fourth Quarter..................................... 5.25 3.75
Fiscal Year 1999
First Quarter (through August 31, 1998)............ 5.25 3.44
- - -------------------------------
As of August 31, 1998, the last reported sale price of the Common Stock was
$4.00 per share. As of such date, there were approximately 216 record holders
and 2,900 beneficial holders of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
- - ------- ------------------------
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales................................. $ 80,732 $ 86,563 $ 93,592 $ 119,438 $ 105,849
Cost of goods sold........................ 48,051 61,912 (a) 64,379 (b) 72,857 59,852
---------- ---------- -------- --------- ----------
Gross profit...................... 32,681 24,651 29,213 46,581 45,997
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Operating expenses:
Sales and marketing........................ 14,335 18,131 21,109 27,091 21,810
Research and development................... 6,503 6,387 6,149 6,210 3,335
General and administrative................. 9,506 10,097 11,310 11,552 9,634
Restructuring and other special charges.... 4,936 (a) 4,431 (b)
---------- -------- --------- ---------- -----------
Operating profit (loss)............... 2,337 (14,900) (13,786) 1,728 11,218
Other expenses (primarily interest)........... (610) (1,011) (1,823) (1,433) (1,160)
----------- --------- --------- ---------- -----------
Earnings (loss) before income taxes........... 1,727 (15,911) (15,609) 295 10,058
Income tax (provision) benefit................ (1,289)(a) 5,147 (89) (3,394)
---------- --------- -------- ---------- -----------
Net earnings (loss)........................... $ 1,727 $ (17,200) $ (10,462) $ 206 $ 6,664
========== ========== ========== ========== ==========
Net earnings (loss) per common share:
Basic......................................... $ 0.12 $ (1.25) $ (0.93) $ 0.02 $ 0.65
========== ========== ========== ========== ==========
Assuming dilution............................. $ 0.11 $ (1.25) $ (0.93) $ 0.02 $ 0.57
========== ========== ========== ========== ==========
Weighted average common shares outstanding.... 14,716 13,706 11,305 11,097 10,192
========== ========== ========== ========== ==========
Weighted average common and dilutive
potential common shares outstanding........... 15,602 13,706 11,305 12,206 12,189
========== ========== ========== ========== ==========
</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.
June 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Working capital $ 9,326 $ 9,732 $ 2,580 $ 13,708 $ 13,973
Total assets 33,120 32,631 46,545 59,161 47,401
Current liabilities 17,286 18,298 30,087 30,933 21,042
Long-term debt, less current
maturities 67 185 820 1,599 1,590
Stockholders' equity 15,767 11,915 15,638 25,293 23,139
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------- ---------------------------------------------------------------
RESULTS OF 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").
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:
17
<PAGE>
Fiscal Years Ended June 30,
---------------------------
1998 1997 1996
----- ----- -----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of goods sold ......................... 59.5 71.5(a) 68.8(b)
----- ----- -----
Gross margin ............................... 40.5 28.5 31.2
Expenses:
Sales and marketing ................... 17.7 20.9 22.5
Research and development .............. 8.1 7.4 6.6
General and administrative ............ 11.8 11.7 12.1
Restructuring and other special charges 5.7(a) 4.7(b)
----- ----- -----
Total operating expenses ................... 37.6 45.7 45.9
----- ----- -----
Operating profit (loss) .................... 2.9 (17.2) (14.7)
Other (expense) income:
Interest expense ...................... (0.9) (1.6) (1.9)
Other ................................. 0.1 0.4 (0.1)
----- ----- -----
Earnings (loss) before income taxes ........ 2.1 (18.4) (16.7)
Income tax (provision)benefit .............. (1.5)(a) 5.5
----- ----- -----
Net earnings (loss) ........................ 2.1% (19.9)% (11.2)%
===== ===== =====
(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 $80.7 million, $86.6 million and $93.6 million in fiscal 1998,
1997 and 1996, respectively. The decrease in net sales of 6.7% in fiscal 1998
was the result of a 21.1% decrease in hardware sales, partially offset by a 6.8%
increase in sales of consumables. The decrease in hardware sales in fiscal 1998
is due to a $2.9 million decrease in sales of PressMate, a $3.5 million decrease
in sales of plain-paper typesetting equipment and a $3.5 million decrease in
sales of Big Color servers (raster image processors or RIPs). The decrease in
sales of PressMate and plain-paper typesetting products is primarily related to
a reduction in marketing resources devoted to these products. The decrease in
sales of Big Color servers is the result of the Company's introduction in 1998
of a version of its HiRes DisplayMaker that is designed for third-party RIP
support and another version that includes an embedded PostScript-language
compatible RIP.
Consumables sales, consisting primarily of ink, media and film, along with
maintenance contracts and spare parts, as a percentage of total net sales was
58.9%, 51.5% and 39.7% in fiscal 1998, 1997 and 1996, respectively. The increase
in consumables sales over the past two years is primarily due to an increased
installed base of 8-Color printers such as DesignWinder and the new HiRes
DisplayMaker series. These 8-Color printers typically use more ink than 4-Color
printers, such as DisplayMaker Professional, in order to achieve a higher
apparent resolution. The increase in sales of ink related to 8-Color printers
more than offset a $2.4 million decrease in sales of plain-paper typesetting
consumables and a $1.6 million decrease in sales of ink related to 4-Color
printers.
18
<PAGE>
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 an $8.9 million decrease in
plain-paper typesetting products, a $1.2 million decrease in PressMate, a $1.8
million decrease in DisplayMaker Express and a $4.2 million decrease in
DisplayMaker Professional. The decrease in sales of plain-paper typesetting
products and PressMate is 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 following table sets forth net sales by product line expressed in thousands
and as a percent of net sales:
Fiscal Years Ended June 30,
----------------------------------------
NET SALES 1998 1997 1996
---- ---- ----
Consumables............... $47,578 58.9% $44,566 51.5% $37,174 39.7%
Big Color................. 29,730 36.9 32,030 37.0 35,190 37.6
Plain-paper Typesetting... 1,474 1.8 4,951 5.7 13,834 14.8
PressMate................. 1,947 2.4 4,871 5.6 6,028 6.4
Other..................... 3 145 0.2 1,366 1.5
Total net sales........... $80,732 100.0% $86,563 100.0% $93,592 100.0%
======= ====== ======= ====== ======= ======
INTERNATIONAL SALES
Japan, Asia/Pacific sales decreased $4.9 million or 34.3% and Latin American
sales decreased $1.9 million or 30.7% in fiscal 1998 primarily as a result of
unstable economic conditions in these regions throughout most of fiscal 1998.
Japan, Asia/Pacific sales increased both as a percentage of total net sales and
in dollars from fiscal 1996 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 is 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:
Fiscal Years Ended June 30,
----------------------------------------------
INTERNATIONAL SALES 1998 1997 1996
---- ---- ----
Europe................ $17,226 21.3% $17,410 20.1% $19,656 21.0%
Japan, Asia/Pacific... 9,451 11.7 14,382 16.6 13,235 14.1
Latin America......... 4,286 5.3 6,184 7.1 5,146 5.5
Canada................ 2,965 3.7 2,118 2.5 2,892 3.1
------- ----- ------- ----- ------- ----
Total net sales....... $33,928 42.0% $40,094 46.3% $40,929 43.7%
======= ===== ======= ===== ======= =====
SALES OUTLOOK
Based on the success of the Company's most recent product introductions,
anticipated products and expectations for the revenue potential in its new
Internet/Software Business Unit, management believes the Company now has the
products, infrastructure and systems in place to increase its revenue base in
fiscal 1999 over fiscal 1998 levels. However, there can be no assurances that
the Company will be able to increase its revenue base in fiscal 1999.
19
<PAGE>
GROSS MARGIN
Gross margins, expressed as a percent of net sales, were 40.5%, 28.5% (32.5%
excluding special charges) and 31.2% (37.1% excluding special charges) for
fiscal 1998, 1997 and 1996, respectively. Gross margin as a percent of net sales
increased in fiscal 1998 by 5.4% as a result of changes in product mix and
pricing and 6.6% as a result of reductions in direct labor and overhead (of
which 4% is related to special charges in fiscal 1997).
Gross margin was negatively impacted throughout fiscal 1997 from excess capacity
related to lower than expected hardware volumes on PressMate and DisplayMaker
Express and aggressive pricing of DisplayMaker Express, as lower-priced
alternative products offered by the Company and its competitors became
available. In addition, gross margin was negatively impacted in fiscal 1997 by
aggressive pricing of plain-paper typesetting products and some 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 1998, 1997 and 1996 the Company's gross margins were favorably
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 were based
on the Company's estimates of net realizable value of the related inventory and
for expected returns of the older model PressMate 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 and $2.7 million for fiscal 1997 and 1996. 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.
There was no amortization of capitalized software development costs in fiscal
1998.
SALES AND MARKETING
Sales and marketing expenses were $14.3 million, $18.1 million and $21.1 million
in fiscal 1998, 1997 and 1996, respectively. The decrease in expense of $3.8
million in 1998 from 1997 included decreased expenses related to sales of
$249,000, marketing of $3.3 million and technical support of $368,000. The
decrease in marketing expenses in 1998 is attributable to reductions in
marketing of PressMate and plain-paper typesetting products along with a
reduction in the Company's direct mail programs for Big Color products. The
Company is now placing more reliance on its reseller channels for end-user
marketing while still providing certain marketing materials and new product
introductions.
The decrease in sales and marketing expenses 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
sales expenses is related to an overall decrease in sales volume.
RESEARCH AND DEVELOPMENT
The Company capitalized software development costs of $1.6 million and $2.7
million in fiscal 1997 and 1996, respectively, as required by FASB No. 86 (see
Note 1 of Notes to Consolidated Financial Statements). No significant
capitalizable software development costs were incurred in fiscal 1998. The
decrease in capitalized software development in 1998 and 1997 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 ("R&D")expenditures, including
amounts expensed and capitalized, were $6.5 million, $7.9 million and $8.8
million in fiscal 1998, 1997 and 1996, respectively. As a percent of overall
sales, these expenditures represented 8.1%, 9.2% and 9.4% in fiscal 1998, 1997,
and 1996, respectively. The decrease in gross R&D expenditures in 1998 and 1997
compared to prior years is attributable to reductions in personnel and other
resources
20
<PAGE>
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, 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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9.5 million, $10.1 million and $11.3
million in fiscal 1998, 1997 and 1996, respectively. The decreases in 1998 and
1997 from prior years are the result of reductions in the infrastructure
necessary to handle lower sales volumes, offset in 1997 and 1996 in part by
costs associated with the defense of the shareholder lawsuit (see "Legal
Proceedings" for further details).
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 shareholders' 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, 1998, approximately $629,000 of the
$4.4 million charge remains in current liabilities.
INTEREST EXPENSE
Interest expense was $715,000, $1.4 million and $1.8 million in fiscal 1998,
1997 and 1996, respectively. The decrease in interest expense in 1998 is
attributable to a decrease in average debt levels resulting from increased cash
flow from operating activities and conversion of the debenture to equity. 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 decreased.
INCOME TAXES
The effective income tax rate was (8.1%) and 33.0% in fiscal 1997 and 1996,
respectively. The Company did not record a provision for income taxes in fiscal
1998 as the availability of net operating loss carryforwards more than offset
the pre-tax income generated in fiscal 1998. 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, 1998, 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. Management believes the losses incurred from
normal operations in fiscal 1997 and 1996 were the result of rapidly declining
revenue from older products that exceeded the revenue generated from newer
products as evidenced by a 7.5% and 21.6% decline in net revenue in fiscal 1997
and 1996, respectively. Although there can be no assurance that additional
charges related to product transitions or future strategies will not be
necessary or that further revenue declines will not occur, management believes
it now has the products, infrastructure, and systems in place to maintain or
increase its revenue base and generate sufficient profits to realize the $4.8
million deferred tax asset. See Note 11 of Notes to Consolidated Financial
Statements for further disclosures relating to income taxes.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity needs during the years ended June 30, 1998 and 1996 were satisfied by
cash flows from operating activities. Liquidity needs during the year ended June
30, 1997 were satisfied primarily by the issuance of common stock and warrants.
Operating activities provided cash of $6.9 million in 1998, consumed cash of
$4.0 million in 1997 and provided cash of $6.2 million in 1996. The increase in
cash provided from operations in 1998 is due primarily to profitable operations
and lower levels of inventory resulting from increased efficiencies in
forecasting and planning. The decrease in cash provided from operations in 1997
compared to 1996 is the result of a $17.2 million net loss incurred by the
Company.
Cash used in investing activities was $1.1 million, $3.0 million and $6.3
million in fiscal 1998, 1997 and 1996, respectively. The decrease in cash used
in investing activities in 1998 and 1997 compared to prior years is the result
of lower expenditures for property and equipment, capitalized software
development costs and other intellectual property. The Company does not expect
significant increases in expenditures for property and equipment in fiscal 1999
compared to fiscal 1998.
Financing activities used cash of $1.3 million in 1998, provided cash of $7.4
million in 1997and used cash of $365,000 in 1996. 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") purchased 914,286 shares for $4 million and received
warrants to purchase an additional 914,286 shares at $7.00 per share. 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.
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 65% 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
22
<PAGE>
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.
The Company does not have any current significant commitments for capital
expenditures however, it does expect to incur substantial expenditures related
to its acquisition strategies in fiscal 1999. Management expects to finance
acquisitions through the issuance of additional equity securities, cash flow
from operations and short-term borrowings under its line of credit. Management
expects to finance operations throughout the remainder of fiscal 1999 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 delay its acquisition strategy or further restructure
its capitalization.
The Company's Senior Debt Agreement, which is secured by substantially all of
the Company's assets, expires in January 1999. Based on negotiations to date and
management's assessment of current conditions in the overall financing market,
management believes it will be able to secure new financing on terms at least as
favorable as its current agreement.
FOREIGN CURRENCIES
In general, the impact of foreign currency gains/losses are immaterial to the
Company as a whole. ColorSpan Europe, Ltd. ("CSE") extends credit in the normal
course of business in five relatively stable European currencies. In addition,
CSE'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.
YEAR 2000
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of time-sensitive information by its computerized
information systems. Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the applicable year. In
such case, programs that have time-sensitive logic may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company utilizes a number of computer
programs across its entire operation. Year 2000 issues could impact the
Company's information systems as well as computer hardware and equipment that is
part of its telephone network such as switches, termination devices and SONET
rings that contain embedded software or "firmware."
The Company's exposure to potential Year 2000 problems exists in two general
areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties. The
majority of the Company's exposure in potential Year 2000 problems is in the
latter area where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on third
parties, many of whom are themselves heavily dependent on technology. The
Company cannot control the Year 2000 readiness of those parties. In some cases,
the Company's third-party dependence is on vendors of technology who are
themselves working towards solutions to Year 2000 problems. The Company has
initiated projects to identify and correct the potential problem in all of its
enterprise systems. The costs incurred to date total less than $30,000 and have
been expensed in the financial statements. The Company is using internal
resources to test the software modifications. Funding for this area is expected
to, and has come from, cash flow from operations. Management expects that
additional costs for this issue will not be material.
