<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended December 28, 1997
----------------------------------------------------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________________to_____________________
Commission File No.: 0-18114
-----------------------------------------------------------
LASERMASTER TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 941-8687
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at 12/28/97
- ----- -----------------------
Common Stock, $.01 par value 14,684,962
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 28, June 30,
1997 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 827,734 $ 484,106
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$1,965,000 and $1,987,000, respectively 11,806,337 12,129,091
Inventory 8,754,074 9,184,671
Other current assets 1,869,585 2,158,833
Deferred income taxes 4,073,000 4,073,000
------------ ------------
TOTAL CURRENT ASSETS 27,330,730 28,029,701
PROPERTY AND EQUIPMENT, NET 2,812,290 3,570,662
DEFERRED INCOME TAXES 693,000 693,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $842,034 and $743,284, respectively 254,343 337,570
------------ ------------
$ 31,090,363 $ 32,630,933
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 970,437 $ 2,781,468
Current maturities of long-term debt 333,911 636,665
Convertible subordinated debenture 1,524,842
Accounts payable 12,003,257 10,232,865
Accrued payroll and payroll taxes 1,362,953 1,623,558
Other current liabilities 1,522,891 1,649,062
Deferred revenue 1,265,452 1,374,447
------------ ------------
TOTAL CURRENT LIABILITIES 18,983,743 18,298,065
CONVERTIBLE SUBORDINATED DEBENTURE 2,233,414
LONG-TERM DEBT, less current maturities 63,254 184,729
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 14,684,962 and 14,432,462
shares issued and outstanding, respectively 146,850 144,325
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
Additional paid-in capital 31,751,314 30,876,964
Accumulated deficit (19,854,798) (19,106,564)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,043,366 11,914,725
------------ ------------
$ 31,090,363 $ 32,630,933
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 21,647,009 $ 24,596,638 $ 36,952,608 $ 46,048,939
COST OF GOODS SOLD 13,075,682 16,747,460 22,797,511 30,269,461
------------ ------------ ------------ ------------
GROSS PROFIT 8,571,327 7,849,178 14,155,097 15,779,478
OPERATING EXPENSES:
Sales & Marketing 3,672,171 4,472,868 6,435,487 8,575,035
Research & Development 1,437,992 1,516,550 2,990,850 2,950,119
General & Administrative 2,337,617 2,424,654 4,965,581 4,779,406
------------ ------------ ------------ ------------
7,447,780 8,414,072 14,391,918 16,304,560
------------ ------------ ------------ ------------
OPERATING PROFIT (LOSS) 1,123,547 (564,894) (236,821) (525,082)
OTHER INCOME (EXPENSE):
Interest Expense (209,645) (331,080) (471,390) (750,309)
Interest Income 21,682 104,060 28,286 113,983
Other (Expense) Income (37,977) 72,120 (68,309) 85,115
------------ ------------ ------------ ------------
(225,940) (154,900) (511,413) (551,211)
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 897,607 (719,794) (748,234) (1,076,293)
INCOME TAX BENEFIT 237,000 355,000
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 897,607 $ (482,794) $ (748,234) $ (721,293)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE $ .06 $ (.03) $ (.05) $ (.06)
EARNINGS (LOSS) PER COMMON SHARE -
ASSUMING DILUTION $ .06 $ (.03) $ (.05) $ (.06)
Weighted average common shares outstanding 14,575,814 14,198,535 14,524,193 13,063,688
Weighted average common and dilutive
potential common shares outstanding 15,423,107 14,198,535 14,524,193 13,063,688
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------
December 28, December 29,
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (748,234) $ (721,293)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 981,592 2,604,921
Amortization of deferred financing costs 105,011 110,693
Loss on sale of property and equipment 78,536 94,832
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (355,000)
Change in current assets and current liabilities:
Accounts receivable 322,754 (2,467,682)
Inventory 430,597 (2,474,645)
Other current assets 184,237 (476,324)
Income tax receivable 400,781
Accounts payable 1,866,507 (188,617)
Accrued payroll and payroll taxes (260,605) (183,871)
Other current liabilities (126,171) 13,374
Income taxes payable 299,874
Deferred revenue (108,995) (419,765)
------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,725,229 (5,179,387)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (211,912) (318,970)
Proceeds from sale of property and equipment 9,396 17,443
Additions to patents and other assets (16,013) (245,556)
Investment in notes receivable - related party (585,000)
Collection of notes receivable - related party 585,000
Additions to capitalized software development costs (880,449)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (218,529) (1,427,532)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 72,188 10,252,794
Net payments under revolving credit lines (1,811,031) (894,491)
Payments on long-term debt (424,229) (612,372)
------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (2,163,072) 8,745,931
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 343,628 2,139,012
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 484,106 90,851
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 827,734 $ 2,229,863
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of presentation -
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. They do not include all information and
footnotes required by generally accepted accounting principles for
complete financial statements. However, except as disclosed herein, there
has been no material change in the information disclosed in the notes to
consolidated financial statements included in the Annual Report on Form
10-K of LaserMaster Technologies, Inc. and subsidiaries (the "Company")
for the year ended June 30, 1997. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three months and six months ended December 28, 1997, are not necessarily
indicative of the results that may be expected for the year ending June
30, 1998.
