-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MpY7terBMCgM1x86lis5I7LhxXh3YoAm7pl0KOmnAAyY1gtqkHrkQEQidpJiseAN 2y9/T1sU6TiO8km4UjKKOg== 0000950131-96-004815.txt : 19961001 0000950131-96-004815.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950131-96-004815 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASERMASTER TECHNOLOGIES INC CENTRAL INDEX KEY: 0000857470 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 411612861 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18114 FILM NUMBER: 96636939 BUSINESS ADDRESS: STREET 1: 7156 SHADY OAK ROAD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129418687 MAIL ADDRESS: STREET 1: 7090 SHADY OAK RD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: RASTER DEVICES CORP DATE OF NAME CHANGE: 19900708 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ---------------------------- Commission file number 0-18114 ------- LASERMASTER TECHNOLOGIES, INC. ------------------------------ (Exact name of registrant as specified in its charter) MINNESOTA 41-1612861 - -------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7090 Shady Oak Road Eden Prairie, Minnesota 55344 - -------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 941-8687 ----------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None - ------------------------ -------------------------------------------- - ------------------------ -------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share - -------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No [COVER PAGE 1 OF 2] 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 31, 1996 was $37,407,400 based on the last sale price for the common stock as recorded by the National Association of Securities Dealers on that date. As of August 31, 1996, there were 11,458,634 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: LaserMaster Technologies, Inc. 1996 Stock Incentive Plan filed on Form S-8 on August 30, 1996 [COVER PAGE 2 OF 2] 2 PART I ------ ITEM 1. BUSINESS. GENERAL LaserMaster Technologies, Inc. (the "Company")/1/ designs, develops, manufactures and markets wide-format (up to 54") digital color printers and chemical-free filmsetters for professional printing applications. In addition, it sells all related consumables for its installed base of printing products, consisting primarily of ink, media, film, process units and toner. The Company's products combine advanced computer technology with the Company's own sophisticated software, hardware and proprietary print engines to produce professional-quality printed output at an affordable cost. The Company's DisplayMaker/(R)/ Professional, DesignWinder/(TM)/ and DisplayMaker Express Big Color/(R)/ wide-format digital inkjet color printers are designed to be cost- effective solutions for the short-run digital printing of photo-realistic, wide- format color output. The Company's Halon/(TM)/ product provides users with an interface from their print server to various color laser copiers including those produced by Canon, Kodak and Xerox. The PressMate/(TM)/-FS proprietary desktop chemical-free FilmSetter/(TM)/ is capable of dry film output with effective resolution of 2400 dots per inch. The ColorMark/(R)/ Pro 1600 Print Server is a raster image processor which is capable of supporting a combination of DisplayMaker Professional, DesignWinder and DisplayMaker Express printers, PressMate-FS Personal FilmSetters/(TM)/, and Halon color laser copier interfaces simultaneously as well as offering time saving features specifically designed for high-volume, production environments. The RIPStation/(TM)/ is an entry-level print server which is capable of supporting one DisplayMaker Professional, one DesignWinder or one PressMate-FS. The primary users of the Company's products are commercial printers reprographic service bureaus, photo labs, quick printers, exhibit builders, in-house print shops, printers, publishers, government and educational facilities and corporate marketing departments. Applications include point of purchase signs, trade show exhibit graphics, banners, billboards, courtroom graphics, pre-press proofing (proofs or other quick output to demonstrate concepts for advertising or graphics layouts), digital photo imaging and lighted signage. The Company's products are primarily sold through the Company's direct telemarketing sales force, supplemented by a network of dealers and value-added distributors in certain geographic markets throughout the world. The Company's sales efforts are supported by a direct mail marketing program designed to achieve frequent contact with its potential customers. The Company complements its direct mail efforts by advertising in trade journals and by exhibiting regularly at industry trade shows. The Company's domestic offices are in Eden Prairie, Minnesota. The Company's European sales subsidiary is headquartered in Amsterdam, The Netherlands. MARKET According to a market survey conducted by IT Strategies, the Large-Format Digital Printing market for hardware and consumables is projected to grow from annual sales of approximately $319 million in 1995 to approximately $1.9 billion in 1998. The rapid growth in this market is being driven primarily by the - ------------------- /1/ LaserMaster Technologies, Inc. (the "Company") was incorporated under the laws of Minnesota as Acquerre Corporation in April 1988. LaserMaster Corporation ("LaserMaster"), the Company's primary operating subsidiary, was incorporated under the laws of the State of Minnesota in February 1986. European operations are carried on by LaserMaster Europe Ltd., a Delaware corporation, that is a wholly-owned subsidiary of LaserMaster. Asian and Pacific operations are carried on by LaserMaster Asia/Pacific, Ltd., a Minnesota corporation that is a wholly- owned subsidiary of LaserMaster. LaserMaster Export Corporation, a Virgin Island corporation, is used by LaserMaster as a Foreign Sales Corporation ("FSC"). Unless the context otherwise indicates, all references to the "Company" refer to LaserMaster Technologies, Inc. and its subsidiaries. 3 increasing desire and need for customized, large-format color graphics, as well as significant advances in short-run printing and desktop publishing technologies. Traditional graphics printing methods, consisting of photographic, screen and offset printing, do not meet the requirements for production of short-run print jobs due to the time consuming, multi-step processes and set-up costs involved. As a result, digital printing has developed to fulfill the unmet demand of short-run users by allowing graphics to be printed directly from desktop publishing systems with dynamic interchange of data print to print onto a variety of media. There are a number of digital printing technologies, including inkjet, pen, electrostatic and thermal, that allow users to produce large-format output. Each of these technologies has specific qualities that can be critical to any given application, including resolution, speed, accuracy, color fill capability, the ability to render a three-dimensional image, reliability and cost. A combination of characteristics has made inkjet the fastest growing technology in the large-format printer market. The characteristics of large-format inkjet printers include relatively low cost, higher resolution, faster speed and the ability to print high-quality color. Inkjet printers typically form images, lines and other characters by placing very small dots of ink as the print head moves horizontally, called a raster scan, while the media is typically scrolled vertically. Because inkjet print heads move above the media and do not actually make contact with the media, there is less mechanical wear and tear than experienced with other types of devices. Most inkjet printers can print on a wide variety of media or substrates. Electrostatic printers generally are more expensive than inkjet printers and require special plotting paper. They offer certain advantages to users requiring low cost per square foot and high speed printing characteristics. Thermal printer/plotters are similar to electrostatic printers in that they require special paper, but also require ink ribbons to take advantage of the thermal print head. Thermal printers are typically more costly than comparable-format inkjet printers. Other technologies that can be adapted to wide-format use include photographic output, electrophotographic output and dot matrix printers. These printers have disadvantages including high costs and relatively poor resolution when compared to inkjet technology. STRATEGY The key elements of LaserMaster's strategy are: To maintain and enhance its position as a leading provider of affordable, high quality, proprietary products and consumables supplies to the professional printing market. A growing portion of LaserMaster products are proprietary printer architectures designed, developed and manufactured by the Company. PressMate-FS, DisplayMaker Express and the Company's third proprietary designed and manufactured printer, DesignWinder, introduced in September 1996, are the first of many proprietary architectures which the Company expects to develop. The Company's family of products is expected to grow with the changing marketplace while meeting the needs of professional printing applications. To develop and produce value-added software which distinguish its printer solutions. LaserMaster has consistently taken market standards to a higher level of performance. The Company has been committed to continually enhancing its products by adding features and options to its current family of devices through software enhancements. These enhancements continually evolve with products over their lives through increasing print speeds, allowing use of additional media and inks for various applications, improving color matching and print quality and continuing compatibility with other vendor's software and operating systems. To continue to emphasize telemarketing as a direct sales approach. LaserMaster has been very successful developing its targeted markets through direct mail and telemarketing efforts. The Company intends 4 to continue to enhance its global third party distribution channels simultaneously while continuing to focus on its core direct marketing approach in North America. To develop additional media, ink and film for use with the Company's proprietary print engines to enhance printing applications and market expansion. Fiscal 1996 was a successful year for LaserMaster-branded consumables sales expansion. The release of larger capacity ink delivery systems, pigmented outdoor inks, new phase change inks, and the announcement of plans for the sale of 3M Matched Component System (MCS(/TM)/) outdoor inks and media which carry a written, one-year guarantee backed by 3M, opened doors to new markets for inkjet users by expanding the uses and potential applications of their DisplayMaker printers. In addition, introductions of media such as WaterFast/(TM)/ vinyl, Tyvek/(R)/ (a DuPont product) and canvas should add enhanced profit potential for the outdoor sector of the inkjet market. In September 1996, the Company entered into a strategic alliance with Sihl-Zurich Paper Mill on Sihl AG, a leading European manufacturer of specialty paper and related media, to enhance the development of unique and high- quality media for use with the Company's print engines. To increase international sales. International sales has been a growing percentage of LaserMaster's core business. The Company is committed to increasing its market share in Europe, Asia, Africa, Central and South America through its physical presence in Europe as well as by building ongoing relationships with resellers and dealers throughout the world. The Company may also choose to increase its global presence by working more closely with one or more of its international trading partners based in Japan. To develop original equipment manufacturing (OEM) customers for the Company's proprietary products. The Company is actively exploring relationships which would result in OEM customers for its various product offerings. Augmenting the Company's existing distribution channels with high-quality OEM's could help gain market acceptance of the Company's products and expand its customer base for after-market consumables sales. LASERMASTER PRODUCTS LaserMaster's three wide-format color inkjet printers, the DisplayMaker Professional (initial shipments in June 1993), DisplayMaker Express (initial shipments in December 1995), and DesignWinder (introduced in September 1996), provide wide-format photo-realistic digital color output. These products are designed to be cost-effective solutions for short-run digital printing of photo- realistic wide-format color output. The printers work with most commercially available desktop digital color manipulation and composition software applications. Using third-party graphics and page-layout software applications that allow printed pages to be "tiled", the DisplayMaker products can be used to create virtually unlimited image sizes. The Company's Big Color products incorporate a number of proprietary software advances, including ColorMark and SmoothTone/(TM/) technologies. ColorMark is the Company's color management system that ensures accurate and consistent color from print to print. This technology allows the user to print multiple copies of the same file and achieve near perfect matching of colors, even after changing ink and media. SmoothTone is an image-enhancement technology that significantly boosts the apparent resolution of the printing engine to provide output with near continuous-tone quality. The Company's ThermalRes/(R)/ technology, for which a United States patent has issued with additional U.S. and foreign patents pending, accomplishes an even higher degree of resolution enhancement for text and line art in monochrome and four-color pre-press printing applications. ThermalRes technology is used in the Company's chemical-free filmsetter product, PressMate-FS. DisplayMaker Professional. The Company's first "Big Color" product is a 36-inch wide, photo-realistic, roll-fed, color inkjet printer capable of printing poster-size images up to 36 inches wide and, depending on the software application, up to 50 feet long. The DisplayMaker Professional includes a third- party-supplied inkjet marking engine and the Company's patented Big Ink/(TM)/ Delivery System. The ColorMark color management system incorporated into the ColorMark print server also ensures consistent color quality from print to print. 5 DisplayMaker Express. The Company's second proprietary printer is a 54-inch wide, photo-realistic, high-speed, roll-fed, color inkjet printer which utilizes phase-change inks together with printhead technologies for which the Company has reasonably exclusive rights for wide-format applications. The DisplayMaker Express prints over 100 square feet per hour, or an E-size print in approximately six minutes. DisplayMaker Express is capable of producing prints 54 inches wide and in excess of 150 feet in length. The DisplayMaker Express uses specially formulated ColorMark solid pigmented ink pucks, rather than dye- based aqueous inks used by other inkjet printers, which provides improved UV stability and water resistance. The DisplayMaker Express requires the use of ColorMark qualified or certified media, which ensures proper print functionality and quality. DesignWinder. LaserMaster's third proprietary printer is a 36-inch wide, drum- based, wide-format, sheet-fed, color inkjet printer which utilizes a revolutionary eight printhead station design to produce high-quality signs, photos and digital art and sets a new five minute benchmark for producing E-size prints. DesignWinder is capable of producing apparent 1200 dpi resolution E-size prints utilizing its patent-pending ColorSpan Wide Gamut(TM) printing technique. The high-precision, drum-based design provides superior dot placement accuracy and repeatability, setting a new standard in Big Color print quality, unattainable in traditional inkjet plotter devices. PressMate-FS. In March 1995, the Company began shipping production quantities of its PressMate desktop chemical-free filmsetter. PressMate, the Company's first proprietary printer engine, is a desktop device that uses a dry process to produce specially designed films necessary for making the printing plates used in offset printing. Traditionally, these films were produced by photographic (or wet process) type imagesetters or cameras, using chemicals to develop the image to be reproduced. PressMate permits printing of text and line art in black and white, and of cyan, magenta, yellow and black (CMYK) layers used for four-color separations, at resolutions considered by the Company to be equivalent to 2400 dots per inch using a heat-sensitive, chemical-free film. This fidelity was previously unavailable in a plain-paper or thermal printing device. PressMate shipments were suspended in August 1995 to improve registration tolerance across multiple layers of film required for the highest quality four-color separations desired by the Company's customers. In December 1995, the Company began shipping production quantities of PressMate-FS, which incorporated these technical improvements. The PressMate-FS is a desktop unit that is easily integrated into just about any office or computer network environment. Halon. The Halon Color Laser Copier interface provides users of the ColorMark Pro 1600 color print server the option of printing their digital files to any one of a variety of color laser copiers. ColorMark Pro 1600. The DesignWinder printer, DisplayMaker printers, PressMate filmsetter and Halon color laser copier interface are all served by the Company's ColorMark Pro 1600 print server, a raster image processor that is based on a 166 MHz, 32-bit microprocessor. The ColorMark Pro 1600 features advanced file spooling for multiple users, "RIP Saver(TM)" (which stores processed files to avoid redundant rasterization), job management and logging features that track ink and paper consumption for job-costing, work-flow planning and other purposes. This device has connectivity capacity to handle up to seven devices simultaneously including one DesignWinder, up to two DisplayMaker Professionals, one DisplayMaker Express, up to two PressMate-FS's and up to three Halon interfaces. RIPStation. The RIPStation is an entry-level color server alternative. It is based on a 133 MHz, 32-bit microprocessor. It functions similarly to the ColorMark Pro 1600 without the added advanced or multiple connectivity features offered by the ColorMark Pro 1600. Consumables. Color printing consumes significant quantities of inks and media. LaserMaster products include a range of consumables, such as specialized dye- based inks for indoor use and pigmented inks for outdoor use. In addition, the Company has recently signed a supply agreement with 3M Commercial Graphics Division to market its Matched Component System (MCS) inks, media and laminates that carry a written guarantee backed by 3M for one year outdoor use. The Company performs qualification testing on these consumables before releasing them for customer shipment. The specialized inks are created 6 specifically for LaserMaster products to optimize image quality and printer performance. The Company currently offers a variety of media for its wide-format inkjet printers that include recent introductions such as WaterFast(TM) vinyl for outdoor use, canvas, paper and polyester-based substrates. The Company sells the consumables (inks, media and film) required for optimum use of the printing products it sells. The Company offers various ColorMark consumables for its Big Color printers, including cyan, magenta, yellow and black(R) 500 ml Big Ink packs for use with the DisplayMaker Professional and DesignWinder, and uniquely configured 150 ml ColorMark solid ink pucks required for the DisplayMaker Express. In addition, the Company expects to sell ColorMark ColorSpan Wide Gamut(TM) inks for use with DesignWinder. The Company currently sells ColorMark Bond, ColorMark Vinyl and ColorMark WaterFast Removable Tyvek media for use with the DisplayMaker Express and expects to add additional media in the near future. The Company also offers a variety of print media such as Coated Gloss paper, PolyGloss(TM), FineArt(TM) Canvas, matte, clearfilm and TransWhite(R) translucent backlit film for use with the DisplayMaker Professional. As part of the ColorMark system, the 500 ml Big Ink packs, and 150 ml ColorMark ink pucks ship with ColorMark profilers that plug into the ColorMark Docking Station, ensuring accurate, consistent color output from print to print. The domestic price per dye-based Big Ink pack is $199 per color. The domestic price per ColorMark ink puck is $175. The domestic prices of the ColorMark paper and other media range from $65 to $439 per 100-to 150-foot, 36-inch wide rolls, and from $239 to $699 per 100- to 160-foot, 54-inch wide rolls. Big Color consumables revenue for fiscal 1996 was $17.7 million, with $5.6 million in the June 1996 quarter. The Company's PressMate-FS Personal FilmSetter(TM) requires specially developed ThermalRes film rolls which are also supplied by the Company. This unique specialty film is manufactured to the Company's specifications. The domestic price is $295 for an 80-foot roll of ThermalRes film. ThermalRes consumables revenue for fiscal 1996 was $1.6 million, with $.6 million in the June 1996 quarter. The Company's Unity(TM) line of plain-paper typesetters requires process units and toner for operation. The domestic price for toner is $69 per unit, and process units list for $699 per unit. Plain-paper typesetting consumables revenue for fiscal 1996 was $9.4 million, with $1.8 million in the June 1996 quarter. The Company's products, which have suggested US list prices of approximately $6,995 to $74,000/(1)/, include:
- --------------------------------------------------------------- PRODUCT DISTINGUISHING FEATURES - --------------------------------------------------------------- DisplayMaker 500 ml/color Big Ink Delivery System Professional ColorMark Calibrator 36" wide roll-fed output - --------------------------------------------------------------- DisplayMaker ColorMark calibrator Express 54" wide roll-fed output 150 ml ColorMark solid ink pucks Print speed up to 6 inches per minute - --------------------------------------------------------------- DesignWinder 500 ml/color Big Ink Delivery System ColorMark Calibrator 36" wide manual sheet-fed output E-Size prints in as little as 5 minutes Apparent resolution of 1200 dpi - ---------------------------------------------------------------
7
- ---------------------------------------------------------------- PressMate-FS Chemical-free film processing Personal FilmSetter 12" x 26" ThermalRes film output VideoNet connection to the RIPStation or ColorMark Pro 1600 500 MB Internal Storage - ---------------------------------------------------------------- Halon32 Color Laser Direct digital support for the Canon, Copier Interface Kodak ColorEdge, Xerox MajestiK and Xerox Regal color laser copiers. - ---------------------------------------------------------------- ColorMark Pro 1600 166 MHz, 32-bit processor Print Server 64 MB RAM PostScript-language compatible Level 2 1 GB storage - ---------------------------------------------------------------- RIPStation Print 133 MHz, 32-bit processor with floating Server point unit 32 MB RAM PostScript-language compatible Level 2 1 GB storage - ----------------------------------------------------------------
/(1)/Effective September 1, 1996. PRODUCT DEVELOPMENT The Company's continued success depends on making ongoing investments in product development to ensure the timely introduction of high-performance products in response to changes in technology, market demands and customer requirements. For certain important additional cautionary factors, risks and uncertainties, refer to Exhibit 99 of this form 10-K. Accordingly, the Company is committed to creating specialty printing products that yield performance superior to standard marking engines, designing new engines and enhancing existing products to achieve higher levels of performance. The Company is also committed to designing and enhancing products to increase the Company's after-market consumables business. As of June 30, 1996, the Company employed approximately 67 people in product development activities. The Company's product development organization consists of multiple project teams. Staffing for these teams is flexible, allowing individual engineers to handle multiple and sometimes overlapping development objectives. The Company's software development group creates and enhances software technologies which improve the usefulness, cost-effectiveness and productivity of printers offered by the Company, and the quality of such printers' output. The Company's hardware group works to enhance existing hardware components and products and works with the software group to develop printer products for specialized applications and markets. SALES AND MARKETING The Company sells its products primarily through direct telemarketing, supplemented by dealers in North America and value-added distributors Internationally. On June 30, 1996 the Company employed a 73 person telemarketing sales force including sales professionals focused on developing relationships with major national printing accounts. The Company's sales efforts are supported by a direct mail marketing program designed to achieve frequent contact with its potential customers, including PostScript and reprographic service bureaus, photo labs, quick printers, sign shops, exhibit houses and corporate marketing departments. The Company complements its direct mail efforts by advertising in trade journals and by exhibiting regularly at industry trade shows. 8 The Company invests significant resources in developing and training its telemarketing staff and has implemented computerized sales management and sales communications systems. Sales representatives participate in continuous training programs so that they understand product features and benefits as well as customer applications and business requirements. Telemarketing sales representatives are compensated on a salary plus bonus and commission basis. Domestic and Canadian Sales. The Company's domestic and Canadian sales and marketing operations are based at its headquarters in Eden Prairie, Minnesota. For all of its products, the Company augments its direct sales activities by using dealers who offer local product demonstrations and support. Although dealers may serve as the local point of contact with the end-user, the Company's factory sales professionals remain the primary sales advocates and work with dealers to close sales in North America. For its Big Color products, the Company has also established relationships with independent copy shops and local service printers that have purchased Big Color products. These Big Color Digital Printing Centers are provided cooperative marketing support to promote Big Color printing services and products in their area. The Company's direct telemarketing sales professionals refer potential customers to these local Big Color Digital Printing Centers or resellers to observe the use of the Company's Big Color products. From time to time, the Company pays a small fee to the showcasing center or reseller following a sale. The Company believes that this marketing approach permits the Company to price its Big Color products at competitive levels. OEM Sales. The Company is currently exploring relationships which would result in OEM customers for its various product offerings. The Company desires to expand the market acceptance of its proprietary products and widen its distribution network for both hardware and after-market consumables. Relationships with high-quality OEM partners would be a vital link in attaining this goal, but no OEM agreements have been signed at this point. International Sales. The Company currently sells its products in all of the Western European nations and in the principal Eastern European, Latin American, Pacific and Asian markets. The Company's European sales, support and warehouse facility is located near Amsterdam, The Netherlands. The Company conducts sales operations for the Middle East and Africa from its European headquarters, while it manages other international sales from its headquarters in the United States. In International markets, the Company sells its products through a network of non-exclusive distributors and directly to dealers. For Big Color products, the Company also sells directly to end-users, including Big Color Digital Printing Service Centers and resellers, which provide some local support in those locations where the Company does not maintain sales offices and/or direct distributor support. For the year ended June 30, 1996, sales to customers outside of the United States accounted for approximately 44% of the Company's total revenues. SERVICE AND SUPPORT At June 30, 1996, the Company had 44 technical and customer support representatives responding to telephone inquiries from customers and dealers. The Company offers a limited warranty for all of the products it manufactures. Under its limited warranty, the Company will repair or replace any defective product on a factory-return or central depot basis for a period ranging from 90 days to one year following purchase. In addition to its factory warranty, the Company offers its customers on-site installation, warranty and maintenance services in some markets, through third-party support organizations. MANUFACTURING The Company performs final assembly, functional testing and quality assurance for essentially all of its products and related components, parts and subassemblies at its facilities in Eden Prairie, Minnesota. 