<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 29, 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 No.: 0-18114
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VIRTUALFUND.COM, INC
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota 41-1612861
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
7090 Shady Oak Road, Eden Prairie, Minnesota 55344
- -------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(612) 941-8687
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
LASERMASTER TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(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 4/30/98
- ----- ----------------------
Common Stock, $.01 par value 15,027,533
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIRTUALFUND.COM, INC. (FORMERLY LASERMASTER TECHNOLOGIES, INC.)
---------------------------------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
--------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
March 29, June 30,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,573,367 $ 484,106
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$1,693,000 and $1,987,000, respectively 10,605,351 12,129,091
Inventory 7,485,141 9,184,671
Other current assets 1,821,937 2,158,833
Deferred income taxes 4,073,000 4,073,000
----------- -----------
TOTAL CURRENT ASSETS 26,558,796 28,029,701
PROPERTY AND EQUIPMENT, NET 2,739,913 3,570,662
DEFERRED INCOME TAXES 693,000 693,000
ACQUIRED TECHNOLOGY, PATENTS
AND LICENSES, less accumulated amortization
of $895,659 and $743,284, respectively 217,840 337,570
----------- -----------
$30,209,549 $32,630,933
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 858,068 $ 2,781,468
Current maturities of long-term debt 265,063 636,665
Convertible subordinated debenture 1,020,131
Accounts payable 10,462,434 10,232,865
Accrued payroll and payroll taxes 1,500,375 1,623,558
Other current liabilities 1,324,645 1,649,062
Deferred revenue 1,222,332 1,374,447
----------- -----------
TOTAL CURRENT LIABILITIES 16,653,048 18,298,065
CONVERTIBLE SUBORDINATED DEBENTURE 2,233,414
LONG-TERM DEBT, less current maturities 25,541 184,729
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized
30,000,000 shares; 14,877,533 and 14,432,462
shares issued and outstanding, respectively 148,775 144,325
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or
outstanding
Additional paid-in capital 32,315,859 30,876,964
Accumulated deficit (18,933,674) (19,106,564)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,530,960 11,914,725
------------ ------------
$ 30,209,549 $ 32,630,933
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
VIRTUALFUND.COM, INC. (FORMERLY LASERMASTER TECHNOLOGIES, INC.)
---------------------------------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- ----------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
------------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $21,272,836 $19,384,538 $58,225,444 $65,433,477
COST OF GOODS SOLD 12,317,283 14,282,880 35,114,794 44,552,341
----------- ----------- ----------- -----------
GROSS PROFIT 8,955,553 5,101,658 23,110,650 20,881,136
OPERATING EXPENSES:
Sales & Marketing 4,065,326 4,683,946 10,500,813 13,258,981
Research & Development 1,657,187 1,622,392 4,648,037 4,572,511
General & Administrative 2,201,338 2,267,320 7,166,919 7,046,726
----------- ----------- ----------- -----------
7,923,851 8,573,658 22,315,769 24,878,218
----------- ----------- ----------- -----------
OPERATING PROFIT (LOSS) 1,031,702 (3,472,000) 794,881 (3,997,082)
OTHER INCOME (EXPENSE):
Interest Expense (179,003) (319,428) (650,393) (1,069,737)
Interest Income 37,453 32,125 65,739 146,108
Other Income (Expense) 30,972 102,771 (37,337) 187,886
----------- ----------- ----------- -----------
(110,578) (184,532) (621,991) (735,743)
----------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE
INCOME TAXES 921,124 (3,656,532) 172,890 (4,732,825)
INCOME TAX BENEFIT 1,207,000 1,562,000
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) $ 921,124 $(2,449,532) $ 172,890 $(3,170,825)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE $.06 $(.17) $.01 $(.24)
EARNINGS (LOSS) PER COMMON SHARE -
ASSUMING DILUTION $.06 $(.17) $.01 $(.24)
Weighted average common shares outstanding 14,808,887 14,295,763 14,619,091 13,474,379
Weighted average common and dilutive
potential common shares outstanding 15,955,323 14,295,763 15,283,667 13,474,379
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
VIRTUALFUND.COM, INC. (FORMERLY LASERMASTER TECHNOLOGIES, INC.)