2. Earnings Per Share Calculation -
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
which is effective for financial statements issued for the periods ending
after December 15, 1997. The Company has adopted the standard as required
and a reconciliation of the numerators and denominators of the basic and
diluted per-share computations are summarized in the table below:
<TABLE>
<CAPTION>
Three months Ended
---------------------------------------------------------------------------------
December 28, 1997 December 29, 1996
---------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $ 897,607 14,575,814 $ .06 $ (482,794) 14,198,535 $ (.03)
Effect of Dilutive Securities:
Stock Options 705,960
Shares issuable relating to
settlement of lawsuit 141,333
--------- ----------- ---------- ----------
Diluted EPS: $ 897,607 15,423,107 $ .06 $ (482,794) 14,198,535 $ (.03)
<CAPTION>
Six Months Ended
---------------------------------------------------------------------------------
December 28, 1997 December 29, 1996
---------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common stockholders $ (748,234) 14,524,193 $ (.05) $ (721,293) 13,063,688 $ (.06)
Effect of Dilutive Securities:
--------- ----------- ---------- ----------
Diluted EPS: $ (748,234) 14,524,193 $ (.05) $ (721,293) 13,063,688 $ (.06)
</TABLE>
5
<PAGE>
The following table summarizes securities that could potentially dilute basic
earnings per share in the future that were not included in the computation of
diluted earnings per share because to do so would have been antidilutive for the
periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Stock Options 504,100 3,151,422 3,538,610 3,151,422
Warrants 3,049,953 3,049,953 3,049,953 3,049,953
Shares issuable in lawsuit settlement 141,333
Convertible Debenture 409,031 426,878 409,031 426,878
--------- --------- --------- ---------
3,963,084 6,628,253 7,138,927 6,628,253
</TABLE>
3. Inventory -
Inventory consists of the following:
<TABLE>
<CAPTION>
December 28, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Raw materials $ 4,033,414 $ 4,178,139
Work in process 321,720 123,664
Finished goods
Consumables 4,050,399 2,824,753
Hardware 348,541 2,058,115
------------ ------------
$ 8,754,074 $ 9,184,671
============ ============
</TABLE>
4. Supplemental disclosure of cash flow information and non-cash financing
activities -
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------
December 28, December 29,
1997 1996
-------------- --------------
<S> <C> <C>
The Company paid and received cash for the following items:
Interest paid $ 343,531 $ 709,935
Income tax paid (received), net 5,450 (700,655)
Financing transactions not affecting cash:
Accounts payable converted to subordinated debenture 1,668,314
Note payable converted to subordinated debenture 859,516
Note payable to related party plus accrued interest offset against
note receivable from related party resulting from
stock sales plus accrued interest 1,818,715
Convertible subordinated debenture and accrued
interest converted into common stock 804,687 180,000
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). These forward looking statements are subject to a number of risks,
including the Company's continuing need for additional cash, sensitivity of the
Company to technology changes in the computer printing industry and intense
competition in that industry, the Company's dependence on sales of newer
products with untested market acceptance, dependance on numerous product
components that are available from single sources, fluctuations in quarterly
operating performance, the strength of the Company's intellectual property
protection, the costs of pending litigation, and the size of the Company's
international operations. These and other factors which are set forth in Exhibit
99 to this Form 10-Q have caused wide fluctuations in the market price of the
Company's common stock and can be expected to cause similar fluctuations in the
future. Refer to Exhibit 99 of this Form 10-Q for certain important cautionary
factors, risks and uncertainties related to forward-looking statements.
Results of Operations
Net sales for the quarter ended December 28, 1997 were $21.6 million compared to
$24.6 million for the same period one year ago. Net earnings for the quarter
ended December 28, 1997 were $898,000 or $.06 per share compared to a net loss
of $483,000 or $.03 per share for the quarter ended December 29, 1996. Net sales
for the six months ended December 28, 1997 were $37.0 million compared to $46.0
million for the same period one year ago. Net loss for the six months ended
December 28, 1997 was $748,000 or $.05 per share compared to a net loss of
$721,000 or $.06 per share for the six months ended December 29, 1996.