9 For some of its products the Company currently purchases fully assembled printer marking engines directly from manufacturers and other components, parts and subassemblies from outside sources. For its PressMate-FS, DisplayMaker Express, DesignWinder and ColorMark Pro products, the Company purchases components and uses them to manufacture the printer engines and servers directly. The Company designs controller boards and software for use with these print engines and components. The Company utilizes a computerized material requirements planning and monitoring system to integrate its purchasing, materials handling and inventory control functions. Certain components used in the Company's products, including printer marking engines, printheads and custom fabricated components, are currently available only from sole sources, and certain other components are available from only a limited number of sources. The Company has in the past experienced delays as a result of the failure of certain suppliers to meet requested delivery schedules. In addition, the Company's sole source supplier for the 36-inch, wide-format, color inkjet marking engine used in the Company's DisplayMaker Professional, also sells wide-format color printers that compete with the DisplayMaker Professional in certain markets. In August 1996, the Company experienced a severe shortfall in Piezo head components due to a yield problem with one of its key vendors. That shortfall will cause a material reduction in revenues for the DisplayMaker Express product line in the September 1996 quarter. The Company hopes to assist the vendor in overcoming this obstacle during the December 1996 quarter. The Company's potential inability to obtain sufficient sole or limited source components, or to develop alternative sources, could result in delays in product introductions, interruptions in product shipments or the need to redesign products to accommodate substitute components, any of which could have a material adverse effect on the Company's operating results. For certain important additional cautionary factors, risks and uncertainties, refer to Exhibit 99 of this form 10-K. In fiscal 1994, the Company made the strategic decision to migrate away from products based on standard marking engines manufactured by unrelated third parties and to focus on engine products designed and manufactured by the Company. In fiscal 1995, the Company began active production of its first proprietary print engine, PressMate, a chemical-free filmsetter. A production line was also established for DisplayMaker Express which was released in December 1995. The Company introduced another proprietary printer engine, DesignWinder, in September 1996. Production of the proprietary engines has required the Company to increase its inventory beyond historical levels, requiring the use of additional working capital. The Company has also experienced increases in production and overhead costs which have had a significant, negative impact on the overall gross margins of the Company. A significant portion of the total manufacturing cost of the Company's filmsetter and Big Color products is represented by certain components, particularly dynamic random access memory chips ("DRAMs"), the prices of which have fluctuated significantly in recent years. Significant fluctuations in price or availability of DRAMs or other components could have a material adverse effect on the Company's operating results. Because the Company normally fills orders within a few days of receipt, it usually carries less than one month's backlog. In addition, customers may generally cancel or reschedule orders without significant penalty. For these reasons, the Company believes that backlog is not a meaningful indicator of future sales. Manufacturing plans and expenditure levels are based primarily on sales forecasts. The absence of a material backlog could contribute to unexpected fluctuations in operating results. COMPETITION The computer printer industry is intensely competitive and rapidly changing. Some of the Company's existing competitors, as well as a number of potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than the Company. For certain important additional cautionary factors, risks and uncertainties, refer to Exhibit 99 of this form 10-K. 10 The Company's Big Color inkjet printing products compete in the short-run, wide- format, photo-realistic color printing market with photographic methods and electrostatic or inkjet digital printers. Competing manufacturers and vendors in this market include Electronics for Imaging, Inc., Iris Graphics, Inc., CalComp, Inc., Hewlett-Packard Co., RasterGraphics, Inc., Versatec, Inc., Roland, Mutoh, Epson, Summagraphics, ENCAD, Inc and a variety of competitors who purchase ENCAD's printer engines on an OEM or systems integration basis. It is widely rumored that Tektronix, Inc. is about to launch a wide-format device as well. The Company introduced a new, ultra-fast, high-resolution Big Color product, DesignWinder, in September 1996. This product is based on a drum and uses eight printheads to achieve the highest quality available on a liquid inkjet printer. The Company uses the eight printhead design to offer customers the option of high speed output (E-size prints in 5 minutes) or highest resolution (effective 1200 dpi) through the use of ColorSpan Wide Gamut inks. The Company anticipates that the successful release of this product will allow it to expand into markets that require large-format printing at a higher quality than has been available with traditional, inkjet, reciprocating head, plotter technology. Competition in this market is generally based on equipment cost, printing quality, production and printing speed, operating costs and the costs of maintenance and upkeep. The traditional photographic approach, employed to produce photo- realistic output one page at a time, is expensive, time-consuming and labor- intensive, especially when an image includes text. This approach also requires skilled personnel and special production facilities and creates chemical wastes. The electrostatic printers that compete with the Company's Big Color products are expensive, costing from $50,000 to over $200,000, and can involve significant maintenance and operating costs. They can also require controlled environments and sophisticated front-end processing systems. Although electrostatic printers provide significantly faster printing speeds and lower per-square-foot consumables costs than those of the Company's products, the Company believes it competes favorably with such devices on the basis of lower initial purchase price, easier operation, higher quality output and lower ongoing maintenance and environmental requirements. High-speed, solid inkjet printers capable of producing photo-realistic output are sold at prices comparable to those of electrostatic systems. An additional limitation on inkjet technology for use in production environments has been the relatively high cost of consumables, especially ink. The Company believes it competes favorably with solid inkjet systems on the basis of lower initial purchase price, easier operation, greater reliability, reduced consumables cost and lower ongoing maintenance and environmental requirements. While other vendors have introduced wide-format printers based on engineering plotter engines, at prices comparable to or below those of the Company's DisplayMaker products, the Company believes that its software and hardware technologies, including SmoothTone image enhancement and ColorMark color management offer it a competitive advantage in terms of higher printing quality, easier operation and lower ongoing operating costs. In particular, with issued United States patents on its Big Ink Delivery System and other patents pending in the US and elsewhere, the Company believes it has a competitive advantage in high-capacity, wide-format, closed-loop color graphics printing using a unitary system. The Company's chemical-free filmsetter, PressMate, competes with phototypesetting equipment produced by a variety of manufacturers such as Varityper, Inc., Linotype-Hell, Inc. and AGFA. Many of the competitive imagesetting systems require a darkroom, other dedicated facilities for storing chemicals required for processing the film, hazardous materials, special insurance and handling capabilities, and strict adherence to OSHA requirements. The Company's PressMate is chemical-free and does not require a special environment for operation. This reduces the cost of operation for users as well as time required to produce documents by allowing the user to control the film production process without the use of chemicals. PressMate competes on the basis of price, operating cost, speed, creative control, convenience and environmental concerns. PROPRIETARY RIGHTS The Company's ability to compete effectively depends, in part, on its ability to maintain the proprietary nature of its technologies through patents, trademarks, copyrights and trade secrets. Important features 11 of the Company's products are represented by proprietary software, some of which is licensed from others and some of which is owned by the Company. The Company attempts to protect its proprietary software with a combination of copyrights, trademarks and trade secrets, employee and third-party nondisclosure agreements and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse-engineer or obtain and use information that the Company regards as proprietary. In addition, there can be no assurance that others will not independently develop software products similar or superior to those developed or planned by the Company. For certain important additional cautionary factors, risks and uncertainties, refer to Exhibit 99 of this form 10-K. The Company has been granted three United States patents for inventions related to its TurboRes(R) approach to enhancing the vertical resolution of conventional laser printer engines, three United States patents relating to the Company's Big Ink Delivery System and one patent relating to its ThermalRes approach to enhancing vertical resolution of printheads which use thermal marking. Additional patent applications are pending relating to the Company's TurboRes, FastPort/TM/, VideoNet/TM/, Big Ink Delivery, and other imaging and image enhancement and wide-format print engine technologies and techniques. There can be no assurance that patents will issue from any of these pending applications. In addition, with regard to current patents or patents that may issue, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or that issued patents will not be challenged or invalidated. Applications to patent the basic TurboRes, ThermalRes and Big Ink Delivery System approaches and related technologies have been filed in selected foreign countries. Patent applications filed in foreign countries are subject to laws, rules and procedures which differ from those of the United States and thus there can be no assurance that any foreign patents will issue as a result of these applications. Furthermore, even if these patent applications result in the issuance of foreign patents, some foreign countries provide significantly less patent protection than the United States. LICENSES The Company licenses Microsoft Corporation's TrueImage/TM/ and Pipeline Associates, Inc.'s PowerPage(R) printer-language software for enhancement and use in its products to provide support for and compatibility with the PostScript page description language. TrueImage is currently used in some typesetting printing products, with PowerPage employed in the majority of typesetter and all Big Color products. These license agreements provide for a per unit royalty on printers shipped by the Company, subject to minimum quarterly requirements. The Company has licensed operating software from Novell, Inc. and Microsoft Corporation for use in its Unity typesetters and Big Color products. These license agreements provide for a per unit royalty on printers shipped by the Company. Certain typefaces bundled with the Company's products and offered by the Company to other customers are licensed from URW Unternehmensberatung ("URW") and others and are edited by the Company for improved quality and utility. The URW license agreement does not require additional payments, except with respect to the use of the trademarked names of certain fonts. Licenses for the use of typeface designs or trademark typeface names upon payment of royalties have also been entered into with International Typeface Corporation, Inc., Treacyfaces, Inc., Linotype-Hell, Inc. and Fundicion Tipografic Neufville, S.A. EMPLOYEES At June 30, 1996 the Company had a total of 417 employees. None of the Company's employees are represented by a labor organization and the Company has never experienced a work stoppage or interruption due to a labor dispute. Management believes its relationship with employees is good. 12 ENVIRONMENTAL MATTERS The Company believes that it is in compliance with all material aspects of applicable federal, state and local laws regarding the discharge of materials into the environment. The Company does not believe that it will be required to spend any material amount in compliance. ITEM 2. PROPERTIES. As of August 31, 1996 the Company leases an aggregate of 296,606 square feet of office and warehouse space in Eden Prairie, Minnesota of which 168,034 square feet is from a related party (see Item 13), pursuant to leases expiring at various times through December 2010. Of the total amount leased, approximately 46,022 square feet has been subleased until October 1, 1996. The leases require payments of property taxes, insurance and maintenance costs in addition to basic rent and contain renewal options for periods ranging from one to three years. The Company also leases approximately 14,850 square feet of office and warehouse for its European headquarters in Hoofddorp, outside of Amsterdam, The Netherlands. ITEM 3. LEGAL PROCEEDINGS. In October 1995, a shareholder of the Company (Becker) filed an action against the Company and four of its officers and directors alleging violations of the Securities and Exchange Act of 1934. In December 1995, two other similar suits were filed by other shareholders and subsequently consolidated with the Becker suit. The Becker claims have been pled as a class action including all purchasers of the Company's stock during the period of December 3, 1993 through December 8, 1994. In February 1996, one of the directors named in the suit was dismissed from the case without prejudice. The suit alleges that the Company and the named individual defendants knew of material, negative, non-public information, withheld such information from the public so as to cause a fraud on the market, and that the individual defendants personally benefitted by selling shares of common stock with knowledge of such material adverse information. The individual defendants may have the right to indemnification from the Company for their defense and liability. The individual defendants, but not the Company, may have coverage for certain claims under the Directors' and Officers' insurance policies in effect at the relevant time. The Company believes the action is totally without merit and is vigorously defending the matter. The Company currently intends to press the case to trial so that the facts will be heard. In order to contain costs, preserve its ability to meet the demands of litigation throughout the lengthy trial process and bolster its legal defense team (which includes the resources of outside counsel), the Company has hired an in-house litigator and support staff with experience in these types of suits. The case is in the early stages of discovery and the plaintiffs' total damage claim has not been articulated. If the matter is not resolved by settlement or a final judgement within the limits and coverage of the applicable Directors' and Officers' insurance, this litigation could have a material adverse effect on the Company. See Exhibit 99 of this form 10-K for additional discussion of risk factors. In October 1995, LaserMaster Corporation (LMC) filed suit against Sentinel Imaging, a division of Sentinel Business System, Inc. The complaint alleges, among other things, patent infringement, trademark infringement, Lanham Act violations, misappropriation of trade secrets, and interference with contractual relationships. This action is related to LaserMaster's Big Color product line generally and, in particular, LaserMaster's Big Ink delivery system and ColorMark color management system. Sentinel Imaging has counterclaimed for false advertising, patent misuse, and unfair competition by LaserMaster. If LMC does not prevail on its claims and Sentinel does prevail on the claims it has alleged, the outcome of these proceedings could have a material adverse effect on the Company. 13 The Company is involved in legal proceedings related to customers credit and product warranty issues in the normal course of business. In certain proceedings, the claimants have alleged claims for exemplary or punitive damages which may not bear a direct relationship to the alleged actual incurred damages, and therefore could have a material adverse effect on the Company. At this time none of the proceedings is expected to have a material effect on the Company's operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of the shareholders of LaserMaster Technologies, Inc. was held on May 23, 1996 pursuant to notice to all shareholders of record at the close of business on April 5, 1996. As of the notice of the meeting there were 11,395,634 common shares outstanding. The following matters were submitted to a Vote of the shareholders of record at the annual meeting: 1. The election of Melvin L. Masters and Ralph D. Rolen as directors of the Company for continuing terms expiring in 1998. The directors were elected by the vote of 8,788,101 proxies in favor of the resolution to elect both directors. There were no abstentions or broker non-votes of record. The terms of directors Lawrence J. Lukis, Jean-Louis Gassee, and Robert J. Wenzel did not expire in 1996 and continued after the annual meeting. 2. The approval of the adoption of the 1996 Stock Incentive Plan. The resolution passed by the vote of 4,520,770 votes in favor of the resolution to approve the plan. There were no abstentions or broker non-votes of record. 3. The approval of the issuance to TimeMasters, Inc. of warrants to purchase 277,952 shares of the Company's common stock and a right to convert $1 million of a promissory note into the Company's common stock. The resolution in favor of approval passed by votes of 6,017,657 proxies. There were no abstentions or broker non-votes of records. 14 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. DIVIDENDS The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and, accordingly, does not anticipate paying any cash dividends in the foreseeable future. Any payment of dividends in the future will depend upon the capital requirements, earnings, and general business and financial condition of the Company, as well as other factors which the Board of Directors may deem relevant. MARKET INFORMATION Since July 17, 1990, the Company's Common Stock has traded on the Nasdaq National Market System (Nasdaq symbol: LMTS). The following table sets forth the high and low sale prices reported in the Nasdaq National Market System:
Common Stock -------------- High Low ---- --- Fiscal Year 1995 First Quarter............................ $18.125 $7.50 Second Quarter........................... 17.125 5.875 Third Quarter............................ 7.25 5.00 Fourth Quarter........................... 8.00 4.625 Fiscal Year 1996 First Quarter............................ 7.0 5.125 Second Quarter........................... 7.5 5.125 Third Quarter............................ 7.125 4.75 Fourth Quarter........................... 6.875 3.625 Fiscal Year 1997 First Quarter (through August 31, 1996).. 4.813 3.25
- ------------------ On August 31, 1996, the last reported sale price of the Common Stock was $4.375 per share. As of such date, there were approximately 259 record holders and 3,640 beneficial holders of the Common Stock. 15 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial information has been derived from the consolidated financial statements of the Company, which have been audited by Deloitte & Touche, LLP, independent certified public accountants, for the years ended June 30, 1996, 1995, 1994, 1993, and 1992. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and notes related thereto.
Fiscal Years Ended June 30, -------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Statement of Operations Data: Net sales.............................. $ 93,592 $119,438 $105,849 $ 68,227 $ 59,857 Cost of goods sold..................... 64,379/(a)/ 72,857 59,852 37,387 31,045 -------- -------- -------- -------- -------- Gross profit..................... 29,213 46,581 45,997 30,840 28,812 Operating expenses: Sales and marketing..................... 21,109 27,091 21,810 19,360 17,450 Research and development................ 6,149 6,210 3,335 1,890 2,034 General and administrative.............. 11,310 11,552 9,634 8,813 7,795 Restructuring and other special charges. 4,431/(a)/ -------- -------- -------- -------- -------- Operating profit (loss)............. (13,786) 1,728 11,218 777 1,533 Other expenses (primarily interest)..... (1,823) (1,433) (1,160) (1,776) (1,935) -------- -------- -------- -------- -------- Earnings (loss) before income taxes and cumulative effect of a change in accounting principle................... (15,609) 295 10,058 (999) (402) Income tax benefit (provision)........... 5,147 (89) (3,394) 289 245 -------- -------- -------- -------- -------- Earnings (loss) before cumulative effect of a change in accounting principle.............................. (10,462) 206 6,664 (710) (157) Cumulative effect on prior years of a change in accounting principle.... 301 -------- -------- -------- -------- -------- Net earnings (loss).................... $(10,462) $ 206 $ 6,664 $ (710) $ 144 ======== ======== ======== ======== ======== Per common share: Earnings (loss) before cumulative effect of change in accounting principle.............................. $ (0.93) $ 0.02 $ 0.57 $ (0.07) $ (0.02) Cumulative effect on prior years of a change in accounting principle.... 0.04 -------- -------- -------- -------- -------- Net earnings (loss)..................... $ (0.93) $ 0.02 $ 0.57 $ (0.07) $ 0.02 ======== ======== ======== ======== ======== Weighted average common and dilutive common equivalent shares outstanding.... 11,305 12,206 12,189 9,565 9,342
/(a)/In May 1996, the Company incurred charges of $9.9 million, consisting of restructuring and other special charges of $4.4 million and a special charge to cost of sales of $5.5 million related to the Company's revised business plan and technical problems in one of its products. 16
June 30, ------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (In thousands) Balance Sheet Data: Working capital.......................... $ 2,580 $13,708 $13,973 $ 5,869 $ 6,135 Total assets............................. 46,545 59,161 47,401 29,008 31,476 Current liabilities...................... 30,087 30,933 21,042 12,898 14,578 Long-term debt, less current maturities.. 820 1,599 1,590 5,743 6,069 Stockholders' equity..................... 15,638 25,293 23,139 9,817 10,413
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS FROM OPERATIONS (Tabular information: dollars in thousands, except per share and percentage amounts) CAUTIONARY STATEMENT The statements in this Management's Discussion and Analysis that are forward looking involve numerous risks and uncertainties and are based on current expectations. Actual results may differ materially. Refer to exhibit 99 of this form 10-K for certain important cautionary factors, risks and uncertainties related to "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). OVERVIEW In fiscal 1994, the Company made the long-term decision to migrate away from products based on standard marking engines manufactured by unrelated third parties to relying on products designed and manufactured by the Company. The decision to progressively integrate the process of developing proprietary engines in-house, was made in an effort to better distinguish its products. Because these proprietary engines require the use of specially designed or configured media or inks and achieve optimum performance when using complete, LaserMaster-branded systems, the effect of this strategy has been to generate a continuous after-market stream of revenue from the sale of LaserMaster-branded consumables. This consumables strategy is expected to build an increasing base of revenues for the Company as well as enhance gross profit margins above those expected from hardware and software sales alone. The implementation of this engine design and manufacture process has taken longer and has been more costly than the Company had originally anticipated. The Company has experienced higher than expected production costs during this period which were associated with the startup of its first two proprietary printer engine manufacturing lines, PressMate and DisplayMaker Express. The start up costs of both new products required substantial resources and the corresponding use of working capital. During the fourth quarter of fiscal 1996, the Company incurred pre-tax charges of $9.9 million consisting of a special charge to cost of sales of $5.5 million and restructuring and other special charges of $4.4 million as a result of its revised business plan which is intended to accelerate the Company's migration away from total reliance on integration of third-party-supplied engines. 17 RESULTS OF OPERATIONS The following table sets forth certain items from the Company's Consolidated Statements of Operations expressed as a percentage of net sales:
Fiscal Years Ended June 30, --------------------------- 1996 1995 1994 ---- ---- ---- Net sales......................................................... 100.0% 100.0% 100.0% Cost of goods sold................................................ 68.8(a) 61.0 56.6 ----- ----- ----- Gross margin...................................................... 31.2 39.0 43.4 Expenses: Sales and marketing............................................ 22.5 22.7 20.6 Research and development....................................... 6.6 5.2 3.1 General and administrative..................................... 12.1 9.7 9.1 Restructuring and other special charges........................ 4.7/(a)/ 0.0 0.0 ----- ----- ----- Total operating expenses.......................................... 45.9 37.6 32.8 ----- ----- ----- Operating profit (loss)........................................... (14.7) 1.4 10.6 Other income (expense): Interest expense............................................... (1.9) (1.1) (1.2) Other.......................................................... (0.1) (0.1) 0.1 ----- ----- ----- Earnings (loss) before income taxes............................... (16.7) 0.2 9.5 Income tax benefit (provision).................................... 5.5 0.0 (3.2) ----- ----- ----- Net earnings (loss)............................................... (11.2)% 0.2% 6.3% ===== ===== =====
/(a)/In May 1996, the Company incurred charges of $9.9 million, consisting of restructuring and other special charges of $4.4 million and a special charge to cost of sales of $5.5 million related to the Company's revised business plan and technical problems in one of its products. The impact on cost of sales and operating expenses was 5.9% and 4.7%, respectively. NET SALES Net sales were $93.6 million, $119.4 million and $105.8 million in fiscal 1996, 1995 and 1994, respectively. The decrease in net sales of 21.6% in fiscal 1996 was attributable to decreases in plain-paper typesetting products and price competition in the Big Color printer market. These decreases were somewhat offset by DisplayMaker Express (DME), which was introduced in fiscal 1996, and increased consumables revenues. Sales growth of 12.8% from fiscal 1994 to 1995 was primarily attributable to increases in the sales of Big Color products and the introduction of PressMate, offset by a decrease in sales of plain-paper typesetting and WinPrint(R)/OEM products. Sales during the three-year period were impacted by the decline in the plain-paper typesetting and WinPrint/OEM/Imaging product lines as the Company has de-emphasized these products in favor of more specialized, professional printing products and proprietary printer products with complimentary consumables. With the reduction in research, development, sales and marketing expenditures related to the plain- paper typesetting products, the Company expects the transition out of these product lines to be complete sometime during fiscal 1997. The Company believes that plain-paper typesetting revenues will be replaced with revenues from PressMate-FS, DME, DesignWinder and future product releases expected in fiscal 1997. In December of 1995, the Company introduced a revised model PressMate product named PressMate-FS which management believes addresses performance related concerns experienced with the older model 18 PressMate. Over the last two fiscal quarters of 1996, the Company embarked on an aggressive repositioning, repricing and exchange campaign to update or replace older model PressMates in the field with the new PressMate-FS. PressMate-related hardware sales increased to $1.7 million in the fourth fiscal quarter of 1996 from $570,000 in the third fiscal quarter. This rebound in PressMate sales can be attributed to the introduction of 133 line-per-inch traditional halftone capabilities accompanied by a rejuvenated marketing effort intended to communicate the new level of reliability and performance achieved with the new PressMate-FS. The Company believes that revenues from sales of PressMate-FS will increase in fiscal 1997. The Company released DisplayMaker Express, its second proprietary printer engine, late in the second fiscal quarter of 1996, generating Big Color hardware sales of $9.3 million and after-market ink and media sales of $1.7 million for the fiscal year ended 1996. The anticipated growth in sales of DME has been slowed by component quality issues as the Company's sole supplier of a key component has been unable to provide sufficient production levels and maintain acceptable quality standards. These quality issues with the supplier have precluded expected productivity gains in the overall DME line. The Company is actively working with its vendor to resolve the problems it is currently experiencing and expects these issues to come under control in the near future. However, if the vendor is unable to maintain sufficient quantities and product quality to meet the Company's production needs, revenues from DME could be significantly below management's expectations for fiscal 1997. In fiscal 1996, the Company sold $37.2 million (40% of net sales) of higher margin consumables consisting primarily of ink, media and film, along with maintenance contracts and spare parts compared to $ 27.1 million (23% of net sales) in the prior year. With the installed base of printers increasing and the releases of PressMate, DisplayMaker Express and DesignWinder, the Company believes that after-market consumables revenues in existing and new markets will continue to increase in fiscal 1997. During the fourth quarter of 1996, the Company announced several additions to its consumables product line which allow the installed base of Big Color customers to capture the business opportunities presented by both indoor and outdoor applications. Changes included increased ink capacity from 400 ml to 500 ml, price reductions on its dye-based indoor inks, and introduction of new pigmented outdoor inks and related media. In addition, the Company announced a supply agreement with 3M Commercial Graphics Division providing for a complete Matched Component System of inks, media and laminate that carry a one-year exterior or five-year interior written warranty. At this time the Company and 3M are uncertain about the timing of any shipments for the 3M materials pending new negotiations related to additional specifications now being requested by the Company. The following table sets forth net sales by product line expressed in thousands and as a percent of net sales:
Fiscal Years Ended June 30, --------------------------------------------------- NET SALES 1996 1995 1994 ---- ---- ---- Consumables.............. $37,174 39.7% $ 27,148 22.7% $ 14,788 14.0% Big Color................ $35,190 37.6% $ 37,525 31.4% $ 28,686 27.1% Plain-paper Typesetting.. $13,834 14.8% $ 41,123 34.4% $ 51,269 48.4% PressMate................ $ 6,028 6.4% $ 7,375 6.2% $ 0 0.0% WinPrint/OEM/Imaging..... $ 1,366 1.5% $ 6,268 5.3% $ 11,106 10.5% ------- ----- -------- ----- -------- ----- Total net sales.......... $93,592 100.0% $119,439 100.0% $105,849 100.0% ======= ===== ======== ===== ======== =====
19 International Sales Japan, Asia/Pacific sales increased both as a percentage of total net sales and in dollars from fiscal 1994 to fiscal 1996 as a result of increased penetration of the Asian markets. The release of DisplayMaker Express in fiscal 1996 and DisplayMaker Professional in fiscal 1994 generated significant sales in Japan. Decreased sales in the European market in fiscal 1996 are attributable to increased competition in the plain-paper typesetting and Big Color product lines as well as the Company's realignment of its European distribution channels. These decreases in Europe were somewhat offset by sales of DME and consumables increases. The following table sets forth international sales expressed as a percent of total net sales and in thousands:
Fiscal Years Ended June 30, ---------------------------------------------- INTERNATIONAL SALES 1996 1995 1994 ---- ---- ---- Europe............... $19,656 21.0% $23,022 19.3% $17,666 16.7% Japan, Asia/Pacific.. 13,235 14.1 12,235 10.2 10,887 10.3 Latin America........ 5,146 5.5 5,118 4.3 3,878 3.7 Canada............... 2,892 3.1 2,496 2.1 3,088 2.9 ------- ---- ------- ---- ------- ---- Total net sales...... $40,929 43.7 $42,871 35.9% $35,519 33.6 ======= ==== ======= ==== ======= ====