THE COMPANY'S PRODUCTS. The Company designs and sells products which are heavily
reliant on software. While the Company has taken appropriate steps to ensure the
readiness of this software and believes it to be compliant, the
23
<PAGE>
Company cannot be certain that the software will operate error free, or that the
Company will not be subject to litigation, whether the software operates error
free or not. However, the Company believes that based on its efforts to ensure
compliance and the fact that the calculations needed in and by its products are
not date dependent, it is not reasonably likely that the Company will be subject
to such litigation.
CONTINGENCY PLANS. The Company has not yet completed its planning and
preparations to handle the most reasonably likely worst case scenarios described
above. The Company intends to develop contingency plans for these scenarios
during fiscal 1999. The Company believes that this is the appropriate timeframe
for developing such plans and that efforts prior to that time should be focused
on renovation, testing and verification of its system modifications.
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
24
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - -------- ---------------------------------------------------
THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1998, CONCERNING
THE DIRECTORS OF THE COMPANY:
Year
Became
Name, Age, Positions, Principal Occupations, Directorships Director
- - --------------------------------------------------------------------------------
DIRECTORS WHOSE TERMS EXPIRE IN 1999
MELVIN L. MASTERS; age 44; Mr. Masters co-founded the Company in 1989
February, 1986 and has been Chairman, Chief Executive Officer and
President of the Company since it acquired LMC in May 1989. Mr. Masters
is also the sole shareholder, director and CEO of TimeMasters, Inc.
(TMI), a company established for the purpose of property management
which has additional investments in the fields of wireless voice and
data communications, internet services and personal motor sports
products.
RALPH D. ROLEN; age 44; Mr. Rolen is Senior Vice President and Manager 1989
of the Retail Credit Division of First Tennessee National Bank of
Memphis, Tennessee, a position he has held since January 1989.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
ROHAN CHAMPION; age 40; Mr. Champion has been Vice President, Strategy 1998
and Alliances at Federal Express Corp., since 1996. Prior to joining
Federal Express, he was Vice President, Corporate Strategy and New
Services for AT&T. He has also held positions at Novell, Inc.,
ARINC-Endeavor Group and Oracle Corporation.
JEAN-LOUIS GASSEE; age 54; Since 1990, Mr. Gassee has been Chairman and 1990
Chief Executive Officer of Be, Inc. of Menlo Park, California. That
company is involved in personal computer technology. From August 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, Inc. of San Bruno, California and 3COM, Inc., Sunnyvale,
California.
THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1998, REGARDING THE
EXECUTIVE OFFICERS OF THE COMPANY:
Name Age Positions
- - --------------------------------------------------------------------------------
Melvin L. Masters 44 Chief Executive Officer, President and Chairman of
the Board
Lawrence J. Lukis 50 Chief Engineer
Robert J. Wenzel 47 Chief Operating Officer and President ColorSpan
Corporation
Thomas D. Ryan 40 Executive Vice President
James Horstmann 37 Chief Financial Officer
David Alexander 39 Secretary
Timothy N. Thurn 42 Treasurer
25
<PAGE>
MR. LUKIS is the Chief Engineer and a co-founder of the Company.
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.
MR. RYAN has been Managing Director of ColorSpan Europe, Ltd. since January 1995
and assumed the Executive Vice President position for the Company in May 1996.
From 1985 to July 1994, 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,
and prior to that was the Vice President of Materials and Administration for
ColorSpan Corporation. Mr. Horstmann has been with the Company since April 1994.
Prior to joining the Company, Mr. Horstmann was with the accounting firm of
Boulay Heutmaker Zibell & Co., PLLP. Mr. Horstmann is a Certified Public
Accountant (CPA).
MR. ALEXANDER has held the position of Vice President of Information Strategy of
the Company since September 1997 and has been Secretary of the Company since
January 1998. Mr. Alexander joined ColorSpan Corporation in 1990 and has held a
variety of management positions in Research and Development, Marketing and
Business Development.
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).
Officers of the Company are elected annually by the Board of Directors. All of
the current officers have been re-elected to serve in the same positions for the
coming year.
26
<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, 1998
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 1998 $ 175,000 $ 8,904(1)
Chief Executive Officer 1997 208,333 7,536(1)
1996 246,875 6,736(1)
- - ------------------------ ------ ----------- ---------- ------- ---------- --------- -------- ----------
Robert Wenzel 1998 $ 175,000
Chief Operating Officer 1997 208,333
1996 203,125 220,000
- - ------------------------ ------ ----------- ---------- ------- ---------- --------- -------- ----------
Thomas D. Ryan 1998 $ 175,000 120,000
Executive Vice 1997 175,000
President 1996 131,458 $ 16,500 40,000
- - ------------------------ ------ ----------- ---------- ------- ---------- --------- -------- ----------
Larry Lukis 1998 $ 149,479 $12,628(1)
Chief Engineer 1997 177,083 11,578(1)
1996 150,000 10,908(1)
- - ------------------------ ------ ----------- ---------- ------- ---------- --------- -------- ----------
James H. Horstmann 1998 $ 158,125 120,000
Chief Financial Officer 1997 *
1996 *
===============================================================================================================
</TABLE>
*Became executive officer during fiscal 1998.
(1)Premiums for life insurance where the Company is not the beneficiary.
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.
The following table summarizes grants of stock options during fiscal 1998 to the
Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table:
27
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
=========================================================================================================
Potential Realizable
Value at Assumed Annual Rates
Individual Grants of Stock Price Appreciation for
Option Term
- - ------------------------------------------------------------------------ -------------------------------
% of Total
Options/
Options/ SARs Granted Exercise or
SARs to Employees Base Price Expiration 5% ($) 10% ($)
Name Granted in Fiscal Year ($/Share) Date
(#)
- - ------------------ ----------- -------------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. Ryan 120,000(1) 11.4% $3.00 September 2007 $226,404 $573,732
- - ------------------ ----------- -------------- ----------- -------------- ---------- ----------
James H. Horstmann 120,000(1) 11.4% $3.00 September 2007 $226,404 $573,732
- - --------------------------------------------------------------------------------------------------------
</TABLE>
(1)Options vest nine years from date of issuance with accelerated vesting
contingent upon meeting performance goals as established by the Chief Executive
Officer.
The following table summarizes exercises of stock options during fiscal 1998 by
the Chief Executive Officer and the Executive Officers named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
===============================================================================================================
Number of Value of unexercised in-
unexercised the-money options/SARs
options/SARs at FY- at FY-end ($)
Shares acquired on Value realized ($) end (#) exercisable / exercisable/
Name exercise (#) unexercisable unexercisable (1)
- - ---------------------- ------------------ ------------------ --------------------- ------------------------
<S> <C> <C> <C> <C>
Melvin L. Masters -0- -0- -0- -0-
- - ---------------------- ------------------ ------------------ --------------------- ------------------------
Robert J. Wenzel -0- -0- 62,500 / 202,500 $ 139,581 / $ 202,031
- - ---------------------- ------------------ ------------------ --------------------- ------------------------
Thomas D. Ryan -0- -0- 70,000 / 170,000 $ 109,375 / $ 265,625
- - ---------------------- ------------------ ------------------ --------------------- ------------------------
Larry Lukis -0- -0- -0- -0-
- - ---------------------- ------------------ ------------------ --------------------- ------------------------
James H. Horstmann -0- -0- 41,250 / 168,750 $ 64,453 / $263,672
===============================================================================================================
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on June 30, 1998 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 1998, there was no plan for compensation to non-employee
directors. All directors were reimbursed for their expenses incurred in
attending meetings. Jean-Louis Gassee and Rohan Champion also acted as
consultants to the Company. Consulting fees of $12,000 were incurred for
services provided by Mr. Gassee during fiscal 1998. 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. Consulting fees of $29,169 were incurred for
services provided by Mr. Champion during fiscal 1998. Mr. Champion has
significant expertise in electronic commerce and supply chain management. The
consulting fees paid to Mr. Gassee and Mr. Champion were determined and set
based on anticipated consulting services and the market cost therefor. The
Company believes that the consulting fees
28
<PAGE>
paid to Mr. Gassee and Mr. Champion 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, 1998, the Company had employment agreements with Messrs. Masters,
Lukis, Wenzel, Ryan, Horstmann and several other members of management. The
agreements for Messrs. Masters, Wenzel and certain members of management renew
automatically on an annual basis unless terminated by either party by written
notice prior to the renewal date. The agreement with Mr. Lukis continues until
terminated on 60 days notice. The agreements provide for continuation payments
equal to 36 months pay for Mr. Masters and one other non-officer. Mr. Lukis'
agreement provides for a continuation of payments for a period depending upon
the length of the non-competition period requested by the Company following
termination. Agreements are in place for 12 months pay for Mr. Wenzel, Mr. Ryan,
Mr. Horstmann, and certain other members of management upon termination of
employment in certain circumstances, including change of control. As of June 30,
1998 minimum salary levels of $250,000 were set for each of Messrs. Masters,
Lukis, and Wenzel. By agreement, these individuals reduced their compensation to
$175,000 in March 1997, and the compensation has not been adjusted to the levels
previously set.
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, 1998, 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.
Number of
Beneficially Owned Percent of Shares
Name of Beneficial Owner Shares Outstanding
- - ------------------------ ------ -----------
Sihl-Zurich Paper Mill on Sihl AG (1) 2,742,858 14.7%
Melvin L. Masters (2) 2,550,525 13.7%
3213 South Duluth Avenue
Sioux Falls, SD 57105
Lawrence J. Lukis (3) 1,003,222 5.4%
3250 Fox Street
Long Lake, MN 55356
Jean-Louis Gassee (4) 85,000 *
Robert J. Wenzel (5) 74,300 *
James H. Horstmann (6) 41,250 *
Thomas D. Ryan (7) 77,000 *
Rohan Champion (8) 20,000 *
All officers and directors
as a group (11 persons) (9) 3,977,946 21.3%
* Less than 1%
29
<PAGE>
(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.
(5) Includes 62,500 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 41,250 shares issuable to Mr. Horstmann under options which
are exercisable or will become exercisable within 60 days.
(7) Includes 70,000 shares issuable to Mr. Ryan under options which are
exercisable or will become exercisable within 60 days.
(8) Includes 20,000 shares issuable to Mr. Champion under options which are
exercisable or will become exercisable within 60 days.
(9) Includes 326,400 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 168,034
square feet of space under this agreement which has a term of fifteen
years and a monthly base rate as of August 31, 1998, of $100,083. 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 $1,547,000 in fiscal
1998.
(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 what
management believes are market rates. The Company also uses the
services of a travel agency which is controlled by Mr. Masters. In the
fiscal year ended June 30, 1998 charges totaled $198,723.
(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
30
<PAGE>
acquired in fiscal 1995 for $211,000 based on competitive proposals for
two other comparable systems. Upgrades to the system amounted to
$52,970 in fiscal 1998. 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 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) The Company has occasionally prepaid the rent and lease expense to
GRAMPI for the Shady View I and II properties. When rent is prepaid
there is an adjustment of the amount paid for rent at the next regular
payment date to reflect the prepayment. In addition, interest is
charged during the interim period.
(7) Melvin L. 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%.
(8) In June 1998, the Company loaned $250,00 to GRAMPI. The note is
personally guaranteed by Mr. Masters and is secured by certain shares
of the Company's common stock owned by GRAMPI, bears interest at the
Prime Rate plus 2.0% and is due February 25, 1999.
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.
(9) The Company and TimeMasters, Inc. share facilities and expenses from
time to time. The intercompany receivable at June 30, 1998 was $87,460.
The amount bears interest at 10%.
(10) 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 1998 from Sihl were $2,721,156.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- - -------- -----------------------------------------------------------------
(a) 1. Financial Statements
Consolidated Financial Statements of VirtualFund.com, Inc. and
Subsidiaries:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the fiscal years
ended June 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
VirtualFund.com, Inc. and Subsidiaries
Schedule I -- Condensed Financial Information of the Registrant
(Parent Only)
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. 3 to Credit Agreement dated May 14, 1997 between
LaserMaster Corporation and General Electric Capital Corporation.
10.2 Amendment No. 4 to Credit Agreement dated October 14, 1997 between
ColorSpan Corporation and General Electric Capital Corporation.
10.3 Fifth Amendment to Credit Agreement dated February 17, 1998 between
ColorSpan Corporation and General Electric Capital Corporation.
10.4 Sixth Amendment and Consent to Credit Agreement dated June 30, 1998
between ColorSpan Corporation and General Electric Capital Corporation.
10.5 Seventh Amendment and Consent to Credit Agreement dated July 15, 1998
between ColorSpan Corporation and General Electric Capital Corporation.
10.6 LaserMaster Technologies, Inc. minutes of shareholder meeting dated
April 3, 1998 which amends Article I of the Articles of Incorporation
to change the company name to VirtualFund.com, Inc.
10.7 Promissory Note with Grandchildren's Realty Alternative Program I, LP,
Pledge Agreement and Guaranty.
27.1 Financial Data Schedule.
99. Cautionary Factors Under Private Securities Litigation Reform Act of
1995.
32
<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 25, 1998
VIRTUALFUND.COM, 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/Rohan Champion Director
- - ------------------------
Rohan Champion
/s/Ralph D. Rolen Director
- - ------------------------
Ralph D. Rolen
/s/Jean-Louis Gassee Director
- - ------------------------
Jean-Louis Gassee
/s/James H. Horstmann Chief Financial Officer and
- - ------------------------ Principal Accounting Officer
James H. Horstmann
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
VirtualFund.com, Inc. and Subsidiaries
Eden Prairie, Minnesota
We have audited the consolidated balance sheets of VirtualFund.com, Inc.