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three months ended Six Months ended
------------------ ----------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
----- ----- ----- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.4 68.1 61.7 65.7
----- ----- ----- -----
Gross profit 39.6 31.9 38.3 34.3
Operating expenses:
Sales and marketing 17.0 18.2 17.4 18.6
Research and development 6.6 6.2 8.1 6.4
General and administrative 10.8 9.8 13.4 10.4
----- ----- ----- -----
Total operating expenses 34.4 34.2 38.9 35.4
----- ----- ----- -----
Operating profit (loss) 5.2 (2.3) (0.6) (1.1)
Other income (expense):
Interest expense (1.0) (1.3) (1.3) (1.6)
Interest income 0.1 0.4 0.1 0.2
Other (0.2) 0.3 (0.2) 0.2
----- ----- ----- -----
Earnings (loss) before income taxes 4.1 (2.9) (2.0) (2.3)
Income tax benefit 0.9 0.8
----- ----- ----- -----
Net earnings (loss) 4.1% (2.0)% (2.0)% (1.5)%
===== ===== ===== =====
</TABLE>
Net Sales. During the December 1997 quarter, the Company recorded hardware sales
of $9.5 million or 44% of total net sales compared to $12.4 million or 50% of
total net sales in the same period one year ago. The decrease in hardware sales
7
<PAGE>
from the previous year consists of a $1.7 million decrease in sales of the
Company's black and white, thermal film device, PressMate and black and white,
plain-paper typesetting products along with a $6.8 million decrease in sales of
the Company's print servers and first generation 4-color printers,
DisplayMaker(R) Professional and DisplayMaker Express, and the previously
released 8-color printer, DesignWinder. These decreases were partially offset by
a $5.6 million increase in sales of the Company's HiRes 8-color DisplayMaker
4000,5000 and 6000 series (DMX) of printers.
During the December 1997 quarter, the Company recorded consumables sales,
consisting primarily of ink, media, film, maintenance contracts and spare parts,
of $12.1 million or 56% of total net sales compared to $12.2 million or 50% of
total net sales in the same period one year ago and $10.4 million or 68% of
total net sales in the quarter ended September 28, 1997. Consumables sales in
the December 1997 quarter were relatively consistent with the prior year despite
a $615,000 decrease in sales of black and white, plain-paper typesetting
supplies and a $700,000 decrease in sales of ink for the Company's first
generation 4-color printers, DisplayMaker Professional and DisplayMaker Express.
These decreases were offset by sales of ink for the Company's HiRes 8-color
DesignWinder and DMX series of printers.
International Sales. The following table sets forth international sales by
region expressed in thousands and as a percentage of total net sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $ 4,537 21.0% $ 5,033 20.5% $ 7,730 20.9% $ 9,571 20.8%
Japan, Asia/Pacific 3,247 15.0 4,647 18.9 4,784 12.9 8,400 18.2
Latin America 1,087 5.0 1,912 7.8 2,256 6.1 3,298 7.2
Canada 763 3.5 1,296 5.2 1,313 3.6 1,643 3.6
------- ----- ------- ----- ------- ----- ------- -----
Total international sales $ 9,634 44.5% $12,888 52.4% $16,083 43.5% $22,912 49.8%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Decreases in sales in Europe, Japan, Asia/Pacific, Latin America and Canadian
markets for the six months ended December 28, 1997 compared to the six months
ended December 29, 1996 are primarily due to the decreases in sales of hardware
described herein. Japan and Asia/Pacific sales were additionally impacted by
these decreases because during the six months ending December 29, 1996 a
relatively higher percentage sales in this market consisted of DisplayMaker
Express and related consumables. A majority of the foreign transactions occur in
U.S. dollars, and as a result, foreign currency risk is not expected to be a
significant risk factor. However, overall sales into Japan and Asia/Pacific are
expected to be adversely impacted in countries where a significant devaluation
of local currency has occurred when compared to the U.S. dollar. The devaluation
can drive the sales price in local markets to levels beyond the reach of some
users.
Gross Profit. Gross profit, expressed as a percent of net sales, was 39.6% in
the quarter ended December 28, 1997 compared to 31.9% in the same period one
year ago. Gross profit, as a percentage of net sales, increased in the December
1997 quarter compared to the prior year as a result of increased margins on
hardware sales as the Company's HiRes 8-color products have essentially replaced
its lower-margin 4-color products. In addition, the Company's consumables sales,
which typically have higher margins than hardware sales, have increased as a
percent of total sales. The Company also reduced its overhead structure in the
June 1997 quarter resulting in an approximately 3% increase in gross profit for
the December 1997 quarter compared to the prior year.
Operating Expenses. Sales and Marketing expenses for the quarter ended December
28, 1997 were $3.7 million compared to $4.5 million in the same period one year
ago. Marketing expenses decreased approximately $631,000 in the December 1997
quarter compared to the same period one year ago primarily as a result of the
Company's reduction in marketing of plain-paper typesetting and PressMate
products along with decreases in direct marketing expenses to potential color
printer end users. Marketing expenditures are expected to increase in future
periods related primarily to promotion of the DMX series of printers.
8
<PAGE>
Research and Development expenditures, including amounts expensed and
capitalized, were $1.4 million in the quarter ended December 28, 1997, compared
to $2.0 million in the same period one year ago. The decrease in research and
development expenditures compared to the prior year is primarily the result of
more efficient development projects based on technology within the Company's
existing products. The Company did not capitalize any research and development
expenditures in the December 1997 quarter compared to $479,000 of capitalized
research and development expenditures in the December 1996 quarter.