---------------------------------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
March 29, March 30,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 172,890 $(3,170,825)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,418,278 4,420,531
Amortization of deferred financing costs 159,845 166,039
Loss on sale of property and equipment 84,516 85,138
Gain on settlement of product quality issues (1,416,665)
Deferred income taxes (1,562,000)
Change in current assets and current liabilities:
Accounts receivable 1,523,740 (65,552)
Inventory 1,699,530 (2,331,415)
Other current assets 177,051 (389,616)
Income tax receivable 400,781
Accounts payable 346,707 (1,952,849)
Accrued payroll and payroll taxes (123,183) (168,182)
Other current liabilities (317,867) 302,904
Income taxes payable (6,550) 269,675
Deferred revenue (152,115) (592,261)
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 4,982,842 (6,004,297)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (539,239) (927,427)
Proceeds from sale of property and equipment 20,059 71,679
Additions to patents and other assets (33,135) (379,418)
Investment in notes receivable - related party (585,000)
Collection of notes receivable - related party 585,000
Additions to capitalized software development costs (1,302,976)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (552,315) (2,538,142)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 112,924 10,474,051
Net payments under revolving credit lines (1,923,400) (143,018)
Payments on long-term debt (530,790) (927,697)
----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (2,341,266) 9,403,336
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,089,261 860,897
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 484,106 90,851
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,573,367 $ 951,748
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
VIRTUALFUND.COM, INC. (FORMERLY 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 VirtualFund.com, Inc. (formerly 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 nine months ended March
29, 1998, are not necessarily indicative of the results that may be expected for
the year ending June 30, 1998.
In April 1998, the Company changed its name from LaserMaster Technologies, Inc.
to VirtualFund.com, Inc. The name change reflects additional opportunities in
the area of the Internet and electronic commerce foreseen by the Company in the
competitive landscape.
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
----------------------------------------------------------------------------------------------
March 29, 1998 March 30, 1997
-------------------------------------------- ----------------------------------------------
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 $921,124 14,808,887 $.06 $(2,449,532) 14,295,763 $(.17)
Effect of dilutive securities:
Stock Options 1,005,103
Shares issuable relating to
settlement of lawsuit 141,333
--------------- ---------------- --------------- ----------------
Diluted EPS: $921,124 15,955,323 $.06 $(2,449,532) 14,295,763 $(.17)
=============== ================ =============== ================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------------------------------------------
March 29, 1998 March 30, 1997
--------------------------------------------- ---------------------------------------------
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 $172,890 14,619,091 $.01 $(3,170,825) 13,474,379 $(.24)
Effect of dilutive securities:
Stock Options 570,354
Shares issuable relating to
settlement of lawsuit 94,222
--------------- ---------------- --------------- ----------------
Diluted EPS: $172,890 15,283,667 $.01 $(3,170,825) 13,474,379 $(.24)
=============== ================ =============== ================
</TABLE>
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 Nine Months Ended
--------------------------------- ---------------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Stock Options 142,000 2,731,665 2,406,406 2,731,665
Warrants 3,049,953 3,049,953 3,049,953 3,049,953
Convertible Debenture 239,173 474,088 239,173 474,088
--------------- --------------- --------------- ---------------
3,431,126 6,255,706 5,695,532 6,255,706
=============== =============== =============== ===============
</TABLE>
3. Inventory -
Inventory consists of the following:
March 29, June 30,
1998 1997
---------- ----------
Raw materials $3,059,876 $4,178,139
Work in process 165,949 123,664
Finished goods:
Consumables 3,358,162 2,824,753
Hardware 901,154 2,058,115
---------- ----------
$7,485,141 $9,184,671
========== ==========
6
<PAGE>
4. Supplemental disclosure of cash flow information and non-cash financing
activities -
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
March 29, March 30,
1998 1997
----------- -----------
<S> <C> <C>
The Company paid and received cash for the following items:
Interest paid $ 506,654 $ 929,816
Income tax paid (received), net 6,550 (670,456)
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 1,413,687 180,000
</TABLE>
7
<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, dependence 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.