GROSS MARGIN Gross margins, expressed as a percent of net sales, were 31.2% (37.1% excluding special charges), 39.0% and 43.4% for fiscal 1996, 1995 and 1994, respectively. Gross margin decreased in 1996 from 1995 primarily as a result of increased production costs associated with the manufacture of proprietary engines. The Company's gross margins during all three fiscal years were negatively affected by aggressive pricing of its plain-paper typesetting products and, in fiscal 1996, aggressive pricing of some of its Big Color products developed as a systems integrator, in an attempt to maintain market share against heavy discounting generated by broad distribution from its third-party OEM supplier of the platform used in the DisplayMaker Professional printer. In addition, gross margins during all three fiscal years were negatively impacted by increased production and overhead costs associated with the start-up of proprietary printer engine manufacturing. In fiscal 1996, 1995 and 1994 the Company's gross margins were favorably impacted by increasing sales of after-market consumables which typically have higher gross margins than hardware/software sales alone. Included in fiscal 1996 cost of sales is a special charge of $5.5 million consisting of $4.2 million in inventory revaluation associated with the transition from certain product lines developed as a systems integrator and $1.3 million to cover replacement costs, product returns, and inventory revaluation related to the Company's older model PressMate product. These charges are based on the Company's estimates of net realizable value of the related inventory and for expected returns of older model PressMates as of the time the charges were incurred. Through the release of the Company's first two proprietary printer products many issues were encountered which required new and innovative customer service, technical support, and manufacturing process enhancements. The Company responded to the needs of its installed base of DME customers with a "Do Whatever It Takes Campaign." In addressing these issues the Company has added experienced customer service staff, technical support staff, manufacturing managers and engineers. Production quality and inspection standards have been developed and implemented. In addition, key personnel of the Company have taken an active role in assisting major suppliers with implementation of control standards and processes to ensure component quality as it relates to the Company's needs and requirements. 20 SALES AND MARKETING Sales and marketing expenses were $21.1 million, $27.1 million and $21.8 million in fiscal 1996, 1995 and 1994, respectively. The decrease in expense of $6.0 million in 1996 from 1995 included decreased expenses related to sales of $3.6 million and marketing of $2.5 million, offset by increases in technical support of $100,000. The decrease in sales and marketing expense in fiscal 1996 is primarily related to reductions directly related to lower sales volumes. The increase in expense of $5.3 million in 1995 from 1994 included $3.0 million in sales expenses, $1.9 million in marketing expense and $400,000 in technical support services. RESEARCH AND DEVELOPMENT The Company capitalized software development costs of $2.7 million, $3.5 million and $3.3 million in fiscal 1996, 1995 and 1994, respectively, as required by FASB No. 86 (see Note 1 of Notes to Consolidated Financial Statements). The decrease in capitalized software development in 1996 from 1995 reflects the Company's focus on developing its first two proprietary printer engines and less on the systems integrator type of products. Research and development expenditures, including amounts expensed and capitalized, were $8.8 million, $9.7 million and $6.7 million in fiscal 1996, 1995 and 1994, respectively. As a percent of overall sales, these expenditures represented 9.1%, 8.1% and 6.3% in fiscal 1996, 1995, and 1994, respectively. The decrease in gross R&D expenditures from fiscal 1995 to 1996 is attributable to increased efficiency in the Company's development activities and reductions in man power allocated to this area. In developing the first two proprietary engines, many process and systems enhancements were implemented to assist in the research, design and subsequent release of products to production. Cutting edge design software, online vendor approval and engineering change order systems have greatly enhanced the design process as well as the interdepartmental communication between the design arm of the organization and the operations (continuation engineering, purchasing and production) arm. Increased benefits and cost savings are anticipated in future periods as these and other systems continue to develop. The Company is striving to get the most benefit for its investment in R&D. The future depends on continually developing new and better products for the markets it serves. As a result, the Company intends to reinvest any cost savings into developing new technology and does not anticipate a material change in the rate it invests in this area. The increase in R&D expenditures from 1994 to 1995 is attributable to increased staffing levels and costs associated with the development of the Company's first two proprietary printer engines. Software development costs capitalized during these periods relate primarily to DisplayMaker Professional, DisplayMaker Express, PressMate, Unity, and DesignWinder. GENERAL AND ADMINISTRATIVE General and administrative expenses were $11.3 million, $11.6 million and $9.6 million in fiscal 1996, 1995 and 1994, respectively. Fiscal 1996 decreases are the result of reductions in the infrastructure necessary to handle lower sales volumes, offset in part by costs associated with the defense of the shareholder lawsuit (see" Legal Proceedings" for further details) and higher than normal bad debt expense as a percent of net sales which was in part, negatively impacted by product reliability issues related to new engines. Increases during 1995 were primarily attributable to increased staff and facilities required to support higher sales levels. RESTRUCTURING AND OTHER SPECIAL CHARGES In May 1996, the Company incurred $4.4 million in restructuring and other special charges as a result of its revised business plan which is intended to accelerate the Company's migration from a systems integrator to a manufacturer of proprietary printing engines. Included in the $4.4 million charge is $3.3 million for the revaluation of intellectual property tied to certain technologies and contract rights and $282,000 for severance related to workforce reductions. The charge also includes $443,000 for expected 21 losses on the disposal of property and equipment and $403,000 in commitments under non-cancelable leases as a result of consolidating foreign sales offices and certain domestic operations. INTEREST EXPENSE Interest expense was $1.8 million, $1.3 million and $1.3 million in fiscal 1996, 1995 and 1994, respectively. The increase in interest expense in 1996 is attributable to an overall increase in average debt levels and costs associated with obtaining new financing. INCOME TAXES The effective income tax rate was 33.0%, 30.1% and 33.7% in fiscal 1996, 1995 and 1994, respectively. The Company expects its effective tax rate to decrease as it returns to profitability due to the benefits it can receive from the use of its Foreign Sales Corporation. See Note 11 of Notes to Consolidated Financial Statements for further disclosures relating to income taxes. LIQUIDITY AND CAPITAL RESOURCES During the three years ended June 30, 1996, liquidity needs have been satisfied primarily by cash flow from operations and short and long-term borrowings. Working capital was $2.6 million at June 30, 1996 compared to $13.7 million at June 30, 1995. The decrease in working capital is primarily due to a net loss from operations of $10.5 million in fiscal 1996. Operating activities provided cash of $6.2 million, $4.4 million and $3.4 million in fiscal 1996, 1995 and 1994, respectively. The increase in cash provided from operations in 1996 compared to 1995 is due principally to lower levels of inventory resulting from increased efficiencies in forecasting and planning. In addition, amounts owed to suppliers have increased in proportion to inventory levels compared to prior years. Cash used in investing activities was $6.3 million, $8.0 million and $7.3 million in fiscal 1996, 1995 and 1994, respectively, which includes expenditures on property and equipment, capitalized software development, patents and other intellectual property. The decrease in cash used in investing activities in 1996 compared to 1995 consists of decreased expenditures on property and equipment and capitalized software offset somewhat by increases in intellectual property. The increase in cash used in investing activities in 1995 compared to 1994 is due primarily to increased expenditures on intellectual property. The Company does not expect significant increases in expenditures for property and equipment in fiscal 1997, despite its initial manufacturing ramp up, as its production processes and equipment are not particularly capital intensive in this phase. Financing activities consumed $365,000 of cash during fiscal 1996. LMC borrowed $1,765,000 in the first quarter of fiscal 1996 from TimeMasters, Inc. ("TMI"), a corporation controlled by the Company's Chief Executive Officer, to cover short- term cash shortfall. In January 1996, LMC replaced the operating line of credit that it maintained through a commercial bank with a new, three-year credit agreement with a commercial financing company. The new agreement allows LMC to borrow up to $10 million based on availability equal to 60% of net eligible accounts receivable and 25% of net eligible inventory. As part of this agreement, the commercial finance company required that the loan to TMI be subordinated and that a forbearance agreement restrict repayment of the TMI debt. In consideration for agreeing to such subordination and forbearance, TMI was issued a warrant to purchase 277,953 shares of the Company's common stock at an exercise price of $6.35 per share and received a right to convert up to $1 million of indebtedness into common stock at the lower of $5.875 per share or the market price on the date of such conversion. The warrant and note to TMI, which the Company believes were on terms at least as favorable to the Company as could have been obtained from an unaffiliated party, were approved by shareholders at the Company's annual meeting in May 1996. 22 Credit availability under the line of credit with the commercial finance company was exhausted during the first quarter of fiscal 1997. The Company's relationship with trade creditors, including a number of suppliers of components that were not available from alternative sources, became strained as the Company deferred payment of trade payables. The Company worked with several of its trade creditors to restructure their indebtedness and sought equity financing to meet its cash needs. In September 1996, the Company entered into a series of agreements with one of its largest trade creditors and their supplier, converting approximately $1.7 million of trade payables and a promissory note of $859,516 into $2.5 million in convertible subordinated debentures. The debentures allow the trade creditor to convert as much of the debt as would purchase 30,000 shares of the Company's common stock in any one week period, provided that the market price for the Company's common stock exceeds $6.00 per share. A related agreement requires the supplier to provide approximately $1.5 million in inventory to the Company in resolution of quality issues with the product previously supplied by the trading partner. Additionally, to meet the cash shortfall in September 1996, the Company privately placed 2,285,715 shares of its common stock for a purchase price of $4.375 per share, together with warrants to purchase an additional 2,285,715 shares with an exercise price of $7.00 per share, for an aggregate consideration of $10 million. Of such shares, 1,371,429 shares were sold to Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation ("Sihl"), for $6 million, $2.2 million of which is represented by a promissory note that is due when a promissory note from a group of entities affiliated with TMI is paid. Sihl conditioned its investment on an investment of $4 million by the Company's Chief Executive Officer or an entity with which he is affiliated. In satisfaction of such condition, TMI and affiliates (the "TimeMasters Group") purchased 914,286 shares for $4 million and received warrants to purchase an additional 914,286 shares at $7.00 per share, all of which is represented by promissory notes that are due October 15, 1996 or upon sale of real estate that such group is selling to finance the investment. Both Sihl and the TimeMasters Group pledged the shares and warrants they purchased to secure their promissory notes and the TimeMasters Group also secured its notes by a mortgage on the real estate. The warrants issued to TMI and Sihl have a term of eight years and may be exercised at any time. The agreement pursuant to which such shares and warrants were purchased provides for both incidental and demand registration rights for a period of ten years from the closing date of the transaction. Additionally, it provides to Sihl, but not to the TimeMasters Group, a right to first refusal to purchase a pro rata portion (based on the ratio of number of shares Sihl owns or has the right to purchase to all shares of the Company that are outstanding or subject to options, warrants or convertible securities), of any securities (subject to certain exceptions) that the Company proposes to issue until Sihl's percentage ownership declines below 10%. The agreement prohibits repayments of LMC's previous indebtedness to TMI until TMI's promissory notes are paid in full or simultaneously therewith. The Company anticipates applying a portion of the proceeds from these transactions to repayment of LMC's indebtedness to TMI. The Company simultaneously entered into a strategic alliance with Sihl, a leading manufacturer of specialty papers and coatings. The Company and Sihl will collaborate on research and development and marketing in order to develop new media and specialty coatings which are intended to address the rapid growth of the graphics and photo realistic segments of the inkjet printing industry. In September 1996, the Company also privately placed 410,256 shares of its common stock for a purchase price of $4.875 per share, together with warrants to purchase an additional 471,286 shares with an exercise price of $6.79 per share, for an aggregate consideration of $2 million. The shares and warrants were issued to General Electric Capital Corporation ("GE"), the Company's senior lender. Of the total purchase price, $1 million is represented by a full recourse promissory note that is due the earlier of March 31, 1997 or when a promissory note from a group of entities affiliated with TMI is paid. The note also provides that upon default, GE may satisfy the note by trading one half of the shares and warrants for cancellation. The Stock Purchase Agreement also provides for both incidental and demand registration rights. The GE investment does not carry with it the preemptive stock purchase rights granted to Sihl as described above. 23 Each of the foregoing transactions was approved by a disinterested majority of the Board of Directors of the Company, by shareholders, or by both. The Company believes that each such transaction is on terms at least as favorable to the Company as could have been obtained from an unaffiliated entity. The Company does not have any significant commitments for capital expenditures, but is devoting significant cash resources to defense costs associated with the class action litigation brought against the Company's officers and has plans to expend significant capital to promote the introduction of its new DesignWinder product series and to expand sales and marketing efforts related to after-market consumables. The Company anticipates that the proceeds from the private placements will be adequate to meet the Company's cash needs through the next several months. Eventually, the Company's need for cash will be dependent upon meeting its business plan, and particularly its sales targets. If sales are less than expected or reasonably priced sources of financing are not available, the Company may be required to revise its business plan or further restructure its capitalization. Substantially all of the Company's assets have been pledged to secure outstanding borrowings and there can be no assurances that the Company would be able to protect existing equity holders in the event of such a restructuring. FOREIGN CURRENCIES In general, the impact of foreign currency gains/losses are immaterial to the Company as a whole. LME extends credit in the normal course of business in five relatively stable European currencies. In addition, LME's financing agreement allows it to factor those receivables and receive Dutch Guilders in which it pays its expenses. The impact of this is to effectively hedge the Company's exposure to foreign currency risk. Essentially all other transactions are in U.S. dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Financial Statements and Supplementary Data attached. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 24 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1996, CONCERNING THE DIRECTORS OF THE COMPANY:
Year Became Name, Age, Positions, Principal Occupations, Directorships Director - -------------------------------------------------------------------------------- Directors whose terms expire in 1996 MR. WENZEL; age 45; has been Chief Operating Officer of the Company since 1996 1996 October 1991 and President of LaserMaster Corporation, the Company's principal operating subsidiary, since October 1989. He joined LaserMaster as General Manager of the PC Division in May 1989 and became Executive Vice President shortly thereafter. Prior to joining LaserMaster, Mr. Wenzel was employed by CPT Corporation, a company specializing in the manufacture and sale of word processing systems, where he served as General Manager of a computer products division from January 1988 through April 1989, and in other capacities before that time. Directors whose terms expire in 1997 LAWRENCE J. LUKIS; age 48; Mr. Lukis co-founded LaserMaster in February, 1989 1986 and has been Chief Technical Officer of the Company since May 1989. JEAN-LOUIS GASSEE; age 52; Since 1990, Mr. Gassee has been Chairman 1990 and Chief Executive Officer of Be, Inc. of Menlo Park, California. That company is involved in personal computer technology. From August of 1988 until September, 1990, Mr. Gassee was President of the Apple Products Division of Apple Computer, Inc. Prior to that time he held the offices of Senior Vice President of Research and Development (1987 to August, 1988) and Vice President of Product Development of Apple Computer, Inc. from 1985 to 1987. Mr. Gassee is also a director of Electronics for Imaging of San Bruno, California and 3COM, Sunnyvale, California. Directors whose terms expire in 1998 MELVIN L. MASTERS; age 42; Mr. Masters co-founded LaserMaster 1989 in February, 1986 and has been Chairman, Chief Executive Officer and President of the Company since May 1989. Mr. Masters also owns TimeMasters, Inc., a company established for the purpose of property management which also has investments in the fields of wireless voice and data communications and in personal motorsports products. RALPH D. ROLEN; age 42; Mr. Rolen is Senior Vice President and 1989 Manager of the Retail Credit Division of First Tennessee National Bank of Memphis, Tennessee, a position he has held since January, 1989.
The Board of Directors met two times during the fiscal year ended June 30, 1996. All directors attended each meeting. The Board of Directors has: (i) an Audit Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen, ii) a Stock Option Committee composed of Mr. Gassee and Mr. Rolen, and (iii) a 25 Compensation Committee composed of Mr. Masters, Mr. Gassee and Mr. Rolen. The Board of Directors has no standing nominating committee. THE FOLLOWING TABLE SETS FORTH INFORMATION, AS OF AUGUST 31, 1996, REGARDING THE EXECUTIVE OFFICERS OF THE COMPANY:
Name Age Positions - ----------------------------------------------------------------------------------------------- Melvin L. Masters 42 Chief Executive Officer, President and Chairman of the Board Lawrence J. Lukis 48 Chief Technical Officer Robert J. Wenzel 45 Chief Operating Officer and President, LaserMaster Corporation James E. Retterath 35 Secretary and Vice President Research & Development Timothy N. Thurn 40 Treasurer Thomas D. Ryan 38 Executive Vice President, LaserMaster Technologies, Inc and LaserMaster Corporation
MR. RETTERATH has been Secretary of the Company since March 1994. He joined the Company in June 1990 and has held a variety of management positions in Research and Development most recently serving as Vice President which position he has held since December 1992. From July 1986 to June 1990, Mr. Retterath was a Senior Design Engineer for Printware, Inc. of Mendota Heights, Minnesota. MR. THURN has been Treasurer of the Company since June 1989 and of LaserMaster Corporation since March 1987. Mr. Thurn has experience as both a public and private accountant. Mr. Thurn is a Certified Public Accountant (CPA) and Certified Management Accountant (CMA). MR. RYAN has been Managing Director of LME since January, 1995 and assumed the Executive Vice President position for the Company and LaserMaster Corporation in May 1996. Prior to working for the Company, Mr. Ryan worked for Mentor Corporation as Vice President and General Manager of its Minnesota operations. Officers of the Company are elected annually by the Board of Directors. All of the current officers are expected to be re-elected to serve in the same positions for the coming year. 26 Item 11. EXECUTIVE COMPENSATION. Summary Compensation Table The following table sets forth the cash and noncash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company and the four executive officers of the Company whose salary and bonus earned in the fiscal year ended June 30, 1996 exceeded $100,000 for services rendered.
====================================================================================================================== Annual compensation Long term compensation --------------------------------------------------------------------------- Awards ---------------------- Other All other annual Restricted Payouts/ compen- Name and principal Year Salary ($) Bonus compen- stock Options/ LTIP sation position ($) sation award(s) SARs (#) payouts ($) ($) ($) ($) - ---------------------------------------------------------------------------------------------------------------------- Melvin Masters 1996 $246,875 $ 6,736/1/ Chief Executive 1995 250,000 $ 6,016/1/ Officer 1994 250,000 $ 5,096/1/ - ---------------------------------------------------------------------------------------------------------------------- Robert Wenzel 1996 $203,125 220,000 Chief Operating 1995 165,625 $35,000 Officer 1994 150,000 1,000 - ---------------------------------------------------------------------------------------------------------------------- James E. Retterath 1996 $203,125 240,000 $34,100/2/ Secretary 1995 161,667 35,000 1994 127,500 - ---------------------------------------------------------------------------------------------------------------------- Larry Lukis 1996 $150,000 $10,908/1/ Chief Technical 1995 250,000 $ 9,898/1/ Officer 1994 250,000 $ 7,923/1/ - ---------------------------------------------------------------------------------------------------------------------- Thomas D. Ryan 1996 $131,458 $16,500 40,000 Executive Vice 1995 * President 1994 * ======================================================================================================================
*Became executive officer during fiscal 1996. /1/Premiums for life insurance where the Company is not the beneficiary. /2/Expenses paid by the Company on behalf of the employee. Stock Options The Company maintains a Stock Option Plan pursuant to which executive officers, other employees and certain non-employees providing services to the Company may receive options to purchase the Company's common stock. The following table summarizes grants of stock options during fiscal 1996 to the Chief Executive Officer and the Executive Officers named in the Summary Compensation Table. 27
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR =================================================================================================================== Potential Realizable Value at Assumed Annual Individual Grants Rates of Stock Price Appreciation for Option Term =================================================================================================================== % of Total Options/ Options/ SARs Exercise or SARs Granted to Base Price Expiration 5% ($) 10% ($) Name Granted Employees ($/Share) Date (#) in Fiscal Year - ------------------------------------------------------------------------------------------------------------------- Robert J. Wenzel 100,000/1/ 7.6% $4.00 April 2006 $251,560 $637,480 120,000/2/ 9.1% $4.00 April 2006 $301,872 $764,976 - ------------------------------------------------------------------------------------------------------------------- James E. Retterath 120,000/1/ 9.1% $4.00 April 2006 $301,872 $764,976 120,000/2/ 9.1% $4.00 April 2006 $301,872 $764,976 - ------------------------------------------------------------------------------------------------------------------- Thomas D. Ryan 40,000 3.0% $4.00 April 2006 $100,624 $254,992 ===================================================================================================================
/1/Options vest ratably over eight years. /2/Options vest ratably over nine years with accelerated vesting contingent upon meeting performance goals as established by the Chief Executive Officer. The following table summarizes exercises of stock options during fiscal 1996 by the Chief Executive Officer and the Executive Officers named in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES =================================================================================================================== Number of Value of unexercised unexercised in-the-money options/SARs at options/SARs at FY- Shares acquired Value Realized FY-end (#) end ($) exercisable/ Name on exercise (#) ($) exercisable/ unexercisable (1) ($) unexercisable - ------------------------------------------------------------------------------------------------------------------- Melvin L. Masters -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------- Robert J. Wenzel -0- -0- 41,250/243,750 $117,200/$189,000 - ------------------------------------------------------------------------------------------------------------------- James E. Retterath -0- -0- 28,750/301,250 $ 66,500/$276,600 - ------------------------------------------------------------------------------------------------------------------- Lawrence J. Lukis -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------- Thomas D. Ryan -0- -0- 10,000/110,000 $ 5,600/$61,900 ===================================================================================================================
(1) Represents the difference between the closing price of the Company's common stock on June 30, 1996 and the exercise price of the options. Long-Term Incentive Plan Awards Other than the Stock Option Plan reported on above, the Company does not maintain any long-term incentive plans. 28 DIRECTOR COMPENSATION For fiscal year 1996, there was no plan for compensation to non-employee directors. All directors were reimbursed for their expenses incurred in attending meetings. Jean-Louis Gassee, John Meyer and Scott Parr also acted as consultants to the Company. An additional $30,000 of consulting fees was incurred for services provided by Mr. Gassee during fiscal 1996. An additional $15,000 of consulting fees was incurred for services provided by Mr. Meyer during fiscal 1996. Mr. Parr was paid $8,000 in consulting fees for services provided during fiscal 1996. EMPLOYMENT AGREEMENTS At June 30, 1996, the Company had employment agreements with Messrs. Masters, Lukis, Wenzel, and Retterath. Those agreements renew automatically on an annual basis unless terminated by either party by written notice 60 days before the renewal date. The agreements provide for continuation payments equal to 36 months pay for Mr. Masters and Mr. Lukis and 12 months pay for Mr. Wenzel and Mr. Retterath, upon termination of employment in certain circumstances, including change of control. As of June 30, 1996 minimum salary levels of $250,000 were set for each of Messrs. Masters, Lukis, Wenzel and Retterath. The Company also has employment agreements with other members of its management. In total, there are nine employment agreements, with aggregate annual compensation of $1,670,000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Chief Executive Officer of the Company, Melvin L. Masters, is a member of the Compensation Committee. Mr. Masters' compensation is set by the Board of Directors as a whole with Mr. Masters abstaining. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of August 31, 1996, certain information with respect to beneficial share ownership by the directors, individually; by all persons known to management to own more than 5% of the Company's outstanding Common Stock, individually; and by all executive officers and directors as a group. Except as otherwise indicated, the shareholders listed below have sole investment and voting power with respect to their shares.
Number of Beneficially Owned Percent of Shares Name of Beneficial Owner Shares Outstanding - ------------------------ ------ ----------- Melvin L. Masters 519,000 4.5% 6425 Beach Road Eden Prairie, MN 55344 Lawrence J. Lukis (1) 2,199,531 19.2% 3250 Fox Street Long Lake, MN 55356 Ralph D. Rolen (2) 107,774 * Jean-Louis Gassee (3) 85,000 * Robert J. Wenzel (4) 53,050 * James E. Retterath (5) 28,750 *
29
Timothy N. Thurn (6) 54,149 * Thomas D. Ryan (7) 12,000 * All officers and directors as a group (8 persons) (8) 3,059,254 26.3%
* Less than 1% (1) Includes shares owned by Donna Lukis, Mr. Lukis' spouse. Includes 183,000 shares held by the Lukis Foundation, of which Mr. Lukis is a director. Mr. Lukis disclaims beneficial ownership both of Ms. Lukis' shares and those held by the Lukis Foundation. (2) On June 6, 1996, effective August 6, 1996, Mr. Rolen resigned his previously held position as trustee of Masters Trust I and as a result, no longer controls shares held in that trust. (3) Includes 60,000 shares issuable to Mr. Gassee under options which are exercisable. (4) Includes 41,250 shares issuable to Mr. Wenzel under options which are exercisable or will become exercisable within 60 days. Also includes shares held as trustee for four education trusts. (5) Includes 28,750 shares issuable to Mr. Retterath under options which are exercisable or will become exercisable within 60 days. (6) Includes 11,483 shares issuable to Mr. Thurn under options which are exercisable or will become exercisable within 60 days. (7) Includes 10,000 shares issuable to Mr. Ryan under options which are exercisable or will become exercisable within 60 days. (8) Includes 151,483 shares issuable under options which are exercisable or will become exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has the following arrangements with certain of its directors, executive officers or five percent shareholders; (1) The Company leases space it currently occupies in Shady View I & II, with the owner of that space, Grandchildren's Realty Alternative Management Partnership I (GRAMPI), a Minnesota limited partnership. The general partner of GRAMPI is TimeMasters, Inc., a Minnesota corporation which is owned by Melvin L. Masters. One of the limited partners of GRAMPI is the Masters Trust I, of which Ralph Rolen, a director of the Company, was Trustee at the time of the negotiations. The Company retained the services of an outside law firm as well as an independent commercial real estate brokerage firm in negotiating the lease. (2) Under a Use Indemnification Agreement and certain related Board of Directors' actions, the Company has the right to sponsor business and business-related occasions at facilities owned by Masters Trust I and/or Melvin L. Masters and/or TimeMasters, Inc and/or GRAMPI and/or GRAMPI #2. For those occasions, the Company indemnifies the owners against loss or damage, reimburses out-of-pocket expenses and pays a facility charge based on market rates. In the fiscal year ended June 30, 1996 charges totalled $30,788. (3) The Company has currently installed a campus-wide TimeMasters, Inc. wireless voice system in its Eden Prairie facility. There are no monthly call operating charges for unlimited use of 30 that system. The system hardware was acquired in fiscal 1995 for $211,000 based on competitive proposals for two other comparable systems. Upgrades to the system amounted to $47,853 in fiscal 1996. TimeMasters, Inc. is a Minnesota corporation wholly-owned by Melvin L. Masters. (4) During September and October 1995, LaserMaster Corporation's (LMC's) cash needs exceeded available cash. To cover short-term cash needs, LMC borrowed $1,765,000 under a demand note from TimeMasters, Inc. (TMI), a corporation controlled by the Company's Chief Executive Officer. The entire amount of the note remained outstanding at June 30, 1996 as repayment was restricted by the terms of a subordination and forbearance agreement between LMC, TMI and LMC's senior lender, GE Capital Corporation. In consideration for providing financing to LMC and executing the subordination and forbearance agreement, TMI was issued a warrant for the purchase of 277,953 shares of the Company's common stock at an exercise price of $6.35 per share and the right to convert up to $1 million of indebtedness into shares of the Company's common stock upon the occurrence of certain events, at the lower of $5.875 per share or market price at the time of conversion. This transaction was submitted to and approved by the shareholders at the Company's annual meeting in May 1996. (5) In September 1996, the Company issued 914,286 shares of restricted common stock for a promissory note of $4 million in a private placement to TimeMasters, Inc., GRAMPI and GRAMPI #2 (together as a group known as the TimeMasters group), which is controlled by Melvin L. Masters, the Company's CEO. The shares were issued at the market price of $4.375 per share and were paid by promissory notes from the TimeMasters group. The notes are due the earlier of October 15, 1996 or upon the closing of the sale of the Shady View properties, which are owned by members of the TimeMasters group. The notes are secured by the shares and warrants purchased as well as a mortgage on the Shady View I and II properties (see item (2) above). In addition, the TimeMasters group was issued a warrant for the purchase of an additional 914,286 shares at $7.00 per share with an expiration date of September 16, 2004. The TimeMasters group has the right to require the Company to effect up to five demand registrations under the Securities Act within ten years of the closing date of the transaction. The agreement also provides for incidental registration rights during this same period. In addition, shares acquired by TimeMasters upon the exercise of the warrant or conversion right, obtained pursuant to the $1,765,000 demand note discussed in item (4) above, have preferential incidental registration rights expiring September 2006. Each of the foregoing transactions was approved by a disinterested majority of the Board of Directors of the Company, by shareholders, or by both. The Company believes that each such transaction is on terms at least as favorable to the Company as could have been obtained from an unaffiliated entity. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements Consolidated Financial Statements of LaserMaster Technologies, Inc. and Subsidiaries: Independent Auditors' Report Consolidated Balance Sheets as of June 30, 1996 and 1995 Consolidated Statements of Operations for the fiscal years ended June 30, 1996, 1995 and 1994 31 Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules LaserMaster Technologies, Inc. and Subsidiaries Schedule I -- Condensed Financial Information of the Registrant Schedule II -- Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are either not applicable or required information has been given in the consolidated financial statements or notes thereto. (a) 3. Listing of Exhibits
Exhibit Number Description - ------- ------------ 10.1 Common Stock Purchase Agreement dated September 16, 1996 between LaserMaster Technologies, Inc. and Sihl-Zurich Paper Mill on Sihl AG, and a business group consisting of Melvin L. Masters, TimeMasters, Inc., Grandchildren's Realty Alternative Management Program I Limited Partnership and Grandchildren's Realty Alternative Management Program I #2 Limited Partnership. 10.2 Common Stock Purchase Agreement dated September 25, 1996 between LaserMaster Technologies, Inc. and General Electric Capital Corporation. 10.3 Debenture Exchange and Trade Debt Settlement Agreement dated September 12, 1996 between LaserMaster Technologies, Inc. and Marubeni International Electronics Corporation. 10.4 LaserMaster Technologies, Inc. Convertible Subordinated Debenture dated September 12, 1996 to Marubeni International Electronics Corporation. 10.5 First Amendment to Credit Agreement dated May 15, 1996 between LaserMaster Corporation and General Electric Capital Corporation. 11.1 Per share earnings calculation. 27.1 Financial Data Schedule 99. Cautionary Factors Under Private Securities Litigation Reform Act of 1995.