(formerly LaserMaster Technologies, Inc.) and Subsidiaries (the Company) as of
June 30, 1998 and 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998 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 VirtualFund.com, Inc.
and Subsidiaries as of June 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 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 7, 1998
F-1
<PAGE>
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,011,181 $ 484,106
Accounts receivable, less allowance for doubtful
accounts and sales returns of $1,662,000 and
$1,987,000, respectively (Notes 5 and 13) 11,648,638 12,129,091
Inventory (Notes 3, 5 and 13) 6,819,968 9,184,671
Other current assets 1,918,258 2,158,833
Deferred income taxes (Note 11) 1,214,000 4,073,000
------------ -----------
TOTAL CURRENT ASSETS 26,612,045 28,029,701
PROPERTY AND EQUIPMENT, NET
(Notes 4, 6 and 13) 2,776,339 3,570,662
DEFERRED INCOME TAXES (Note 11) 3,552,000 693,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $747,719 and $743,284, respectively (Note 5) 179,286 337,570
------------ -----------
$ 33,119,670 $32,630,933
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Notes 5 and 13) $ 2,015,988 $ 2,781,468
Current maturities of long-term debt (Notes 6 and 13) 259,550 636,665
Convertible subordinated debenture (Note 7) 375,866
Accounts payable (Note 13) 10,524,613 10,232,865
Accrued payroll and payroll taxes 1,475,317 1,623,558
Other current liabilities (Note 13) 1,412,021 1,649,062
Deferred revenue 1,222,265 1,374,447
------------ -----------
TOTAL CURRENT LIABILITIES 17,285,620 18,298,065
CONVERTIBLE SUBORDINATED DEBENTURE (Note 7) 2,233,414
LONG-TERM DEBT, less current maturities (Notes 6 and 13) 66,746 184,729
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY: (Notes 7, 8, 9, 11, 16 and 17)
Common stock, $.01 par value; authorized
30,000,000 shares; 15,178,866 and 14,432,462 shares issued
and outstanding, respectively 151,789 144,325
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 32,995,320 30,876,964
Accumulated deficit (17,379,805) (19,106,564)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 15,767,304 11,914,725
------------ -----------
$ 33,119,670 $32,630,933
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 14) $80,731,534 $ 86,563,422 $ 93,592,044
COSTS OF GOODS SOLD (Notes 2 and 13) 48,050,731 61,912,116 64,378,882
----------- ------------ ------------
GROSS PROFIT 32,680,803 24,651,306 29,213,162
OPERATING EXPENSES
Sales and marketing 14,335,306 18,131,483 21,108,559
Research and development 6,503,287 6,387,642 6,148,919
General and administrative (Note 13) 9,505,652 10,096,910 11,310,135
Restructuring and other special charges (Notes 2 and 16) 4,935,563 4,431,273
----------- ------------ ------------
30,344,245 39,551,598 42,998,886
----------- ------------ ------------
OPERATING PROFIT (LOSS) 2,336,558 (14,900,292) (13,785,724)
OTHER INCOME (EXPENSE)
Interest expense (Note 13) (715,048) (1,388,247) (1,784,365)
Interest income (Note 13) 118,494 154,559 17,728
Other income (expense) (13,245) 223,292 (56,173)
----------- ------------ ------------
(609,799) (1,010,396) (1,822,810)
----------- ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 1,726,759 (15,910,688) (15,608,534)
INCOME TAX (PROVISION) BENEFIT (Note 11) (1,289,000) 5,147,000
----------- ------------ ------------
NET EARNINGS (LOSS) $ 1,726,759 $(17,199,688) $(10,461,534)
=========== ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE -
BASIC (Note 12) $ .12 $ (1.25) $ (.93)
=========== ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE -
ASSUMING DILUTION (Note 12) $ .11 $ (1.25) $ (.93)
=========== ============ ==============
Weighted average common shares outstanding (Note 12) 14,716,003 13,705,609 11,305,232
=========== ============ =============
Weighted average common and dilutive
potential common shares outstanding (Note 12) 15,602,071 13,705,609 11,305,232
=========== ============ =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VIRTUALFUND.COM, INC. (formerly 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, 1995 11,176,382 $ 111,764 $ 16,626,953 $ 8,554,658 $ 25,293,375
Issuance of common stock -
Stock options exercised (Note 9) 249,752 2,497 577,602 580,099
Stock option tax benefit (Note 11) 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 8) 2,695,971 26,960 11,810,376
11,837,336
Conversion of debentures (Note 7) 105,000 1,050 361,763 362,813
Stock options exercised (Note 9) 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 11) 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
Issuance of common stock -
Conversion of debentures (Note 7) 525,000 5,250 1,985,146 1,990,396
Stock options exercised (Note 9) 80,071 801 134,623 135,424
Litigation settlement (Note 16) 141,333 1,413 (1,413)
Net earnings 1,726,759 1,726,759
---------- ------------ ------------ ------------ ------------
BALANCES, JUNE 30, 1998 15,178,866 $ 151,789 $ 32,995,320 $(17,379,805) $ 15,767,304
========== ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,726,759 $ (17,199,688) $ (10,461,534)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,843,802 5,526,593 5,859,577
Amortization of deferred financing costs 214,679 221,385 240,335
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 102,875 149,395 528,840
Gain on settlement of product quality issues (1,416,665)
Litigation settlement 636,000
Deferred income taxes 1,084,000 (4,318,000)
Stock option tax benefit 199,000 226,000
Change in current assets and current liabilities:
Accounts receivable 730,453 415,306 4,541,241
Inventory 2,364,703 5,789,962 8,085,173
Other current assets 25,896 403,566 (571,353)
Income tax receivable 400,781 (400,781)
Accounts payable 424,596 (4,049,438) (1,027,772)
Accrued payroll and payroll taxes (148,241) (292,350) (191,625)
Income taxes payable 273,273 (201,768)
Other current liabilities (237,041) 175,525 (185,849)
Deferred revenue (152,182) (519,815) 698,622
-------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,896,299 (3,964,106) 6,172,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related party (250,000) (585,000)
Collection of notes receivable - related party 585,000
Additions to property and equipment (815,336) (1,058,108) (1,660,716)
Additions to capitalized software costs (1,557,931) (2,660,717)
Proceeds from sale of property and equipment 24,600 82,357 53,968
Additions to patents and other assets (43,163) (500,596) (2,056,156)
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (1,083,899) (3,034,278) (6,323,621)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit lines (765,480) (1,740,053) (1,918,979)
Proceeds from note payable to related party 1,765,000
Proceeds from notes payable 271,149
Repayments of notes payable (293,550)
Proceeds from long-term debt 307,514
Payments on long-term debt (655,269) (1,246,968) (1,075,989)
Issuance of common stock 135,424 10,378,660 580,099
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,285,325) 7,391,639 (364,756)
------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,527,075 393,255 (516,372)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 484,106 90,851 607,223
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 5,011,181 $ 484,106 $ 90,851
============= ============= =============
</TABLE>
See notes to consolidated financial tatements.
F-5
<PAGE>
VIRTUALFUND.COM, INC. (FORMERLY LASERMASTER TECHNOLOGIES, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
VirtualFund.com, Inc. (the Company) designs, manufactures, markets and
sells wide-format digital color printers, aftermarket inks and
specialty coated media for graphic arts professionals. The Company also
develops and sells Internet-based electronic commerce software and
offers aftermarket customization and support services.
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
VirtualFund.com, Inc. and its subsidiaries, Embedded Data Systems,
Corp. and ColorSpan Corporation (CSC) (formerly LaserMaster
Corporation), and CSC's subsidiaries, ColorSpan Europe, Ltd. (CSE)
(formerly LaserMaster Europe, Ltd.), ColorSpan Asia/Pacific, Ltd. (CSA)
(formerly LaserMaster Asia/Pacific, Ltd.), and ColorSpan Latin America,
Inc. (CSLA) (formerly ColorMasters, Inc.). 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 and $2,732,829 for the
fiscal years ended June 30, 1997 and 1996, 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 development costs to zero at June 30,
1997. Software development costs incurred during fiscal 1998 were not
significant, and as such, no costs were capitalized.
F-6
<PAGE>
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 licenses included in general and administrative
expenses aggregated $200,957, $710,838 and $596,277 for the fiscal
years ended June 30, 1998, 1997, and 1996, 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 at June 30, 1997 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, 1998
and 1997 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, 1998, $21,000 of advertising was included in other current
assets as compared with $7,000 at June 30, 1997. Advertising expense
was $3,549,000, $6,298,000 and $7,343,000 for the fiscal years ended
June 30, 1998, 1997, and 1996, respectively.
NET EARNINGS (LOSS) PER COMMON SHARE
The Company adopted SFAS No. 128, "EARNINGS PER SHARE" effective
December 28, 1997. As a result, all prior periods presented have been
restated to conform to the provisions of SFAS No. 128, which requires
the presentation of basic and diluted earnings per share. Basic
earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding during each
period. Diluted earnings (loss) per share is computed under the
treasury stock method and is calculated by dividing net earnings (loss)
by the weighted average number of common shares and dilutive common
equivalent shares outstanding during the period. Common share
equivalents included in the calculation reflect the dilutive effect of
outstanding stock options, warrants, convertible debenture (Note 7) and
the litigation settlement (Note 16) . 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.
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
The Financial Accounting Standards Board has recently issued SFAS No.
130, "REPORTING COMPREHENSIVE INCOME" and SFAS No. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". The Company
intends to adopt these standards in fiscal 1999 by making the required
disclosures. Therefore, the adoption of these standards is not expected
to have an effect on the Company's financial position or results of
operations.
The Financial Accounting Standards Board has also recently issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
which will be effective for the Company in fiscal 2000. The Company is
reviewing the requirements of this standard and has not yet determined
the impact on the financial statements of the Company.
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.
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, 1998,
approximately $629,000 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 remained 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:
June 30, 1998 June 30, 1997
------------- -------------
Raw materials $ 3,285,194 $ 4,178,139
Work in process 207,303 123,664
Finished goods:
Consumables 2,604,318 2,824,753
Hardware 723,153 2,058,115
------------- -------------
$ 6,819,968 $ 9,184,671
============= =============
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Life Used
for Depreciation June 30, 1998 June 30, 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Computer equipment 2 - 5 years $ 10,086,605 $ 10,416,254
Trade show computer equipment 2 - 5 years 217,369 470,007
Capitalized tooling 3 years 440,710 263,693
Furniture and fixtures 5 - 7 years 4,123,670 4,359,607
Purchased software 3 years 1,112,377 1,065,817
Vehicles 5 years 209,738 264,171
Leasehold improvements 5 years 2,897,817 2,918,862
------------- -------------
19,088,286 19,758,411
Accumulated depreciation and amortization 16,311,947 16,187,749
------------- -------------
$ 2,776,339 $ 3,570,662
============= =============
</TABLE>
Property and equipment includes assets under capital leases as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Computer equipment and purchased software $ 340,446 $ 237,085
Furniture and fixtures 233,435 709,774
------------- -------------
573,881 946,859
Accumulated amortization 230,247 426,308
------------- -------------
$ 343,634 $ 520,551
============= =============
5. NOTES PAYABLE
Notes payable consists of the following:
June 30, 1998 June 30, 1997
------------- -------------
Note payable under revolving
line of credit (1) $ 1,708,956
Note payable under revolving
line of credit (2) $ 2,015,988 1,072,512
------------- -------------
$ 2,015,988 $ 2,781,468
============= =============
Weighted average interest rate 5.81% 8.48%
============= =============
</TABLE>
(1) On January 17, 1996, CSC entered into a credit agreement with a
commercial finance company. The agreement allows CSC to borrow up to
$10,000,000 based on availability equal to 65% 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%
F-9
<PAGE>
at June 30, 1998) with a 0.5% unused line fee. At June 30, 1998,
approximately $5,259,000 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 CSC to meet various non-financial covenants (Note 13).
(2) CSE, a subsidiary of the Company's CSC subsidiary, maintains a
receivables financing arrangement, which has no stated expiration, with
a commercial finance company whereby CSE may borrow up to 80% of
eligible accounts receivable, with a maximum advance of $2,500,000. At
June 30, 1998, approximately $484,000 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% (5.81% at June 30, 1998). Borrowings in U.S. Dollars are due on
demand and bear interest at a rate that fluctuates with the market
(8.55% at June 30, 1998).
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Notes payable to a finance company, with monthly payments
aggregating $9,758, including interest at the "One-Month"
Commercial Paper rate plus 4.0% (9.49% at June 30, 1998),
due through May 1999, secured by certain domestic
property and equipment (Note 13) $ 60,295 $385,198
Note payable to a bank paid in fiscal 1998 2,922
Obligations under capital leases for equipment,
payable in monthly installments (Note 10) 266,001 433,274
--------- --------
326,296 821,394
Less current maturities 259,550 636,665
--------- --------
$ 66,746 $184,729
========= ========
</TABLE>
Excluding capital lease obligations, the balance of $60,295 at June 30,
1998 is due in fiscal 1999.
7. 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, 1998, 630,000 shares had been converted aggregating
$2,353,209. The principal balance outstanding at June 30, 1998 is
$375,866.
F-10
<PAGE>
8. 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.
9. 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.
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, 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
Granted 1,051,500 2.97
Exercised ( 80,071) 1.69
Forfeited (15,000) (150,500) 3.07
Repriced*** (0.89)
------------ ----------
Balance, June 30, 1998 3,034,953 $ 6.91 3,629,039 $ 3.11
============ ==========
Exercisable, June 30, 1996 292,953 $ 6.31 722,339 $ 2.50
Exercisable, June 30, 1997 3,049,953 6.90 779,308 2.65
Exercisable, June 30, 1998 3,034,953 6.91 1,034,513 2.71
</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
F-11
<PAGE>
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 July17, 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.
*** The Company's Board of Directors approved the repricing of 776,000
non-statutory stock options to the closing Nasdaq price on September
26, 1997 ($3.00 per share). These options had original exercise prices
ranging from $3.38 to $4.75 per share with an average exercise price of
$3.89 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 stock option plans been
determined based on the fair value at the grant date for awards in
fiscal 1998, 1997 and 1996 consistent with the provisions of SFAS 123,
the Company's net earnings (loss) and net earnings (loss) per share
would have been adjusted to the pro forma amounts reflected in the
following table:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Reported net earnings (loss) $1,726,759 $(17,199,688) $(10,461,534)
Pro forma net earnings (loss) 1,129,090 (17,545,997) (10,482,957)
Net earnings (loss) per share:
As reported - basic .12 (1.25) (.93)
As reported - diluted .11 (1.25) (.93)
Pro forma - basic .08 (1.28) (.93)
Pro forma - diluted .07 (1.28) (.93)
</TABLE>
Statement No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995, thus the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. 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
1998, 1997 and 1996:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Expected dividend yield $ - $ - $ -
Expected stock price volatility 60% 60% 60%
Risk-free interest rate 5.50% 6.22% 6.22%
Expected life of options (years) 4.5 4.5 4.5
</TABLE>
The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 is estimated as $1.60, $2.23 and $2.34,
respectively on the date of grant using the Black-Scholes option
pricing model.
The following table summarizes information about the Company's stock
option plans at June 30, 1998:
<TABLE>
<CAPTION>
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices June 30, 1998 Contractual Life Exercise Price June 30, 1998 Exercise Price
-------- --------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ .34 to 2.00 57,372 45 months $1.58 37,122 $1.35
2.01 to 3.00 2,454,817 86 months 2.79 802,291 2.53
3.01 to 4.00 972,750 90 months 3.78 175,250 3.63
above 4.00 144,100 98 months 4.74 19,850 4.69
--------- ----- --------- -----
3,629,039 $3.11 1,034,513 $2.71
</TABLE>
F-12
<PAGE>
10. 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 the 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 54% 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
--------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
GRAMPI $ 1,547,000 $ 1,525,000 $ 1,355,000
Other parties 1,037,000 1,104,000 1,211,000
------------- ------------- ------------
Total $ 2,584,000 $ 2,629,000 $ 2,566,000
============ ============= ============
</TABLE>
Future minimum lease payments under capital and operating leases in
effect at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Leases
Capital -------------------------------
Year ending June 30: Leases GRAMPI Other
----------- ------------- ------------
<S> <C> <C> <C>
1999 $ 213,690 $1,201,000 $ 1,280,000
2000 69,430 1,327,000 1,255,000
2001 1,327,000 770,000
2002 1,272,000 754,000
2003 1,244,000 784,000
Thereafter (2004 through 2010) 10,250,000 2,725,000
----------- ------------- ------------
283,120 $ 16,621,000 $ 7,568,000
============= ============
Less interest (17,119)
-----------
Present value of net minimum lease payments $ 266,001
===========
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with twelve of its officers and
executives which renew automatically on an annual basis. Two of the
agreements provide continuation payments equal to 36 months pay upon
termination of employment in certain circumstances, including change of
control. The other ten 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, 1998, minimum annual salary levels set for the twelve
individuals was, in aggregate, $2,875,000.
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, 1998,
1997, and 1996.