RECENT DEVELOPMENTS
In April 1998 pursuant to shareholder approval, the Company changed its name
from LaserMaster Technologies, Inc. to VirtualFund.com, Inc. The name change
reflects the Company's intention to expand its expertise in desktop publishing
and printing to the additional opportunities foreseen by management in the area
of the Internet and electronic commerce. In connection with the name change, the
Company also announced its plans to organize the current and new business
activities into three business units with concentrations in:
- - Graphics Printing
- - Electronic Commerce Software and Systems
- - Information Technology Consulting
The Graphics Business Unit, which is the primary operating subsidiary, is
comprised mainly of ColorSpan Corporation with its wide-format digital printing
products and aftermarket consumables.
The Electronic Commerce Software and Systems Business Unit is currently in a
start-up phase with operations established including approximately 10
programmers working on the Company's planned release of business-to-business e-
commerce software under the name E-Com Tools(TM).
The Information Technology Consulting Business Unit is now in the planning
stage. Management believes that it is going to need to gain access to Internet
Consulting resources to offer aftermarket customization of the e-commerce sites
established by the E-Com Tools software product.
RESULTS OF OPERATIONS
Net sales for the quarter ended March 29, 1998 were $21.3 million compared to
$19.4 million for the same period one year ago. Net earnings for the quarter
ended March 29, 1998 were $921,000 or $.06 per share compared to a net loss of
$2,450,000 or $.17 per share for the quarter ended March 30, 1997. Net sales for
the nine months ended March 29, 1998 were $58.2 million compared to $65.4
million for the same period one year ago. Net earnings for the nine months ended
March 29, 1998 were $173,000 or $.01 per share compared to a net loss of
$3,171,000 or $.24 per share for the nine months ended March 30, 1997.
8
<PAGE>
The following table sets forth certain items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------------- --------------------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 57.9 73.7 60.3 68.1
----- ------ ----- -----
Gross profit 42.1 26.3 39.7 31.9
Operating expenses:
Sales and marketing 19.1 24.1 18.0 20.2
Research and development 7.8 8.4 8.0 7.0
General and administrative 10.4 11.7 12.3 10.8
----- ------ ----- -----
Total operating expenses 37.3 44.2 38.3 38.0
----- ------ ----- -----
Operating profit (loss) 4.8 (17.9) 1.4 (6.1)
Other income (expense):
Interest expense (0.8) (1.6) (1.1) (1.6)
Interest income 0.2 0.2 0.1 0.2
Other 0.1 0.5 (0.1) 0.3
----- ------ ----- -----
Earnings (loss) before income taxes 4.3 (18.8) 0.3 (7.2)
Income tax benefit 6.2 2.4
----- ------ ----- -----
Net earnings (loss) 4.3% (12.6)% 0.3% (4.8)%
===== ====== ===== =====
</TABLE>
Net Sales. During the March 1998 quarter, the Company's Graphics Business Unit
recorded hardware sales of $9.2 million or 43% of total net sales compared to
$8.9 million or 46% of total net sales in the same period one year ago. The
increase in hardware sales from the previous year is due to increased sales of
the Company's HiRes 8-Color DisplayMaker(R) 4000, 5000 and 6000 series (DMX) of
printers introduced this year. This increase was partially offset by decreases
in sales of the Company's older black and white products and its first
generation 4-color printers and print servers.
During the March 1998 quarter, the Company's Graphics Business Unit recorded
consumables sales, consisting primarily of ink, media, film, maintenance
contracts and spare parts, of $12.1 million or 57% of total net sales compared
to $10.5 million or 54% of total net sales in the same period one year ago. The
increase in consumables sales in the March 1998 quarter from the prior year is
primarily due to an increase in sales of ink for the Company's 8-Color
DesignWinder(R) and DMX printers. This increase was partially offset by a
decrease in consumables sales for the Company's black and white, plain-paper
typesetting products.