32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 30, 1996 LASERMASTER TECHNOLOGIES, INC. By /s/ Melvin L. Masters ----------------------------------- Melvin L. Masters, President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Melvin L. Masters President, Chief Executive Officer - ------------------------ and Chairman of the Board Melvin L. Masters (Principal Executive Officer) /s/ Lawrence J. Lukis Chief Technical Officer and - ------------------------ Director Lawrence J. Lukis /s/ Ralph D. Rolen Director - ------------------------ Ralph D. Rolen /s/ Jean-Louis Gassee Director - ------------------------ Jean-Louis Gassee /s/ Robert Wenzel Director - ------------------------ Robert Wenzel /s/ Timothy Thurn Treasurer - ------------------------ Timothy Thurn 33 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders LaserMaster Technologies, Inc. and Subsidiaries Eden Prairie, Minnesota We have audited the consolidated balance sheets of LaserMaster Technologies, Inc. and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996 and financial statement schedules listed in the index at Item 14(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of LaserMaster Technologies, Inc. and subsidiaries as of June 30, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly in all material respects the information therein set forth. Deloitte & Touche, LLP Minneapolis, Minnesota August 9, 1996
LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------ June 30, 1996 June 30, 1995 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 90,851 $ 607,223 Accounts receivable, less allowance for doubtful accounts and sales returns of $ 2,475,000 and $2,051,000, respectively (Note 5) 12,563,112 17,104,353 Inventory (Notes 3 and 5) 13,524,314 21,609,487 Income tax receivable 400,781 Other current assets 2,783,784 2,452,766 Deferred income taxes (Note 11) 3,304,000 2,868,000 ----------- ----------- TOTAL CURRENT ASSETS 32,666,842 44,641,829 PROPERTY AND EQUIPMENT, NET (Notes 4, 7 and 12) 5,099,560 6,323,749 CAPITALIZED SOFTWARE, less accumulated amortization of $3,636,979 and $3,465,724, respectively (Note 5) 4,150,913 4,991,084 DEFERRED INCOME TAXES (Note 11) 2,546,000 ACQUIRED TECHNOLOGY, PATENTS AND LICENSES, less accumulated amortization of $1,000,154 and $967,765, respectively (Note 5) 2,081,649 3,204,610 ----------- ----------- $46,544,964 $59,161,272 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 5) $ 5,381,037 $ 6,462,901 Note payable - related party (Note 6) 1,765,000 Current maturities of long-term debt (Note 7) 1,248,267 1,009,917 Accounts payable (Note 12) 16,682,191 18,569,479 Accrued payroll and payroll taxes 1,915,908 2,107,533 Income taxes payable 201,768 Other current liabilities (Note 12) 1,200,264 1,386,113 Deferred revenue 1,894,262 1,195,640 ----------- ----------- TOTAL CURRENT LIABILITIES 30,086,929 30,933,351 LONG-TERM DEBT, less current maturities (Note 7) 820,095 1,598,546 DEFERRED INCOME TAXES (Note 11) 1,336,000 COMMITMENTS AND CONTINGENCIES (Notes 9 and 15) STOCKHOLDERS' EQUITY: (Notes 5, 6, 8 and 10) Common stock, $.01 par value; authorized 30,000,000 shares; 11,426,134 and 11,176,382 shares issued and outstanding, respectively 114,261 111,764 Preferred stock, $.01 par value; authorized 5,000,000 shares; no shares issued or outstanding Additional paid-in capital 17,430,555 16,626,953 Retained earnings (accumulated deficit) (1,906,876) 8,554,658 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 15,637,940 25,293,375 ----------- ----------- $46,544,964 $59,161,272 =========== ===========
See notes to consolidated financial statements. F-2 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------- Years Ended June 30, -------------------------------------------- 1996 1995 1994 -------------- ------------- ------------- NET SALES (Note 13) $ 93,592,044 $119,438,719 $105,849,310 COSTS OF GOODS SOLD (Note 2) 64,378,882 72,857,356 59,852,292 ------------ ------------ ------------ GROSS PROFIT 29,213,162 46,581,363 45,997,018 OPERATING EXPENSES Sales and marketing 21,108,559 27,091,414 21,810,013 Research and development 6,148,919 6,210,006 3,335,081 General and administrative (Note 12) 11,310,135 11,552,092 9,634,228 Restructuring and other special charges (Note 2) 4,431,273 ------------ ------------ ------------ 42,998,886 44,853,512 34,779,322 ------------ ------------ ------------ OPERATING (LOSS) PROFIT (13,785,724) 1,727,851 11,217,696 OTHER INCOME (EXPENSE) Interest expense (Note 12) (1,784,365) (1,331,139) (1,296,810) Interest income 17,728 26,846 102,130 Other (expense) income (56,173) (128,084) 34,620 ------------ ------------ ------------ (1,822,810) (1,432,377) (1,160,060) ------------ ------------ ------------ (LOSS) EARNINGS BEFORE INCOME TAXES (15,608,534) 295,474 10,057,636 INCOME TAX BENEFIT (PROVISION) (Note 11) 5,147,000 (89,000) (3,394,000) ------------ ------------ ------------ NET (LOSS) EARNINGS $(10,461,534) $ 206,474 $ 6,663,636 ============ ============ ============ NET (LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ (.93) $ .02 $ .57 ============ ============ ============ Weighted average common shares in 1996 and weighted average common and common equivalent shares in 1995 and 1994 11,305,232 12,206,280 12,188,896 ============ ============ ============
See notes to consolidated financial statements. F-3 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ----------------------------------------------------------
Retained Common Stock Additional Earnings ------------------------ Paid-in (Accumulated Shares Amount Capital Deficit) Total ---------- -------- ----------- ------------ ----------- BALANCES, JUNE 30, 1993 9,751,156 $ 97,511 $ 8,035,057 $ 1,684,548 $ 9,817,116 Issuance of common stock - Conversion of debentures, less issuance costs of $306,334 766,439 7,664 5,214,002 5,221,666 Stock options exercised 428,321 4,284 570,988 575,272 Stock option tax benefit (Note 11) 861,000 861,000 Net earnings 6,663,636 6,663,636 ---------- -------- ----------- ------------ ----------- BALANCES, JUNE 30, 1994 10,945,916 109,459 14,681,047 8,348,184 23,138,690 Issuance of common stock - Stock options exercised 230,466 2,305 410,906 413,211 Stock option tax benefit (Note 11) 1,535,000 1,535,000 Net earnings 206,474 206,474 ---------- -------- ----------- ------------ ----------- BALANCES, JUNE 30, 1995 11,176,382 111,764 16,626,953 8,554,658 25,293,375 Issuance of common stock - Stock options exercised 249,752 2,497 577,602 580,099 Stock option tax benefit (Note 11) 226,000 226,000 Net loss (10,461,534) (10,461,534) ---------- -------- ----------- ------------ ----------- BALANCES, JUNE 30, 1996 11,426,134 $114,261 $17,430,555 $ (1,906,876) $15,637,940 ========== ======== =========== ============ ===========
See notes to consolidated financial statements. F-4 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 14)
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended June 30, ------------------------------------------------- 1996 1995 1994 -------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636 Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and amortization 5,859,577 6,302,444 4,950,886 Amortization of deferred financing costs 240,335 96,127 193,672 Revaluation of acquired technology, patents and licenses 2,582,840 Revaluation of capitalized software 768,059 Loss on sale of property and equipment 528,840 131,113 12,048 Deferred income taxes (4,318,000) (1,606,000) 927,000 Stock option tax benefit 226,000 1,535,000 861,000 Change in current assets and current liabilities: Accounts receivable 4,541,241 (1,175,687) (7,524,524) Inventory 8,085,173 (8,038,448) (7,293,941) Other current assets (571,353) (784,152) (734,788) Income tax receivable (400,781) Accounts payable (1,027,772) 6,342,131 4,124,447 Accrued payroll and payroll taxes (191,625) 221,415 606,660 Income taxes payable (201,768) (220,911) 345,153 Other current liabilities (185,849) 703,858 1,389 Deferred revenue 698,622 638,591 245,115 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 6,172,005 4,351,955 3,377,753 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,660,716) (2,654,705) (2,831,073) Additions to capitalized software costs (2,660,717) (3,535,312) (3,328,224) Proceeds from sale of property and equipment 53,968 16,363 52,950 Additions to patents and other assets (2,056,156) (1,793,993) (1,172,678) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (6,323,621) (7,967,647) (7,279,025) CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowing under revolving credit lines (1,918,979) 2,002,144 2,942,262 Proceeds from note payable to related party 1,765,000 Proceeds from notes payable 271,149 111,345 77,493 Repayments of notes payable (293,550) (103,429) (680,539) Proceeds from long-term debt 307,514 470,938 2,187,000 Payments on long-term debt (1,075,989) (864,966) (525,981) Issuance of common stock 580,099 413,210 575,273 ------------ ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (364,756) 2,029,242 4,575,508 ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (516,372) (1,586,450) 674,236 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 607,223 2,193,673 1,519,437 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 90,851 $ 607,223 $ 2,193,673 ============ ============ ============
See notes to consolidated financial statements. F-5 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS LaserMaster Technologies, Inc. (the Company) designs, manufactures, markets and sells wide-format color, chemical-free filmsetting, plain-paper typesetting, and direct-to-plate printing systems for graphic arts, pre- press, and desktop publishing professionals. CREDIT RISK The Company sells its products on a prepaid basis, on a COD basis, through nonrecourse third-party leasing arrangements and by extending credit in the normal course of business. Its customer base is comprised primarily of resellers and end users in the graphic arts, prepress and desktop publishing industries throughout the world. Credit risk is spread across a significant number of customers and geographic areas such that no material credit risk resides with one or a small number of customers or in a given geographic area. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. CONSOLIDATION The consolidated financial statements include the accounts of LaserMaster Technologies, Inc. and its subsidiaries, Digital Typeface Corporation (DTC) and LaserMaster Corporation (LMC) and LMC's subsidiaries, LaserMaster Export Corporation, LaserMaster Europe, Ltd. (LME), LaserMaster Asia/Pacific (LMA), and ColorMasters, Inc. (CMI). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION AND WARRANTIES Product sales are recorded on shipment. Reserves are established for anticipated returns of product and bad debts. The Company offers extended maintenance agreements with revenue from these agreements recognized ratably over the contract period. The Company provides a warranty for labor and materials on certain products sold. No other stock balancing programs or product rebate programs exist outside of the terms of the limited warranty. The estimated warranty liability is included in other current liabilities in the consolidated balance sheets. CASH EQUIVALENTS All highly liquid cash investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) basis. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets of two to seven years. CAPITALIZED SOFTWARE Software development costs incurred subsequent to establishment of the software's technological feasibility are capitalized. Capitalization ceases when the software is available for general release to customers. The recoverability of capitalized software costs is continually evaluated, and provisions for estimated losses are recorded in the period such losses are determined. Amortization of capitalized software costs is provided at the greater of the amount computed using (a) the ratio of current gross revenues from a product to the total of current and anticipated future gross revenues from the product or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of three years is assigned to capitalized software development costs. Amortization of capitalized software costs, included in cost of goods sold, aggregated $2,732,829, $3,124,616, and $2,409,307 for the fiscal years ended June 30, 1996, 1995, and 1994, respectively. ACQUIRED TECHNOLOGY, PATENTS, AND LICENSES Acquired technology, patents, and licenses are amortized using the straight-line method over the estimated useful lives of the assets, generally from three to ten years. The recoverability of these assets is continually evaluated by comparing the remaining unamortized cost to the estimated future revenue of the associated assets. Provisions for estimated losses are recorded in the period such losses are determined. F-6 ACCOUNTS PAYABLE Accounts payable include $389,860 at June 30, 1996 related to issued checks which had not cleared the Company's bank accounts reduced by deposits in transit and cash on deposit in the Company's depository banks. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term debt, accounts payable, and accrued liabilities are reflected in the financial statements at their estimated fair value. The carrying amount of the Company's long-term debt approximated its fair value at June 30, 1996 due to the debt agreements containing market interest rates. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. RESEARCH AND DEVELOPMENT The Company is involved in the development of new products and improvement of existing products. Research and development costs are charged to expense as incurred. ADVERTISING The Company adopted the provisions of Statement of Position No. 93-7, "Reporting on Advertising Costs," effective for the Company's 1995 fiscal year. The Company expenses the costs of advertising the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists of printing, postage, and mailing list costs relating to direct mail advertising. The capitalized costs of the advertising are amortized over the period during which the benefits of the mailings are expected, up to two months following the mailing date. The effect of this accounting change was to increase fiscal 1995 earnings before income taxes, net income, and earnings per share by $412,000, $289,000, and $0.02, respectively. At June 30, 1996, $333,000 of advertising was included in other current assets as compared with $412,000 at June 30, 1995. Advertising expense was $7,343,000, $9,519,000, and $7,470,000 for the fiscal years ended June 30, 1996, 1995, and 1994, respectively. NET (LOSS) EARNINGS PER SHARE Net (loss) earnings per common share is based on the weighted average number of common and dilutive common equivalent shares outstanding. Common stock equivalents included in the calculation reflect the dilutive effect of outstanding stock options and warrants. During fiscal year 1996, common equivalent shares were excluded from the calculation because they are anti- dilutive. LIQUIDITY During 1996, the Company incurred losses and special charges aggregating $10.5 million and, as of June 30, 1996, had an accumulated deficit in stockholders' equity totaling $1.9 million. During this period, management has taken several steps to improve cash flows and return the Company to profitability. These included securing a new $10 million working capital line of credit, reducing operating expenses through workforce reductions and consolidating international sales offices, transitioning out of certain products, and developing new products to be released during early fiscal 1997. Management believes these changes will allow the Company to meet its obligations and return to profitability in 1997. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss should be recognized when the estimated future undiscounted cash flows from the asset are less than the carrying value of the asset. Assets to be disposed of should be reported at the lower of their carrying amount or fair value less cost to sell. SFAS No. 121 is effective for financial statements for fiscal years beginning after December 15, 1995. Management believes that adoption of this statement will not have a material impact on results of operations or financial position. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. The Company will adopt the disclosure provisions of SFAS No. 123 in fiscal year 1997. RECLASSIFICATIONS Certain reclassifications of previously reported amounts have been made to conform to the current year's presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported. 2. RESTRUCTURING AND OTHER SPECIAL CHARGES In May 1996, the Company incurred pre-tax charges of $9.9 million, consisting of restructuring and other special charges of $4.4 million and a special charge to cost of sales of $5.5 million related to its revised business plan and technical problems in one of its products. The revised business plan is intended to complete the Company's transition from a systems integrator to a manufacturer of proprietary printing engines which utilize the Company's consumable products. Included in the $4.4 million charge is $3.3 million for the revaluation of intellectual property tied to certain technologies and contract rights associated with the transition from a systems integrator to a manufacturer of printing engines. The charge also includes a $1.1 million provision for severance related to workforce reductions, expected losses on the sale of tangible assets and expenses under non-cancelable leases as a result of consolidating foreign sales offices and certain domestic operations. At June 30, 1996, approximately $1.3 million of the total $4.4 million charge remains in current liabilities. Included in the $5.5 million charge to cost of sales is $4.2 million in inventory revaluation associated with the transition from certain product lines developed as a systems integrator. In addition, the charge includes $1.3 million to cover replacement costs, product returns, and inventory revaluation related to the Company's older model PressMate product. This product has been replaced with the PressMate-FS model, which is believed to have solved the technical problems of the earlier model. 3. INVENTORY Inventory consists of the following:
June 30, 1996 June 30, 1995 ------------- ------------- Raw materials Purchased printer engines $ 469,870 $ 796,940 Completed subassemblies 3,053,985 5,419,774 Raw materials 5,994,178 9,397,341 Work in process 436,753 987,009 Finished goods 3,569,528 5,008,423 ----------- ----------- $13,524,314 $21,609,487 =========== ===========
F-8 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
Life Used for Depreciation June 30, 1996 June 30, 1995 ---------------- ------------- ------------- Computer equipment 2 - 5 years $10,358,217 $10,088,455 Trade show computer equipment 2 - 5 years 600,475 424,410 Capitalized tooling 3 years 234,206 202,913 Furniture and fixtures 5 - 7 years 4,245,907 4,241,649 Purchased software 3 years 961,970 764,351 Vehicles 5 years 420,706 505,490 Leasehold improvements 5 years 2,577,253 2,282,348 ----------- ----------- 19,398,734 18,509,616 Accumulated depreciation and amortization 14,299,174 12,185,867 ----------- ----------- $ 5,099,560 $ 6,323,749 =========== ===========
Property and equipment includes assets under capital leases as follows:
June 30, 1996 June 30, 1995 ------------- ------------- Computer equipment and purchased software $ 212,085 $ 31,810 Furniture and fixtures 740,319 1,301,995 Vehicles 10,499 49,109 ---------- ---------- 962,903 1,382,914 Accumulated amortization 248,368 558,905 ---------- ---------- $ 714,535 $ 824,009 ========== ========== 5. NOTES PAYABLE Notes payable consists of the following: June 30, 1996 June 30, 1995 ------------- ------------- Note payable under revolving line of credit (1) $3,529,459 $4,961,468 Note payable under revolving line of credit (2) 972,977 1,459,947 Promissory note from trading partner (3) 859,516 Other 19,085 41,486 ---------- ---------- $5,381,037 $6,462,901 ========== ========== Weighted average interest rate 10.15% 9.78% ========== ==========
(1) On January 17, 1996, LMC replaced the operating line of credit that it had maintained with a commercial bank with a new credit agreement with a commercial finance company. The new agreement allows LMC to borrow up to $10,000,000 based on availability equal to 60% of the net eligible accounts receivable and 25% of the net eligible inventory. Borrowings are secured by inventory, accounts receivable, and general intangibles and bear interest at a defined bank reference rate (prime) plus 2.0% (10.25% at June 30, 1996) with a 0.5% unused line fee. At June 30, 1996, approximately $1,407,000 of eligible financing was unused under this credit line. Availability under this credit line fluctuates daily. The agreement expires January 17, 1999 and requires the borrower to meet various financial covenants involving capital expenditures, additions to capitalized software and intellectual property, minimum debt service coverage ratio, and maintenance of a minimum net worth. The agreement also requires LMC to meet various non-financial covenants. F-9 (2) LME, a subsidiary of the Company's LMC subsidiary, maintains a receivables financing arrangement, which has no stated expiration, with a commercial finance company whereby LME may borrow up to 70% of eligible accounts receivable, with a maximum advance of $2,500,000. At June 30, 1996, approximately $1,149,345 was unused under this credit line. Borrowings are due in Dutch Guilders on demand and bear interest at the Promissory Note Discount Rate of the Dutch Central Bank plus 2.5% (10.25% at June 30, 1996). Borrowings in U.S. Dollars are due on demand and bear interest at a rate that fluctuates with the market (no U.S. Dollars were borrowed at June 30, 1996). (3) On November 29, 1995, LaserMaster Corporation converted $859,516 of accounts payable into a promissory note. The note is payable to a trading partner that supplies inventory to LMC, bears interest at 10% and was originally due on May 29, 1996. LaserMaster Corporation and the trading partner are currently discussing new payment terms on this note and on subsequent accounts payable balances due this supplier. 6. NOTE PAYABLE - RELATED PARTY During September and October 1995, LMC borrowed $1,765,000 under a demand note from TimeMasters, Inc. (TMI), a corporation controlled by the Company's Chief Executive Officer. The note bears interest at prime rate plus 1.75% (10% at June 30, 1996). In January 1996, LMC obtained a new line of credit with a commercial finance company that required the indebtedness to TMI be subordinated to the line of credit and not be repaid unless certain financial covenants were achieved. In return for such subordination and for the significant restrictions on repayment, the Company issued to TMI a warrant to purchase 277,953 shares of common stock and the right to convert up to $1,000,000 of the indebtedness into common stock in the event either LMC is unable to repay such indebtedness before January 17, 1998 or an event of default occurs. The warrant is exercisable at $6.35 per share through January 17, 2002. The conversion right is equal to the lesser of $5.875 per share or the fair market value of the common stock on the date of the exercise. 7. LONG-TERM DEBT Long-term debt consists of the following:
June 30, 1996 June 30, 1995 ------------- ------------- Note payable to a finance company, payments, including principal and interest at 8.53%, of $59,000 due monthly through August 1997, secured by certain domestic property and equipment $ 789,260 $1,405,777 Notes payable to a finance company, with monthly payments aggregating $24,504, including interest at the "One-Month" Commercial Paper rate plus 4.0% (9.40% at June 30, 1996), expiring January 1998 through May 1999, secured by certain domestic property and equipment 527,151 412,021 Note payable to bank, with interest at prime plus .5% (8.75% at June 30, 1996), final payment due December 1997 8,405 13,374 Obligations under capital leases for equipment, payable in monthly installments (Note 9) 743,546 777,291 ---------- ------------- 2,068,362 2,608,463 Less current maturities 1,248,267 1,009,917 ---------- ------------- $ 820,095 $1,598,546 ========== =============
F-10 Maturities of long-term debt at June 30, 1996, excluding capital lease obligations, are as follows:
Year ending June 30: 1997 $ 936,695 1998 327,824 1999 60,297 ---------- $1,324,816 ==========
8. CONVERTIBLE SUBORDINATED DEBENTURES In February 1994, the Company notified the holders of its subordinated debentures that the Company was exercising its option to redeem the remaining debentures, which had a face value of $5,528,000. The debentures, originally issued in 1990 and bearing interest at 10 percent, were due in November 1997. By March 21, 1994, all of the holders had elected to convert their debentures into common stock of the Company. The Company issued 766,439 additional shares as a result of the conversion. The Company incurred a total of $1,099,030 of costs to complete the original $10,000,000 offering. The costs were being amortized on a straight-line basis over the life of the debentures. A summary of the transactions associated with the debentures follows:
Year Ended June 30, 1994 ------------------------ Debentures converted $5,528,000 Unamortized offering costs charged to additional paid-in capital $ 306,334 Amortization of offering costs included in interest expense $ 58,583 Shares of common stock issued as a result of conversion 766,439
9. COMMITMENTS LEASES The Company leases certain equipment under leases which meet the criteria for capital lease classification. These agreements have been capitalized at the lesser of fair market value of the equipment or the present value of the future minimum lease payments. The Company also leases other equipment under operating leases. In addition, the Company leases its office and warehouse facilities under operating leases which expire at various dates through December 2010. The leases require payments of property taxes, insurance, and maintenance costs in addition to basic rent and contain renewal options for periods ranging from one to three years. Certain of the facilities leases are under a 15-year commercial lease with Grandchildren's Realty Alternative Management Program I ("GRAMPI"), a Minnesota limited partnership controlled by the Company's Chief Executive Officer for space it currently occupies in Shady View I & II. The Shady View space is approximately 50% of all space leased by the Company. GRAMPI purchased the real estate in April 1995, after the Company's Board of Directors declined to do so. The Company's Board of Directors retained services of an outside commercial real estate brokerage firm and outside legal counsel to negotiate the lease with the landlord's outside legal counsel. Management and the outside brokerage firm and legal counsel believe that the lease is at market rate. F-11 Rent expense under all equipment and facilities operating leases (including property taxes, insurance, and maintenance costs) was as follows:
Year Ended June 30 -------------------------------------------- 1996 1995 1994 ---------- ----------- ---------- GRAMPI $1,355,000 198,000/(a)/ Other parties 1,211,000 1,996,000 $1,882,000 ---------- ----------- ---------- Total $2,566,000 $ 2,194,000 $1,882,000 ========== =========== ==========
/(a)/Two months rent following April 1995 purchase. Future minimum lease payments under capital and operating leases in effect at June 30, 1996 are as follows:
Operating Leases Capital ------------------------- Year ending June 30: Leases GRAMPI Other -------- ----------- ---------- 1997 $376,650 $ 963,000 $ 743,000 1998 336,422 963,000 532,000 1999 126,211 1,086,000 401,000 2000 3,821 1,208,000 373,000 2001 1,209,000 30,000 Thereafter (2002 through 2010) 12,376,000 -------- ----------- ---------- 843,104 $17,805,000 $2,079,000 =========== ========== Less interest 99,558 -------- Present value of net minimum lease payments $743,546 ========
Future minimum operating lease payments are net of $211,200 of sublease rentals to be received by the Company due ratably through January 1997. EMPLOYMENT AGREEMENTS The Company has employment agreements with nine of its officers and executives which renew automatically on an annual basis. Three of the agreements provide continuation payments equal to 36 months pay upon termination of employment in certain circumstances, including change of control. The other six agreements provide for 12 months notice of termination, other than for cause, or payment in lieu of notice. Three of the agreements also provide for acceleration of option vesting in the event of a change in control or termination without cause. As of June 30, 1996, minimum annual salary levels set for the nine individuals was, in aggregate, $1,670,000. EMPLOYEE BENEFIT PLAN The Company has a qualified defined contribution 401(k) plan covering substantially all employees. The plan offers an employee savings feature and discretionary Company matching contributions. There were no employer contributions to the plan for the years ended June 30, 1996, 1995, and 1994. OTHER At June 30, 1996, the Company had outstanding letters of credit totaling $300,000, all of which are secured by property and equipment. F-12 10. STOCK OPTIONS AND WARRANTS During fiscal 1991, the stockholders amended and restated three stock option plans as the 1990 Restated Stock Option Plan. Under the plan, incentive stock options and non-statutory stock options may be granted to key employees, directors, and consultants of the Company at exercise prices not less than 100 percent of the fair market value of the common stock at the date of grant and 110 percent for incentive stock options granted to individuals owning 10 percent or more of the Company's common stock. The total number of shares authorized under the plan is 3,513,309. The plan is administered by a Stock Option Committee appointed by the Board of Directors. The committee establishes all terms and conditions of each grant, except that, in the case of incentive options, the term may not exceed 10 years. On May 23, 1996 the stockholders approved the adoption of the "LaserMaster Technologies, Inc. 1996 Stock Incentive Plan" (the 1996 Plan). The aggregate number of shares of the Company's common stock which may be issued pursuant to the 1996 Plan is 1,500,000. Terms and conditions of the 1996 Plan are similar to those of the 1990 Restated Stock Option Plan. Warrant activity and activity under the plan is summarized as follows:
Average Average Warrants Warrant Price Options Option Price Outstanding Per Share Outstanding Per Share ------------ ------------- ----------- ------------ Balance, June 30, 1993 2,351,179 $ 2.08 Granted 15,000 $ 5.50 324,000 6.09 Exercised (428,321) 1.34 Forfeited (151,289) 3.19 ------------ ----------- Balance, June 30, 1994 15,000 5.50 2,095,569 2.76 Granted 544,000 6.04 Exercised (230,466) 1.81 Forfeited (268,417) 5.06 ------------ ----------- Balance, June 30, 1995 15,000 5.50 2,140,686 3.38 Granted 277,953 6.35 1,322,000 4.29 Exercised (249,752) 2.32 Forfeited (449,824) 4.18 Repriced* (1.23) Balance, June 30, 1996 292,953 $ 6.31 2,763,110 $ 3.54 ============ =========== Exercisable, June 30, 1996 292,953 722,339 ============ ===========
*The Company's Board of Directors approved the repricing of 249,250 non- statutory stock options to the closing Nasdaq price on July 3, 1995 ($5.40 per share). These options had original exercise prices ranging from $5.63 to $8.50 per share with an average exercise price of $6.75 per share. The Company's Board of Directors approved the repricing of 210,000 non- statutory stock options to the closing Nasdaq price on April 23, 1996 ($4.00 per share). These options had original exercise prices ranging from $5.00 to $5.40 per share with an average exercise price of $5.09 per share. F-13 11. INCOME TAXES The benefit (provision) for income taxes consists of the following:
Year Ended June 30, -------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------ Current: Federal $ 835,000 $ (1,626,000) $ (2,349,000) State (6,000) (69,000) (118,000) ------------- ------------- ------------- 829,000 (1,695,000) (2,467,000) Deferred, primarily federal 4,318,000 1,606,000 (927,000) ------------- ------------- ------------ $ 5,147,000 $ (89,000) $ (3,394,000) ============= ============= ============
A reconciliation of the expected federal income tax benefit (provision) at the statutory rates of 35% with the benefit (provision) for income taxes is as follows:
Year Ended June 30, -------------------------------------------------- 1996 1995 1994 ------------ ------------- ------------ Tax benefit (provision) computed at statutory rates $5,463,000 $(103,000) $(3,520,000) State income tax, net of federal benefit 283,000 (6,000) 201,000) Graduated tax bracket benefit (provision) (156,000) 5,000 101,000 Increase in valuation allowance (821,000) Research and development activities 48,000 Foreign Sales Corporation 218,000 Other 378,000 15,000 (40,000) ------------ ------------- ------------ $ 5,147,000 $ (89,000) $ (3,394,000) ============ ============= ============
Under SFAS No. 109, deferred tax assets and liabilities are classified as current and noncurrent on the basis of the classification of the related asset or liability for financial reporting. Deferred taxes are recorded for temporary differences between the bases of assets and liabilities for financial reporting purposes and tax purposes. Temporary differences comprising the net deferred taxes shown on the consolidated balance sheets are as follows:
June 30, 1996 June 30, 1995 --------------------------------------- ------------- Assets Liabilities Total Total ------------ ------------ ----------- ------------- Allowance for doubtful accounts and sales returns $ 773,000 $ 773,000 $ 718,000 Inventory costs 2,383,000 2,383,000 1,831,000 Accrued vacation 228,000 228,000 267,000 Other 281,000 $ (361,000) (80,000) 52,000 ----------- ----------- ----------- ----------- Current 3,665,000 (361,000) 3,304,000 2,868,000 Research and development costs (1,411,000) (1,411,000) (1,747,000) Property and equipment basis 343,000 343,000 104,000 Net operating loss carryforwards 2,646,000 2,646,000 Research and development credit carryforwards 1,775,000 1,775,000 Alternative minimum tax credits 225,000 225,000 181,000 Other 189,000 (400,000) (211,000) 126,000 ----------- ----------- ----------- ----------- Noncurrent 5,178,000 (1,811,000) 3,367,000 (1,336,000) ----------- ----------- ----------- ----------- Gross 8,843,000 (2,172,000) 6,671,000 1,532,000 Valuation allowance (821,000) (821,000) ----------- ----------- Net $ 8,022,000 $(2,172,000) $ 5,850,000 $ 1,532,000 =========== =========== =========== ===========
F-14 The valuation allowance for deferred tax assets as of June 30, 1996 was $821,000 and is primarily related to the uncertainty of realizing state net operating loss carryforwards. The net change in the total valuation allowance for the year ended June 30, 1996 was an increase of $821,000. At June 30, 1996, the Company has net operating loss carryforwards for federal income tax purposes of approximately $7 million which are available to offset future taxable income, if any, through 2011. The Company also has alternative minimum tax credit carryforwards of approximately $225,000 available to reduce future federal income taxes, if any, over an indefinite period and research and development credit carryforwards of approximately $1.3 million available to reduce future federal income tax, if any, through 2011. The Company recognized income tax benefits of $226,000, $1,535,000, and $861,000 in 1996, 1995, and 1994, respectively, pertaining to the exercise of stock options, which are reflected in additional paid-in capital. 12. RELATED PARTY TRANSACTIONS The Company is involved in various transactions with TimeMasters, Inc., a corporation controlled by the Company's Chief Executive Officer, as follows:
June 30, 1996 June 30, 1995 June 30, 1994 ------------- ------------- ------------- Note Payable (Note 6) $1,765,000 Accrued interest 14,507 Interest expense 139,398 Equipment purchases (a) 47,853 $211,362 Rent expense (Note 9) 1,355,000 198,000 Operating expenses (b) 30,788 63,128 $15,200 Accounts payable 35,845 65,878
(a) The Company has currently installed a campus-wide TimeMasters, Inc. wireless voice system in its Eden Prairie facility. There are no monthly call operating charges for unlimited use of that system. The system hardware was acquired in 1995 for $211,362 based on competitive proposals for two other comparable systems. In 1996, the Company acquired an additional $47,853 of hardware. (b) Under a Use Indemnification Agreement and certain related Board of Director's actions, the Company has the right to sponsor business and business-related occasions at facilities owned by Masters Trust I and/or Melvin L. Masters and/or TimeMasters, Inc. For those occasions, the Company indemnifies the owners against loss or damage, reimburses out-of-pocket and operating expenses, and pays a facility charge based on what management believes are market rates. F-15 13. INTERNATIONAL OPERATIONS Financial information by geographic location is as follows:
Year Ended June 30, ------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ North America and other $ 60,701,808 $ 84,181,438 $ 77,296,161 Europe 19,655,566 23,021,944 17,666,149 Japan, Asia, Pacific 13,234,670 12,235,337 10,887,000 ------------ ------------ ------------ Total sales $ 93,592,044 $119,438,719 $105,849,310 ============ ============ ============ Operating (loss) profit: North America and other $(17,227,577) $ (1,963,763) $ 8,504,516 Europe (106,343) 303,028 (302,820) Japan, Asia, Pacific 3,548,196 3,388,586 3,016,000 ------------ ------------ ------------ (13,785,724) 1,727,851 11,217,696 Interest expense and other (1,822,810) (1,432,377) (1,160,060) ------------ ------------ ------------ (Loss) earnings before income taxes $(15,608,534) $ 295,474 $ 10,057,636 ============ ============ ============ Assets: North America $ 38,383,859 $ 49,641,247 $ 39,118,472 Europe 4,828,561 7,901,241 6,029,118 Japan, Asia, Pacific 3,332,544 1,618,784 2,253,645 ------------ ------------ ------------ Total assets $ 46,544,964 $ 59,161,272 $ 47,401,235 ============ ============ ============
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING ACTIVITIES The Company paid cash for the following items:
Year Ended June 30, -------------------------------------------------- 1996 1995 1994 -------------------- ------------- ------------- Interest paid $2,001,050 $1,243,051 $1,175,794 Income tax (received) paid (452,451) 380,911 1,260,846
Financing transactions not affecting cash during the years ended June 30, 1996, 1995, and 1994 were: Accounts payable totaling $859,516 were converted to a note payable during the year ended June 30, 1996 (Note 5). Capital lease obligations of $228,374, $599,236, and $195,136 were incurred during the years ended June 30, 1996, 1995, and 1994, respectively. Debentures totaling $5,528,000 were converted into 766,439 shares of common stock during the year ended June 30, 1994. Upon conversion, a pro-rata allocation of costs associated with the original issuance of debentures reduced additional paid-in capital by $306,334 during the year ended June 30, 1994. F-16 15. LITIGATION In October 1995, a shareholder of the Company (Becker) filed an action against the Company and four of its officers and directors alleging violations of the Securities and Exchange Act of 1934. In December 1995, similar claims filed by other shareholders were consolidated into the Becker claim as a class action to include all purchasers of the Company's stock during the period of December 3, 1993 through December 8, 1994. In February 1996, one of the directors named in the suit was dismissed from the case without prejudice. The basic allegation is that the Company and the named defendants knew of material, negative, non-public information and withheld such information from the market so that they could personally benefit by selling shares of common stock at an inflated price. The case is at a very early stage, and the size of the plaintiffs' damage claim has not yet been articulated. The Company believes the action is without merit and is vigorously defending its position. Whether the case is disposed of by settlement or by court adjudication, it is anticipated that a substantial portion of any payment obligation would be covered by the Company's Directors and Officers liability insurance coverage. However, if insurance coverage is not adequate or if this matter is not disposed of with the insurance carrier's assistance and the plaintiffs obtain a verdict in their favor, this litigation could have a material adverse effect on the Company. In October 1995, LMC filed suit against Sentinel Imaging, a division of Sentinel Business Systems, Inc. The complaint alleges, among other things, patent infringement, trademark infringement, and other violations relating to the Company's Big Color product line. In response, Sentinel Imaging has counterclaimed for false advertising, patent misuse, and unfair competition by LaserMaster. If the court were to find LMC's claims were without merit and endorse the claims made by Sentinel, the outcome of these proceedings could have a material adverse effect on the Company. One of LMC's suppliers claims that LMC is in default on a $2.6 million trade payment obligation under the terms of a credit agreement. This obligation is included in current liabilities at June 30, 1996. LMC claims that at least part of the delay in payment is due to quality problems with the products purchased from that supplier. The Company is currently negotiating a settlement which contemplates converting the trade debt to convertible subordinated debentures. If the negotiations break down and the supplier initiates legal action to collect, the Company believes that it would have several meritorious counter-claims. However, there can be no assurance that the supplier wouldn't ultimately succeed in such a claim. If the claim does not settle and if the supplier is able to obtain a judgement in its favor, this claim could have a material adverse effect on the Company. In addition, in the ordinary course of its business the Company experiences various types of claims which sometimes result in litigation or other legal proceedings. The Company does not anticipate that any of these proceedings will have a material adverse effect on the Company. 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended ------------------------------------------------ Fiscal Sept. 30 Dec. 31 Mar. 31 June 30 Year --------- ------------- -------- ------------ -------------- 1996: Net sales $21,266 $25,340 $23,227 $23,759 $ 93,592 Gross profit 8,539 9,898 7,426 3,350/(a)/ 29,213/(a)/ Net earnings (loss) (921) 79 (2,230) (7,390)/(b)/ (10,462)/(b)/ Net earnings (loss) per share (0.08) 0.01 (0.18) (.65) (.93) 1995: Net sales $30,263 $28,484 $30,979 $29,713 $ 119,439 Gross profit 13,178 11,851 11,511 10,041 46,581 Net earnings (loss) 1,499 54 (289) (1,058) 206 Net earnings (loss) per share 0.12 0.00 (0.02) (0.09) 0.02
(a) Includes a special charge to cost of sales of $5.5 million related to the Company's revised business plan and technical problems in one of its products. (b) Includes pre-tax restructuring and other special charges of $4.4 million and a special charge to cost of sales of $5.5 million related to the Company's revised business plan and technical problems in one of its products. F-17 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY) CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------- June 30, June 30, ASSETS 1996 1995 ---------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 33,932 $ 71,484 Accounts receivable 21,932 4,010 Receivable from subsidiary 4,648,498 10,173,716 Income tax receivable 400,781 Other current assets 60,030 115,248 ------------ ----------- TOTAL CURRENT ASSETS 5,165,173 10,364,458 PROPERTY AND EQUIPMENT, NET 805,965 1,003,734 INVESTMENT IN SUBSIDIARIES 10,563,097 14,870,493 ------------ ----------- $ 16,534,235 $26,238,685 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 41,486 Accounts payable $ 652,005 500,790 Accrued payroll 182,559 151,841 Accrued expenses 31,823 36,051 Income taxes payable 201,768 Current maturities of long-term debt 10,691 4,943 ----------- ----------- TOTAL CURRENT LIABILITIES 877,078 936,879 LONG-TERM DEBT, less current maturities 19,217 8,431 STOCKHOLDERS' EQUITY: Common stock 114,261 111,764 Additional paid-in capital 17,430,555 16,626,953 Retained earnings (accumulated deficit) (1,906,876) 8,554,658 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 15,637,940 25,293,375 ----------- ----------- $16,534,235 $26,238,685 =========== ===========
See notes to condensed financial information of registrant on page F-20. F-18 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I (Continued) CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY) STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------- Years ended June 30, 1996 1995 1994 ------------ ---------- ---------- REVENUES (management fees from subsidiaries) $ 4,200,000 $4,200,000 $4,200,000 OPERATING EXPENSES 4,653,138 4,547,489 4,284,055 ------------ ---------- ---------- (LOSS) BEFORE INCOME TAXES AND EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES (453,138) (347,489) (84,055) EQUITY IN (LOSS) EARNINGS OF SUBSIDIARIES (10,157,396) 449,963 6,719,691 INCOME TAX BENEFIT 149,000 104,000 28,000 ------------ ---------- ---------- NET (LOSS) EARNINGS (10,461,534) 206,474 6,663,636 RETAINED EARNINGS AT BEGINNING OF YEAR 8,554,658 8,348,184 1,684,548 ------------ ---------- ---------- RETAINED EARNINGS (ACCUMULATED DEFICIT) AT END OF YEAR $ (1,906,876) $8,554,658 $8,348,184 ============ ========== ==========
See notes to condensed financial information of registrant on page F-20. F-19 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule I (Continued) CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30, 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636 Equity in loss (earnings) of subsidiaries 10,157,396 (449,963) (6,719,691) Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities: Depreciation and amortization 368,828 504,519 393,563 Amortization of deferred financing costs 58,582 Stock option tax benefit 226,000 1,535,000 861,000 Loss (gain) on sale of property and equipment 402 (186) (89) Net change in operating current assets and liabilities (712,331) (1,843,912) (1,241,340) ------------ ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (421,239) (48,068) 15,661 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (146,461) (366,221) (738,789) Proceeds from sale of property and equipment 2,629 5,690 ------------ ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (146,461) (363,592) (733,099) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 580,099 413,210 575,273 Payments on long-term debt (8,466) (4,571) (41,909) Net (payments) borrowing under short-term debt (41,485) 7,916 16,954 Proceeds from long term debt 21,000 ------------ ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 530,148 416,555 571,318 ------------ ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (37,552) 4,895 (146,120) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 71,484 66,589 212,709 ------------ ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,932 $ 71,484 $ 66,589 ============ =========== ===========
NOTES: See consolidated financial statements for details of and changes in stockholders' equity. See Note 8 to consolidated financial statements for information regarding the convertible subordinated debentures. Capital lease obligations of $25,000 were incurred during the year ended June 30, 1996. No capital lease obligations were incurred during the years ended June 30, 1995 and 1994, respectively. During the year ended June 30, 1994, the Company exercised its option to redeem the remaining Debentures which had a face value of $5,528,000. These Debentures were converted into 766,439 shares of common stock. Upon conversion, all remaining costs associated with the original issuance of Debentures reduced additional paid-in capital by $306,334 during the year ended June 30, 1994. No cash dividends have been paid to LaserMaster Technologies, Inc. by the subsidiaries. F-20 LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Schedule II
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994 - ----------------------------------------------------------------------------------------------------------------- Balance Charged Balance beginning to costs Accounts at of and written end of Description period expenses off period - ----------- ---------- ---------- ---------- ---------- 1996: Allowance for doubtful accounts and sales returns $2,051,485 $1,730,491/(a)/ $1,306,497 $2,475,479 1995: Allowance for doubtful accounts and sales returns $1,890,000 $ 636,207 $ 474,722 $2,051,485 1994: Allowance for doubtful accounts and sales returns $1,945,000 $ 744,930 $ 799,930 $1,890,000
/(a)/ Includes special charge of $1 million to cover product returns related to the Company's older model PressMate product. F-21 EX-10.1 2 COMMON STOCK PURCHASE AGREEMENT Exhibit 10.1 ================================================================================ LASERMASTER TECHNOLOGIES, INC. -------------------- COMMON STOCK PURCHASE AGREEMENT -------------------- Dated September 15, 1996 Shares of Common Stock ($.01 Par Value) ================================================================================ -1- LASERMASTER TECHNOLOGIES, INC. COMMON STOCK PURCHASE AGREEMENT AGREEMENT, made and entered into as of the 15th day of September, 1996, between LaserMaster Technologies, Inc., a Minnesota corporation (the "Company"), Sihl-Zurich Paper Mill on Sihl AG, a Swiss corporation ("Sihl"), and a business group (the "TimeMasters Group") consisting of TimeMasters, Inc., a Minnesota corporation wholly owned by Melvin L. Masters, Grandchildren's Realty Alternative Management Program I Limited Partnership and Grandchildren's Realty Alternative Management Program I #2 Limited Partnership, Minnesota limited partnerships for which TimeMasters, Inc. serves as general partner. Sihl and the TimeMasters Group are sometimes together referred to herein as the "Investors". For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Investors agree as follows: 1. AUTHORIZATION OF ISSUE OF SHARES. The Company has authorized (i) the issue and sale of up to 2,694,000 shares of its Common Stock, $.01 par value per share (the "Common Stock") and (ii) the issuance of Warrants to purchase up to 2,694,000 shares of its Common Stock to the Investors. 2. SALE AND PURCHASE PRICE. (a) Effective on the date hereof (the "Effective Date"), and subject to the terms and conditions herein set forth, Sihl shall purchase from the Company the number of shares (the "Sihl Shares") of Common Stock as is equal to $6 million divided by the purchase price (the "Purchase Price") for such Shares and the TimeMasters Group shall purchase from the Company the number of shares of Common Stock as is equal to $4 million divided by the Purchase Price (the "TimeMasters Shares" and together with the Sihl Shares, the "Shares"). The Purchase Price shall be equal to the last sale price of the Common Stock on the Nasdaq National Market on the date immediately preceding the date hereof; provided, however, that the Purchase Price shall not be more than $4.5375 nor less than $3.7125. Simultaneous with the purchase of Common Stock, the Company shall issue to each such Investor a Warrant in the form of the attached Exhibit A (the "Warrants") dated as of the date of such Closing, and without any additional consideration, to purchase one share of Common Stock (subject to appropriate adjustment in the event of stock splits, stock dividends or other reorganizations) at an exercise price equal to one-hundred and sixty percent (160%) of the Purchase Price for each Share purchased (the "Warrant Shares"). (b) Simultaneous with execution of this Agreement (i) Sihl shall purchase the Sihl Shares by delivering its promissory note in the form of the attached Exhibit B for $6 million ("Sihl Promissory Note") and the TimeMasters Group shall purchase the TimeMasters Shares by delivering its promissory notes in form of the attached Exhibit C and Exhibit D in the aggregate amount of $4 million (the "TimeMasters Promissory Notes" and together with the Sihl Promissory Note, the "Promissory Notes"), and (ii) the Company shall issue and deliver the Shares and Warrants to the Investors. The Investors shall each simultaneously (i) execute a stock pledge agreement in the form of Exhibit E (the "Stock Pledge Agreement") and (ii) in accordance with the Stock Pledge Agreements, deliver the Shares and Warrants to the Company, with associated stock powers executed in blank. The TimeMasters Group and the Company shall also simultaneously execute the Mortgage and Security Agreement and Fixture Financing Agreement in the form of the attached Exhibit F (the "Mortgage"). 3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company hereby represents and warrants to the Investors that: -2- (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business in all material respects as it is now being conducted and as it currently proposes to conduct it in the future. The Company has the requisite corporate power and authority to issue the Shares, the Warrants and the Warrant Shares and to otherwise perform its obligations under this Agreement. (b) The copies of the Articles of Incorporation, as amended (the "Articles of Incorporation") and bylaws of the Company which have been delivered to legal counsel for Sihl prior to the execution of this Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and Bylaws of the Company in effect as of the date of this Agreement. (c) The Company is duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. (d) The Company has delivered to Sihl and the TimeMasters Group copies of (i) its Form 10-K for the Year Ended June 30, 1995, which includes its audited statements of operations, cash flows, and changes in stockholders' equity for the three years ended June 30, 1995 and its balance sheets as of June 30, 1995 and 1994, (ii) its quarterly reports on Form 10-Q for the quarters ended September 30, 1995, December 31, 1995 and March 31, 1996, which contain its unaudited statements of operations for the quarterly and year to date periods then ended and for the prior year periods, unaudited statements of cash flow for the year to date and prior year comparative periods, and balance sheets as of quarter end, (iii) its 1995 annual report to shareholders, (iv) its proxy statement for its annual meeting held May 23, 1996, and (v) Company's audited financial statements for the year ended June 30, 1996. (e) The Shares, when issued and paid for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except for the encumbrances created by the Stock Pledge Agreements and restrictions on transfer under applicable securities laws. The Warrants are duly authorized, and when issued pursuant to the terms of this Agreement will be validly granted and outstanding, fully paid and free and clear of all pledges, liens, and encumbrances and restrictions, except for the encumbrances created by the Stock Pledge Agreements and restrictions on transfer under applicable securities laws. The Warrant Shares have been duly authorized and reserved for issuance and, when issued upon exercise of the Warrant, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except for the encumbrances created by the Stock Pledge Agreements and restrictions on transfer under applicable securities laws. (f) The authorized capital stock of the Company consists of 35,000,000 shares, 30,000,000 of which are shares of Common Stock, $.01 par value, and 5,000,000 of which are shares of preferred stock, undesignated as to terms and preferences. As of September 1, 1996, 11,458,634 shares of Common Stock were outstanding, 292,951 shares of Common Stock were reserved for issuance upon the exercise of outstanding warrants and 3,739,379 shares of Common Stock were reserved for issuance pursuant to the Stock Option Plans. No shares of Preferred Stock are outstanding. Neither the offer nor the issuance or sale of the Shares or the Warrants constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. No holder of any security of the Company is entitled to any preemptive or similar rights to purchase any securities of the Company from the Company. -3- (g) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action of the Company, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights or by general principles of equity. (h) The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, constitute a default under, result in a violation of, result in the creation of a right of termination or acceleration or any lien, security interest, charge or encumbrance upon any assets of the Company, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Article of Incorporation or Bylaws of the Company or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which the Company is bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which the Company is subject. (i) The Company is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or, except as contemplated herein, the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by the Company in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. (j) No person, firm or corporation has or will have, as a result of any act or omission by the Company, any right, interest or valid claim against any Investor or the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. 4. REPRESENTATIONS AND WARRANTIES BY THE INVESTORS. Each of the Investors, for itself and not for any other Investor, represents and warrants to the Company that: (a) It is purchasing the Shares for investment for its own account and not with the view to, or for resale in connection with, any distribution of the Shares in violation of any applicable securities law. Each Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof and that the reliance of the Company and others upon this exemption is predicated in part upon this representation by the Investors. Each Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. (b) Each Investor understands that an exemption from such registration is not presently available pursuant to Rule 144 promulgated under the Securities Act by the Commission. Each Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. (c) Each Investor is an "accredited investor" for purposes of Regulation D promulgated under the Securities Act and, either alone or with such Investor's representative, has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment in the Shares and Warrants and bear the economic consequences thereof. Each Investor has relied upon such Investors' own independent investigation and, to the extent believed -4- appropriate, such Investors' own professional, tax and other advisors, and has not relied upon any representation or warranty from the Company, or any of their respective officers, directors, employees agents, affiliates or representatives, with respect to the value of the Shares. Each of the Investors has evaluated the merits and risks of an investment in the Shares and has determined that such shares are a suitable investment for the Investor in light of such Investor's overall financial condition and prospects. Each of the Investors has been advised, and is aware, that the market prices of shares of stock of publicly traded companies fluctuate and that there can be no assurance as to the future performance of any given securities, including the Shares. Each of the Investors has been furnished with all publicly available information about the Company's assets, operations, and business activities which such Investor has requested and which such Investor considers necessary or relevant to enable such Investor to make a prudent decision about the purchase of the Shares and Warrants. (d) The execution, delivery and performance of this Agreement by each Investor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action of each Investor, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. This Agreement has been duly executed and delivered by each Investor and constitutes the valid and binding obligation of such Investor, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights or by general principles of equity. (e) The execution, delivery and performance of this Agreement by each Investor and the consummation by such Investor of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, constitute a default under, result in a violation of, result in the creation of a right of termination or acceleration or any lien, security interest, charge or encumbrance upon any assets of either Investor, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Article of Incorporation or Bylaws of such Investor or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which such Investor is bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which such Investor is subject. (f) The Investor is not required to submit any notice (other than reports under Section 16(a) or 13D of the Securities Act of 1934), report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by the Investor in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. (g) No person, firm or corporation has or will have, as a result of any act or omission by the Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Each Investor will indemnify, defend and hold the Company harmless against any and all liability (including without limitation, reasonable attorneys' fees and expenses) with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement as a result of any act or omission by the Investor. 5. COVENANTS OF THE COMPANY. So long as the Warrants shall remain outstanding and not fully exercised, the Company covenants and agrees, and solely with respect to section 5(f) Grandchildren's Realty Alternative Management Program I Limited Partnership and Grandchildren's Realty Alternative Management Program I #2 Limited Partnership (collectively "Grampi") covenant and agree as follows: -5- (a) The Company will maintain its corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. (b) The Company will keep books of record and account in which full, true and correct entries are made of all of its dealings, business and affairs, in accordance with GAAP consistently applied. The Company will employ certified public accountants of recognized national standing selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). (c) The Company will deliver to each Investor promptly upon transmission thereof, copies of all reports, notices, financial statements, proxy statements, registration statements and notifications filed by it with the Commission pursuant to any act administered by the Commission or furnished to shareholders of the Company or to any national securities exchange, except reports on Form D filed pursuant to Rule 503 under the Securities Act and registration statements relating to employee benefit plans. (d) The Company hereby grants to Sihl (but to no other Investor) the right of first refusal to purchase its Pro-Rata Share (as defined below) of all or any part of any New Securities (as defined in this Section 5(d)) that the Company may, from time to time, propose to sell and issue. Sihl's "Pro-Rata Share" shall be the ratio of the number of shares of Common Stock held by Sihl, as of the date of the Rights Notice (as defined below) to the total number of shares of Common Stock outstanding as of such date. The number of shares of Common Stock held by Sihl shall be deemed to include the aggregate of the number of shares of Common Stock held by Sihl (but shall not exceed the number of such shares constituting the Shares purchased by Sihl hereunder, plus any shares issued in any stock splits, stock dividends, recapitalization, reclassification and similar events with respect to such Shares or pursuant to exercise of the right of first refusal pursuant to this Section 5(d)) together with the number of shares of Common Stock issuable upon exercise of the Warrant (as if the Warrant had been exercised in full), and the number of shares of Common Stock outstanding shall be deemed to include the aggregate of (A) all Common Stock outstanding, (B) all Common Stock issuable upon exercise of all outstanding options or warrants to purchase Common Stock and (C) the conversion of all outstanding convertible securities and of all convertible securities issuable upon exercise of outstanding options or warrants to purchase convertible securities. "New Securities" shall mean any Common Stock or preferred shares of any kind of the Company, whether now or hereafter authorized, and rights, options, or warrants to purchase said Common Stock or preferred shares, and securities of any type whatsoever that are, or may become, convertible into said Common Stock or preferred shares; provided, however, that "New Securities" shall not include securities issued in any of the transactions set forth in Schedule I. If the Company proposes to issue New Securities, it shall give Sihl written notice (the "Rights Notice") of its intention, describing the New Securities, the price, and the general terms upon which the Company proposes to issue them. Sihl shall have ten (10) business days from the date of mailing of the Rights Notice to agree to purchase all or any part of its pro-rata share of such New Securities, for the price and upon the general terms specified in the Rights Notice by giving written notice to the Company setting forth the quantity of New Securities to be purchased. The rights of Sihl under this Section 5(d) shall terminate and be of no further force or effect on and after the date on which its "Pro-Rata Share" (as defined above but without the parenthetical limitation above as to the number of Shares purchased hereunder) is less than ten percent (10%). -6- (e) The Company will not repay, or allow its subsidiary LaserMaster Corporation to repay, the indebtedness represented by that certain Promissory Note to TimeMasters, Inc. dated January 17, 1996 (the "January Note") in original principal amount of $1,765,000 until payment in full of the TimeMasters Promissory Notes, except that the Company may, with the agreement of or at the direction of TimeMasters, offset the obligation under the January Note against the TimeMasters Promissory Notes. Sihl shall be deemed to be a third party beneficiary of this subsection (e). (f) The Company will, upon the occurrence of an event of default under the Mortgage or the TimeMasters Promissory Note attached hereto as Exhibit D (the "Mortgage Note"), diligently exercise its remedies under the Mortgage in a commercially reasonable manner, including, in the event the mortgagor is not actively proceeding with the sale of the property subject to the Mortgage, commencing foreclosure thereof, and will, in any event, commence foreclosure proceedings within 60 days after any notice of such event of default unless Sihl otherwise agrees in writing that such remedy shall be further delayed. The Company and GRAMPI acknowledge that the agreement of Sihl hereunder, and the timing of the payments of the Sihl Promissory Note, is conditional on the payment of the TimeMasters Promissory Notes. Accordingly, the Company and GRAMPI agree that Sihl may exercise the Company's rights under the Mortgage on behalf of the Company through the receivership described in Section 8(d). 6. REGISTRATION. (a) Definitions. As used in this Section 6, the following terms have the following meanings: (i) "Forms S-1, SB-1, S-2, SB-2 and S-3" shall mean the forms so designated, promulgated by the Commission for registration of securities under the Securities Act, and any forms succeeding to the functions of such forms, whether or not bearing the same designation. (ii) "Holder" shall mean Investor and any holder of Registrable Stock to whom the registration rights granted hereunder have been transferred in accordance with Section 6(j), provided that anyone who acquires any Registrable Stock in a distribution pursuant to a registration statement filed by the Company under the Securities Act shall not thereby be deemed to be a "Holder." (iii) "Register", "registered" and "registration" shall refer to a registration effected by filing a registration statement in compliance with the Securities Act and the declaration or ordering by the Commission of effectiveness of such registration statement. (iv) "Registrable Stock" shall mean the Shares, all shares of Common Stock issued or issuable upon exercise of the Warrants, and in each case held by a Holder, all shares of Common Stock issued by the Company in respect of such shares. Registrable Stock does not include any common stock currently held by the TimeMasters Group (including shares held by Melvin Masters and his affiliates and family members). (b) Required Registration. (i) If at any time until two years after the earlier to occur of the full exercise, or the termination, of the Warrants a Holder proposes to dispose of the then Registrable Stock (the "Initiating Holders"), and such disposition may not, in the opinion of such Initiating Holders, be effected in the public marketplace (as opposed to a private transaction under the Securities Act) at equally favorable net terms to the Initiating Holders without registration of such shares under the Securities Act, the Initiating Holders may request the Company in writing to effect such registration, stating the number of shares of Registrable Stock to be disposed of by such Initiating Holders and the intended method of disposition. Upon receipt of such request, the Company will give prompt written notice thereof to all other Holders, whereupon such other -7- Holders shall give written notice to the Company within 20 days after the date of the Company's notice (the "Notice Period") if they propose to dispose of any shares of Registrable Stock pursuant to such registration, stating the number of shares of Registrable Stock to be disposed of by such Holder(s) and the intended method of disposition. (ii) The Company will use its best efforts to effect promptly after the Notice Period the registration under the Securities Act of all shares of Registrable Stock specified in the requests of the Initiating Holders, and the requests of the other Holders, subject, however, to the limitations set forth in Section 6(d). (c) Registration Procedures. Whenever the Company is required by the provisions of Section 6(b) to use its best efforts to effect promptly the registration of shares of Registrable Stock, the Company will: (i) prepare and file with the Commission a registration statement with respect to such shares and use its best efforts to cause such registration statement to become and remain effective as provided herein; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the disposition of all shares covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition from time to time of the prospective seller or sellers of such shares, but for no longer than ninety (90) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1, SB-1, SB- 2 or S-2 and for no longer than one hundred fifty (150) days in the case of a registration statement on Form S-3; (iii) furnish to each prospective seller such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the shares owned by such seller; and (iv) use its best efforts to register or qualify the shares covered by such registration statement under such other securities or blue sky or other applicable laws of such jurisdictions within the United States as each prospective seller shall reasonably request, to enable such seller to consummate the public sale or other disposition in such jurisdictions of the shares owned by such seller; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not at the time so qualified. (d) Limitations on Required Registrations. (i) The TimeMasters Group (considered together with any Holder that acquires Registrable Stock therefrom and registration rights pursuant to Section 6(j)) shall have the right to require the Company to effect no more than five registrations pursuant to Section 6(b)) and Sihl (considered together with any Holder that acquires Registrable Stock therefrom and registration rights pursuant to Section 6(j)) shall have the right to require the Company to effect no more than five registrations pursuant to Section 6(j)). (ii) The Company shall not be required to effect a registration pursuant to Section 6(b) more frequently than once every six months. (iii) Whenever a requested registration is for an underwritten offering, only shares which are to be included in the underwriting may be included in the registration. Notwithstanding the provisions of Sections 6(b), if the underwriter determines that (A) marketing factors require a limitation of the total number of shares to be underwritten, or (B) the offering price per share would be reduced by the inclusion of the shares of the Company, then the number of shares to be included in the registration and underwriting shall first be allocated among all Holders who indicated to the Company their decision to distribute any of their Registrable Stock -8- through such underwriting, in proportion, as nearly as practicable, to the respective numbers of shares of Registrable Stock owned by such Holders at the time of filing the registration statement, and the remainder, if any, to the Company. No stock excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If the Company disapproves of any such underwriting, the Company may elect to withdraw therefrom by written notice to the Initiating Holders and the underwriter. The securities so withdrawn from such underwriting shall also be withdrawn from such registration. (iv) If at the time of any request to register Registrable Stock pursuant to Section 6(b), the Company is engaged, or has fixed plans to engage within 90 days of the time of the request, in a registered public offering as to which the Holders may include such Stock pursuant to Section 6(e) or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of 90 days from the effective date of such offering, or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once with respect to any request for registration. (e) Incidental Registration. If the Company at any time until two years after the earlier to occur of the full exercise, or the termination, of the Warrants proposes to register any of its securities under the Securities Act (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable), it will each such time give written notice to all Holders of its intention so to do. Upon the written request of a Holder or Holders (stating the number of shares of Registrable Stock to be disposed of by such Holder or Holders and the intended method of disposition) given within 30 days after receipt of any such notice, the Company will use its best efforts to cause all such shares of Registrable Stock intended to be disposed of, the Holders of