F-13
<PAGE>
11. INCOME TAXES
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ - $ (193,000) $ 835,000
State - (12,000) (6,000)
------------- ------------- -------------
- (205,000) 829,000
Deferred, primarily federal - (1,084,000) 4,318,000
------------- ------------- -------------
$ - $ (1,289,000) $ 5,147,000
============= ============= =============
</TABLE>
A reconciliation of the expected federal income tax (provision) benefit
at the statutory rate of 35% with the (provision) benefit for income
taxes is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Tax (provision) benefit
computed at statutory rates $ (604,000) $ 5,569,000 $ 5,463,000
State income tax, net of
federal benefit (31,000) 288,000 283,000
Graduated tax bracket
benefit (provision) 17,000 (159,000) (156,000)
Change in valuation allowance 457,000 (7,339,000) (821,000)
Other 161,000 352,000 378,000
------------- ------------- -------------
$ - $ (1,289,000) $ 5,147,000
============= ============= =============
</TABLE>
Under SFAS 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.
Temporary differences comprising the net deferred taxes shown on the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------------------------------- -------------
Assets Liabilities Total Total
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns $ 565,000 $ 565,000 $ 676,000
Inventory costs 2,612,000 2,612,000 2,782,000
Acquired technology 304,000
Litigation settlement 216,000
Accrued vacation 145,000 145,000 182,000
Other 174,000 $ (318,000) (144,000) (87,000)
------------ ----------- ----------- -----------
Current 3,496,000 (318,000) 3,178,000 4,073,000
Property and equipment basis 682,000 682,000 594,000
Net operating loss carryforwards 6,573,000 6,573,000 6,162,000
Research and development credit
carryforwards 1,773,000 1,773,000 1,773,000
Alternative minimum tax credits 225,000 225,000 225,000
Other 38,000 38,000 99,000
------------ ----------- ----------- -----------
Noncurrent 9,291,000 - 9,291,000 8,853,000
------------ ----------- ----------- -----------
Gross 12,787,000 (318,000) 12,469,000 12,926,000
Valuation allowance (7,703,000) (7,703,000) (8,160,000)
------------ ----------- ----------- -----------
Net $ 5,084,000 $ (318,000) $ 4,766,000 $ 4,766,000
============ =========== =========== ===========
</TABLE>
F-14
<PAGE>
The valuation allowance for deferred tax assets as of June 30, 1998 and
1997 is $7,703,000 and $8,160,000, respectively. The net change in the
total valuation allowance for the year ended June 30, 1998 was a
decrease of $457,000. Realization of the entire deferred tax asset will
depend on the Company's ability to generate sufficient taxable income.
The valuation allowance reduces the deferred tax asset to what
management believes is realizable in the foreseeable future.
At June 30, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $17.4 million which are
available to offset future taxable income, if any, through 2013. 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 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 and $226,000 in
1997 and 1996, respectively, pertaining to the exercise of stock
options, which are reflected in additional paid-in capital.
12. EARNINGS PER SHARE CALCULATION
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "EARNINGS PER
SHARE." The following table summarizes the reconciliation of the basic
and diluted average common shares outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Average common shares outstanding 14,716,003 13,705,609 11,305,232
Assumed conversion of stock options 716,117
Assumed conversion of debentures 28,998
Assumed issuance of common stock at
beginning of year related to settlement
of litigation 140,953
---------- ---------- ----------
Average common and assumed conversion shares 15,602,071 13,705,609 11,305,232
========== ========== ==========
</TABLE>
The following table summarizes the securities that could potentially
dilute basic earnings per share in the future that were not included in
the computation of diluted earnings (loss) per share because to do so
would have been antidilutive for the periods presented:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Stock options 142,000 2,808,110 2,763,110
Warrants 3,034,953 3,049,953 292,953
Convertible debenture 794,687
Shares issuable relating to settlement
of litigation 141,333
---------- ---------- ----------
Average common and assumed conversion shares 3,176,953 6,794,083 3,056,063
========== ========== ==========
</TABLE>
13. RELATED PARTY TRANSACTIONS
The Company is involved in various transactions with TimeMasters, Inc.
(TMI), 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:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest expense (Notes 5 and 6) $ 336,816 $ 727,630
Interest expense (a) 7,440 83,696 $ 139,398
Interest income (b), (e) 4,696 38,882
Rent expense (Note 10), (e) 1,547,000 1,525,000 1,355,000
Operating expenses (c) 198,723 88,240 30,788
Equipment purchases (d) 52,970 49,075 47,853
Inventory purchases 2,721,156 1,569,844
</TABLE>
F-15
<PAGE>
Balances outstanding with related parties are as follows:
June 30,
----------------------
1998 1997
---------- ----------
Notes payable (Notes 5 and 6) $ 60,295 $2,094,154
Accrued rent 178,388
Accounts payable 597,608 70,389
Note Receivable (b) 250,000
Accounts receivable (e) 87,460
(a) During September and October 1995, CSC borrowed $1,765,000 under a
demand note from TMI. In January 1996, CSC 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 8).
Fiscal 1998 expense represents interest paid to GRAMPI for past due
rent payments.
(b) 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 TMI in exchange for promissory notes
aggregating $4 million (Note 8). 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%. On June 26, 1998 GRAMPI borrowed $250,000 from the Company. The
note is personally guaranteed by Mr. Masters and is secured by certain
shares of the Company's common stock owned by GRAMPI, bears interest at
the Prime Rate plus 2.0% and is due February 25, 1999.
(c) 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. The
Company also uses the services of a travel agency which is controlled
by Mr. Masters.
(d) The Company has installed a campus-wide TMI 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 and
upgrades in 1998, 1997 and 1996.
(e) The Company subleases space to TMI. Rent charged to TMI reduces
rent expense and was $18,820, $18,608, and $4,599 for the years ended
June 30, 1998, 1997 and 1996 respectively. The Company also performed
services and paid various amounts on behalf of TMI. Interest is accrued
on the unpaid balance at a rate of 10%.
F-16
<PAGE>
14. SEGMENT INFORMATION
Financial information by geographic location is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
------------- ------------- -------------
Sales:
<S> <C> <C> <C>
North America and other $ 54,054,188 $ 54,771,696 $ 60,701,808
Europe 17,226,431 17,410,002 19,655,566
Japan, Asia, Pacific 9,450,915 14,381,724 13,234,670
------------- ------------- -------------
Total sales $ 80,731,534 $ 86,563,422 $,,93,592,044
============= ============= =============
Operating profit (loss):
North America and other $ (179,740) $ (20,396,052) $ (17,227,577)
Europe 1,651,966 2,115,152 (106,343)
Japan, Asia, Pacific 864,332 3,380,608 3,548,196
------------- ------------- -------------
2,336,558 (14,900,292) (13,785,724)
Interest expense and other (609,799) (1,010,396) (1,822,810)
------------- ------------- -------------
Earnings (loss) before
income taxes $ 1,726,759 $ (15,910,688) $ (15,608,534)
============= ============= =============
June 30, 1998 June 30, 1997
------------- -------------
Assets:
North America $ 22,702,031 $ 23,195,621
Europe 4,690,326 4,589,271
Japan, Asia, Pacific 5,727,313 4,846,041
------------- -------------
Total assets $ 33,119,670 $ 32,630,933
============= =============
</TABLE>
Throughout the fiscal year ending June 30, 1998, the Company has been
investing resources in a diversification effort designed to enter the
Internet Software and Information Technology Consulting markets. The
financial results of this diversification effort are not material to
the fiscal 1998 operations.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
The Company paid cash for the following items:
Interest paid $ 452,023 $1,246,358 $2,001,050
Income tax paid (received), net 7,677 (668,054) (452,451)
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 and accrued
interest converted to common stock 1,990,396 362,813
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 160,171 228,374
</TABLE>
F-17
<PAGE>
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. The basic allegation was 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
settlement in this case was reached between the Company and the
plaintiffs and was approved in October 1997. The settlement included an
amount from the Company's insurance carrier and $636,000 from the
Company. The Company's portion of the proposed settlement was to be
paid in cash or common stock at the Company's discretion. The Company
elected to contribute common stock and issued 141,333 shares on June
30, 1998 in settlement of the obligation. The Company recorded its
$636,000 share of the proposed settlement as expense and additional
paid in capital as of June 30, 1997.
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.
17. SUBSEQUENT EVENT
On July 15, 1998, the Company issued 600,000 shares of common stock in
exchange for all of the common stock of Kilborn Photo Products Inc.
(Kilborn). Kilborn is a manufacturer of specialty coated media and is
based in Cedar Rapids, Iowa. The business combination will be accounted
for as a pooling of interests in fiscal 1999. Kilborn reported net
sales of $1.9 million (unaudited) for the year ended December 31, 1997.
Assets acquired and liabilities assumed include the following as of
July 15, 1998:
(Unaudited)
Accounts receivable $ 155,000
Inventory 411,000
Property, plant and equipment, net 280,000
Other assets 91,000
Notes payable and accrued interest 2,956,000
Other liabilities 7,000
18. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------- Fiscal
Sept. 28 Dec. 28 Mar. 29 June 30 Year
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
Net sales $ 15,306 $ 21,647 $ 21,273 $ 22,506 $ 80,732
Gross profit 5,584 8,571 8,956 9,570 32,681
Net (loss) earnings (1,646) 898 921 1,554 1,727
Net (loss) earnings per share:
Basic (.11) .06 .06 .10 .12
Diluted (.11) .06 .06 .10 .11
</TABLE>
F-18
<PAGE>
<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
Basic (.02) (.03) (.17) (.97) (1.25)
Diluted (.02) (.03) (.17) (.97) (1.25)
</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.
F-19
<PAGE>
Schedule I
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED BALANCE SHEETS
- - --------------------------------------------------------------------------------
June 30, June 30,
ASSETS 1998 1997
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 337,702 $ 329,993
Accounts receivable 266,391 1,463
Receivable from subsidiary 3,620,920 8,604,283
Other current assets 152,450 112,981
-------------- --------------
TOTAL CURRENT ASSETS 4,377,463 9,048,720
PROPERTY AND EQUIPMENT, NET 648,396 649,563
INVESTMENT IN SUBSIDIARIES 12,338,019 5,484,595
-------------- --------------
$ 17,363,878 $ 15,182,878
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 85,154 $ 8,830
Convertible subordinated debenture 375,866
Accounts payable 583,920 589,455
Accrued payroll 215,949 151,481
Accrued expenses 268,939 274,586
-------------- --------------
TOTAL CURRENT LIABILITIES 1,529,828 1,024,352
CONVERTIBLE SUBORDINATED DEBENTURE 2,233,414
LONG-TERM DEBT, less current maturities 66,746 10,387
STOCKHOLDERS' EQUITY:
Common stock 151,789 144,325
Additional paid-in capital 32,995,320 30,876,964
Accumulated deficit (17,379,805) (19,106,564)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 15,767,304 11,914,725
-------------- --------------
$ 17,363,878 $ 15,182,878
============== ==============
See notes to condensed financial information of registrant on page F-22.
F-20
<PAGE>
Schedule I
(Continued)
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES (management fees from subsidiaries) $ 4,730,000 $ 4,200,000 $ 4,200,000
OPERATING EXPENSES 5,090,665 5,418,186 4,653,138
------------ ------------ -----------
(LOSS) BEFORE INCOME TAXES AND EQUITY
IN EARNINGS (LOSS) OF SUBSIDIARIES (360,665) (1,218,186) (453,138)
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES 2,087,424 (9,844,502) (10,157,396)
INCOME TAX (PROVISION) BENEFIT (6,137,000) 149,000
------------ ------------ -----------
NET EARNINGS (LOSS) 1,726,759 (17,199,688) (10,461,534)
(ACCUMULATED DEFICIT) RETAINED EARNINGS
AT BEGINNING OF YEAR (19,106,564) (1,906,876) 8,554,658
------------ ------------ -----------
(ACCUMULATED DEFICIT) AT END OF YEAR $(17,379,805) $(19,106,564) $(1,906,876)
============ ============ ===========
</TABLE>
See notes to condensed financial information of registrant on page F-22.
F-21
<PAGE>
Schedule I
(Continued)
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND
SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 1,726,759 $(17,199,688) $(10,461,534)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Equity in (earnings) loss of subsidiaries (2,087,424) 9,844,502 10,157,396
Depreciation and amortization 320,439 345,493 368,828
Litigation settlement 636,000
Stock option tax benefit 199,000 226,000
Loss (gain) on sale of property and equipment 26,794 (14,250) 402
Net change in operating current assets
and liabilities 360,798 (3,714,392) (712,331)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 347,366 (9,903,335) (421,239)
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable - related party (250,000)
Additions to property and equipment (197,893) (224,023) (146,461)
Proceeds from sale of property and equipment 300 55,450
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (447,593) (168,573) (146,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 135,424 10,378,660 580,099
Payments on long-term debt (27,488) (10,691) (8,466)
Net payments under short-term debt (41,485)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 107,936 10,367,969 530,148
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,709 296,061 (37,552)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 329,993 33,932 71,484
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 337,702 $ 329,993 $ 33,932
============ ============ ============
</TABLE>
NOTES: See consolidated financial statements for details of and changes in
stockholders' equity. See Note 7 to consolidated financial statements
for information regarding the convertible subordinated debenture.
Capital lease obligations of $160,171 and $25,000 were incurred during
the years ended June 30, 1998 and 1996 respectively.
No cash dividends have been paid to VirtualFund.com, Inc. by the
subsidiaries.
F-22
<PAGE>
Schedule II
VIRTUALFUND.COM, INC. (formerly LaserMaster Technologies, Inc.) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance Charged Balance
beginning to costs Accounts at
of and written end of
period expenses off period
Description ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
Allowance for doubtful accounts
and sales returns $1,987,000 $ 683,000 1,008,000 $1,662,000
1997:
Allowance for doubtful accounts
and sales returns $2,475,000 $ 764,000 $1,252,000 $1,987,000
1996:
Allowance for doubtful accounts
and sales returns $2,051,000 $1,472,000(a) $1,048,000 $2,475,000
</TABLE>
(a) Includes special charge of $1 million to cover product returns related to
the Company's older model PressMate product.
F-23
<PAGE>
Exhibit 10.1
AMENDMENT NO. 3 TO CREDIT AGREEMENT
This AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "Amendment") is
entered into as of this 14th day of May, 1997 by and between LASERMASTER
CORPORATION, a Minnesota corporation ("Borrower"), and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation as Agent and Lender ("Agent"). Unless
otherwise specified herein, capitalized terms used in this Amendment shall have
the meanings ascribed to them by the Credit Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower and Agent have entered into that certain
Credit Agreement, dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement, dated as of May 15, 1996 (as further amended,
supplemented, restated or otherwise modified from time to time, the "Credit
Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain
amendments to the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedule
Schedule H to the Credit Agreement is amended as follows:
(i) clause (c) is amended and restated to read in its entirety
as follows:
(c) Minimum Net Worth. Borrower and it Subsidiaries
(other than LaserMaster Europe) on a consolidated basis shall
maintain from March 31, 1997 through June 30, 1997 Net Worth
equal to or greater than $1,930,000, and a Net Worth equal to
greater than $2,500,000 at all times thereafter.