International Sales. The following table sets forth international sales by
region expressed in thousands and as a percentage of total net sales:
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------------------- ----------------------------------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
---------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Europe $4,454 21.0% $ 3,463 17.9% $ 12,184 20.9% $13,034 19.9%
Japan, Asia/Pacific 2,157 10.1 3,185 16.4 6,941 11.9 11,585 17.7
Latin America 1,048 4.9 1,658 8.5 3,304 5.7 4,956 7.6
Canada 803 3.8 457 2.4 2,116 3.6 1,452 2.2
------ ----- --------- ---- -------- ---- ------- ----
Total international sales $8,462 39.8% $ 8,763 45.2% $ 24,545 42.1% $31,027 47.4%
====== ==== ========= ==== ======== ==== ======= ====
</TABLE>
9
<PAGE>
Decreases in sales in Europe, Japan, Asia/Pacific, and Latin American markets
for the nine months ended March 29, 1998 compared to the nine months ended March
30, 1997 are primarily due to the decreases in sales of hardware described
herein. Japan and Asia/Pacific sales were impacted by additional decreases
because during the nine months ending March 30, 1997 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.
Backlog. The Company's Graphics Business Unit had a backlog of $810,000 as of
March 29, 1998 that consisted primarily of the new DMX series of printers and
related hardware and consumables. The backlog was filled during April and the
Company expects to be able to meet demand in the future.
Gross Profit. Gross profit, expressed as a percent of net sales, was 42.1% in
the quarter ended March 29, 1998 compared to 26.3% in the same period one year
ago. Gross profit, as a percentage of net sales, increased in the March 1998
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 in total
and 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 March 1998 quarter compared to the prior year. Gross profit was
negatively impacted in the March 1997 quarter by a $600,000 writedown to
estimated net realizable value for certain PressMate(R) related assets, and by
excess capacity due to lower than expected volumes.
Operating Expenses. Sales and Marketing expenses for the quarter ended March
29, 1998 were $4.1 million compared to $4.7 million in the same period one year
ago. Marketing expenses decreased approximately $534,000 in the March 1998
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 and the
DesignWinder Professional Film-Quality inkjet printer which is expected to be
released in the June 1998 quarter.
Research and Development expenditures, including amounts expensed and
capitalized, were $1.7 million in the quarter ended March 29, 1998, 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 March 1998 quarter compared to $423,000 of capitalized
research and development expenditures in the March 1997 quarter.
General and Administrative expenses were $2.2 million for the quarter ended
March 29, 1998, compared to $2.3 million in the same period one year ago.
Other. Interest expense was $179,000 for the quarter ended March 29, 1998
compared to $319,000 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 a tax liability related to the earnings for the nine
months ended March 29, 1998 due to significant net operating loss carryforwards
available to the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the nine months ended March 29,
1998 was $5.0 million compared to net cash used in operating activities of $6.0
million in the same period one year ago. Cash flow was positively impacted in
the nine months ended March 29, 1998 by a $1.7 million decrease in inventory and
a $1.5 million decrease in accounts receivable.
Net cash used in investing activities was $552,000 during the nine months ended
March 29, 1998 compared to $2.5 million in the same period one year ago.
Investment in capital equipment was $539,000 in the nine months ended March 29,
1998 compared to $927,000 in the same period one year ago. Investment in
intellectual property and capitalized software
10
<PAGE>
development costs was $33,000 in the nine months ended March 29, 1998 compared
to $1.7 million in the same period one year ago.
Net cash used in financing activities was $2.3 million in the nine months ended
March 29, 1998 compared to net cash provided by financing activities of $9.4
million in the same period one year ago. Net repayments under revolving credit
lines were $1.9 million in the nine months ended March 29, 1998 compared to
$143,000 in the same period one year ago. Payments on long-term debt were
$531,000 in the nine months ended March 29, 1998 compared to $928,000 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.