which shall have requested registration thereof, to be included in such registration, subject, however, to the following limitations: (i) If any registration pursuant to Section 6(e) shall be underwritten in whole or in part, the Company may require that the Registrable Stock requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. (ii) If in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Selling Shareholders' Shares originally covered by a request for registration would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among the holders thereof requesting such registration (based upon the number of shares requested to be included by each such holder), other than holders of shares of Common Stock issued or issuable upon conversion of that certain Promissory Note dated January 17, 1996 between TimeMasters and the Company or pursuant to exercise of that certain Stock Purchase Warrant dated January 17, 1996 between TimeMasters and the Company. (iii) If, in connection with a registration initiated at the request of any security holder of the Company pursuant to a demand registration right granted to such security holder (the "Requesting Security Holder"), the Registrable Stock requested for inclusion pursuant to Section 6(e), together with all additional shares of all other shareholders that have requested inclusion of their shares (the Registrable Stock and all of the other shares requested for inclusion are herein together referred to as the "Other Selling Shareholders' Shares") pursuant to the incidental registration rights granted by the Company prior to the date hereof (including permitted transferees and assignees of such incidental registration rights), would reduce the number of shares to be offered by the Requesting Shareholder or interfere with the successful marketing of the shares of stock offered by the Requesting Shareholder, the number of Other -9- Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among the holders thereof requesting such registration (based upon the number of shares requested to be included by each such holder). (iv) Those Selling Shareholders' Shares or Other Selling Shareholders' Shares which are excluded from the underwritten public offering pursuant to this Section 6(e) shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. (f) Rule 144. The registration rights granted under Section 6 shall terminate as to any Holder or permissible transferees or assignees of such rights if such person would be permitted to sell all of the Registrable Stock held by him or it within one three-month period pursuant to Rule 144. (g) Cooperation by Prospective Sellers. (i) Each prospective seller of Registrable Stock, and each underwriter designated by each such seller, will furnish to the Company such information as the Company may reasonably require from such seller or underwriter in connection with the registration statement (and the prospectus included therein). (ii) The Holders holding shares included in the registration statement will suspend (until further notice) further sales of such shares after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus or, if the Company reasonably determines that correcting or updating the registration statement or prospectus would require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, during the time that such suspension is necessary so that the registration statement and prospectus will meet the requirements of the Securities Act. At the end of the period during which the Company is obligated to keep the registration statement current and effective as described in Section 6(b)(i)(and any extensions thereof required by the preceding sentence), the Holders holding shares included in the registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holders shall (after written request for such notice, describing the information required in the response) notify the Company of the number of shares registered which remain unsold promptly upon receipt of such notice from the Company. (h) Expenses of Registration. All expenses incurred in effecting any registration pursuant to this Section 6, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any audits incidental to or required by any such registration, shall be borne by the Company, except (a) that all underwriting discounts and commissions shall be borne by the Holders holding the securities registered pursuant to such registration, pro-rata according to the quantity of their securities so registered; and (b) the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 6(b) if the registration request is subsequently withdrawn at the request of the Initiating Holder, and not at the request of the Company or because of any other action by the Company, unless the Initiating Holder agrees to forfeit its right to one demand registration pursuant to Section 6(b) (in which case the Company shall bear such expenses). (i) Indemnification. (i) To the extent permitted by law, the Company will indemnify each Holder requesting or joining in a registration, each agent, officer and director of such Holders, each person controlling such Holder, and each underwriter and selling broker of the securities so registered (collectively, "Representatives" and collectively with each such Holder, agent, officer, director or person, "Indemnitees") against all claims, losses, damages and liabilities (or actions in -10- respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Indemnitee for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that the Company will not be liable to any Indemnitee in any such case to the extent that any such claim, loss, damage or liability is caused by any untrue statement or omission so made in strict conformity with written information furnished to the Company by an instrument duly executed by such Indemnitee and stated to be specifically for use therein and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement contained in this subsection 6(i) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld; and provided, further, that the foregoing shall not relieve the Company from liability for indemnity to an officer or director that furnishes information to the Company in his capacity as an officer or director. (ii) To the extent permitted by law, each Holder requesting or joining in a registration and each underwriter of the securities so registered will indemnify the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made; and will reimburse the Company and each other person indemnified pursuant to this paragraph (ii) for all legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that this paragraph (ii) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon and in strict conformity with written information (including, without limitation, written negative responses to inquiries) furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use in such prospectus, offering circular or other document (or related registration statement, notification or the like) or any amendment or supplement thereto and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; -11- provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement contained in this subsection 6(i)(ii) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, further, that the obligations of such Holders shall be limited to an amount equal to the proceeds to each such Holder of the Registrable Stock sold as contemplated herein, unless such claim, loss, damage, liability or action resulted from such Holder's fraudulent misconduct; and provided, further, that the foregoing shall not create right to indemnity from an officer or director that furnishes information to the Company in his capacity as an officer or director. (iii) Each party entitled to indemnification hereunder (the "indemnified party") shall give notice to the party required to provide indemnification (the "indemnifying party") promptly after such indemnified party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the indemnifying party (at its expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the indemnifying party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the indemnified party, and the indemnified party may participate in such defense at such party's expense, and provided, further, the omission by any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 6(i), except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give notice. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (j) Transfer of Registration Rights. One or more of the five demand registration rights granted to each Investor under Section 6(b) may be transferred but only to a transferee who shall acquire not less than 100,000 shares of Registrable Stock (as adjusted for Recapitalization Events) and the registration rights under Section 6(e) may not be transferred separate from the registration rights under section 6(b); provided, however, that the rights under section 6(e) shall apply to all members of the TimeMasters Group who acquire Registrable Stock. Any request for transfer of the Registrable Stock to which a transfer of registration rights pursuant to this Section 6(j) is intended to apply shall be accompanied by notice to the Company of the number of demand registration rights which the transferring party intends that the transferee acquire. Notwithstanding any provision of this Section 6, the registration rights granted to the Holders under this Section 6 may not be assigned to any person or entity which, in the Company's reasonable judgment, is a competitor of the Company. (k) Delay of Registration. The Holders shall have no right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 6. 7. RESTRICTION ON TRANSFER OF SHARES. (a) Restrictions. The Shares, the Warrant and the Warrant Shares are only transferable pursuant to (a) an offering registered under the Securities Act, (b) Rule 144 or Rule 144A or other exemption under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) and, with respect to the Warrant, the terms of the Warrant, any other legally available means of transfer. (b) Legend. Each certificate representing Shares or Warrant Shares shall be endorsed with the following legends: "The shares represented by this certificate may not be transferred -12- without (i) the opinion of counsel reasonably satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended, and all applicable state securities laws or (ii) such registration." 8. MISCELLANEOUS. (a) Waivers Amendments and Approvals. No amendment or waiver of any provision of this Agreement, shall in any event be effective against an Investor unless the same shall be in writing and signed by such Investor and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (b) Changes, Waiver, Etc. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing. (c) Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered if personally delivered, the next business day if sent by overnight courier or when receipt is acknowledged if mailed by first class mail, return receipt requested or if sent by facsimile, telecopy or other electronic transmission device. Notices, demands and communications will, unless another address is specified in writing, be sent to the address indicated below: Notices to the Company: with a copy to: - ----------------------- --------------- LaserMaster Technologies, Inc. Dorsey & Whitney LLP 7090 Shady Oak Road 220 South Sixth Street Eden Prairie, Minnesota 55344 Minneapolis, Minnesota 55402 Attention: General Counsel Attention: Thomas O. Martin, Esq. Telecopy: (612) 941-8687 Telecopy: (612) 340-8738 Notices to Sihl: with a copy to: - ---------------- --------------- Sihl-Zurich Paper Mill on Sihl AG Homburger Rechtsanwalte Giesshubelstrasse 15 Weinbergstrasse 56/58 CH-8045 Zurich GH-8006 Zurich Switzerland Switzerland Attention: Mr. Melk M. Lehner, Chairman Attention: Mr. Ueli Huber Telecopy: 011-41-1-205-48-35 Telecopy: 011-41-1-265-35-11 and: ---- Oppenheimer Wolff & Donnelly Plaza VII 45 South Seventh Street, Suite 3400 Minneapolis, Minnesota 55402-1609 Attention: Steven A. Wellvang, Esq. Telecopy: (612) 344-9376 Notices to the TimeMasters Group: - --------------------------------- TimeMasters, Inc. 6245 Beach Road Eden Prairie, MN 55344 Attention: Melvin Masters Telecopy: (612) 942-8911 -13- (d) Remedies. The parties agree that, in addition to, but not to the exclusion of any other available remedy, Sihl shall have the right to enforce the provisions of sections 5(d), 5(e) and 5(f) by applying for and obtaining specific performance or temporary and permanent restraining orders or injunctions from a court of competent jurisdiction. In addition, in the event that the Company fails to commence foreclosure proceedings in accordance with Section 5(d) within 60 days after notice of an event of default, the Company and GRAMPI agree that Sihl shall have the right, without notice and without giving bond and without regard to the solvency or insolvency of the Company or GRAMPI, or waste of the premises or adequacy of the security of the premises, to apply on behalf of the Company for the appointment of a receiver under any statute or law who shall have all the rights, powers and remedies as provided by such statute or law, including without limitation the rights of receiver pursuant to Minn. Stat. Section 576.01, as amended, and who shall from the date of his appointment through any period of redemption existing at law collect the rents, and all other income of any kind; manage the premises so as to prevent waste; and perform the terms, including any rights to foreclosure on behalf of the Company, of the Mortgage, and apply the rents, issues and profits to the payment of the expenses enumerated in Minn. Stat. Section 576.01, Subd. 2 in the priority mentioned therein and to all expenses for maintenance of the premises and to the costs and expenses of the receivership, including attorney's fees, to the repayment of the indebtedness secured by the first mortgage and then of the Mortgage Note and as further provided in any assignment of leases and rents executed by the Mortgagor to the Mortgagee whether contained in this Mortgage or in a separate instrument. GRAMPI does hereby irrevocably consent to such appointment. The Company further agrees that, in the event a receiver is appointed as provided in this subparagraph (d), the Company shall promptly grant such receiver a power of attorney to authorize the receiver and/or its legal counsel to foreclose on the Mortgage on behalf of the Company. (e) Survival of Representations and Warranties, Etc. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by Sihl or on their behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to this Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. (f) Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Purchased shares. (g) Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (h) Choice of Law. The laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. (i) Counterparts. This Agreement may be executed concurrently in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (j) Definition of Purchased Shares. For purposes of this Agreement the term "Purchased Shares" shall refer to and include (a) the Shares, (b) the Warrant Shares, (c) any shares of capital stock of the Company issued with respect to, or in exchange for, any of the foregoing in any corporate recapitalization or corporate restructuring and (d) all shares of the Company's capital stock which Sihl may purchase pursuant to their preemptive rights or rights of first refusal or otherwise. (k) Confidentiality. Sihl agrees that it shall not divulge, furnish or make accessible to anyone or use in any way any confidential or secret knowledge or information of the Company which Sihl has acquired or become acquainted with or will acquire or become acquainted with pursuant to the terms of this Agreement, except that Sihl may use such knowledge or information in furtherance of its interests as an investor in the Company. Sihl acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company and represents a substantial investment of time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause -14- irreparable harm to the Company. Sihl will refrain from any acts or omissions that would reduce the value of such knowledge or information to the Company. The foregoing obligations of confidentiality shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this agreement. (l) Entire Agreement. This Agreement and exhibits and schedules referenced herein contain the entire agreement between the parties with respect to the transactions contemplated hereby and thereby, and supersede all negotiations, agreements, representations, warranties, commitments, whether in writing or oral, prior to the date hereof. (m) Successors and Assigns. All of the terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided, however, that, except as otherwise provided herein, Sihl's rights and obligations under this Agreement may only be assigned to any entity under common control of Sihl. (n) Severability. In the event any provision of this Agreement or the application of any such provision to any party shall be held by a court of competent jurisdiction to be contrary to law, the remaining provisions of this Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Very truly yours, LASERMASTER TECHNOLOGIES, INC. By /s/ Robert Wenzel ----------------------------- Name: Robert Wenzel Title: Chief Operating Officer SIHL-ZURICH PAPER MILL ON SIHL AG By /s/ Melk Lehne ------------------------------ Its CEO --------------------------- TIMEMASTERS, INC. By /s/ Melvin Masters --------------------------------- Melvin Masters, Chief Executive Officer Grandchildren's Realty Alternative Management Program I Limited Partnership and Grandchildren's Realty Alternative Management Program I #2 Limited Partnership By TimeMasters, Inc., their General Partner By /s/ Melvin Masters -------------------------------------- Melvin Masters, Chief Executive Officer -15- EX-10.2 3 COMMON STOCK PURCHASE AGREEMENT EXHIBIT 10.2 ================================================================================ LASERMASTER TECHNOLOGIES, INC. --------------------- COMMON STOCK PURCHASE AGREEMENT --------------------- Dated September 25, 1996 Shares of Common Stock ($.01 Par Value) ================================================================================ -1- LASERMASTER TECHNOLOGIES, INC. COMMON STOCK PURCHASE AGREEMENT AGREEMENT, made and entered into as of the 25th day of September, 1996, between LaserMaster Technologies, Inc., a Minnesota corporation (the "Company") and General Electric Capital Corporation (the "Investor"). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Investor agree as follows: 1. AUTHORIZATION OF ISSUE OF SHARES. The Company has authorized (i) the issue and sale of up to 538,720 shares of its Common Stock, $.01 par value per share (the "Common Stock") and (ii) the issuance of Warrants to purchase up to 541,406 shares of its Common Stock to the Investor. 2. SALE AND PURCHASE PRICE. (a) Effective on the date hereof, and subject to the terms and conditions herein set forth, Investor shall purchase from the Company 410,256 shares (the "Shares") of Common Stock at a price of $4.875 per share for an aggregate purchase price of $1,999,998. Simultaneous with the purchase of the Shares, the Company shall issue to the Investor a Warrant in the form of the attached Exhibit A (the "Warrants") dated as of the date hereof, and without any additional consideration, to purchase 471,285 shares of Common Stock at an exercise price (subject to adjustment) of $6.79 per share. (b) Simultaneous with execution of this Agreement (i) Investor shall purchase the Shares by delivering its promissory note in the form of the attached Exhibit B for $1,999,998 ("Promissory Note"), and (ii) the Company shall issue and deliver the Shares and Warrants to the Investor. 3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company hereby represents and warrants to the Investor that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business in all material respects as it is now being conducted and as it currently proposes to conduct it in the future. The Company has the requisite corporate power and authority to issue the Shares, the Warrants and the Warrant Shares and to otherwise perform its obligations under this Agreement. (b) The copies of the Articles of Incorporation, as amended (the "Articles of Incorporation") and bylaws of the Company which have been delivered to legal counsel for Investor prior to the execution of this Agreement are true and complete copies of the duly and legally adopted Articles of Incorporation and Bylaws of the Company in effect as of the date of this Agreement. (c) The Company is duly qualified, licensed or domesticated as a foreign corporation in good standing in each jurisdiction wherein the nature of its activities or the properties owned or leased by it makes such qualification, licensing or domestication necessary and in which failure to so qualify or be licensed or domesticated would have a material adverse impact upon its business. (d) The Company has delivered to Investor copies of (i) its Form 10-K for the Year Ended June 30, 1995, which includes its audited statements of operations, cash flows, and changes in stockholders' equity for the three years ended June 30, 1995 and its balance sheets as of June 30, 1995 and 1994, (ii) its quarterly reports on Form 10-Q for the quarters ended September 30, 1995, December 31, 1995 and March 31, 1996, which contain its unaudited statements of operations for the quarterly and year to date periods then ended and for the prior year periods, unaudited statements of cash flow for the year to date and prior year -2- comparative periods, and balance sheets as of quarter end, (iii) its 1995 annual report to shareholders, (iv) its proxy statement for its annual meeting held May 23, 1996, and (v) Company's audited financial statements for the year ended June 30, 1996. (e) The Shares, when issued and paid for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid, nonassessable shares and shall be free and clear of all pledges, liens, encumbrances and restrictions, except for restrictions on transfer under applicable securities laws. The Warrants are duly authorized, and when issued pursuant to the terms of this Agreement will be validly granted and outstanding, fully paid and free and clear of all pledges, liens, and encumbrances and restrictions, except for restrictions on transfer under applicable securities laws. The Warrant Shares have been duly authorized and reserved for issuance and, when issued upon exercise of the Warrant, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except for restrictions on transfer under applicable securities laws. (f) The authorized capital stock of the Company consists of 35,000,000 shares, 30,000,000 of which are shares of Common Stock, $.01 par value, and 5,000,000 of which are shares of preferred stock, undesignated as to terms and preferences. As of September 1, 1996, 11,458,634 shares of Common Stock were outstanding, 292,951 shares of Common Stock were reserved for issuance upon the exercise of outstanding warrants and 3,739,379 shares of Common Stock were reserved for issuance pursuant to the Stock Option Plans. No shares of Preferred Stock are outstanding. Neither the offer nor the issuance or sale of the Shares or the Warrants constitutes an event, under any anti-dilution provisions of any securities issued or issuable by the Company or any agreements with respect to the issuance of securities by the Company, which will either increase the number of shares issuable pursuant to such provisions or decrease the consideration per share to be received by the Company pursuant to such provisions. (g) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action of the Company, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights or by general principles of equity. (h) The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, constitute a default under, result in a violation of, result in the creation of a right of termination or acceleration or any lien, security interest, charge or encumbrance upon any assets of the Company, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Articles of Incorporation or Bylaws of the Company or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which the Company is bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which the Company is subject. (i) The Company is not required to submit any notice, report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or, except as contemplated herein, the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other party or person is required to be obtained by the Company in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. (j) No person, firm or corporation has or will have, as a result of any act or omission by the Company, any right, interest or valid claim against any Investor or the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions -3- contemplated by this Agreement. 4. REPRESENTATIONS AND WARRANTIES BY THE INVESTOR. The Investor represents and warrants to the Company that: (a) It is purchasing the Shares for investment for its own account and not with the view to, or for resale in connection with, any distribution of the Shares in violation of any applicable securities law. The Investor understands that the Shares have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof and that the reliance of the Company and others upon this exemption is predicated in part upon this representation by the Investor. The Investor further understands that the Shares may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. (b) The Investor is an "accredited investor" for purposes of Regulation D promulgated under the Securities Act and, either alone or with such Investor's representative, has such knowledge and experience in financial and business matters that such Investor is capable of evaluating the merits and risks of the investment in the Shares and Warrants and bear the economic consequences thereof. The Investor has relied upon such Investors' own independent investigation and, to the extent believed appropriate, the Investor's own professional, tax and other advisors, and has not relied upon any representation or warranty from the Company, or any of their respective officers, directors, employees agents, affiliates or representatives, with respect to the value of the Shares. The Investor has evaluated the merits and risks of an investment in the Shares and has determined that such shares are a suitable investment for the Investor in light of such Investor's overall financial condition and prospects. The Investor has been advised, and is aware, that the market prices of shares of stock of publicly traded companies fluctuate and that there can be no assurance as to the future performance of any given securities, including the Shares. The Investor has been furnished with all publicly available information about the Company's assets, operations, and business activities which the Investor has requested and which the Investor considers necessary or relevant to enable the Investor to make a prudent decision about the purchase of the Shares and Warrants. (c) The execution, delivery and performance of this Agreement by the Investor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action of the Investor, and no other corporate proceedings on its part are necessary to authorize the execution, delivery or performance of this Agreement. This Agreement has been duly executed and delivered by the Investor and constitutes the valid and binding obligation of such Investor, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights or by general principles of equity. (d) The execution, delivery and performance of this Agreement by the Investor and the consummation by such Investor of the transactions contemplated hereby do not conflict with or result in any breach of any of the provisions of, constitute a default under, result in a violation of, result in the creation of a right of termination or acceleration or any lien, security interest, charge or encumbrance upon any assets of either Investor, or require any authorization, consent, approval, exemption or other action by or notice to any court or other governmental body, under the provisions of the Articles of Incorporation or Bylaws of such Investor or any indenture, mortgage, lease, loan agreement or other agreement or instrument by which such Investor is bound or affected, or any law, statute, rule or regulation or order, judgment or decree to which such Investor is subject. (e) The Investor is not required to submit any notice (other than reports under Section 16(a) or 13D of the Securities Act of 1934), report or other filing with any governmental authority in connection with the execution or delivery by it of this Agreement or the consummation of the transactions contemplated hereby. No consent, approval or authorization of any governmental or regulatory authority or any other -4- party or person is required to be obtained by the Investor in connection with its execution, delivery and performance of this Agreement or the transactions contemplated hereby. (f) No person, firm or corporation has or will have, as a result of any act or omission by the Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. 5. COVENANTS OF THE COMPANY. So long as the Warrants shall remain outstanding and are not fully exercised, the Company covenants and agrees as follows: (a) The Company will maintain its corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. (b) The Company will keep books of record and account in which full, true and correct entries are made of all of its dealings, business and affairs, in accordance with GAAP consistently applied. The Company will employ certified public accountants of recognized national standing selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Commission. The Company will have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards, as will enable them to give such reports or opinions with respect to the financial statements of the Company as will satisfy the requirements of the Commission in effect at such time with respect to reports or opinions of accountants (except with regard to the Commission's requirements for accounting for preferred shares as debt rather than equity). (c) The Company will deliver to the Investor promptly upon transmission thereof, copies of all reports, notices, financial statements, proxy statements, registration statements and notifications filed by it with the Commission pursuant to any act administered by the Commission or furnished to shareholders of the Company or to any national securities exchange, except reports on Form D filed pursuant to Rule 503 under the Securities Act and registration statements relating to employee benefit plans. (d) The Company shall use its best efforts to cause its shares to continue to be quoted on the Nasdaq National Market, or listed on a national securities exchange. (e) The Company will not repay, or allow its subsidiary LaserMaster Corporation to repay, the indebtedness represented by that certain Promissory Note to TimeMasters, Inc., a Minnesota corporation ("TimeMasters") dated January 17, 1996 (the "January Note") in original principal amount of $1,765,000 until payment in full of that certain promissory note from TimeMasters to the Company dated September 15, 1996 in $1,800,000 original principal amount (the "TimeMasters Note") and that certain promissory note dated September 15, 1996 from Grandchildren's Realty Alternative Management Program I Limited Partnership and Grandchildren's Realty Alternative Management Program I #2 Limited Partnership, Minnesota limited partnerships for which TimeMasters serves as general partner (together, "GRAMPI") to Company in original principal amount of $2,200,000 (the "Mortgage Note" and together with the TimeMasters Note, the "TimeMasters Promissory Notes"), except that the Company may, with the agreement of or at the direction of TimeMasters, offset the obligation under the January Note against the TimeMasters Note. Investor shall be deemed to be a third party beneficiary of this subsection (e). (f) The Company will, upon the occurrence of an event of default under the Mortgage Note or that certain Mortgage and Security Agreement and Fixture Financing Agreement dated September 15, 1996 securing the Mortgage Note (the "Mortgage"), diligently exercise its remedies under the Mortgage in a commercially reasonable manner, including, in the event the mortgagor is not actively proceeding with the sale of the property subject to the Mortgage, commencing foreclosure thereof, and will, in any event, commence foreclosure proceedings within 60 days after any notice of such event of default unless Investor, together with Sihl-Zurich Paper Mill on Sihl AG , a Swiss corporation ("Sihl"), otherwise agree in writing that such remedy shall be further delayed. The Company acknowledges that the agreement of Investor -5- hereunder, and the timing of the second installment of the Promissory Note, is conditional on the payment of the TimeMasters Promissory Notes. 