(ii) clause (d) is amended and restated as to read in its
entirety as follows:
(d) Minimum Debt Service Coverage Ratio. Borrower and
its Subsidiaries (other than LaserMaster Europe) on a
consolidated basis shall have at the end of each Fiscal Month,
a Debt Service Coverage Ratio for the 12-month period then
ended (or for the Fiscal Months ending on or before June 30,
1997, the period of July 1, 1996 to such date) of not less
than .23 to 1.0 with respect to the Fiscal Months ending March
31, 1997, April 30, 1997 and May 31, 1997 and not less than
1.0 to 1.0 with respect to each Fiscal Month ending
thereafter.
<PAGE>
SECTION 2. Representations and Warranties.
2.1 Borrower. Borrower represents and warrants that:
(a) the execution, delivery and performance by Borrower of
this Amendment have been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in
the Credit Agreement is true and correct in all material respects on and as of
the date hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this
Amendment nor the consummation of the transactions contemplated hereby does or
shall contravene, result in a breach of, or violate (i) any provision of
Borrower's certificate or articles of incorporation or bylaws, (ii) any law or
regulation, or any order or decree of any court or government instrumentality or
(iii) indenture, mortgage, deed of trust, lease, agreement or other instrument
to which Borrower or any of its Subsidiaries is a party to by which Borrower or
any of its Subsidiaries or any of their property is bound, except in any such
case to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof; and
(d) no Default or Event of Default will exist or result after
giving effect hereto.
SECTION 3. Reference to and Effect Upon the Credit Agreement
(a) Except as specifically amended above, the Credit Agreement
and the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of Agent
or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein. Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of similar import shall mean and be a reference to the Credit
Agreement as amended hereby.
SECTION 4. Costs and Expenses. As provided in Section 11.3 of the
Credit Agreement, Borrower agrees to reimburse Agent for all fees, costs and
expenses, including the fees, costs and expenses of counsel or other advisors
for advice, assistance, or other representation in connection with this
Amendment.
<PAGE>
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF
LAW PROVISIONS) OF THE STATE OF ILLINOIS.
SECTION 6. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purposes.
SECTION 7. Counterparts. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
[signature pages follow]
<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>
Exhibit 10.2
AMENDMENT NO. 4 TO CREDIT AGREEMENT
This AMENDMENT NO. 4 TO CREDIT AGREEMENT (this "Amendment") is
entered into as of this 14th day of October, 1997 by and between COLORSPAN
CORPORATION (f/k/a LaserMaster Corporation), a Minnesota corporation
("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation,
as Agent and Lender ("Agent"). Unless otherwise specified herein, capitalized
terms used in this Amendment shall have the meanings ascribed to them by the
Credit Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower and Agent have entered into that certain
Credit Agreement dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement dated as of May 15, 1996, that Second Amendment to
Credit Agreement dated as of January 3 1, 1997, that Third Amendment to Credit
Agreement dated as of May 14, 1997 (as further amended, supplemented, restated
or otherwise modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain
amendments to the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedules.
Schedule H to the Credit Agreement is amended as follows:
(i) Clause (c) is amended and restated to read in its entirety
as follows:
c) Minimum Net Worth. Borrower and its Subsidiaries
(other than LaserMaster Europe) on a consolidated basis shall
maintain Net Worth equal to or greater than the following
respective amounts measured as of the last day of the
following respective quarters:
Fiscal Quarter Ending Minimum Net
Worth
June 30, 1997 ($5,441,000)
September 30, 1997 ($7,767,000)
December 31, 1997 ($7,636,000)
March 31, 1998 ($7,660,000)
June 30, 1998 ($7,083,000)
<PAGE>
(ii) Clause (d) is amended and restated to read in its
entirety as follows:
(d) Minimum Debt Service Coverage Ratio. Borrower and
its Subsidiaries (other than LaserMaster Europe) on a
consolidated basis shall have at the end of each Fiscal Month,
a Debt Service Coverage Ratio for the 12-month period then
ended (or for the Fiscal Months ending on or before June 30,
1997, for the period of July 1, 1996 to such date) of not less
than .23 to 1.0 with respect to the Fiscal Months ending March
31, 1997, April 3 0, 1997 and May 31, 1997, and not less than
the following ratios for the following respective periods:
Period Ratio
------ -----
Twelve months ended June 30, 1997 (4.74)
Three months ended September 30, 1997 (2.20)
Six months ended December 31, 1997 .12
Nine months ended March 31, 1998 .68
Twelve months ended June 30, 1998 and as of
the last day of each Fiscal Month thereafter 1.43
SECTION 2. Representations and Warranties.
2.1 Borrower. Borrower represents and warranties that:
(a) the execution, delivery and performance by
Borrower of this Amendment have been duly authorized by all necessary corporate
action and this Amendment is a legal, valid and binding obligation of Borrower
enforceable against Borrower in accordance with its terms, except as the
enforcement thereof may be subject to (i) the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforcement is sought in a proceeding in equity or at law);
(b) each of the representations and warranties
contained in the Credit Agreement is true and correct in all material respects
on and as of the date hereof as if made on the date hereof, except to the extent
that such representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance
of this Amendment nor the consummation of the transactions contemplated hereby
does or shall contravene, result in a breach of, or violate (i) any provision of
Boffower'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
<PAGE>
conflict or breach has been waived by a written waiver document a copy of which
has been delivered to Agent on or before the date hereof, and
(d) no Default or Event of Default will exist or
result after giving effect hereto.
SECTION 3. Conditions to Effectiveness.
This Amendment will be effective upon satisfaction of the
following conditions:
(a) Execution and delivery of four counter-parts of this
Amendment by each of the parties hereto.
(b) Payment to the Agent of an Amendment Fee in the amount of
$50,000, which amount Agent is authorized to charge to the outstanding balance
of the Revolving Loan upon execution and delivery of this Amendment by Borrower.
SECTION 4. Reference to and Effect Upon the Credit
Agreement.
(a) Except as specifically amended above, the Credit Agreement
and the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver or any right, power or remedy of Agent
or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein. Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof',
"herein" or words of similar import shall mean and refer to the Credit Agreement
as amended hereby.
SECTION 5. Waiver. In consideration of the foregoing, Borrower
hereby waives, and covenants not to sue Agent with respect to, any and all
claims it may have against Agent, whether known or unknown, arising in tort, by
contract or otherwise prior to the date hereof.
SECTION 6. Costs and Expenses. As provided in Section 11.3 of
the Credit Agreement, Borrower agrees to reimburse Agent for all fees, costs and
expenses, including the fees, costs and expenses of counsel or other advisors
for advice, assistance, or other representation in connection with this
Amendment.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF
LAWS PROVISIONS) OF THE STATE OF ILLINOIS.
<PAGE>
SECTION 8. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this amendment for any other purposes.
SECTION 9. Counterparts. This Amendment may be executed in any
number of counterparts, each of which when so executed shall be deemed an
original but all such counterparts shall constitute one and the same instrument.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Amendment as of the date and year first above written.
COLORSPAN CORPORATION
By:____________________________
Title:_________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL
Commitment: $10,000,000 CORPORATION, as Agent
By:____________________________
Title:_________________________
<PAGE>
Exhibit 10.3
FIFTH AMENDMENT TO CREDIT AGREEMENT
This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
entered into as of this 17th day of February, 1998 by and between COLORSPAN
CORPORATION (f/k/a LaserMaster Corporation), a Minnesota corporation
("Borrower"), and GENERAL ELECTRIC CAPITAL CORPOPATION, a New York corporation,
as Agent and Lender ("Agent"). Unless otherwise specified herein, capitalized
terms used in this Amendment shall have the meanings ascribed to them by the
Credit Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower and Agent have entered into that certain
Credit Agreement dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement dated as of May 15, 1996, that Second Amendment to
Credit Agreement dated as of January 31, 1997, that Third Amendment to Credit
Agreement dated as of May 14, 1997 that Fourth Amendment to Credit Agreement
dated as of October 14, 1997(as further amended, supplemented, restated or
otherwise modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain
amendments to the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Amendments to the Credit Agreement and Schedules.
Schedule A to the Credit Agreement is amended as follows:
The definition of Borrowing Base is amended to read in its
entirety as follows:
"Borrowing Base" shall mean, as of any date of determination
by Agent, in its reasonable discretion from time to time, an amount equal to the
sum at such time of:
(a) sixty-five percent (65%) of Eligible Accounts, less
reserves (provided that in no event shall the amount calculated in this clause
(a) with respect to Asia/Pacific exceed $1,000,000 at any time) and
(b) twenty-five percent (25%) of the book value of Eligible
Inventory valued on a first-in, first-out basis (at the lower of cost or
market), in each case, less reserves.
Section 2. Representations and Warranties.
2.1 Borrower represents and warranties that:
<PAGE>
(a) the execution, delivery and performance by
Borrower of this Amendment have been duly authorized by all necessary corporate
action and this Amendment is a legal, valid and binding obligation of Borrower
enforceable against Borrower in accordance with its terms, except as the
enforcement thereof may be subject to (i) the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforcement is sought in a proceeding in equity or at law);
(b) each of the representations and warranties
contained in the Credit Agreement is true and correct in all material respects
on and as of the date hereof as if made on the date hereof, except to the extent
that such representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance
of this Amendment nor the consummation of the transactions contemplated hereby
does or shall contravene, result in a breach of, or violate (i) any provision of
Borrower's certificate or articles of incorporation or bylaws, (ii) any law or
regulation, or any order or decree of any court or government instrumentality or
(iii) indenture, mortgage. deed of trust, lease, agreement or other instrument
to which Borrower or any of its Subsidiaries is a party or by which Borrower or
any of its Subsidiaries or any of their property is bound, except in any such
case to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof, and
(d) no Default or Event of Default will exist or result
after giving effect hereto.
SECTION 3. Conditions to Effectiveness.
This Amendment will be effective upon satisfaction of the
following conditions:
(a) Execution and delivery of four counter-parts of this
Amendment by each of the parties hereto.
SECTION 4. Reference to and Effect Upon the Credit
Agreement.
(a) Except as specifically amended above, the Credit Agreement
and the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver or any right, power or remedy of Agent
or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein. Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof',
"herein" or words of similar import shall mean and refer to the Credit Agreement
as amended hereby.
<PAGE>
SECTION 5. Waiver. In consideration of the foregoing,
Borrower hereby waives, and covenants not to sue Agent with respect to, any and
all claims it may have against Agent, whether known or unknown, arising in tort,
by contract or otherwise prior to the date hereof.
SECTION 6. Costs and Expenses. As provided in Section
11.3 of the Credit Agreement, Borrower agrees to reimburse Agent for all fees,
costs and expenses, including the fees, costs and expenses of counsel or other
advisors for advice, assistance, or other representation in connection with this
Amendment.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS
OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS.
SECTION 8. Headings. Section headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this amendment for any other purposes.
SECTION 9. Counterparts. This Amendment may be executed in
any number of counterparts, each of which when so executed shall be deemed an
original but all such counterparts shall constitute one and the same instrument.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
COLORSPAN CORPORATION
By:________________________________
Title:_____________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL
Commitment: $10,000,000 CORPORATION, as Agent
By:________________________________
Title:_____________________________
<PAGE>
Exhibit 10.4
SIXTH AMENDMENT AND CONSENT TO CREDIT AGREEMENT
This SIXTH AMENDMENT AND CONSENT TO CREDIT AGREEMENT (this
"Amendment") is entered into as of this 30th of June, 1998 by and between
COLORSPAN CORPORATION (f/k/a LaserMaster Corporation), a Minnesota corporation
("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation,
as Agent and Lender ("Agent"). Unless otherwise specified herein, capitalized
terms used in this Amendment shall have the meanings ascribed to them by the
Credit Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower and Agent have entered into that certain
Credit Agreement dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement dated as of May 15, 1996, that Second Amendment to
Credit Agreement dated as of January 3 1, 1997, that Third Amendment to Credit
Agreement dated as of May 14, 1997 that Fourth Amendment to Credit Agreement
dated as of October 14, 1997 and that Fifth Amendment to Credit Agreement dated
as of February 17, 1998 (as further amended, supplemented, restated or otherwise
modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain
amendments to the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. Name Change; Location Change.
Agent and Lenders consent to the change of name of
ColorMasters, Inc. to ColorSpan Latin America, Inc. ("CSLA") and to the
establishment of an office for CSLA at 3785 Northwest 82nd Avenue, Suite 300,
Miami, Florida 33166. Borrower represents to Agent and Lenders that the FEIN for
CSLA is 41-17615-II.
SECTION 2. Transfer of Assets.
Agent and Lenders hereby consent to the transfer from Borrower
to CSLA of accounts, inventory, general intangibles and books and records
relating to business conducted by Borrower in Latin America.
SECTION 3. Amendments to Credit Agreement.
(a) Definitions. Schedule A to the Credit Agreement is
amended as follows:
<PAGE>
(i) to delete the definition of ColorMasters and
insert the following definition in its place:
"CSLA" shall mean ColorSpan Latin America,
Inc., a Minnesota corporation.
(ii) to delete the definition of "Asia/Pacific" and
insert the following definition in its place:
"Asia/Pacific" shall mean ColorSpan
Asia/Pacific, Inc., a Minnesota corporation
(iii) clause (a) of the definition of Borrowing Base
is amended to read in its entirety as follows:
(a) sixty percent (65%) of Eligible
Accounts, less reserves, provided that in no
event shall the amount calculated in this
clause (a) with respect to Asia/Pacific
exceed $1,000,000 at any time or the amount
calculated in this clause (a) with respect
to CSLA exceed $250,000 at any time.
(b) General Amendment. All references in the Credit Agreement
and other Loan Documents to ColorMasters shall be changed to refer to CSLA.
(c) New Negative Covenant. The following additional negative
covenant is added to the Credit Agreement:
6.24 CSLA. Borrower shall not cause or permit CSLA to
incur obligations or indebtedness other than (a)
obligations owing to Borrower, (b) obligations
arising solely by operation of law, (c) Indebtedness
permitted under Sections 6.3(i) and 6.7(iii), and (d)
obligations under any lease of real estate which do
not exceed $300,000 per year.
(d) Amend Section 6.3(i). Clause (i) of Section 6.3 is amended
to read as follows:
(i) Indebtedness of Borrower, Asia/Pacific and CSLA
permitted under Section 6.7.
(e) Amendment to Section 6.7(iii). The parenthetical carve-out
in clause (iii) of Section 6.7 is amended to read as follows:
"(provided that the aggregate amount incurred by
Asia/Pacific shall not exceed $300,000 at any time
and the aggregate amount incurred by CSLA shall not
exceed $300,000 at any time.)"
<PAGE>
SECTION 4. Representations and Warranties. Borrower
represents and warranties that:
(a) the execution, delivery and performance by Borrower of
this Amendment have been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in
the Credit Agreement is true and correct in all material respects on and as of
the date hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this
Amendment nor the consummation of the transactions contemplated hereby does or
shall contravene, result in a breach of, or violate (i) any provision of
Borrower's certificate or articles of incorporation or bylaws, (ii) any law or
regulation, or any order or decree of any court or government instrumentality or
(iii) indenture, mortgage, deed of trust, lease, agreement or other instrument
to which Borrower or any of its Subsidiaries is a party or by which Borrower or
any of its Subsidiaries or any of their property is bound, except in any such
case to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof, and
(d) no Default or Event of Default will exist or result after
giving effect hereto.