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 Company has
filed a Form S-3 with the Securities and Exchange Commission to register the
potential sale of these shares in satisfaction of the settlement. The SEC is in
the process of reviewing this Form S-3 and as a result, the form is not yet
effective. The financial impact of this settlement was previously recognized in
the Company's June 1997 financial statements.
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(R) 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. Sentinel has filed
an appeal of the judgment. The Company believes the awarded damages may be
difficult to collect. On March 18, 1998, Sentinel Imaging filed a voluntary
petition for Chapter 11 bankruptcy protection in New Hampshire.
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.
11
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 2, 1998, the following matters were submitted to a vote of security
holders:
1. Election of two directors to serve for three year terms, or until their
successors have been duly elected and qualified and election of one
director to serve for a two year term, or until his successor has been duly
elected and qualified.
The shareholders affirmed appointment of George Kline as a director for a
two year term and Jean-Louis Gassee and Rohan Champion were elected to
three year terms as directors.
2. Approval of an amendment to the Articles of Incorporation to change the
name of the Company to VirtualFund.com, Inc.
The shareholders approved the proposed amendment.
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
-------------------
12
<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.
VIRTUALFUND.COM, 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: May 5, 1998
13
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERNAL
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-29-1998
<CASH> 2,573,367
<SECURITIES> 0
<RECEIVABLES> 10,605,351
<ALLOWANCES> 1,693,000
<INVENTORY> 7,485,141
<CURRENT-ASSETS> 26,558,796
<PP&E> 2,739,913
<DEPRECIATION> 16,219,845
<TOTAL-ASSETS> 30,209,549
<CURRENT-LIABILITIES> 16,653,048
<BONDS> 0
0
0
<COMMON> 148,775
<OTHER-SE> 13,382,185
<TOTAL-LIABILITY-AND-EQUITY> 30,209,549
<SALES> 58,225,444
<TOTAL-REVENUES> 58,225,444
<CGS> 35,114,794
<TOTAL-COSTS> 35,114,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650,393
<INCOME-PRETAX> 172,890
<INCOME-TAX> 0
<INCOME-CONTINUING> 172,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,890
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY FACTORS UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
VirtualFund.com, Inc. 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. ("GE"). 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 subject to remedies available to GE under the loan agreements or 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 developed software to
support the new electronic commerce (e-commerce)
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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 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 based 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
introduced a new family of printers, the DisplayMaker HiRes 8-Color series,
during September 1997. Three new versions of these printers have been introduced
since December 1997. In March 1998, the Company introduced a HiRes 8- Color
drum-based printer called the DesignWinder Professional. 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.
2
<PAGE>
The Company is aware of intermittent customer issues with the performance of
certain aftermarket supplies used with the Company's printers. The Company is
taking steps to address the supplies performance issues. However, failure to
address supply functionality issues, or some other failure of the product to
perform as expected by the customer may result in customer requests for
compensatory supplies or other requests which could have a material adverse
effect on the Company's financial performance.
The Company is dependent on a sole source supplier for the printheads for the
PressMate-FS. The Company has experienced availability and quality consistency
issues from this supplier. If the Company is unable to resolve the availability
and quality issues, the Company's production, 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 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
3
<PAGE>
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 will
be 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 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 electronic components, the
prices of which have fluctuated significantly in recent years. Significant
increases or decreases in the price or reductions in the availability of
electronic 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 new or modified product
offerings will be adaptable to the
4
<PAGE>
Company's products or will be available to the Company from the supplier(s).
Further, there is no assurance 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 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 wide-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
5
<PAGE>
buying patterns of its customers, which have in the past generally resulted in
reduced revenues and earnings during the Company's first fiscal quarter.
Further, the Company's customers typically order products on an as-needed basis,
and virtually all of the Company's sales in any given quarter result from orders
received in that quarter. Certain products require significant capital
expenditures, causing some customers to delay their purchasing decision. Delays
in purchases of low-volume, high-cost printers may cause significant
fluctuations in the sales volume for a given period. Also, the Company's
manufacturing plans, sales staffing levels and marketing expenditures are
primarily based on sales forecasts. Accordingly, deviations from these sales
forecasts may cause significant fluctuations in operating results from quarter
to quarter and may result in unanticipated quarterly earnings shortfalls or
losses. Historically, a large percentage of orders have been received and
shipped near the end of each month. If anticipated sales and shipments do not
occur, expenditure and inventory levels may be disproportionately high and
operating results could be adversely affected.