General and Administrative expenses were $2.3 million for the quarter ended
December 28, 1997, compared to $2.4 million in the same period one year ago.
Other. Interest expense was $210,000 for the quarter ended December 28, 1997
compared to $331,000 in the same period one year ago. The decrease in interest
expense is the result of lower average outstanding debt balances.
The Company did not record an expected tax benefit related to the loss incurred
for the six months ended December 28, 1997 as the recovery of such benefit is
not certain at this time.
Liquidity and Capital Resources
Net cash provided by operating activities during the six months ended December
28, 1997 was $2.7 million compared to net cash used in operating activities of
$5.2 million in the same period one year ago. Cash flow was positively impacted
in the six months ended December 28, 1997 by a $1.9 million increase in accounts
payable.
Net cash used in investing activities was $219,000 during the six months ended
December 28, 1997 compared to $1.4 million in the same period one year ago.
Investment in capital equipment was $212,000 in the six months ended December
28, 1997 compared to $319,000 in the same period one year ago. Investment in
intellectual property and capitalized software development costs was $16,000 in
the six months ended December 28, 1997 compared to $1.1 million in the same
period one year ago.
Net cash used in financing activities was $2.2 million in the six months ended
December 28, 1997 compared to net cash provided by financing activities of $8.7
million in the same period one year ago. Net repayments under revolving credit
lines were $1.8 million in the six months ended December 28, 1997 compared to
$900,000 in the same period one year ago. The Company received approximately $10
million, net of transaction costs, from the issuance of common stock in a series
of private placements completed in the December 1996 quarter. An additional $1.8
million from the issuance of common stock to TimeMasters, Inc. (TMI) was used to
offset a $1.765 million term loan and $35,000 in accrued interest owed by
ColorSpan Corporation to TMI, a related party, in a non-cash transaction
completed in December 1996.
Currently, the Company has reduced its outstanding debt to its senior lender and
expects that the available borrowing capacity, along with expected cash flow
from operations, to finance operations for the remainder of fiscal 1998.
PART II. OTHER INFORMATION
ITEM I: LEGAL PROCEEDINGS
In prior reports on Form 10-Q and the Annual Report on Form 10-K for the year
ending June 30, 1997, the Company reported on a class action lawsuit originally
filed by a shareholder, John Becker, alleging violations of the Securities and
Exchange Act of 1934. In August 1997, the Company announced a settlement
agreement with shareholder class representatives and preliminary court approval
of the settlement. Final court approval of the settlement was received in
October 1997. As part of the settlement of this action, the Company will be
required to contribute $636,000 in value of stock (141,333 shares), or may
substitute cash in the same amount, upon registration of the shares which is
expected to occur prior to the end of the June 1998 quarter. The financial
impact of this settlement was previously recognized in the Company's June 1997
financial statements.
9
<PAGE>
In the Company's report on Form 10-Q for the quarter ending September 30, 1995,
the Company first reported on the suit filed by LaserMaster Corporation (LMC)
against Sentinel Imaging, a division of Sentinel Business Systems, Inc., and
Brian Haberstroh, a former LaserMaster and Sentinel employee. LMC alleged
misappropriation of trade secrets related to LaserMaster's Big Ink Delivery
System and customer information and breach of a confidentiality agreement with
Haberstroh. In October 1997, the Company announced that it had prevailed in its
two year old suit against Sentinel and was awarded damages of $2.17 million
against Sentinel by a jury in U.S. Federal District Court. The Company believes
the awarded damages may be difficult to collect.
The Company is currently involved in a dispute regarding liability for the value
of certain components totaling approximately $400,000 which were lost by a
carrier prior to delivery to the Company. At this time, the liability of the
shipper, the carrier, or the insurers of the shipper, the carrier and the
Company has not been determined.
The Company is also involved in various legal proceedings related to customer
credit and product warranty and performance issues in the normal course of
business. In certain proceedings, the claimants have alleged claims for
exemplary or punitive damages which may or may not bear a direct relationship to
the alleged actual incurred damages, and therefore could have a material adverse
effect on the Company. At this time the Company is not aware of any proceedings
or claims which are expected to have a material effect on the Company's
operations or financial position.
See Exhibit 99, attached, for additional discussion of risks factors related to
legal proceedings.
ITEM 2: CHANGES IN SECURITIES
Nothing to report.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Nothing to report.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Nothing to report.
ITEM 5: OTHER INFORMATION
Nothing to report.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
-------------------
99. Cautionary Factors Under Private Securities Litigation Reform
Act of 1995.
(b) Reports on Form 8-K
-------------------
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
LASERMASTER TECHNOLOGIES, INC.
/s/ Melvin L. Masters
- -------------------------------
Melvin L. Masters
Chief Executive Officer
/s/ James H. Horstmann
- -------------------------------
James H. Horstmann
Chief Financial Officer and Principle Accounting Officer
Dated: February 11, 1998
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LASERMASTER TECHNOLOGIES, INC.