SECTION 5. Conditions to Effectiveness.
This Amendment will be effective upon satisfaction of the
following conditions:
(a) Execution and delivery of four counter-parts of this
Amendment by each of the parties hereto.
(b) Delivery to Agent from CSLA of a UCC-3 amendment for
filing in Minnesota and a UCC- I for filing in Florida.
SECTION 6. 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.
<PAGE>
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver or any right, power or remedy of Agent
or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein. Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof',
"herein" or words of similar import shall mean and refer to the Credit Agreement
as amended hereby.
SECTION 7. Waiver. In consideration of the foregoing, Borrower
hereby waives, and covenants not to sue Agent with respect to, any and all
claims it may have against Agent, whether known or unknown, arising in tort, by
contract or otherwise prior to the date hereof.
SECTION 8. 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 9. 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 10. 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 11. Counterparts. This Amendment may be executed in
any number of counterparts, each of which when so executed shall be deemed an
original but all such counterparts shall constitute one and the same instrument.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
COLORSPAN CORPORATION
By:_______________________________
Title:____________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL
Commitment: $10,000,000 CORPORATION, as Agent
By:_______________________________
Title:____________________________
<PAGE>
Exhibit 10.5
SEVENTH AMENDMENT AND CONSENT TO CREDIT AGREEMENT
This SEVENTH AMENDMENT AND CONSENT TO CREDIT AGREEMENT (this
"Amendment") is entered into as of this 15th of July, 1998 by and between
COLORSPAN CORPORATION (f/k/a LaserMaster Corporation), a Minnesota corporation
("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation,
as Agent and Lender ("Agent"). Unless otherwise specified herein, capitalized
terms used in this Amendment shall have the meanings ascribed to them by the
Credit Agreement (as hereinafter defined).
RECITALS
WHEREAS, Borrower and Agent have entered into that certain
Credit Agreement dated as of January 17, 1996, as amended by that certain First
Amendment to Credit Agreement dated as of May 15, 1996, that Second Amendment to
Credit Agreement dated as of January 31, 1997, that Third Amendment to Credit
Agreement dated as of May 14, 1997 that Fourth Amendment to Credit Agreement
dated as of October 14, 1997, that Fifth Amendment to Credit Agreement dated as
of February 17, 1998, and that Sixth Amendment and Consent to Credit Agreement
dated as of June 30, 1998 (as further amended, supplemented, restated or
otherwise modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to enter into certain
amendments to the Credit Agreement, all as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein
and other good and valuable consideration, the parties hereto agree as follows:
SECTION 1. ACQUISITION OF INTERCOMPANY DEBT
Agent and Lenders consent to the partial repayment of
intercompany loans owing by Borrower to VirtualFund.com, Inc. (fka LaserMaster
Technologies, Inc.), a Minnesota corporation ("Holdings"), in an amount not to
exceed Three Million Five Hundred Thousand Dollars ($3,500,000) for the purpose
of contributing such funds to the capital of Virtual Acquisition Corp. II, a
Minnesota corporation ("VAC IIA"), or loaning such funds to VAC IIA so that VAC
IIA may loan to, or contribute such funds to the capital of, Kilborn Photo
Products, Inc., an Iowa corporation ("Kilborn"), and Kilborn may use such funds
to repay amounts owing to its former stockholders, concurrently with the
purchase by VAC IIA of all of the outstanding stock of Kilborn, in exchange for
stock of Holdings.
SECTION 2. AMENDMENTS TO DEFINITIONS IN CREDIT AGREEMENT.
(a) Definitions. Schedule A to the Credit Agreement is
amended as follows:
(i) to delete the definition of Holdings and insert
the following definition in its place:
<PAGE>
"Holdings" shall mean VirtualFund.com, Inc., a
Minnesota corporation.
(ii) to insert the following definitions:
"Kilborn" shall mean Kilborn Photo Products,
Inc., an Iowa corporation.
"VAC IIA" shall mean Virtual Acquisition Corp.
IIA, a Minnesota corporation.
SECTION 3. AMENDMENT TO ELIGIBLE ACCOUNTS TO INCLUDE CSLA ACCOUNTS.
The preamble of Schedule B to the Credit Agreement is amended
and restated to read in its entirety as follows:
Eligible Accounts shall include all Accounts of
Borrower, Asia/Pacific and CSLA, except any Account
SECTION 4. AMENDMENT TO NEGATIVE COVENANTS:
Clause (c) of Section 6.2 of the Credit Agreement is amended
to read in its entirety as follows:
(c) loans or Investments by Borrower in or to
Asia/Pacific, CSLA and/or Kilborn in an aggregate
amount not to exceed (A) $800,000 per fiscal year,
plus (B) 50% of the Cumulative Net Income Investment
Basket, if positive, from and after January 1, 1996,
plus (C) 100% of the amount of any cash, proceeds of
sales of common stock and/or capital contributions
received by Borrower (net of any fees, costs and
expenses incurred in connection with any such sale or
contribution, including, without limitation,
underwriters' discounts) from and after the Closing
Date (but excluding any equity proceeds (x) invested
in or otherwise used to benefit LaserMaster Europe or
(y) used to repay the TimeMasters Debt pursuant to
Section 5(d) of the TimeMasters Subordination
Agreement); provided that in the case of loans to
Kilborn, (i) no Default or Event of Default shall
have occurred and be continuing at the time such
loans are made, (ii) Borrower shall have Excess
Availability of $2,000,000 or greater after giving
effect to any such loans, (iii) the Average Payable
Days are less than 60 days, and (iv) such Investments
shall be made solely by means of intercompany loans
evidenced by promissory notes that are pledged and
delivered to Agent.
<PAGE>
SECTION 5. REPRESENTATIONS AND WARRANTIES.
4.1 Borrower represents and warranties that:
(a) the execution, delivery and performance by Borrower of
this Amendment have been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms, except as the enforcement thereof
may be subject to (i) the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in
the Credit Agreement is true and correct in all material respects on and as of
the date hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date;
(c) neither the execution, delivery and performance of this
Amendment nor the consummation of the transactions contemplated hereby does or
shall contravene, result in a breach of, or violate (i) any provision of
Borrower's certificate or articles of incorporation or bylaws, (ii) any law or
regulation, or any order or decree of any court or government instrumentality or
(iii) indenture, mortgage, deed of trust, lease, agreement or other instrument
to which Borrower or any of its Subsidiaries is a party or by which Borrower or
any of its Subsidiaries or any of their property is bound, except in any such
case to the extent such conflict or breach has been waived by a written waiver
document a copy of which has been delivered to Agent on or before the date
hereof; and
(d) no Default or Event of Default will exist or result after
giving effect hereto.
SECTION 6. CONDITIONS TO EFFECTIVENESS.
This Amendment will be effective upon satisfaction of the
following conditions:
(a) Execution and delivery of four counter-parts of this
Amendment by each of the parties hereto.
(b) Delivery to Agent of pledge agreements executed by (i)
Holdings with respect to the stock of VAC IIA, and (ii) VAC IIA with respect to
the stock of Kilborn, along with share certificates for all of the outstanding
capital stock of VAC IIA and Kilborn and stock powers endorsed in blank.
(c) Delivery to Agent of a Phase 1, and, if requested, Phase
II, environmental audits regarding real estate operated by Kilborn.
<PAGE>
SECTION 7. REFERENCE TO AND EFFECT UPON THE CREDIT AGREEMENT.
(a) Except as specifically amended above, the Credit Agreement
and the other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver or any right, power or remedy of Agent
or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as
specifically set forth herein. Upon the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement" "hereunder","hereof',
"herein" or words of similar import shall mean and refer to the Credit Agreement
as amended hereby.
SECTION 8. WAIVER. In consideration of the foregoing, Borrower hereby
waives, and covenants not to sue Agent with respect to, any and all claims it
may have against Agent, whether known or unknown, arising in tort, by contract
or otherwise prior to the date hereof.
SECTION 9. 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 10. 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 11. 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 12. COUNTERPARTS. This Amendment may be executed in any number
of counterparts, each of which when so executed shall be deemed an original but
all such counterparts shall constitute one and the same instrument.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
COLORSPAN CORPORATION
By:____________________________
Title:_________________________
Revolving Credit Loan GENERAL ELECTRIC CAPITAL
Commitment: $10,000,000 CORPORATION, as Agent
By:___________________________
Title:________________________
<PAGE>
Exhibit 10.6
LASERMASTER TECHNOLOGIES, INC.
MINUTES OF SHAREHOLDER MEETING
The undersigned, Chief Executive Officer of LaserMaster Technologies, Inc.,
a Minnesota corporation organized pursuant to the provisions of Minnesota
Statute Chapter 302A, certifies that in a meeting of the shareholders of the
corporation duly called and held on April 2, 1998, that the majority powers of
the authorized and outstanding shares of common stock par value .01 per share,
such shares being the class of the common stock of the corporation outstanding,
duly adopted the following resolution:
RESOLVED, that Article I of the Articles of the Incorporation is hereby
amended to read as follows:
ARTICLE I
The name of the corporation shall be VirtualFund.com, Inc.
FURTHER RESOLVED, that the Chief Executive Officer of the corporation or
any other designated officer is authorized to file an Amendment of Articles of
Incorporation to effect the amendment authorized herein and to undertake such
other filings that may be necessary to change the name of the corporation.
IN WITNESS WHEREOF, I have set my hand this 3/rd/ day of April, 1998.
________________________________________
Melvin Masters
Chief Executive Officer
<PAGE>
Exhibit 10.7
PROMISSORY NOTE
$250,000.00 Eden Prairie, Minnesota
June 26, 1998
FOR VALUE RECEIVED, the undersigned, Grandchildren's Realty Alternative
Management Program I L.P., a Minnesota limited partnership ("Maker"), hereby
agrees and promises to pay to the order of VirtualFund.com, Inc., a Minnesota
corporation ("Holder"), at its address of 7090 Shady Oak Road, Eden Prairie, MN
55344, or at any other place designated by the Holder hereof, in lawful money of
the United States, the principal sum of Two Hundred Fifty Thousand Dollars and
No Cents ($250,000.00), with interest thereon at the rate of two percent (2%)
above the Prime Rate (as herein defined). The term "Prime Rate" as used herein
means an annual interest rate equal to the rate per annum publicly announced by
Norwest Bank, N.A. or any successor thereto ("Norwest") as being its prime rate.
The Prime Rate shall change automatically, without notice and simultaneously,
with each change in the per annum rate announced by Norwest. The principal
amount and interest accruing hereunder shall be due and payable on February 25,
1999. This Note may be prepaid without penalty, in whole or in part, at any
time and from time to time prior to February 25, 1999. This Note is secured by
a Guaranty of even date herewith made by Melvin L. Masters and by a Pledge
Agreement of even date herewith between Maker and Holder.
This Note shall be due and payable (together with unpaid interest) immediately,
without demand or notice thereof, if a petition in bankruptcy is filed by or
against the Maker under the United States Bankruptcy Code, as amended, and such
petition is not withdrawn or dismissed within thirty (30) days.
The Maker agrees to pay all costs of collection, including reasonable attorneys'
fees and legal expenses, in the event this Note is not paid when due, whether or
not legal proceedings are commenced. This Note is a Minnesota contract and
Holder may seek to enforce it in any court sitting in the State of Minnesota,
and Maker specifically consents to both the subject matter and personal
jurisdiction of such courts. Service of process may be made by registered or
certified mail in addition to the methods allowed by law.
Maker waives its rights for presentment, demand for payment, notice of dishonor
or protest.
GRANDCHILDREN'S REALTY ALTERNATIVE
MANAGEMENT PROGRAM I L.P.
By:____________________________
Its:___________________________
Maker's Address: ________________________
________________________
<PAGE>
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT is entered into and effective as of June ___, 1998,
by Grandchildren's Realty Alternative Management Program I L.P., a Minnesota
limited partnership (the "Pledgor") and an affiliate of Melvin L. Masters (the
"Masters"), in favor of VirtualFund.com, Inc., a Minnesota corporation (the
"Secured Party").
A. The Pledgor has issued a promissory note of even date herewith (the
"Note") payable to the order of the Secured Party in the original principal
amount of Two Hundred Fifty Thousand Dollars and No Cents ($250,000.00) in
connection with a loan from the Secured Party to the Pledgor (the "Loan").
B. Masters, as the sole shareholder of the general partner of the Pledgor,
will benefit indirectly from the Loan and, as such, has agreed to guaranty
payment of the Note pursuant to the terms of a guaranty executed by Masters on
the date hereof (the "Guaranty").
C. To secure the obligations of Masters under the Guaranty and the
obligations of the Pledgor under the Note, the Secured Party requires that the
Pledgor grant the Secured Party a security interest in Eighty Thousand Nine
Hundred Ninety-Three (80,993) shares of common stock of the Secured Party owned
by the Pledgor (the "Shares") in accordance with this Pledge Agreement, and the
Pledgor agrees to grant the Secured Party such a security interest.
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Pledgor hereby agrees as follows:
1. Terms of Pledge.
---------------
(a) Pledge. The Pledgor does hereby pledge and grant to the Secured Party
a security interest in all of the following described property (the
"Collateral"):
(1) The Shares; and
(2) The proceeds of any dividend or other distribution attributable to
the Shares (payable other than in cash) or any shares of stock or
securities of the Company or of another corporation payable with respect to
the Shares in connection with any change in the corporate structure or
shares of the Company or pursuant to any merger or recapitalization or
otherwise.
(b) Delivery of Collateral. The Secured Party hereby acknowledges receipt
of the certificate evidencing the Collateral together with a stock power
therefor duly endorsed. The Pledgor agrees to deliver promptly to the Secured
Party, in the exact form received, all securities and other property which come
into the possession, custody or control of the Pledgor which would be included
within the definition of Collateral in Section 1(a) above.
<PAGE>
(c) Actions Prior to an Event of Default. Until the occurrence of an Event
of Default (as defined in Section 3(a) below) the Pledgor will have the sole
right (a) to vote the securities constituting the Collateral and to give
consents, waivers and ratifications in respect thereof, provided that no vote
shall be cast, or consent, waiver or ratification given or action taken that
would violate or not comply with any of the terms and provisions of this Pledge
Agreement; and (b) to receive any and all cash dividends declared and paid on
the securities constituting the Collateral that are not otherwise in violation
of any of the terms and provisions of this Pledge Agreement.
(d) Termination of Security Interest and Return of Collateral. Upon such
date as the entire principal sum and all accrued interest on the Note shall have
been paid in full, (i) all of the Collateral shall automatically, and without
any further action of the parties hereto, be released from the security interest
of the Secured Party created by this Pledge Agreement and (ii) the Secured Party
shall deliver the certificate or certificates representing the Collateral to the
Pledgor.
2. Representations, Warranties And Covenants of the Pledgor.
--------------------------------------------------------
(a) Power and Authority to Pledge. The Pledgor has full power and
authority to execute and deliver this Pledge Agreement and to perform the
Pledgor's obligations hereunder.
(b) Enforceability. This Pledge Agreement is the valid and binding
obligation of the Pledgor, enforceable against the Pledgor according to its
terms, subject to applicable bankruptcy, insolvency, moratorium and other laws
affecting creditors' rights and remedies and the judicial limitations on the
right to specific performance. Upon delivery of the Shares to the Secured
Party, this Pledge Agreement shall create a valid first lien upon, and perfected
security interest in, the Shares.