Dependence on Consumables Revenues. The Company anticipates it will derive an
increasing component of its revenues and operating income from the sale of ink,
paper, film and other consumables to its customers. To the extent sales of the
Company's consumables are reduced because its customers are unsuccessful in
marketing their own printing services, 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 consumables 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 and the Courts have upheld that at least one manufacturer
has improperly used the Company's trade secrets to commence such competition.
Although the Company is involved and has prevailed 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 to enhancing the resolution of conventional laser printer engines,
high-resolution imaging and image enhancement and wide-format printing
technologies and techniques, and the Company's Big Ink Delivery System, product
patents, and consumable formulations. Additional patent applications are
pending. There can be no assurance that
6
<PAGE>
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 or display of one or more trademarks, or an allegation that the
use or display of one or more trademarks 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
require the Company to enter into a royalty or licensing arrangement 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 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
7
<PAGE>
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 and has prevailed on several of these claims in court. The
competitor had counter-claimed for false advertising, patent misuse, and unfair
competition by ColorSpan. The counterclaims have been dismissed. The competitor
has appealed the current judgment; there is no assurance that the claims will be
upheld. In a subsequent action against this competitor the Company has alleged
copyright violations and the competitor has alleged a counterclaim for copyright
misuse. Although the Company does not believe any of its practices violate
applicable trade, antitrust laws, or copyright there is no assurance that claims
or actions will not be commenced by customers, competitors or governmental
authorities based on trade, anti-trust claims or copyrights which could affect
the Company's operations and cash position.
The Company is also engaged in various actions related to transactional matters,
employee matters, customers' credit and product quality and/or warranty issues.
Some of these actions include claims against the Company for punitive, exemplary
or multiple damages. An award of punitive damages may not bear a direct
relationship to the actual or compensatory damages claimed from the Company.
Although the Company does not believe there are any actions pending or
threatened against the Company which would have a material adverse impact on the
financial position of the company, there is no assurance that there will not be
an adverse award of multiple punitive or exemplary damages which could adversely
affect the cash position of the company.
Any litigation which the Company is involved in may have an adverse impact on
the Company's operations and may result in a distraction or diversion of
management's attention, thereby adversely affecting the operations of the
Company.
International Operations. The Company expects that international revenues will
continue to represent a substantial portion of its total revenues. International
operations are subject to various risks, including exposure to currency
fluctuations, political and economic instability, differing economic conditions
and trends, differing trade and business laws, unexpected changes in applicable
laws, rules, regulatory requirements or tariffs, difficulty in staffing and
managing foreign operations, longer customer payment cycles, greater difficulty
in accounts receivable collection, potentially adverse tax consequences and
varying degrees of intellectual property protection. Fluctuations in currency
exchange rates could result in lower sales volume reported in U.S. dollars.
Fluctuations in foreign exchange rates are unpredictable and may be substantial.
From time to time the Company has engaged in limited foreign currency hedging
transactions. There can be no assurance that the Company will be successful if
it engages in such practices to a significant degree in the future.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon certain key personnel, including Mr. Masters, its Chief Executive
Officer and President, 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
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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 Issue 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 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 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.
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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.
Name Change. Pursuant to shareholder approval on April 2, 1998 and discussed in
the attached Form 10-Q, the Company has changed the name of its holding company
from LaserMaster Technologies, Inc. to VirtualFund.com, Inc. On April 20, 1998,
the Company changed its Nasdaq trading symbol from LMTS to VFND. There can be no
assurance the market will accept the new name or that the change will not impact
the trading patterns of the stock. Any unusual fluctuations in trading patterns
caused by the name change could cause volatility in the stock price.
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.
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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