- -------------------------------
Melvin L. Masters
Chief Executive Officer
- -------------------------------
James H. Horstmann
Chief Financial Officer and Principle Accounting Officer
Dated: February 11, 1998
12
<TABLE> <S> <C>
<PAGE>
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<RECEIVABLES> 11,806,337
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<OTHER-SE> 11,896,516
<TOTAL-LIABILITY-AND-EQUITY> 31,090,363
<SALES> 36,952,608
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<CGS> 22,797,511
<TOTAL-COSTS> 22,797,511
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<INTEREST-EXPENSE> 471,390
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<PAGE>
Exhibit 99
Cautionary Factors Under the
Private Securities Litigation Reform Act of 1995
LaserMaster desires to take advantage of the new "safe harbor" provisions
contained in the Private Securities Litigation Reform Act of 1995 (the "Act").
Contained in this Form 10-Q are statements which are intended as
"forward-looking statements" within the meaning of the Act. The words or phrases
"expects", "will continue", "is anticipated", "management believes", "estimate",
"projects", "hope" or expressions of a similar nature denote forward-looking
statements. Those statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or from
those results presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on forward-looking statements. Readers
should also be advised that the factors listed below have affected the Company's
performance in the past and could affect future performance. Those factors
include, but are not limited to, the risk that a product may not ship when
expected or may contain technical difficulties; uncertain demand for new or
existing products; the impact of competitor's advertising, products or pricing;
availability or reliability of component parts, including sole source parts;
manufacturing limitations; availability of sources of financing; economic
developments, both domestically and internationally; new accounting standards;
and, the impact of the initiation, defense and resolution of litigation.
Other factors include the following:
Cash Needs. Although the Company has a credit agreement with a commercial
finance company that has adequately financed its cash requirements in the past.
Previously, net operating losses in fiscal 1996 and fiscal 1997 and
manufacturing and inventory requirements for product offerings 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.
The Company's Senior Debt Agreement includes financial covenants which the
Company must meet. 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 Credit,
Inc.. 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.
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 Media*By*Air(TM). Internet based software and
service activities represent an extension
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of many of the printing and publishing tools which are integral to the core
technology of the Company.
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, 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.
Product Development and Technological Change. The pre-press and wide-format
color printing industries are highly competitive and are characterized by
frequent technological advances and new product introductions and enhancements.
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. This process
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. Any quality, durability or
reliability problems with existing or new products, regardless of materiality,
or any other actual or perceived problems with the Company's products could have
a material adverse effect on market acceptance of such new products. Any quality
problems with components could result in "epidemic" failures of the products in
the field causing return and refund requests that would likely have a material
effect on the financial results of the Company and future sales potential. There
can be no assurance that such problems or perceived problems will not arise with
respect to any existing products or that even in the absence of such problems,
the Company's products will achieve market acceptance. In addition, the market
anticipation or the announcement of new products and technologies, 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 4000, 5000 and 6000 HiRes
8-Color series, during September 1997. 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.
The Company is aware of intermittent customer issues with the performance and
formulation of certain inks used in the Company's printers. The Company is
taking steps to address the ink issues. However, failure to address ink
functionality issues, or some other failure of the product to perform as
expected by the customer may result in customer requests for compensatory
supplies or other requests which could have a material adverse effect on
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the Company's financial performance.
The Company is dependent on a sole source supplier for the printheads for the
PressMate-FS. The Company has experienced availability and quality consistency
issues from this supplier. If the Company is unable to resolve the availability
and quality issues, the Company's production, support of its installed base, and
quality requirements will be adversely affected.
Various potential actions by any of the Company's competitors, especially those
with a substantial market presence, could have a material adverse effect on the
Company's business, financial condition and results of operations. Such actions
may include reduction of product price, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways, product
bundling or other competitive actions. Additionally, a competitor's entry into
the wide-format market in such ways as to compete more directly and effectively
with the Company's products could adversely affect operational results.
Competition. The computer printer industry is intensely competitive and rapidly
changing. Some of the Company's existing competitors, as well as a number of
potential new competitors, have longer operating histories, greater technical
resources, more established and larger sales and marketing organizations,
greater name recognition, larger customer bases and significantly greater
financial resources than the Company, which may result in a competitive
advantage. Suppliers of wide-format print engines and systems compete on the
basis of print quality, color, print time, print size, product features,
including ease of use, service, and price. Competitive product sales practices
such as price reductions, increased promotion, product giveaways and bundling,
or announcement or accelerated introduction of new or enhanced products could
have a material adverse effect on the sales and financial condition of the
Company. New product introductions and changes in pricing structure by
competitors have had, and can be expected to continue to have, a significant
impact on the demand for the Company's products. Currently Hewlett Packard Co.