(c) Title to Collateral. The Pledgor warrants and represents to the
Secured Party that it holds title to the Collateral free and clear of any liens,
encumbrances, security interests and restrictions on transfer and assignment
thereof, except for the security interest created by this Pledge Agreement and
as required by federal and state securities laws.
(d) Preservation of Rights on Collateral. The Pledgor will take any action
necessary to preserve redemption, conversion, warrant, preemptive or other
rights (and be aware of the dates limiting the exercise of such rights)
concerning the Collateral.
(e) Maintenance of Security Interest. The Pledgor will do and enact all
things deemed necessary or appropriate by the Secured Party from time to time to
establish, determine priority of, perfect, continue perfection, terminate and
enforce the Secured Party's interest in the Collateral and the Secured Party's
rights under this Pledge Agreement.
2
<PAGE>
3. Events of Default and Remedies.
------------------------------
(a) Events of Default. The occurrence of one or more of the following
shall constitute an "Event of Default" hereunder:
(1) The Pledgor defaults in the performance or observance of any of
the terms or covenants in this Pledge Agreement unless cured within ten
(10) days of notice of such occurrence from the Secured Party;
(2) Any representation or warranty made by the Pledgor in this Pledge
Agreement is untrue in any material respect unless cured within ten (10)
days of notice of such occurrence from the Secured Party;
(3) Any default under the Note; or
(4) Any default or failure to perform under the Guaranty.
(b) Secured Party's Right to Sell Collateral. Upon the occurrence of an
Event of Default, the Collateral shall be forfeited by the Pledgor to the
Secured Party unless the Secured Party, in its sole discretion, permits the
Pledgor to continue to make payments under the Note and to retain his rights and
interest in the Collateral. The Secured Party shall be entitled to sell the
Collateral upon ten (10) business days' written notice to Pledgor, at a private
sale. Thereafter the Collateral shall be held by the Secured Party for its own
account and the Secured Party may cause the Collateral to be registered in its
name and, to the extent permitted by law, may vote the Collateral (whether or
not transferred or registered in the name of the Secured Party) and give all
consents, waivers and ratifications in respect thereof, and may receive all
dividends, interest and other distributions thereon. The Secured Party may
limit sales to purchasers who are acquiring for investment and not with any view
to distribution and may condition any sale or sales upon restriction against
future transfers to the extent that the Secured Party as it may be advised by
counsel as necessary to protect the Secured Party from any liability under the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, state securities laws, and any like or similar laws now or hereafter in
effect.
(c) Rights Cumulative. All rights and remedies of the Secured Party
hereunder are in addition to rights and remedies afforded the Secured Party
under the Note, any other document or under law. All remedies are cumulative
and may be exercised by the Secured Party concurrently or consecutively. No
failure or omission of the Secured Party to exercise any such right or remedy
shall constitute a waiver thereof.
4. Termination. Upon payment in full of the obligations under the Note,
this Pledge Agreement and the security interest granted herein shall terminate
and be of no further force and effect, and the Secured Party shall thereupon
promptly return to the Pledgor such of the Collateral and such other documents
delivered by the Pledgor as may then be in the Secured Party's possession.
3
<PAGE>
5. Application of Proceeds. The proceeds of any sale of the Collateral
shall be applied as follows:
(a) First, to the payment of the costs and expenses of such sale, and
all expenses (including reasonable fees and expenses of counsel);
(b) Second, to the payment of all amounts owing under the Note; and
(c) Finally, to the payment to Pledgor, or to its successors and
asigns, or as a court of competent jurisdiction may direct, of any surplus
then remaining from such proceeds.
6. Miscellaneous.
(a) Agreement Binding. This Pledge Agreement shall be binding upon and
inure to the benefit of the successors and permitted assigns of the Pledgor
and the Secured Party. This Pledge Agreement may not be assigned by either
party without the prior written consent of the other party.
(b) Severability. In the event that one or more provisions of this
Pledge Agreement should be declared to be invalid, illegal or unenforceable
in any respect by a court of competent jurisdiction, the validity, legality
and enforceability of the remaining provisions herein shall not in any way
be affected or impaired thereby.
(c) Survival of Representations. All representations and warranties
made herein are, and shall continue to be, true and correct in all material
respects until the Note is paid in full.
(d) Notices. All notices and other communications required or
permitted to be given hereunder shall be given and become effective when
deposited in the U.S. Mail postage prepaid, return receipt requested
addressed to the parties at the addresses of the parties set forth in the
stock records of the Company, or such other address as the parties may
designate from time to time.
(e) Governing Law. This Pledge Agreement shall be construed,
interpreted and governed according to the laws of the State of Minnesota.
(f) Nature of Obligations. The obligations of the Pledgor under this
Pledge Agreement shall be absolute and unconditional and shall remain in
full force and effect without regard to, and shall not be released,
suspended, discharged, terminated, lessened or otherwise affected by, any
circumstance or occurrence whatsoever, whether or not the Pledgor shall
have notice or knowledge, including, without limitation, (a) any renewal,
extension, substitution, amendment or modification of or addition or
supplement to or deletion from the Note, the Guaranty, this Pledge
Agreement or any permitted assignment or transfer of any thereof; (b) any
waiver, consent, extension, indulgence or other action or inaction under or
in respect of the Note, the Guaranty, this Pledge Agreement, or any
exercise or nonexercise of any right, remedy, power or privilege under or
in respect of the
4
<PAGE>
Note or this Pledge Agreement; (c) any furnishing of any additional
collateral or security to the Secured Party or its assignee or any
acceptance thereof or any release of any collateral or security in whole or
in part by the Secured Party or its assignee under this Pledge Agreement or
otherwise; (d) any limitation on any party's liability or obligations under
the Note, the Guaranty or under this Pledge Agreement or any invalidity or
unenforceability, in whole or in part, or any such instrument or any term
thereof; or (e) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating to
the Pledgor, or any action taken with respect to this Pledge Agreement, the
Guaranty or the Note by any trustee or receiver, or by any court, in any
such proceeding.
IN WITNESS WHEREOF, the parties have executed this Pledge Agreement as of
the day and year first above written.
GRANDCHILDREN'S REALTY ALTERNATIVE
MANAGEMENT PROGRAM I L.P.
By:____________________________
Its:___________________________
VIRTUALFUND.COM, INC.
By:____________________________
Its:___________________________
5
<PAGE>
GUARANTY
IN CONSIDERATION OF and in order to induce VIRTUALFUND.COM, INC., a Minnesota
corporation (the "Company"), to extend credit to GRANDCHILDREN'S REALTY
ALTERNATIVE MANAGEMENT PROGRAM I L.P., a Minnesota limited partnership (the
"Borrower"), Melvin L. Masters (the "Guarantor") does hereby:
1. Unconditionally and absolutely guarantee to the Company the full and prompt
payment, when due, of all indebtedness, obligation and liability of whatsoever
nature of the Borrower to the Company, whether now existing or hereafter created
and whether due or to become due, absolute or contingent, direct or indirect, or
joint or joint and several, including, without limitation, indebtedness,
obligation and liability created or arising under that certain promissory note
of Borrower, dated of even date herewith, in the original principal amount of
$250,000.00 payable to the order of the Company (such indebtedness, obligation
and liability herein collectively referred to as the "Obligations"), and the
prompt and full performance of all other duties of the Borrower to the Company,
together with any and all costs and expenses of and incidental to the collection
of the Obligations or the enforcement of this Guaranty, including, but not
limited to, reasonable attorneys' fees.
2. Waive presentment, demand, notice of nonpayment, protest and notice of
protest on the Obligations and notice of the creation of the Obligations by the
Borrower.
3. Agree that the Company may from time to time, without notice to the
Guarantor, extend, modify, renew, or compromise the Obligations and the
liability of the Guarantor under this Guaranty, in whole or in part, without
releasing, extinguishing or affecting in any manner whatsoever the liability of
the Guarantor under this Guaranty.
4. Agree that this Guaranty shall be construed as a continuing, absolute and
unconditional guarantee without regard to (i) the validity, regularity or
enforceability of the Obligations or the disaffirmance thereof in any insolvency
or bankruptcy proceeding relating to the Borrower, or (ii) any event or any
conduct or action of the Borrower to the Company or any other party, which might
otherwise constitute a legal or equitable discharge of a surety or guarantor but
for this provision.
5. Agree that the Company is expressly authorized to forward any or all
collateral and security which may at any time be placed with it by the Borrower
or the Guarantor or any other person, directly to the Borrower for collection
and remittance or for credit, or to collect the same in any other manner and to
renew, extend, compromise, exchange, release, surrender, or modify the terms of,
such collateral and security with or without consideration and without notice to
the Guarantor and without in any manner affecting the absolute liability of the
Guarantor hereunder; that the liability of the Guarantor hereunder shall not be
affected or impaired by any failure, neglect, or omission on the part of the
Company to realize upon the Obligations, or upon any collateral or security
therefor, nor by the taking by the Company of any other guaranty or guaranties
to secure
<PAGE>
the Obligations, nor by taking by the Company of collateral or security of any
kind nor by any act or failure to act whatsoever which but for this provision
might or could in law or in equity act to release or reduce the Guarantor's
liabilities hereunder; and that no failure or delay on the part of the Company
in exercising any right or remedy hereunder shall operate as or constitute a
waiver of such right or remedy; nor shall any single or partial exercise of any
right or remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right or remedy granted hereby or by law.
6. Agree that so long as any portion of the Obligations are due and owing or to
become due and owing by the Borrower to the Company, the Guarantor shall not,
without the prior written consent of the Company, collect or seek to collect
from the Borrower any claim acquired by the Guarantor through payment of any
part of the Obligations, whether by subrogation or otherwise.
7. Waive any rights of subrogation, indemnity, reimbursement and contribution
which would otherwise arise or be acquired by the Guarantor by reason of payment
by the Guarantor of any part of the Obligations.
8. Agree that the liability of the Guarantor hereunder shall be reinstated to
the extent the Company is required at any time to disgorge or repay any amounts
then previously received in payment of the Obligations, for any reason,
including, without limitation, amounts recovered pursuant to preference claims
in connection with bankruptcy proceedings of the Borrower.
9. Agree that this Guaranty shall inure to the benefit of the Company and its
successors, assigns, and legal representatives and that the Guarantor shall have
no right to assign or otherwise transfer his rights and obligations under this
Guaranty to any third party without the prior written consent of the Company;
and that any such assignment or transfer shall not release or affect the
liability of the Guarantor hereunder in any manner whatsoever.
10. Agree that the Guarantor may be joined in any action or proceeding
commenced against the Borrower in connection with or based upon the Obligations
and recovery may be had against the Guarantor in any such action or proceeding
or in any independent action or proceeding against the Guarantor under this
Guaranty should the Borrower fail to duly and punctually pay any of the
principal of or interest on the Obligations, without any requirement that the
Company first resort for payment or performance to, or assert, prosecute, or
exhaust any remedy or claim against, the Borrower or any other person or entity.
11. Agree that this Guaranty shall be deemed a contract made under and pursuant
to the laws of the state of Minnesota and shall be governed by and construed
under the laws of such state and that, wherever possible, each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty or any part thereof shall
be prohibited by or invalid under applicable law, such
2
<PAGE>
provision shall be ineffective without invalidating the remainder of such
provision or the remaining provisions of the Guaranty.
12. Agree that all notices pursuant to this Guaranty shall be given by
facsimile or by notice in writing, hand-delivered or sent by first-class mail,
postage prepaid, to the parties hereto at the following addresses:
The Company: VirtualFund.com, Inc.
7090 Shady Oak Road
Eden Prairie, MN 55344
Attention: General Counsel
The Guarantor: Melvin L. Masters
3213 South Duluth Avenue
Sioux Falls, SD 57105
or to such other number or address as such party shall designate in a written
notice to the other party. All such notices shall be effective upon delivery to
the designated address.
13. Represent, acknowledge and agree that:
(a) The Company's willingness, upon receipt of this Guaranty, to
extend credit to the Borrower would also inure to the benefit of
the Guarantor and constitutes good and valuable consideration to
the Guarantor; and
(b) The Company may from time to time determine at its sole
discretion that the financial condition of the Borrower and/or
the Guarantor is not adequate to support additional extensions of
credit to the Borrower and that the Company may request
additional assurances of payment and of the Borrower's ability to
pay the Obligations to the Company, and if such assurances are
not forthcoming, may refuse to extend additional credit to the
Borrower without in any way affecting the liability of the
Guarantor hereunder.
Dated as of the ____ day of June, 1998.
________________________
Melvin L. Masters
STATE OF______________________)
) ss.
COUNTY OF_____________________)
This instrument was acknowledged before me this _______ day of June, 1998, by
Melvin L. Masters.
________________________
Notary Public
3
<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-30-1998 JUN-30-1998
<PERIOD-START> MAR-30-1998 JUL-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 5,011,181
<SECURITIES> 0 0
<RECEIVABLES> 0 11,648,638
<ALLOWANCES> 0 1,662,000
<INVENTORY> 0 6,819,968
<CURRENT-ASSETS> 0 26,612,045
<PP&E> 0 2,776,339
<DEPRECIATION> 0 16,311,947
<TOTAL-ASSETS> 0 33,119,670
<CURRENT-LIABILITIES> 0 17,285,620
<BONDS> 0 0
0 0
0 0
<COMMON> 0 151,789
<OTHER-SE> 0 15,615,515
<TOTAL-LIABILITY-AND-EQUITY> 0 33,119,670
<SALES> 22,506,090 80,731,534
<TOTAL-REVENUES> 22,506,090 80,731,534
<CGS> 12,935,937 48,050,731
<TOTAL-COSTS> 12,935,937 48,050,731
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 64,655 715,048
<INCOME-PRETAX> 1,553,869 1,726,759
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,553,869 1,726,759
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,553,869 1,726,759
<EPS-PRIMARY> .10 .12
<EPS-DILUTED> .10 .11
</TABLE>
<PAGE>
Exhibit 99
EXHIBIT 99
CAUTIONARY FACTORS UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
VirtualFund.com, Inc. desires to take advantage of the "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. The Company has a credit agreement with a commercial finance
company that has adequately financed its cash requirements in the past.
Previously, net operating losses in fiscal 1996 of $10,461,534 and fiscal 1997
of $17,199,688 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 to meet future needs, 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, competitive product introductions, or by market
conditions in general. In addition, there can be no assurance that the Company
can achieve or maintain profitability on a quarterly or annual basis in the
future.
Potential Acceleration of Senior Debt. The Company's Senior Debt Agreement
includes financial covenants, which the Company must meet. Currently, the
Company is in compliance with all of the financial covenants required by its
Senior Lender. For further information, refer to Form 10-K, Item 14(a)1.
Financial Statements, Note #5 of the Notes to Consolidated Financial Statements.
The financial performance of the Company in the past has made it necessary for
the Company to renegotiate the financial covenants to avoid being declared in
violation of the covenants by General Electric Capital Corporation. If future
financial performance were to cause covenant violations 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. As
of June 30, 1998, no amounts were owed to the Company's Senior Debt Lender.
However, the Company anticipates additional borrowings under the agreement in
the future.