(HP) has announced a new 54 inch wide-format inkjet printer it expects to begin
shipping in the near future. The product is expected to compete for market share
with the Company's current DisplayMaker 5000 and 6000 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 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 4000, 5000 and 6000 series of printers
and the DesignWinder product platform 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 select new
technologies for use in its products and pays a royalty for those rights. 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.
3
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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 products. Further, a number of competitors have introduced
consumables which they allege to be compatible with the Company's products and
have priced the consumables below the ColorSpan-branded consumables. Although
the Company believes that its Big Color products possess certain advantages over
the competitors' products, the increased competition has impacted sales volumes
and margins and may continue to impact volumes and margins in the future. The
Company has generally competed in these markets by introducing technologically
advanced products that create new market demand and products which offer optimum
performance characteristics. There can be no assurance that the Company will be
able to continue to innovate to the extent necessary to maintain a competitive
advantage in these markets or that other competitors will not achieve sufficient
product performance to achieve customer satisfaction with their products
offering better pricing or other competitive features.
Dependence on Component Availability and Costs. Certain components used in the
Company's current and planned products, including printer marking engines and
other printer components, are currently available from sole sources, and certain
other components are available from only a limited number of sources. The
Company has in the past experienced delays as a result of the failure of certain
suppliers to meet requested delivery schedules and standards of product
performance and quality. In addition, recent losses from operations of the
Company have restricted cash availability and the ability to keep supplier debt
current or within the established credit limits. The requirement to bring
certain component suppliers' debt obligations current, or other restrictions in
credit terms of such component suppliers, could result in an inability to
manufacture certain product lines and thereby adversely affect the financial
performance of the Company. The Company's inability to obtain sufficient supply
of components, or to develop alternative sources, could result in delays in
product introductions, interruptions in product shipments, the need to redesign
products to accommodate substitute components or the need to substitute
alternative components which may not have the same performance capabilities, any
of which could have a material adverse effect on the Company's operating
results. A portion of the total manufacturing cost of the Company's typesetting
and Big Color products is represented by certain components, particularly
dynamic random access memory chips ("DRAMs"), the prices of which have
fluctuated significantly in recent years. Significant increases or decreases in
the price or reductions in the availability of DRAMs or other components, could
have a material affect on the Company's operating results.
The Company is dependent on a sole source supplier for the printheads and hot
melt ink used in DisplayMaker Express. The Company has experienced availability
and quality issues with this supplier that have affected shipping schedules and
customer satisfaction and have negatively impacted operating results in the
past. While the Company has taken strong corrective measures in dealing with
this supplier, there can be no assurance that this supplier will be able to meet
the Company's production requirements in the future or that the quality of
on-going product supply will be acceptable.
The Company sells consumable print media and inks for use with its Big Color
product line, and film used with the PressMate-FS. The Company depends on the
availability of consumable products to support its installed base of print
engines. There is no assurance that the suppliers of these consumables will
continue to offer their products to the Company, or that the consumable products
will continue to be available to the company at the same 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.
Uncertainty Regarding Development of Wide-Format Market; Uncertainty Regarding
Market Acceptance of
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New Products. The Wide-Format market is relatively new and evolving. The
Company's future financial performance will depend in large part on the
continued growth of this market and the continuation of present, Wide-Format
printing trends such as use and customization of large-format advertisements,
use of color, transferring of color images onto a variety of substrates,
point-of-purchase printing, in-house graphics design and production and the
demand for limited printing runs of less than 200 copies. The failure of the
Wide-Format market to achieve anticipated growth levels or a substantial change
in Wide-Format printing customer preferences could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, in a new market, customer preferences can change rapidly and new
technology can quickly render existing technology obsolete. Failure by the
Company to respond effectively to changes in the Wide-Format market, to develop
or acquire new technology or to successfully conform to industry standards could
have a material adverse effect on the business and financial condition and
results of operations of the Company.
The Company's products currently target the high-performance production segment
of the Wide-Format printing market. The future success of the Company will
likely depend on its ability to develop and market new products that provide
superior performance at acceptable prices within this segment. In addition, the
Company's future success will likely depend on the Company's ability to
successfully introduce lower-cost products aimed at a broader segment of the
Wide-Format market. Any quality, durability or reliability problems with such
new products, regardless of materiality, or any other actual or perceived
problems with new Company products, could have a material adverse effect on
market acceptance of such products. There can be no assurance that such problems
or perceived problems will not arise, or that even in the absence of such
problems, new Company products will receive market acceptance. In addition, the
announcement by the Company of new products and technologies could cause
customers to defer purchases of the Company's existing products, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Returns Reserves. The Company has established reserves for the return of
merchandise. The amount of the returns reserve is based on historical data
regarding returns of products. For new products there may be insufficient
information to accurately predict return rate and therefore the required reserve
may not be sufficient. Additionally, there is no assurance that there will not
be an unknown or unanticipated problem with a product or any component thereof,
or a defect or shortage of repair components or the consumable media or inks
that are needed to use the product which could cause the actual returns to
exceed the reserves. Returns of a product which exceed reserves could have an
adverse effect on the financial operations and results of the Company.
Fluctuations in Quarterly Operating Results. The Company's quarterly results of
operations have fluctuated and are expected to continue to fluctuate
significantly. These fluctuations have been caused by various factors,
including, but not limited to: the timing of new product announcements; product
introductions and price reductions by the Company and its competitors; the
availability and cost of key components and materials for the Company's
products; fluctuations and availability in customer financing; the relative
percentages of sales of consumables and printer architectures; risks related to
international sales and trade; and general economic conditions. In addition, the
Company's operating results are influenced by the seasonal buying patterns of
its customers, which have in the past generally resulted in reduced revenues and
earnings during the Company's first fiscal quarter. Further, the Company's
customers typically order products on an as-needed basis, and virtually all of
the Company's sales in any given quarter result from orders received in that
quarter. Certain products require significant capital expenditures, causing some
customers to delay their purchasing decision. Delays in purchases of low-volume,
high-cost printers may cause significant fluctuations in the sales volume for a
given period. Also, the Company's manufacturing plans, sales staffing levels and
marketing expenditures are primarily based on sales forecasts. Accordingly,
deviations from these sales forecasts may cause significant fluctuations in
operating results from quarter to quarter and may result in unanticipated
quarterly earnings shortfalls or losses. Historically, a large percentage of
orders have been received and shipped near the end of each month. If
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anticipated sales and shipments do not occur, expenditure and inventory levels
may be disproportionately high and operating results could be adversely
affected.
Dependence on Consumables Revenues. The Company anticipates it will derive an
increasing component of its revenues and operating income from the sale of ink,
paper, film and other consumables to its customers. To the extent sales of the
Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, 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 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 resolution of conventional laser printer engines, high-resolution
imaging and image enhancement and wide-format printing technologies and
techniques, the Company's Big Ink Delivery System, product patents, and
comsumable 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, ThermalRes and Big Ink Delivery System approaches and related
technologies have been filed in selected foreign countries. Patent applications
filed in foreign countries are subject to laws, rules and procedures which
differ from those of the United States, and there can be no assurance that
foreign patents will be granted as a result of these applications. Furthermore,
even if these patent applications result in the issuance of foreign patents,
some foreign countries provide significantly less patent protection than the
United States.
6
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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.
The Company is actively pursuing development of new and unique print solutions
and processes, media and inks. Although the research and development process
involves an analysis of protected proprietary rights in any technology that is
being pursued, there is no assurance that competitors or others will not
interpret any such products or processes developed by the Company as violating
protected intellectual rights and pursue legal action, which could be costly and
may affect the financial performance of the Company. In addition, although the
Company does not have any knowledge of violations of its intellectual property
rights, there can be no assurance that the Company will not be forced to take
action to protect its intellectual property portfolio. Such enforcement activity
could require the expenditure of significant cash resources and could affect the
financial performance of the Company.
Although the Company has not received notices from third parties alleging
infringement claims that the Company believes would have a material adverse
effect on the Company's business, there can be no assurance that third parties
will not claim that the Company's current or future products or manufacturing
processes infringe the proprietary rights of others. Any such claim, with or
without merit, could result in costly litigation or might require the Company to
enter into a royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined. In addition, the Company could incur substantial costs in
defending itself in suits brought against the Company on such patents or in
bringing suits to protect the Company's patents against infringement, which
could adversely affect the Company's financial condition or results. If the
outcome of any such litigation is adverse to the Company, the Company's business
and financial results could be adversely affected.
Litigation and Litigation Costs. The Company has instituted action against a
competitor for patent infringement, misappropriation of trade secrets and other
causes of action. The competitor had counter-claimed for false advertising,
patent misuse, and unfair competition by LaserMaster. The counterclaims have
been dismissed. Although the Company does not believe any of its practices
violate applicable trade or anti-trust laws, there is no assurance that claims
or actions will not be commenced by customers, competitors or governmental
authorities based on trade or anti-trust claims which could affect the Company's
operations and cash position.
The Company is also engaged in various actions related to transactional matters,
employee matters, customers
7
<PAGE>
credit and product quality and/or warranty issues. Some of these actions include
claims against the Company for punitive, exemplary or multiple damages. An award
of punitive damages may not bear a direct relationship to the actual or
compensatory damages claimed from the Company. Although the Company does not
believe there are any actions pending or threatened against the Company which
would have a material adverse impact on the financial position of the company,
there is no assurance that there will not be an adverse award of multiple
punitive or exemplary damages which could adversely affect the cash position of
the company.
Any litigation which the Company is involved in may have an adverse impact on
the Company's operations and may result in a distraction or diversion of
management's attention, thereby adversely affecting the operations of the
Company.