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Technology and Industry Pressures/Reliance on New Technology. 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. As product life cycles get shorter, the resulting consumable
stream generated by the installed base may be negatively impacted. 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.
New Product Design and Development. The process of developing new
products involves adopting new and emerging technologies and components which
may not have product histories or long term use testing to establish expected
life cycles in the field or to assure long term field use.
Product Quality Issues. Any quality, durability or reliability problems
with existing or new products, regardless of materiality, or any other actual or
perceived problems with the Company's products could have a material adverse
effect on market acceptance of such new products. Any quality problems with
components could result in "epidemic" or wide-spread 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.
Product Acceptance/Market Anticipation. There is no assurance 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
has introduced a new family of printers, the DisplayMaker(R) 4000, 5000 and 6000
or HiRes 8-Color series, during September 1997. Two new versions of these
printers have been introduced since February 1998. The DisplayMaker 7000 was
introduced in August 1998. Sales of these and the related products comprise
approximately 43% of the Company's total revenues for fiscal 1998.
Additionally, in August 1998 the Company introduced the Giclee PrintMakerFA, an
8-Color HiRes drum-based printer. Although the Company has had successes
introducing new products in the past, some earlier 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.
Product Malfunction. The Company is aware of intermittent customer issues
with the performance and formulation of certain inks used in the Company's
printers. The Company has taken steps to address the ink issues with its
supplier. 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.
Dependence on Suppliers. The Company is dependent on sole source suppliers
for the heads for PressMate-FS(R) and DisplayMaker Express (DME). Over the time
that the Company has worked with its
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supplier for the PressMate printheads, there have been quality and consistency
issues with the printheads supplied. The Company does not have a written
agreement with this supplier and cannot purchase the supplies from another
source. Currently, the Company does not sell significant numbers of the
PressMate-FS printers which utilize the sole-sourced component. However, the
Company has an installed base of printers who purchase consumables from the
Company and could experience head failure or need a replacement. Overall, the
percentage of the Company's revenues related to the product utilizing this head
is less than 7% of fiscal 1998 revenue. The Company is also dependent upon a
sole source supplier for the heads for the DME printer. Quality and consistency
of the printheads delivered by this supplier have also been a problem. Although
the Company currently sells very few new DME printers, there is an installed
base of printers who purchase consumables from the Company and could experience
printhead failure or require replacement. The Company has a written agreement
with the sole source supplier of the DME heads. The written agreement includes
the manufacturing specifications and directions which would allow a second
supplier to produce the printheads should the current supplier be unable to cure
any defaults under the manufacturing and supply agreement. The adverse effect
upon the Company if the Company were unable to resolve an issue with the
supplier, may be considered material if the effect were a significant increase
in the returns of the DME printer based on the inability to supply replacement
printheads. Overall, the percentage of the Company's revenues related to the
product utilizing this head is less than 9% of fiscal 1998 revenue.
The Company's aqueous inkjet printers are based on a printhead supplied
pursuant to a written contract with Hewlett-Packard Company. The Company does
not anticipate availability or quality issues which would affect the supply of
printheads supplied by Hewlett-Packard Company (HP). The revenues of the Company
associated with sales of this product or products including those components
represent approximately 67% of the Company's fiscal 1998 revenue. If the Company
is unable to resolve a potential future availability or quality issue, the
Company's production, support of its installed base, and quality requirements
will be materially adversely affected.
Competitive Pricing/Product Introductions. 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.
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.
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Technological Advancements. The digital color inkjet printing market is
rapidly moving to two distinct technologies for the placement of ink on a
substrate: thermal inkjet cartridges and piezo-electric printheads. Any company
without a secure, economical source of one or both of these products will face
serious competitive pricing and margin pressures going forward. The Company
currently has a license to remanufacture specific HP 300 dpi inkjet cartridges
for use in its wide-format, roll-fed color inkjet printers. HP has introduced a
new inkjet cartridge with a capability of producing output resolution of 600
dpi. The Company has secured the use of this product in non-roll fed devices
and has introduced a product based on this cartridge. However, the market for
non-roll fed devices is considered a low volume market niche by Company
management. In addition, Lexmark has developed a 600 dpi inkjet cartridge.
Both companies are competitors in the wide-format color market. At this time
the Company does not have a source of 600 dpi printheads for use on roll fed
printers. The Company is considering several component suppliers in its search
for a dependable, manufacturable piezo-electric printhead. No one source has
been identified for use in a future product as of this time. 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.
Expansion and Diversification to Software and Services Outside of the Core
Printer Business. The Company's continuing efforts to expand sales and increase
profits and desire to reposition itself as a diversified technology company is
stimulating a series of new product development activities. Currently the focus
of these new business opportunities is primarily internet based software and
service businesses. During this past year, the Company launched an electronic
commerce (e-commerce) initiative for selling specialty media for wide-format
printers under the brand name of Supplies.By.Air(TM). Internet based software
and service activities represent an extension of many of the printing and
publishing tools which are integral to the core technology of the Company. The
Company is currently developing a commercialization of its internet software and
has not generated any revenue from sales of this product.
Expansion into technologies outside of the core hard-copy base printer
business involves significant risk. Such risk includes, but is not limited to,
the following factors: New products may not meet customer needs or may face
significant competition from companies with lower overhead and product costs
and/or greater marketing and promotional budgets. In addition, the Company may
not be able to attract and retain key personnel and it may not be able to
develop the products in the time needed to gain market acceptance. Due to the
early stage development, the Company may not be able to predict product features
needed to gain market acceptance, development may require more time and
resources than anticipated for the development, or it may turn out that the
product can not be feasibly developed. Diversification also carries the risk
that the new activity will distract management time and resources from focusing
on the core hard-copy based printer business. In addition, diversification may
involve risks related to the resources required to participate in this new
business including, but not limited to, risks related to raising cash or
obtaining cash investments, doing business with one or more "partners" as a
partnership or joint venture, and risks related to acquisitions or other
combinations of businesses.
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Intense 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. Currently, Hewlett-Packard has
announced and is supplying a new 54-inch wide-format inkjet printer. ENCAD has
announced and is shipping a new version of its printer line with 600 dpi
cartridges. These products are expected to compete for market share with the
Company's current DisplayMaker 5000, 6000 and 7000 series of printers. 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 DisplayMaker HiRes 8-Color series and DesignWinder product
platforms 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.
The Company's HiRes 8-Color DisplayMaker series of printers and the
DesignWinder product platforms utilize HP licensed inkjet technology. The
Company also purchases licensed inkjet cartridges from HP who is a sole source
of the cartridge component for the Company's aqueous ink consumable offerings.
The Company also competes with HP in the wide-format digital color printing
market. Both Companies design and market wide-format printing devices.
Currently, the Company has been granted access to these and selected new
technologies for use in its products and pays a royalty for those rights.
Revenues associated with the sale of these products or products including those
components represented approximately 67% of the Company's fiscal 1998 revenues.
As new technologies are developed, there can be no assurance the Company will be
able to negotiate additional licenses for newly developed technologies or that
the new terms are equal to the terms currently in place.
Certain companies that supply the Company with consumable products such as
ink and media compete with the Company by selling directly to users or selling
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(R) 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(R) 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
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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.
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 with less marketable advantages will face
significant pressure on revenue growth and gross margins. In order to remain
competitive, the smaller companies within this sector may have to seek merger or
consolidation opportunities with other companies.
If the Company were to merge with another company within the printer
industry, short-term financial results and the market price of the Company's
stock may be negatively impacted. Merger or consolidation of competitors may
enhance the financial strength and competitive abilities of such competitor(s)
which could adversely affect the Company's sales and financial performance.
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.
Substantially all of the Company's revenue is subject to these risks. 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, losses from operations of the Company have
in the past restricted cash availability and the ability to keep supplier debt
current or within the established credit limits. The potential 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 whose
prices have fluctuated significantly in recent years. Significant increases or
decreases in the price or reductions in the availability of certain 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
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to offer their products to the Company, or that the consumable products will
continue to be available to the Company at the same quantity, 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.
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, as a result,
virtually all of the Company's sales in any given quarter result from orders
received in that quarter. The Company rarely operates with a backlog of orders
from quarter to 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.
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.
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. During fiscal 1998,
consumables revenue was 59% of total revenue. To the extent sales of the
Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, product iterations by competitors and the
Company make the Company's products obsolete or customers substitute third-party
or private label consumables for those of the Company, the Company's results of
operations could be adversely affected. Reduced life cycles of hardware
products are expected to negatively impact consumable revenues. 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
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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 various United States patents for inventions
related to resolution of conventional laser printer engines, high-resolution
imaging and image enhancement and wide-format printing technologies and
techniques, the Company's Big Ink(TM) Delivery System, product patents, and
consumable formulations. Additional patent applications are pending. 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(R), ThermalRes(R) 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.
The Company relies on a variety of trademarks in the promotion and
identification of its products. The Company has a variety of trademarks which
are registered, and others that are not registered, or cannot be registered.
There is no assurance that there will not be some challenge to the rights of the
Company to use one or more trademarks, or an allegation that the use or display
of one or more trademark violates the trademark rights of another party, which
could subject the Company to damages and losses related to the inability to use
recognized marks in the promotion of its products.
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.
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The Company is actively pursuing development of new and unique print
solutions and processes, media and inks. There are a significant number of
patents which are already filed relating to printing cartridges, printing
methods and processes, mechanical printer features, medias and inks. Many of
these patents are held by companies which are larger and have greater resources
to pursue violation of intellectual property. 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 all applicable
patents have been completely reviewed and analyzed, or 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 agreement. 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 has instituted action against
a competitor for copyright violation and other causes of action. The competitor
has counter-claimed for copyright misuse by the Company. Although the Company
does not believe any of its practices violate applicable copyright laws, there
is no assurance that claims or actions will not be commenced by customers,
competitors or governmental authorities based on copyright, 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.
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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. (In
fiscal 1998, international operations composed 42% of total sales.)
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. The Company's European
subsidiary extends credit in the normal course of business in five relatively
stable European currencies. In addition, the financing agreement in place
allows the subsidiary 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. Substantially all other
transactions are in U.S. dollars. 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, Lawrence Lukis, Chief Engineer, and key research and
development staff. The loss of 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 technology related markets 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.
The Year 2000 Issue. The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of time-sensitive
information by its computerized information systems. Year 2000 issues may arise
if computer programs have been written using two digits (rather than four) to
define the applicable year. In such case, programs that have time-sensitive
logic may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. The Company
utilizes a number of computer programs across its entire operation. Year 2000
issues could impact the Company's information systems as well as computer
hardware and equipment that is part of its telephone network such as switches,
termination devices and SONET rings that contain embedded software or
"firmware."
The Company's exposure to potential Year 2000 problems exists in two
general areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties.
The majority of the Company's exposure in potential Year 2000 problems is in the
latter area where the situation is much less within the Company's ability to
predict or control. The Company's business is heavily dependent on third
parties, many of whom are themselves heavily dependent on technology. The
Company cannot control the Year 2000 readiness of those parties. In some cases,
the Company's third-party dependence is on vendors of technology who are
themselves
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working towards solutions to Year 2000 problems. The Company has initiated
projects to identify and correct the potential problem in all of its enterprise
systems. The costs incurred to date total less than $30,000 and have been
expensed in the financial statements. The Company is using internal resources to
test the software modifications. Funding for this area is expected to, and has
come from, cash flow from operations. Management expects that additional costs
for this issue will not be material.
The Company's Products. The Company designs and sells products which are
heavily reliant on software. While the Company has taken appropriate steps to
ensure the readiness of this software and believes it to be Year 2000 compliant,
the Company cannot be certain that the software will operate error free, or that
the Company will not be subject to litigation, whether the software operates
error free or not. However, the Company believes that based on its efforts to
ensure compliance and the fact that the calculations needed in and by its
products are not date dependent, it is not reasonably likely that the Company
will be subject to such litigation.
Contingency Plans. The Company has not yet completed its planning and
preparations to handle the most reasonably likely worst case Year 2000 scenarios
described above. The Company intends to develop contingency plans for these
scenarios during fiscal 1999. The Company believes that this is the appropriate
timeframe for developing such plans and that efforts prior to that time should
be focused on renovation, testing and verification of its system modifications.
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 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
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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
affect on the business and financial performance of the Company.
Brand Awareness. The Company is currently in the process of changing its
name to VirtualFund.com, Inc. and 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.
Control of the Company's Stock. As of August 31, 1998, officers and
directors as a group beneficially owned 21.3% of the outstanding shares of the
Company's stock. One of the Company's suppliers owns 14.7% of the Company's
outstanding shares. Although the impact of the holdings of the officers and
directors and the supplier is not believed to be material. Such control may
have the effect of reducing liquidity of the stock which may affect shareholder
value.
The Company's Board has considered, but has not yet adopted, a shareholder
rights plan. The Company's Board of Directors has authorized issuance of
preferred shares of stock which may be utilized in undertaking a shareholder
rights plan. Minnesota Statutes govern "control share acquisitions" and require
potential acquirers of at least 20% of the Company's stock to provide notice and
information to the Company about the proposed acquisition of stock and limits
voting rights in acquired stock unless such voting rights are approved by an
affirmative vote of shareholders and the control share acquisition is
consummated within 180 days after shareholder approval. The effect of the
statute is to limit the opportunity for a hostile takeover of control of the
Company unless there is a majority of shareholders consenting to the acquirer's
control. There is no assurance that the control share acquisition statute will
not adversely affect shareholder value.
Dilution. The Company has outstanding a large number of stock options and
warrants to purchase the Company's Common Stock. To the extent such options or
warrants are exercised, there will be further dilution. The Company expects to
seek additional acquisitions in pursuing its strategies and intends to grant
additional stock options and stock bonuses to the employees of the acquired
companies. For these reasons, the Company's acquisition program will result in
further substantial ownership dilution to investors.
Risks Related to Acquisitions. A key component of the Company's growth
strategy is the acquisition of Information Technology professional service firms
that meet the Company's criteria for revenues, profitability, growth potential
and operating strategy. The successful implementation of this strategy depends
on the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. There can be no assurance that the Company will be
able to identify suitable acquisition candidates or that the Company will be
able to acquire such candidates on acceptable terms. Moreover, in pursuing
acquisition opportunities the Company
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may compete with other companies with similar growth strategies, certain of
which competitors may be larger and have greater financial and other resources
than the Company. Competition for these acquisition targets likely could also
result in increased prices of acquisition targets and a diminished pool of
companies available for acquisition. Acquisitions also involve a number of other
risks, including adverse effects on the Company's reported operating results
from increases in goodwill amortization, acquired in-process technology, stock
compensation expense and increased compensation expense resulting from newly
hired employees, the diversion of management attention, potential disputes with
the sellers of one or more acquired entities and the possible failure to retain
key acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of the
Company as a whole, and any acquired subsidiary could significantly underperform
relative to the Company's expectations. The Company's pursuit of an overall
acquisition strategy or any individual pending or future acquisition may have a
material adverse effect on the Company's business, results of operations and
financial condition. To the extent the Company chooses to use cash consideration
for acquisitions in the future, the Company may be required to obtain additional
financing, and there can be no assurance that such financing will be available
on favorable terms, if at all. As the Company issues stock to complete future
acquisitions, existing stockholders will experience further ownership dilution.
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