International Operations. The Company expects that international revenues will
continue to represent a substantial portion of its total revenues. International
operations are subject to various risks, including exposure to currency
fluctuations, political and economic instability, differing economic conditions
and trends, differing trade and business laws, unexpected changes in applicable
laws, rules, regulatory requirements or tariffs, difficulty in staffing and
managing foreign operations, longer customer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences and
varying degrees of intellectual property protection. Fluctuations in currency
exchange rates could result in lower sales volume reported in U.S. dollars.
Fluctuations in foreign exchange rates are unpredictable and may be substantial.
From time to time the Company has engaged in limited foreign currency hedging
transactions. There can be no assurance that the Company will be successful if
it engages in such practices to a significant degree in the future.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon certain key personnel, including Mr. Masters, its Chief Executive
Officer and President, 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 has assessed and continues to assess the impact
of The Year 2000 Issue on its operational systems and its products. The Year
2000 Issues exists because many computer systems and applications currently
store a two-digit date field to designate a year. As the century date occurs,
date sensitive systems will recognize the year 2000 as 1900 or not at all.
Management believes the Company's Big Color products are compliant with this
issue and performance will not be significantly impacted by the date changes
into the 21st century. The Company has initiated projects to identify and
correct the potential problem in all of its enterprise systems. The cost of such
programs, most of which has been incurred and expended already, is not
considered material to the Company's financial results. Management believes it
has taken the necessary steps to prepare for this issue, but there can be no
assurance additional issues will not occur or unforeseen problems arise causing
additional expense to the Company.
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
8
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contamination, disposal or injury from the use, storage, or disposition of inks
or other materials used in the Company's operations. In the event of such
accident, the Company could be held liable for any damages that result and any
such liability could have a material adverse effect on the Company's financial
condition. In addition, there can be no assurance that the Company will not be
required to comply with environmental claims, laws, or regulations in the future
which could result in significant costs which could materially adversely affect
the Company's financial condition.
Tax Liability. The Company sells its products from its offices in Eden Prairie,
Minnesota and reports sales and income tax liability based on sales occurring at
that location. It is possible that one or more state or local taxing authorities
could determine that there have been taxable transactions occurring within their
jurisdiction and seek recovery of taxes for current and/or past periods. In
addition, it is possible that local, state or federal taxing authorities will
take issue with the reporting or determination of tax liability and seek
additional taxes for current and/or past periods. The Company currently has a
net operating loss ("NOL") carry forward that may be used to offset future
federal taxable income. However, there is no assurance that the NOL will
continue to be available as an offset against future federal taxable income or
that there will be sufficient taxable income to fully utilize the NOL.
Volatility of Stock Price. The trading price of the Company's common stock is
subject to wide fluctuations in response to variations in operating results,
changes in the laws or regulations to which the company may be subject,
announcements of new products or technological innovations by the Company or its
competitors, overall economic conditions and indicators, market conditions
unrelated to Company performance, and general conditions in the industry.
Factors such as quarterly variation in actual or anticipated operating results,
changes in earnings estimates by analysts, and analysts' reactions to Company
statements and actions also contribute to stock price fluctuations. In addition,
the prices of securities of many high technology companies have experienced
significant volatility in recent years for reasons frequently unrelated to the
operating performance of the specific companies. These fluctuations may
materially affect the market price of the Company's common stock.
One time in the past, following fluctuations in the market price of the
Company's stock, a securities action was commenced alleging that the Company and
certain insiders had knowledge of certain material, adverse information about
the Company prior to the time that such information allegedly caused a drop in
the market price of the stock. Because the Company's stock has historically
fluctuated significantly, it is possible that following a significant change in
the market price of the stock another securities action could be commenced
against the company. Such action, whether commenced by one or more individuals,
or by a class of securities holders, could result in substantial costs and
diversion of management's attention and resources and thereby cause an adverse
effect on the business and financial performance of the Company.
Brand Awareness. The Company has changed the name of its principal operating
subsidiary from LaserMaster Corporation to ColorSpan Corporation. The Company
has significant brand awareness associated with its LaserMaster trade names. If
the market is unable to accept or delays the acceptance of the name change, the
Company's financial performance and sales may be negatively impacted.
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.
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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 print heads. Any company without a
secure, economical source of these products will face serious competitive
pricing and margin pressures going forward. The Company currently has a license
to remanufacture specific HP 300 dpi inkjet cartridges for use in its
wide-format color inkjet printers. HP has introduced a new inkjet cartridge with
a visual resolution of 600 dpi. In addition, Lexmark is believed to have
developed a 600 dpi inkjet cartridge. Both companies are competitors in the
wide-format color market. Should the market for wide-format color demand the
increased resolution provided by these new products and the Company be unable to
secure adequate supplies at reasonable prices or develop a reasonably priced
substitute from other sources, the Company's sales of printer engines and the
related gross margins could be negatively impacted.
The Company's products target the market for high quality printing output.
Hardware and software technological advances have enhanced actual and perceived
resolution. There is no assurance that other companies will not achieve actual
or apparent resolution with less expensive printers and supplies and therefore
capture the market held by higher cost printers.
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