6. REGISTRATION. (a) Definitions. As used in this Section 6, the following terms have the following meanings: (i) "Forms S-1, SB-1, S-2, SB-2 and S-3" shall mean the forms so designated, promulgated by the Commission for registration of securities under the Securities Act, and any forms succeeding to the functions of such forms, whether or not bearing the same designation. (ii) "Holder" shall mean Investor and any holder of Registrable Stock to whom the registration rights granted hereunder have been transferred in accordance with Section 6(j), provided that anyone who acquires any Registrable Stock in a distribution pursuant to a registration statement filed by the Company under the Securities Act shall not thereby be deemed to be a "Holder." (iii) "Register", "registered" and "registration" shall refer to a registration effected by filing a registration statement in compliance with the Securities Act and the declaration or ordering by the Commission of effectiveness of such registration statement. (iv) "Registrable Stock" shall mean the Shares, all shares of Common Stock issued or issuable upon exercise of the Warrants, and in each case held by a Holder, all shares of Common Stock issued by the Company in respect of such shares. (v) "Registration Rights Period" shall mean the period of time commencing on the date of this Agreement and ending on the latter to occur of (A) two years after the earlier to occur of the full exercise, or the termination, of the Warrants, or (B) in the event that the Warrants are exercised within the first six years of their term after a notice of, but prior to a record date for, a dividend pursuant to section 3(f) of such Warrants, four years after such exercise. (b) Required Registration. (i) If at any time during the Registration Rights Period a Holder proposes to dispose of the then Registrable Stock (the "Initiating Holders"), and such disposition may not, in the opinion of such Initiating Holders, be effected in the public marketplace (as opposed to a private transaction under the Securities Act) at equally favorable net terms to the Initiating Holders without registration of such shares under the Securities Act, the Initiating Holders may request the Company in writing to effect such registration, stating the number of shares of Registrable Stock to be disposed of by such Initiating Holders and the intended method of disposition. Upon receipt of such request, the Company will give prompt written notice thereof to all other Holders, whereupon such other Holders shall give written notice to the Company within 20 days after the date of the Company's notice (the "Notice Period") if they propose to dispose of any shares of Registrable Stock pursuant to such registration, stating the number of shares of Registrable Stock to be disposed of by such Holder(s) and the intended method of disposition. (ii) The Company will use its best efforts to effect promptly after the Notice Period the registration under the Securities Act of all shares of Registrable Stock specified in the requests of the Initiating Holders, and the requests of the other Holders, subject, however, to the limitations set forth in Section 6(d). (c) Registration Procedures. Whenever the Company is required by the provisions of Section 6(b) to use its best efforts to effect promptly the registration of shares of Registrable Stock, the Company will: (i) prepare and file with the Commission a registration statement with respect to such shares and use its best efforts to cause such registration statement to become and remain -6- effective as provided herein; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and current and to comply with the provisions of the Securities Act with respect to the disposition of all shares covered by such registration statement, including such amendments and supplements as may be necessary to reflect the intended method of disposition from time to time of the prospective seller or sellers of such shares, but for no longer than ninety (90) days subsequent to the effective date of such registration in the case of a registration statement on Form S-1, SB-1, SB- 2 or S-2 and for no longer than one hundred fifty (150) days in the case of a registration statement on Form S-3; (iii) furnish to each prospective seller such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the public sale or other disposition of the shares owned by such seller; (iv) use its best efforts to register or qualify the shares covered by such registration statement under such other securities or blue sky or other applicable laws of such jurisdictions within the United States as each prospective seller shall reasonably request, to enable such seller to consummate the public sale or other disposition in such jurisdictions of the shares owned by such seller; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not at the time so qualified; and (v) if such registration includes an underwritten public offering, cooperate with the Holders in the preparation and execution of an underwriting agreement containing customary representations and warranties on the part of the Company and furnish at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, covering such matters as such underwriters and holder or holders may reasonably request; and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, covering such matters as such underwriters and holder or holders may reasonably request. (d) Limitations on Required Registrations. (i) Investor (considered together with any Holder that acquires Registrable Stock therefrom and registration rights pursuant to Section 6(j)) shall have the right to require the Company to effect no more than five registrations pursuant to Section 6(j)). (ii) The Company shall not be required to effect a registration pursuant to Section 6(b) more frequently than once every six months. (iii) Whenever a requested registration is for an underwritten offering, only shares which are to be included in the underwriting may be included in the registration. Notwithstanding the provisions of Sections 6(b), if the underwriter determines that (A) marketing factors require a limitation of the total number of shares to be underwritten, or (B) the offering price per share would be reduced by the inclusion of the shares of the Company, then the number of shares to be included in the registration and underwriting shall first be allocated among all Holders who indicated to the Company their decision to distribute any of their Registrable Stock through such underwriting, in proportion, as nearly as practicable, to the respective numbers of shares of Registrable Stock owned by such Holders at the time of filing the registration statement, and the remainder, if any, to the Company. No stock excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If the Company disapproves of any such underwriting, the Company may elect to withdraw therefrom by written notice to the Initiating Holders and the underwriter. The securities so withdrawn from such underwriting shall also be withdrawn from such registration. -7- (iv) If at the time of any request to register Registrable Stock pursuant to Section 6(b), the Company is engaged, or has fixed plans to engage within 90 days of the time of the request, in a registered public offering as to which the Holders may include such Stock pursuant to Section 6(e) or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of 90 days from the effective date of such offering, or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once with respect to any request for registration. (e) Incidental Registration. If at any time during the Registration Rights Period the Company proposes to register any of its securities under the Securities Act (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable), it will at each such time give written notice to all Holders of its intention so to do. Upon the written request of a Holder or Holders (stating the number of shares of Registrable Stock to be disposed of by such Holder or Holders and the intended method of disposition) given within 30 days after receipt of any such notice, the Company will use its best efforts to cause all such shares of Registrable Stock intended to be disposed of, the Holders of which shall have requested registration thereof, to be included in such registration, subject, however, to the following limitations: (i) If any registration pursuant to Section 6(e) shall be underwritten in whole or in part, the Company may require that the Registrable Stock requested for inclusion pursuant to this Section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. (ii) If in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Registrable Stock requested for inclusion pursuant to Section 6(e), together with all additional shares of all other shareholders that have requested inclusion of their shares pursuant to incidental registration rights granted by the Company prior to the date hereof (the Registrable Stock and all of the other shares requested for inclusion, other than shares of Common Stock issued or issuable upon conversion of that certain Promissory Note dated January 17, 1996 between TimeMasters and the Company or pursuant to exercise of that certain Stock Purchase Warrant dated January 17, 1996 between TimeMasters and the Company, being herein together referred to as the "Selling Shareholders' Shares") would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among all holders of Selling Shareholders' Shares (based upon the number of shares requested to be included by each such holder) . (iii) If, in connection with a registration initiated at the request of any security holder of the Company pursuant to a demand registration right granted to such security holder (the "Requesting Security Holder"), the Selling Shareholders' Shares would reduce the number of shares to be offered by the Requesting Shareholder or interfere with the successful marketing of the shares of stock offered by the Requesting Shareholder, the number of Selling Shareholders' Shares otherwise to be included in the underwritten public offering may be reduced pro rata among the holders thereof requesting such registration (based upon the number of shares requested to be included by each such holder). (iv) Those Selling Shareholders' Shares which are excluded from the underwritten public offering pursuant to this Section 6(e) shall be withheld from the market by the holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. (f) Rule 144. The registration rights granted under Section 6 shall terminate as to any Holder or permissible transferees or assignees of such rights if such person would be permitted to sell all of -8- the Registrable Stock held by him or it within one three-month period pursuant to Rule 144. (g) Cooperation by Prospective Sellers. (i) Each prospective seller of Registrable Stock, and each underwriter designated by each such seller, will furnish to the Company such information as the Company may reasonably require from such seller or underwriter in connection with the registration statement (and the prospectus included therein). (ii) The Holders holding shares included in the registration statement will suspend (until further notice) further sales of such shares after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus or, if the Company reasonably determines that correcting or updating the registration statement or prospectus would require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, during the time that such suspension is necessary so that the registration statement and prospectus will meet the requirements of the Securities Act. At the end of the period during which the Company is obligated to keep the registration statement current and effective as described in Section 6(b)(i)(and any extensions thereof required by the preceding sentence), the Holders holding shares included in the registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holders shall (after written request for such notice, describing the information required in the response) notify the Company of the number of shares registered which remain unsold promptly upon receipt of such notice from the Company. (h) Expenses of Registration. All expenses incurred in effecting any registration pursuant to this Section 6, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any audits incidental to or required by any such registration, shall be borne by the Company, except (a) that all underwriting discounts and commissions shall be borne by the Holders holding the securities registered pursuant to such registration, pro-rata according to the quantity of their securities so registered; and (b) the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 6(b) if the registration request is subsequently withdrawn at the request of the Initiating Holder, and not at the request of the Company or because of any other action by the Company, unless the Initiating Holder agrees to forfeit its right to one demand registration pursuant to Section 6(b) (in which case the Company shall bear such expenses). (i) Indemnification. (i) To the extent permitted by law, the Company will indemnify each Holder requesting or joining in a registration, each agent, officer and director of such Holder, each person controlling such Holder, and each underwriter and selling broker of the securities so registered (collectively, "Representatives" and collectively with each such Holder, agent, officer, director or person, "Indemnitees") against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Indemnitee for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that (A) the Company will not be liable to any Indemnitee in any such case to the extent that any such claim, loss, damage or liability is caused by any untrue statement or omission so made in strict conformity with written information furnished to the Company by an instrument duly executed by -9- such Indemnitee and stated to be specifically for use therein; (B) the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; (C) this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; (D) the indemnity agreement contained in this subsection 6(i) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld; and (E) the foregoing shall not relieve the Company from liability for indemnity to an officer or director that furnishes information to the Company in his capacity as an officer or director. (ii) To the extent permitted by law, each Holder requesting or joining in a registration and each underwriter of the securities so registered will indemnify the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made; and will reimburse the Company and each other person indemnified pursuant to this paragraph (ii) for all legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that (A) this paragraph (ii) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon and in strict conformity with written information (including, without limitation, written negative responses to inquiries) furnished to the Company by an instrument duly executed by such Holder or underwriter and stated to be specifically for use in such prospectus, offering circular or other document (or related registration statement, notification or the like) or any amendment or supplement thereto; (B) the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of any Representative, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Securities Act; (C) this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; (D) the indemnity agreement contained in this subsection 6(i)(ii) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; (E) the obligations of such Holders shall be limited to an amount equal to the proceeds to each such Holder of the Registrable Stock sold as contemplated herein, unless such claim, loss, damage, liability or action resulted from such Holder's fraudulent misconduct; and (F) the foregoing shall not create any right to indemnity from an officer or director that furnishes information to the Company in his capacity as an officer or director. (iii) Each party entitled to indemnification hereunder (the "indemnified party") shall give notice to the party required to provide indemnification (the "indemnifying party") promptly after such indemnified party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the indemnifying party (at its expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the indemnifying party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the indemnified party, -10- and the indemnified party may participate in such defense at such party's expense, and provided, further, the omission by any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 6(i), except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give notice. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (iv) The Company agrees that the failure of the Company or any Holder of Registrable Stock to negotiate an underwriting agreement that excludes from the Company's obligation to indemnify Representatives the matters set forth in section 6(i)(i)(A) or (B) shall not relieve the Company of its obligation to proceed with such registration on the terms proposed by such Representative. (j) Transfer of Registration Rights. One or more of the five demand registration rights granted to the Investor under Section 6(b) may be transferred but only to a transferee who shall acquire not less than 100,000 shares of Registrable Stock (as adjusted for Recapitalization Events) and the registration rights under Section 6(e) may not be transferred separate from the registration rights under section 6(b). Any request for transfer of the Registrable Stock to which a transfer of registration rights pursuant to this Section 6(j) is intended to apply shall be accompanied by notice to the Company of the number of demand registration rights which the transferring party intends that the transferee acquire. Notwithstanding any provision of this Section 6, the registration rights granted to the Holders under this Section 6 may not be assigned to any person or entity which, in the Company's reasonable judgment, is a competitor of the Company. (k) Delay of Registration. The Holders shall have no right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 6. 7. RESTRICTION ON TRANSFER OF SHARES. (a) Restrictions. The Shares, the Warrant and the Warrant Shares are only transferable pursuant to (a) an offering registered under the Securities Act, (b) Rule 144 or Rule 144A or other exemption under the Securities Act (or any similar rule then in effect) if such rules are or become available, or (c) and, with respect to the Warrant, the terms of the Warrant, any other legally available means of transfer. (b) Legend. Each certificate representing Shares or Warrant Shares shall be endorsed with the following legends: "The shares represented by this certificate may not be transferred without (i) the opinion of counsel reasonably satisfactory to this corporation that such transfer may lawfully be made without registration under the Securities Act of 1933, as amended, and all applicable state securities laws or (ii) such registration." 8. MISCELLANEOUS. (a) Waivers Amendments and Approvals. No amendment or waiver of any provision of this Agreement, shall in any event be effective against an Investor unless the same shall be in writing and signed by such Investor and the Company, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. -11- (b) Changes, Waiver, Etc. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing. (c) Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered if personally delivered, the next business day if sent by overnight courier or when receipt is acknowledged if mailed by first class mail, return receipt requested or if sent by facsimile, telecopy or other electronic transmission device. Notices, demands and communications will, unless another address is specified in writing, be sent to the address indicated below: Notices to the Company: with a copy to: - ----------------------- --------------- LaserMaster Technologies, Inc. Dorsey & Whitney LLP 7090 Shady Oak Road 220 South Sixth Street Eden Prairie, Minnesota 55344 Minneapolis, Minnesota 55402 Attention: General Counsel Attention: Thomas O. Martin, Esq. Telecopy: (612) 941-8687 Telecopy: (612) 340-8738 Notices to Investor: with a copy to: - -------------------- --------------- General Electric Capital Corporation Winston & Strawn 105 West Madison Street 35 West Wacker Drive Suite 1600 Chicago, Illinois 60601-9703 Chicago, Illinois 60602 Attention: David G. Crumbaugh, Esq. Attention: John Hatherly Telecopy: (312) 588-5700 Telecopy: (312) 419-5992 (d) Remedies. The parties agree that, in addition to, but not to the exclusion of any other available remedy, Investor shall have the right to enforce the provisions of sections 5(e) and 5(f) by applying for and obtaining specific performance or temporary and permanent restraining orders or injunctions from a court of competent jurisdiction. (e) Survival of Representations and Warranties, Etc. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by Investor or on their behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to this Agreement (other than legal opinions) or in connection with or in contemplation of the transactions herein contemplated shall constitute representations and warranties by the Company hereunder. (f) Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. (g) Choice of Law. The laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. (h) Counterparts. This Agreement may be executed concurrently in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (i) Confidentiality. Investor agrees that the confidentiality letter dated November 22, 1995 between Investor and LaserMaster Corporation, a subsidiary of the Company ("LMC"), shall apply to all information provided by the Company to the Investor hereunder as if the Company, rather than LMC, was a party thereto and that Investor shall keep all such information provided to Investor hereunder or pursuant hereto confidential to the same extent such confidentiality letter requires Investor to keep information obtained from LMC confidential. (j) Entire Agreement. This Agreement and exhibits and schedules referenced herein contain the entire agreement between the parties with respect to the transactions contemplated hereby and -12- thereby, and supersede all negotiations, agreements, representations, warranties, commitments, whether in writing or oral, prior to the date hereof. (k) Successors and Assigns. All of the terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided, however, that, except as otherwise provided herein, Investor's rights and obligations under this Agreement may only be assigned to any entity under common control of Investor. (l) Severability. In the event any provision of this Agreement or the application of any such provision to any party shall be held by a court of competent jurisdiction to be contrary to law, the remaining provisions of this Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LASERMASTER TECHNOLOGIES, INC. By /s/Robert Wenzel ------------------------------ Name: Robert Wenzel Title: Chief Operating Officer GENERAL ELECTRIC CAPITAL CORPORATION By /s/ Glenn P. Bartley -------------------------------- Its duly-authorized signatory --------------------------------- EX-10.3 4 DEBENTURE EXCHANGE Exhibit 10.3 DEBENTURE EXCHANGE AND TRADE DEBT SETTLEMENT AGREEMENT THIS AGREEMENT is made and entered into this 12th day of September, 1996, by and between LaserMaster Technologies, Inc., a Minnesota corporation having its principal office at 7090 Shady Oak Road, Eden Prairie, MN 55344 (the "Company") and Marubeni International Electronics Corporation, a Massachusetts corporation having its principal address at 20 William Street, Wellesley, Massachusetts, 02181 ("Marubeni"). WHEREAS, LaserMaster Corporation ("LMC"), a wholly owned subsidiary of the Company is indebted to Marubeni in the aggregate amount of Two Million Five Hundred Twenty Seven Thousand Eight Hundred Twenty Nine Dollars and Seventy Nine Cents ($2,527,829.79) (the "Indebtedness") for product purchased from Marubeni pursuant to that certain Purchase Agreement dated May 28, 1992, as amended (the "Purchase Agreement"); and WHEREAS, the Indebtedness is currently due and owing pursuant to the terms of the Purchase Agreement and LMC and the Company have represented to Marubeni that they are presently unable to satisfy the indebtedness in accordance with the terms of the Purchase Agreement; and WHEREAS, the Company, LMC and Marubeni desire to provide for the timely repayment of the Indebtedness and for the right for Marubeni to acquire an equity interest in the Company. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Issuance of Debenture - Exchange of Indebtedness. Subject to the terms hereof, Marubeni agrees to accept, in full satisfaction of the Indebtedness, and the Company agrees to deliver, the Company's Convertible Debenture, in the original principal amount equal to the balance of the Indebtedness, in the form attached hereto as Exhibit A (the "Debenture"). Marubeni shall accept the Debenture and the Company shall deliver the Debenture, upon the effectiveness of the Registration Statement (as defined in Section 7 of the Debenture). Upon exchange of the Debenture for the Indebtedness, the Company and LMC shall be released from any further liability under the Indebtedness in accordance with Section 3 hereof. Until such time as the Registration Statement (as defined in Section 7 of the Debenture) becomes effective under the Securities Act of 1933, or December 31, 1996, whichever date is earlier, Marubeni agrees that it will stand still and forebear from taking any action to collect the Indebtedness, provided no default has occurred hereunder or under the Debenture. Marubeni further agrees that absent a failure of the Registration Statement to become effective, it is obligated to accept the Debenture as provided herein. Notwithstanding the December 31, 1996 deadline imposed hereinabove, Marubeni agrees that it will continue to stand still and forebear for an additional period of time extending up through January 31, 1997, if the Securities and Exchange Commission rejects or objects to the Registration Statement due at least in part to either (a) the fact that the Debenture was not accepted by Marubeni in exchange for the Indebtedness prior to the effectiveness of the Registration Statement, or (b) the fact that Marubeni receives "price restoration" on the sales of securities issued pursuant to conversion of the Debenture; provided the Company files the Registration Statement by October 15, 1996, and provides Marubeni with copies of the filings and correspondence with the Securities and Exchange Commission relating solely to the Registration Statement. During such extension, LaserMaster shall use its best efforts to obtain effectiveness of Registration Statement. Marubeni shall have the right to approve a further extension of time to enable the Company to obtain effectiveness of the Registration Statement, not to exceed sixty (60) days, which approval shall not be unreasonably withheld. 2. Representations and Warranties. In connection with the exchange of the Debenture for the Indebtedness, Marubeni hereby represents and warrants as follows: (a) That Marubeni has received, carefully reviewed and is familiar with the Company's (i) Annual Report on Form 10-K for the year ended June 30, 1995; (ii) Quarterly Reports on Form 10-Q for the quarters ended September 30, 1995, December 31, 1995 and March 31, 1996; (iii) the Proxy Statement for the annual meeting of shareholders of the Company held May 23, 1996; and (iv) 1996 annual report to shareholders (the "Filed Documents"); (b) That Marubeni has been given access to full and complete financial information regarding the Company and has utilized such access to its satisfaction for the purpose of obtaining financial information in addition to, or verifying information included in the Filed Documents. Further, Marubeni has met with officers of the Company for the purpose of asking questions of, and receiving answers from, such officers concerning the Company's financial information and to obtain any additional financial information, to the extent reasonably available, necessary to verify the accuracy of financial information provided in the Filed Documents; (c) That Marubeni recognizes that the Common Stock issued upon conversion thereof involves certain risks, including, but not limited to, the risks described in Exhibit 99 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; (d) That Marubeni realizes that the Debenture has not been registered under federal and applicable state securities laws and that the transferability of the Debenture and the Common Stock issuable upon conversion thereof is restricted and requires conformity with the restrictions contained in paragraph 7 of the Debenture; (e) That Marubeni is an Accredited investor as defined in Rule 501 of the Securities and Exchange Commission. 3. Release of Indebtedness. In consideration of issuance of the Debenture, and effective upon receipt thereof, Marubeni, for itself, its affiliates, agents, and suppliers, hereby agrees that the Indebtedness is discharged and further releases and forever discharges the Company and each of its subsidiaries, including LMC, each of their respective directors, officers, agents, employees, successors and assigns from any and all liability with respect to the Indebtedness, and any claims, demands, actions liability, damages or rights of any kind, whether known or unknown, arising out of or resulting from the Indebtedness, except for claims relating to the Debenture issued pursuant hereto. Marubeni further agrees that it will not institute or -2- authorize any other party, either governmental or otherwise, to institute any administrative or legal proceedings against the Company, LMC or any Subsidiary, its directors, officers, agents, employees, successors and assigns as a result of any claims of any kind or character which Marubeni might have against them arising from or related to the Indebtedness, except for claims relating to the Debenture issued pursuant hereto. This unconditional release includes, but is not limited to, claims based upon any federal, state, or local anti- discrimination law, rule, or regulation, and any contract, quasi-contract, estoppel, tort, or statutory claims, whether developed or undeveloped, that arose before, or existed as of, the date of this Agreement. 4. Price Restoration. Notwithstanding Section 3 of this Agreement, the Company hereby agrees to pay to Marubeni, at the end of the two year term of the Debenture, the difference between (a) the principal amount of the Debenture plus accrued interest and (b) the sum of the following: (i) the net sales proceeds actually received by Marubeni (after payment of any customary brokerage commissions or mandatory fees but excluding taxes) ("Net Proceeds") on the sale of the Company's common stock acquired through Automatic Conversion or Mandatory Conversion and held for ten (10) business days or less, plus (ii) the principal amount of the Debenture which has been converted through Optional Conversion, plus (iii) the principal amount of the Debenture which has been converted through Automatic Conversion or Mandatory Conversion where Marubeni has held the shares of Company's common stock received through such conversion for more than ten (10) business days, provided, however, that (A) Net Proceeds for purposes of such calculation on any individual sale of Common Stock was not more than $.50 per share less than the conversion price pursuant to which such stock was acquired and that all of such sales were executed in good faith by Marubeni, (B) Marubeni provides to the Company, within 20 days after the trade date on which it executes any trade in the Company's Common Stock acquired upon any such conversion, copies of the trade confirmations referencing the sale price, and, where applicable, a certificate that the shares so sold were acquired through Automatic Conversion or Mandatory Conversion of the Debenture at a price less than such sale price (and confirming such conversion price), and (C) the ten (10) business day holding period set forth in Section 4(b)(i) and 4(b)(iii) shall be tolled during any Suspension Period set forth in Section 7 of the Debenture. 5. Confidentiality Agreement. Marubeni agrees to keep and hold confidential (except where it is legally required to disclose such information by a court of competent jurisdiction) and not to disclose to unrelated third parties all information of whatever kind or nature which relates in any way to this transaction, the settlement of the underlying trade debt which is the basis of this transaction, or any other aspect of the facts or circumstances surrounding this transaction. Marubeni expressly acknowledges and agrees to this obligation shall remain binding upon it even if the Company discloses this transaction to the public. 6. Choice of Law. The laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 7. Counterparts. This Agreement may be executed concurrently in two or more -3- counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LaserMaster Technologies, Inc. Marubeni International Electronics Corporation By /s/ Mel Masters By /s/ Hideaki Takagi ----------------------------- ------------------------------- Melvin Masters, CEO Its President & CEO ------------------------ LaserMaster Corporation /s/ Mel Masters - ----------------- By: Mel Masters Its: CEO #110481v2 -4- EX-10.4 5 CONVERTIBLE SUBORDINATED DEBENTURE Exhibit 10.4 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF THE STATE OF MINNESOTA, OR ANY OTHER STATE. THIS DEBENTURE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR APPROPRIATE EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS DEBENTURE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT (i) THE OPINION OF COUNSEL SATISFACTORY TO THIS CORPORATION THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE FEDERAL SECURITIES ACT OF 1933 AND THE SECURITIES LAWS OF THE STATE OF MINNESOTA OR ANY OTHER APPLICABLE STATE SECURITIES LAWS; OR (ii) SUCH REGISTRATION. THIS LEGEND REPRESENTS A RESTRICTION ON TRANSFERABILITY OF THIS DEBENTURE. LASERMASTER TECHNOLOGIES, INC. CONVERTIBLE SUBORDINATED DEBENTURE $2,527,829.79 September 12, 1996 ------------ Eden Prairie, Minnesota LaserMaster Technologies, Inc., a Minnesota corporation (hereinafter referred to as the "Company"), for value received, hereby promises to pay to Marubeni International Electronics Corporation, at the address designated below, or to its successors and assigns (hereinafter referred to as "Holder"), the principal sum of Two Million Five Hundred Twenty Seven Thousand Eight Hundred Twenty Nine Dollars and Seventy Nine Cents ($2,527,829.79) in lawful money of the United States of America, plus simple interest on the unpaid principal balance of this Debenture at an annual rate of eight percent (8%). Interest only shall accrue on the principal balance until paid in full. The principal amount of this Debenture, and any accrued and unpaid interest, shall be payable in lump sum on the second anniversary of the date of this Debenture. The Company covenants and agrees that so long as any portion of this Debenture remains outstanding and unpaid either as to the principal hereof or the interest hereon, it will comply with the following provisions, to which this Debenture is subject and by which it will be governed: 1. Prepayment. The Company may prepay all or any part of the principal amount of this Debenture at any time or from time to time without payment of any penalty or premium. Any prepayment made by the Company shall be applied first to the payment of accrued interest and then to the unpaid principal installments in the inverse order of maturity. 2. Acceleration of Maturity. Upon the occurrence of any of the following events, to-wit: (a) Nonpayment within thirty (30) days of the date due of the principal and interest on this Debenture; or (b) Any receivership, insolvency proceeding, bankruptcy, assignment for the benefit of creditors, reorganization, whether or not pursuant to bankruptcy laws, dissolution, liquidation or any other marshalling of assets and liabilities of the Company; or, (c) If the Registration Statement (defined in Section 7 hereof) ceases to be effective for any period of time beyond a Suspension Period (defined in Section 7 hereof) through the negligence, recklessness or bad faith of the Company. Holder may declare the entire principal and accrued interest on this Debenture due and payable immediately, and upon such declaration this Debenture shall become immediately due and payable without further notice, demand or presentment. The Company agrees to pay all reasonable costs of collection, including reasonable attorneys' fees, in the event that payment shall not be made under the terms and conditions of this Debenture. 3. Subordination. The indebtedness evidenced by this Debenture is and shall remain subordinate in right of payment to all Senior Debt to the extent and in the manner hereinafter set forth. "Senior Debt" shall mean the principal and interest on indebtedness of the Company to financial institutions for borrowed money (other than the indebtedness evidenced by this Debenture), including indebtedness outstanding under that certain Credit Agreement dated January 17, 1996 with General Electric Capital Corporation, indebtedness to TimeMasters, Inc. under that certain convertible Promissory Note dated as of January 17, 1996, and for purchase money loans secured by real estate or personal property used in connection with the business of the Company, whether created, incurred or assumed before or after the date hereof, except such as by its terms is expressly not superior in right of payment to this Debenture, and renewals, extensions and refundings of any such indebtedness. Notwithstanding the foregoing, payment of principal and interest on this Debenture shall not be subordinated to the prior payment of such Senior Debt as to all amounts which actually are paid by the Company under this Debenture if the Company is not in default under any or all of said Senior Debt at the time or times such payment or payments are made. 4. Conversion. This Debenture shall be converted into fully paid and nonassessable shares of common stock, $.01 par value, of the Company (the "Common Stock"), upon the terms set forth in this Section 4. (a) Definitions. For purposes of this Section 4: (i) "Market Price" shall mean the last sale price of the Common Stock as reported by the Nasdaq National Market on the immediately preceding trading day (or if not so quoted, the average of the last bid and asked price quoted by the three principal market makers in such Common -2- Stock); (ii) "Base Price" shall mean $6.00 per share, provided that, if the Company at any time divides the outstanding shares of its Common Stock into a greater number of shares (whether pursuant to a stock split, stock dividend or otherwise), and conversely, if the outstanding shares of its Common Stock are combined into a smaller number of shares, the Base Price in effect immediately prior to such division or combination shall be proportionately adjusted to reflect the reduction or increase in the value of each such common share; (iii) "Suspension Period" shall have the meaning assigned to it in Section 8(a) of this Debenture. (iv) "Threshold Amount" shall mean (A) 75,000 shares of Common Stock with respect to the quarter ending March 31, 1997, (B) 100,000 shares of Common Stock with respect to the quarter ending June 30, 1997, (C) 125,000 shares of Common Stock with respect to the quarter ending September 30, 1997, and (D) 150,000 shares of Common Stock with respect to the quarter ending December 31, 1997, and any calendar quarter thereafter during which this Debenture remains outstanding. (b) Automatic Conversion. That portion of the principal amount of this Debenture as would purchase 30,000 shares of the Common Stock at the Market Price shall be automatically converted into shares of Common Stock, without any further action by the Company or by the Holder of this Debenture, and the principal balance of this Debenture shall be reduced by the same amount, at the close of business on Wednesday of each calendar week during which this Debenture remains outstanding and unpaid (the "Automatic Conversion Date"), if (i) the Market Price on the Automatic Conversion Date is equal to or greater than the Base Price in effect on such Automatic Conversion Date, (ii) the registration statement filed by the Company pursuant to paragraph 7 has been declared effective and (iii) the Company has not notified the Holder of a Suspension Period. (c) Mandatory Conversion. Notwithstanding Section 4(b), if there remains outstanding any principal amount of this Debenture and if less than the Threshold Amount of shares of the Common Stock have been issued upon conversion of this Debenture in any calendar quarter commencing with respect to the quarter ending March 31, 1997, this Debenture shall automatically be converted with respect to the principal amount of this Debenture as would purchase one-half of the Threshold Amount of shares of the Common Stock at the Market Price at the close of business on the first and second Wednesday (for a total of the Threshold Amount of shares) ending at least 72 hours after the Company's earnings release (a "Mandatory Conversion Date") with respect to such quarter, without any further action by the Company or by the Holder of this Debenture, and the principal balance of this Debenture shall be reduced, provided that (i) the registration statement filed by the Company pursuant to paragraph 7 has been declared effective and (ii) the Company has not notified the Holder of a Suspension Period. (d) Record of, and Procedures for, Automatic or Mandatory Conversion. The trading records of the Common Stock, as reported by the Nasdaq Stock Market, or as reported by the three principal market makers of such Common Stock if the Common Stock is not then traded, shall be conclusive evidence of such conversion and of the extinguishment of the obligation of the -3- Company to pay the principal balance so converted. The Company shall, by the close of business on each Automatic Conversion Date or Mandatory Conversion Date, advise and provide issuance instructions to its transfer agent of such automatic conversion with an objective of issuing certificates in the Holder's name within three days. The Company shall simultaneously notify Holder, or such agent of Holder as it may designate, or both, of such conversion by facsimile to the number below. Failure by the Company to provide such issuance instructions to the Transfer Agent or notice to the Holder shall not effect the validity of such conversion as of the close of business on the Automatic Conversion Date or Mandatory Conversion Date. (e) Optional Conversion. This Debenture may be converted, in whole or in part, at the Option of the Holder, at any time that the Base Price exceeds the Market Price. The conversion price for purposes of this paragraph shall be equal to the Base Price. To convert this Debenture into shares of the Common Stock pursuant to this Section 4(e), Holder shall give written notice to the Company that it elects to convert all, or any part of this Debenture, which notice shall specify the portion hereof to be converted. As promptly as possible thereafter, the Company shall issue and deliver to Holder certificates representing the number of shares of Common Stock into which this Debenture has been converted. Thereupon, this Debenture, or the portion hereof converted, shall be deemed to have been satisfied and discharged, and the shares of Common Stock into which this Debenture shall be so converted shall be fully paid and nonassessable shares. (f) Fractional Shares. The Company shall not be required to issue any fraction of a share of Common Stock representing a fraction of such shares of Common Stock upon any conversion of this Debenture. The Company may make a cash adjustment in lieu of any such fraction of a share which otherwise would be issuable upon such conversion. (g) Reorganizations. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of the Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for such common shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, Holder shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Debenture and in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, other securities or assets as would have been issued or delivered to Holder if Holder had exercised this Debenture and had received such shares of Common Stock immediately prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered Holder of this Debenture at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. -4- 5. Transfer and Investment Representation. Holder understands that this Debenture has not been registered under the federal Securities Act of 1933 or any state securities laws and that this Debenture may not be subsequently transferred or resold without (i) such registration, or (ii) the existence of an exemption from the applicable registration requirements. In furtherance of this representation, Holder agrees that this Debenture shall be legended to prohibit transfer, sale or other disposition except in compliance with such investment representation. 6. Transfer of Debenture and Common Stock. --------------------------------------- (a) Unless such transfer is made pursuant to registration in accordance with Section 7, Holder agrees to give written notice to the Company before transferring this Debenture or transferring any shares of the Common Stock issuable or issued upon the exercise of this Debenture of Holder's intention to do so, describing briefly the manner of any proposed transfer of this Debenture or Holder's intention as to the shares of Common Stock issuable upon the exercise hereof or the intended disposition to be made of shares of Common Stock upon such exercise. Promptly upon receiving such written notice, the Company shall present copies thereof to legal counsel for the Company. If, in the opinion of such counsel, the proposed transfer of this Debenture or disposition of shares may be effected without registration or qualification (under any federal or state law) of this Debenture or the shares of Common Stock issuable or issued upon the exercise hereof, the Company, as promptly as practicable, shall notify Holder of such opinion, whereupon Holder shall be entitled to transfer this Debenture, or to exercise this Debenture in accordance with its terms and dispose of the shares received upon such exercise or to dispose of shares of Common Stock received upon the previous exercise of this Debenture, all in accordance with the terms of the notice delivered by Holder to the Company, provided that an appropriate legend in substantially the form set forth at the end of this Debenture respecting the foregoing restrictions on transfer and disposition is endorsed on this Debenture or the certificates for such shares. (b) Holder further agrees that, notwithstanding any registration of the resale of the Common Stock issuable upon conversion of this Debenture in accordance with Section 7, and unless the Company is in default under this Debenture, without the written consent of the Company (as certified by its Chief Executive Officer) Holder will not sell, transfer or assign in any calendar week prior to the original scheduled maturity of this Debenture more than 30,000 shares of the Common Stock issued upon Automatic or Optional conversion of this Debenture. Holder and the Company further agree that in addition to the shares of Common Stock permitted to be sold upon Automatic Conversion and Optional Conversion, Holder may sell, in any calendar week, up to 50% of the Common Stock which has been issued through Mandatory Conversion in that calendar quarter pursuant to Section 4(c) of this Debenture. Holder also agrees to execute its trades in a reasonable and orderly fashion. Holder further agrees that the Company may place stop transfer orders and a legend on the certificates representing the shares issued upon conversion of the Debentures referencing such restrictions. 7. Registration of Common Stock. (a) The Company shall prepare and file with the Securities and Exchange Commission (the "Commission") as soon as practicable after execution of this Debenture, a registration statement ("Registration Statement"), on such form as is available to the Company, relating to the resale of the Common Stock issuable upon conversion -5- of the Debenture in accordance with the methods of distribution set forth in such Registration Statement (which shall not include any distribution in violation of section 6(b) of this Debenture) and shall use its best efforts to cause such Registration Statement to be declared effective by the Commission as soon as reasonably practicable thereafter. The Company agrees to use its best efforts to keep such Registration Statement continuously effective for a period of two years after the date hereof, or such shorter period as is necessary to allow all of the shares of Common Stock issued upon conversion of the Debentures to be sold; provided, however, that the Company need not maintain such Registration Statement, nor update or amend the same in accordance with subparagraph (b), (i) during any period deemed necessary by the Company or any underwriter in connection with any offering of shares by the Company, or (ii) during any period deemed necessary by the Company, not to exceed thirty (30) days, which thirty (30) day period may be extended with consent of Holder, which consent shall not be unreasonably withheld, to consider and act upon an material plan of acquisition or disposition, any tender offer or any merger, consolidation, corporate reorganization or restructuring or other transaction material to the Company and its subsidiaries taken as a whole (a "Suspension Period"). (b) The Company will: (i) except during a Suspension Period, prepare and file with the Commission such amendments to such Registration Statement and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective for such period as may be reasonably necessary to effect the sale of such securities, not to exceed two (2) years, which two (2) year period shall automatically be extended for a period of time equal to any Suspension Periods declared by the Company during the term of this Debenture. (ii) furnish to the Holder such reasonable number of copies of the Registration Statement, preliminary prospectus, final prospectus and such other documents relating solely to the sale of the securities as the Holder may reasonably request; (iii) use its best efforts to register or qualify the securities covered by such Registration Statement under such state securities or blue sky laws of such jurisdictions as the Holder may reasonably request within 20 days following the original filing of such Registration Statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; and (iv) except during a Suspension Period, prepare and promptly file with the Commission and promptly notify the Holder of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading. (c) The Company shall bear the following fees, costs and expenses in connection with such -6- registration: all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, all internal Company expenses, the premiums and other costs of the Company's policies of insurance against liability arising out of the sale, and all of the Company's legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Fees and disbursements of counsel and accountants for Holder, underwriting discounts and commissions and transfer taxes for Holder and any other expenses incurred by Holder not expressly included above shall be borne by Holder. (d) (i) The Company will indemnify and hold harmless Holder and any underwriter (as defined in the Securities Act) for Holder from and against any and all loss, damage, liability, cost and expense to which Holder or any such underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Holder or such underwriter. Holder will indemnify and hold harmless the Company and any underwriter from and against any and all loss, damage, liability, cost or expense to which the Company or any underwriter may become subject under the Securities Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue or alleged untrue statement of any material fact contained in such Registration Statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with information furnished by Holder. Holder's liability under this Debenture shall not exceed the total amount received by it hereunder. (ii) Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (i) of this section of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (i), promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel satisfactory to the indemnifying party; provided, however, if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interest which would -7- prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select separate counsel reasonably satisfactory to the indemnifying party to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (i) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (x) the indemnified party shall have employed counsel in accordance with the proviso of the preceding sentence, or (y) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. 8. Covenants of the Company. So long as any amount is owing to Holder pursuant to this Debenture, the Company covenants and agrees with Holder as follows: (a) Within forty five (45) days after the end of each fiscal quarter, the Company shall deliver to Holder unaudited financial statements (consisting of a balance sheet and a statement of receipts and expenditures) for such fiscal quarter, which financial statements shall be certified as correct by the chief financial officer of the Company; (b) Within ninety (90) days after the end of each fiscal year, the Company shall deliver to Holder a copy of its financial statements for such fiscal year, which financial statements shall have been audited by the Company's regular certified public accountants; and (c) The Company shall reserve and set aside a sufficient number of authorized shares of its Common Stock for issuance to Holder upon the exercise of the conversion rights contained in this Debenture. 9. Notices. All demands and notices to be given hereunder shall be delivered or sent by certified mail, return receipt requested or by telefax transmission with proper evidence of receipt. In the case of the Company, such notice should be addressed to its corporate headquarters, LaserMaster Technologies, Inc., 7090 Shady Oak Road, Eden Prairie, MN 55344, Tel. (612) 941-8687, Fax (612) 941-8652 with copies to "General Counsel, LaserMaster Technologies", at the same address until a new address shall have been substituted by like notice; and in the case of Holder, addressed to Holder care of Kazuhiko Yoshie, 20 William Street, Wellesley, Massachusetts, Tel. (617) 237-2115, Fax. (617) 237-1046 until a new address shall have been substituted by like notice with copies to Paul F. O'Donnell, III, Esq., Hinckley, Allen & Snyder, One Financial Center, Boston, MA 02111 Tel. (617) 345-9000, Fax. (617) 345-9020. -8- IN WITNESS WHEREOF, the Company has caused this Debenture to be executed and delivered by its duly authorized officer as of the date first above written. LASERMASTER TECHNOLOGIES, INC. MARUBENI INTERNATIONAL ELECTRONICS CORPORATION By /s/ Mel Masters By: /s/ Hideaki Takagi ------------------------ ------------------------ Melvin Masters, President Hideaki Takagi President & CEO #110479v3 -9- EX-10.5 6 FIRST AMENDMENT TO CREDIT AGREEMENT Exhibit 10.5 EXECUTION COPY FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of May 15, 1996, is by and between LASERMASTER CORPORATION, a Minnesota corporation ("Borrower"), a GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders. RECITALS A. Borrower, Agent and Lenders are parties to that certain Credit Agreement dated as of January 17, 1996 (the "Credit Agreement"), pursuant to which Lenders have made and may hereafter make loans and advances and other extensions of credit to Borrower; B. Borrower, Agent and Lender wish to amend certain provisions of the Credit Agreement, all on the terms and conditions set forth in this Amendment; and C. Capitalized terms used in this Amendment and not otherwise defined in this Amendment shall have the meanings ascribed to them in Schedule A to the Credit Agreement. This Amendment shall constitute a Loan Document. These Recitals shall be construed as part of this amendment. NOW, THEREFORE, in consideration of the foregoing and the agreements, promises and covenants set forth herein and in the Credit Agreement, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of the Credit Agreement. 1.1 The definition of "EBITDA" appearing in Schedule A to the Credit Agreement is hereby amended by inserting the following sentence at the end of such definition: "Notwithstanding the foregoing, there shall be excluded from the computation of net income for purposes of computing EBITDA any non- operating gain, including but not limited to, any gain which must be treated under GAAP as an extraordinary item, an unusual gain, a prior period adjustment, a normal recurring correction and adjustment, a change in accounting principles, or as a gain or income from discontinued operations, or any gain realized upon the sale or other disposition of any property or asset that is not sold in the ordinary course of business." 1.2 Paragraph (c) of Schedule H to the Credit Agreement is hereby amended to read as follows: "(c) Minimum Net Worth. Borrower and its Subsidiaries (other than LaserMaster Europe) on a consolidated basis shall maintain at all times Net Worth equal to or greater than $2,500,000." 1.3 Paragraph (d) of Schedule H to the Credit Agreement is hereby amended to read as follows: "(d) Minimum Debt Service Coverage Ratio. Borrower and its Subsidiaries (other than LaserMaster Europe) on a consolidated basis shall have at the end of each Fiscal Quarter, a Debt Service Coverage Ratio for the 12-month period then ended (or for the Fiscal Quarters ending on or before June 30, 1997, the period from July 1, 1996 to such date) of not less than (i) with respect to the Fiscal Quarter ending September 1996, 0.00 to 1.00 and (ii) with respect to the Fiscal Quarter ending December 31, 1996 and each Fiscal Quarter thereafter, 1.00 to 1.00." 2. Conditions to Effectiveness. This Amendment shall become effective upon satisfaction of the following conditions: (a) Agent shall have received duly executed counterparts of this Amendment; and (b) Agent shall have received such other documents, instruments or agreements as Agent may reasonably request. 3. Due Execution, Delivery and Performance by Borrower; No Conflicts. Borrower hereby represents and warrants to Agent and Lenders that the execution, delivery and performance by Borrower of this Amendment and each of the documents and agreements described herein, or contemplated hereby, to which Borrower is a party (a) are within its corporate powers and have been duly authorized by all necessary corporate action on the part of Borrower, and this Amendment and such documents and agreements are the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with their respective terms; (b) are not in contravention of any provision of Borrower's certificate or articles or incorporation or bylaws; (c) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; (d) will not conflict with or result in the breach or termination of, constitute a default under or accelerate any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which Borrower is a party or by which Borrower or any of its property is bound; (e) will not result in the creation or imposition of any Lien upon any of the property of such Person other than those in favor of Agent, on behalf of itself and Lenders, all pursuant to the Loan Documents; and (f) do not require the consent or approval of any Governmental Authority or any other Person. 4. Status of Loan Documents; Reference to Credit Agreement. Except as specifically modified and amended hereby, the Credit Agreement and the other Loan Documents shall remain in full force and effect and effect and are hereby ratified and confirmed. This Agreement shall not operate as a waiver of any provision of the Credit Agreement or the other Loan Documents, nor is it to be construed as a release or waiver of any Default or Event of Default, whether now existing or hereafter arising, or of any of the rights, powers or remedies of Lenders or Agent under the Credit Agreement or any of the other Loan Documents. Upon the effectiveness of this Agreement each reference in (a) the Credit Agreement to "this Agreement," "hereunder," "hereof," or words of similar import and (b) any other Loan Document to "the Credit Agreement" shall, in each case and except as otherwise specifically stated therein, mean and be a reference to the Credit Agreement, as amended and modified hereby pursuant to the terms hereof. 5. Fees and Expenses. As provided in Section 11.3 of the Credit Agreement, Borrower agrees to pay on demand all fees, costs and expenses incurred by Agent in connection with the preparation, execution and delivery of this Amendment. 6. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 7. Counterparts. This Amendment may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first written above. LASERMASTER CORPORATION By: /s/Melvin Masters ------------------ Title: CEO --------------- GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Glenn P. Bartley -------------------- Title: Its Duly Authorized Signatory ----------------------------- REAFFIRMATION OF GUARANTIES The undersigned acknowledge receipt of copies of the First Amendment to Credit Agreement dated as of May 15, 1996 and each of the undersigned hereby reaffirms its respective obligations applicable under the Holdings Guaranty of Guaranty, each dated as of January 17, 1996 in favor of General Electric Capital Corporation, as Agent and Lender. Dated: May ____, 1996 LASERMASTER TECHNOLOGIES, INC. By: /s/Melvin Masters ------------------ Title: CEO --------------- LASERMASTER ASIA/PACIFIC, LTD. By: /s/Melvin Masters ------------------ Title: CEO --------------- COLORMASTERS, INC. By: /s/Melvin Masters ------------------ Title: CEO --------------- EX-11.1 7 PER SHARE EARNINGS CALCULATION LASERMASTER TECHNOLOGIES, INC. AND SUBSIDIARIES Item 15(a)(3) PER SHARE EARNINGS (LOSS) COMPUTATIONS Exhibit 11.1
Fiscal Years Ended June 30, ---------------------------------------- 1996 1995 1994 ------------ ----------- ----------- PRIMARY ------- Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636 Add: Interest on convertible subordinated debentures, net of applicable income taxes 262,653 ------------ ----------- ----------- Net (loss) earnings for primary earnings per share $(10,461,534) $ 206,474 $ 6,926,289 ============ =========== =========== Weighted average number of common shares outstanding 11,305,232 11,097,091 10,191,694 Add: Common equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of warrants and employee stock options 844,688 1,109,189 1,468,044 Common stock equivalents from assumed exercise of convertible debentures 529,158 ------------ ----------- ----------- Weighted average number of shares used in the calculation of primary earnings per share 12,149,920 12,206,280 12,188,896 ============ =========== =========== Primary (loss) earnings per common and common equivalent share $(0.86) $0.02 $0.57 ============ =========== =========== FULLY DILUTED ------------- Net (loss) earnings $(10,461,534) $ 206,474 $ 6,663,636 Add: Interest on convertible subordinated debentures, net of applicable income taxes 262,653 ------------ ----------- ----------- Net (loss) earnings for fully diluted earnings per share (10,461,534) 206,474 6,926,289 ============ =========== =========== Weighted average number of common shares outstanding 11,305,232 11,097,191 10,191,694 Add: Common equivalent shares (determined using the "treasury stock" method) representing shares issuable upon exercise of warrants and employee stock options 1,020,376 1,216,355 1,608,528 Common stock equivalents from assumed exercise of convertible debentures 529,158 ------------ ----------- ----------- Weighted average number of shares used in the calculation of fully diluted earnings per share 12,325,608 12,313,446 12,329,380 ============ =========== =========== ------------ ----------- ---------- Fully diluted (loss) earnings per common and common equivalent share $ (0.85) $ 0.02 $ 0.56 ============ =========== ==========
The calculation of fully diluted EPS uses the higher of the ending market price for the period or the average market price. For the year ended June 30, 1996, the inclusion of common stock equivalents in the primary and fully diluted earnings per share shown above have an anti- dilutive effect on the per share loss reported. Consistent with the provisions of Accounting Principles Board No. 15, the Company's earnings per share reported on its statement of operations for the year ended June 30, 1996, exclude common stock equivalents in the earnings per share amounts reported. Accordingly, such per share amounts do not agree with the amounts shown above. EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERNAL FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 12-MOS JUN-30-1996 JUN-30-1996 APR-01-1996 JUL-01-1995 JUN-30-1996 JUN-30-1996 90,851 90,851 0 0 12,563,112 12,563,112 2,475,000 2,475,000 13,524,314 13,524,314 32,666,842 32,666,842 5,099,560 5,099,560 14,299,174 14,299,174 46,544,964 46,544,964 30,086,929 30,086,929 0 0 114,261 114,261 0 0 0 0 15,523,679 15,523,679 46,544,964 46,544,964 23,759,161 93,592,044 23,759,161 93,592,044 20,409,349 64,378,882 20,409,349 64,378,882 0 0 0 0 458,699 1,784,365 (11,076,892) (15,608,534) 3,687,000 5,147,000 (7,389,892) (10,461,534) 0 0 0 0 0 0 (7,389,892) (10,461,534) (.65) (.93) (.65) (.93)
EX-99 9 CAUTIONARY FACTORS EXHIBIT 99 CAUTIONARY FACTORS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 LaserMaster desires to take advantage of the new "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995 (the "Act"). Contained in this Form 10-K are statements which are intended as "forward- looking statements" within the meaning of the Act. The words or phrases "expects", "will continue", "is anticipated", "management believes", "estimate", "projects", "hope" or expressions of a similar nature denote forward-looking statements. Those statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on forward-looking statements. Readers should also be advised that the factors listed below have affected the Company's performance in the past and could affect future performance. Those factors include, but are not limited to, the risk that a product may not ship when expected or may contain technical difficulties; uncertain demand for new or existing products; the impact of competitor's advertising, products or pricing; availability or reliability of component parts, including sole source parts; manufacturing limitations; availability of sources of financing; economic developments both domestically and internationally; new accounting standards; and, the impact of the initiation, defense and resolution of litigation. Other factors include the following: Cash Needs. Although the Company has a credit agreement with a commercial finance company that has adequately financed its cash requirements in the past, net operating losses in fiscal 1996 and manufacturing and inventory requirements for current and new printer engines have resulted in a need for additional financing. In September 1996, projected cash requirements in excess of available sources required the issuance of private placements of common stock and warrants to purchase common stock in the Company. There can be no assurances that cash availability under the credit agreement and proceeds from the private placements will be adequate, or that other sources of financing would be available to the Company on favorable terms or at all, if the Company's operations are further affected by declining revenue from existing product lines, or introduction difficulties with new product lines, or by market conditions in general. In addition, there can be no assurance that the Company can achieve profitability on a quarterly or annual basis in the future. Product Development and Technological Change. The pre-press and wide-format color printing industries are highly competitive and are characterized by frequent technological advances and new product introductions and enhancements. Accordingly, the Company believes that its future success depends upon its ability to enhance current products, to develop and introduce new and superior products on a timely basis and at acceptable pricing, to respond to evolving customer requirements, and to design and build products which achieve general market acceptance. Any quality, durability or reliability problems with 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 with respect to any existing products or that even in the absence of such problems, the Company's products will achieve market acceptance. In addition, the market anticipation or the announcement of new products and technologies could cause customers to defer purchases of the Company's existing products, which could have a material adverse effect on the Company's business and financial condition. The Company is currently undertaking a number of development projects. Although the Company has had successes introducing new products, some products have experienced limited market acceptance, the introductions of some products have been delayed, and the quality and reliability reputation of certain products may unfavorably affect new products. There can be no assurance that the Company will be successful with 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. 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 competitors 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. Suppliers of large-format print engines and systems compete on the basis of print quality, color, print time, print size, product features, including ease of use and service, and price. Competitive product sales practices such as price reductions, increased promotion, product giveaways and bundling, or announcement or accelerated introduction of new or enhanced products could have a material adverse effect on the sales and financial condition of the Company. New product introductions and changes in pricing structure by competitors have had, and can be expected to continue to have, a significant impact on the demand for the Company's products. In particular, the high-resolution laser printer market in which the Company's plain-paper typesetters compete has become increasingly competitive as the resolution of commodity laser printers sold for general purpose business printing, such as those manufactured by Hewlett-Packard, has improved. The Company anticipates decreasing demand for its products in this market and decreasing revenue from sales of plain-paper typesetting products. In addition, the manufacturer of the printing engine for the Company's DisplayMaker Professional sells its own branded products in direct competition with the Company's products and continues to sell its engines to other systems integrators and distributors that compete directly with the Company. Also, it is possible that the companies that supply the Company with consumable products such as ink and media will compete with the Company by selling directly to users or sell to competitors who may offer the products to the users. Further, a number of competitors have introduced consumables which they allege to be compatible with the Company's products and have priced the consumables below the LaserMaster-branded consumables. Although the Company believes that its Big Color products possess certain advantages over the competitors' products, the increased competition has impacted sales volumes and margins and may continue to impact volumes and margins in the future. The Company has generally competed in these markets by introducing technologically advanced products that create new market demand and products which offer optimum performance characteristics. There can be no assurance that the Company will be able to continue to innovate to the extent necessary to maintain a competitive advantage in these markets or that other competitors will not achieve sufficient product performance with products offering better pricing or other competitive features. The Company's PressMate-FS, DisplayMaker Express and DesignWinder products are based on relatively new technology, are complex and must be reliable and durable to achieve market acceptance and enhance revenue opportunities. Development and production of new, complex technologies and products often have associated difficulties and delays. Consequently, customers may experience reliability and durability problems that arise only as the product is subjected to extended use over a prolonged period of time. The Company and certain DisplayMaker Express users have encountered operational problems which the Company is addressing. However, given the recent introduction of several new engines, there can be no assurance that the Company has successfully resolved these operational problems or that the Company will successfully resolve any future problems in the manufacture or operation of the DisplayMaker Express printers or any new product. Failure by the Company to resolve manufacturing or operational problems with the DisplayMaker Express printer or 2 any new product in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Component Availability and Costs. Certain components used in the Company's current and planned products, including printer marking engines and other printer components, are currently available from sole sources, and certain other components are available from only a limited number of sources. The Company has in the past experienced delays as a result of the failure of certain suppliers to meet requested delivery schedules and standards of product performance and quality. In addition, recent losses from operations of the Company have restricted cash availability and the ability to keep supplier debt current or within the established credit limits. The requirement to bring certain component suppliers' debt obligations current, or other restrictions in credit terms of such component suppliers, could result in an inability to manufacture certain product lines and thereby adversely affect the financial performance of the Company. The Company's inability to obtain sufficient supply of components, or to develop alternative sources, could result in delays in product introductions, interruptions in product shipments or the need to redesign products to accommodate substitute components, any of which could have a material adverse effect on the Company's operating results. A substantial portion of the total manufacturing cost of the Company's typesetting and Big Color products is represented by certain components, particularly dynamic random access memory chips ("DRAMs"), the prices of which have fluctuated significantly in recent years. Significant increases or decreases in the price or reductions in the availability of DRAMs or other components, could have a material affect on the Company's operating results. In addition, the Company is dependent upon a third-party supplier for the inkjet engine used in its DisplayMaker Professional product. The Company believes that it will be able to purchase adequate inventory of current and future versions of the supplier's print engines to meet its requirements for integration into the DisplayMaker product line. Nevertheless, there can be no assurances that the supplier will make its print engines available on the same terms as the current print engine or that the Company will be able to successfully integrate product revisions into the Company's product line in the time frame required to minimize competitive sales pressures in the marketplace. The Company is also dependent on a sole source supplier for the printheads used in DisplayMaker Express. The Company has experienced availability and quality issues with this supplier that have affected shipping schedules and customer satisfaction and have negatively impacted operating results in the past. There can be no assurance that this supplier will be able to meet the Company's production requirements in the future or that the quality of the product will be acceptable. The Company sells consumable print media and inks for use with its Big Color product line, and film used with the PressMate-FS. The Company depends on the availability of consumable products to support its installed base of print engines. There is no assurance that the suppliers of these consumables will continue to offer their products to the Company, or that the consumable products will continue to be available to the company at the same quarterly, pricing and terms. The unavailability of consumable products or negative changes in quality could adversely impact the market acceptance of the Company's new and existing products, and may adversely affect sales of consumables. Uncertainty Regarding Development of Wide-Format Market; Uncertainty Regarding Market Acceptance of New Products. The Wide-Format market is relatively new and evolving. The Company's future financial performance will depend in large part on the continued growth of this market and the continuation of present large- format printing trends such as use and customization of large-format advertisements, use of color, transferring of color images onto a variety of substrates, point-of-purchase printing, in-house graphics design and production and the demand for limited printing runs of less than 200 copies. The failure of the Wide-Format market to achieve anticipated growth levels or a substantial change in large-format printing customer preferences could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, in a new market, 3 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, 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. 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: the timing of new product announcements; product introductions and price reductions by the Company and its competitors; the availability and cost of key components and materials for the Company's products; fluctuations and availability in customer financing; the relative percentages of sales of consumables and printer architectures; risks related to international sales and trade; and general economic conditions. In addition, the Company's operating results are influenced by the seasonal buying patterns of its customers, which have in the past generally resulted in reduced revenues and earnings during the Company's first fiscal quarter. Further, the Company's customers typically order products on an as-needed basis, and virtually all of the Company's sales in any given quarter result from orders received in that quarter. Certain products require significant capital expenditures, causing some customers to delay their purchasing decision. Delays in purchases of low volume, high-cost printers may cause significant fluctuations in the sales volume for a given period. Also, the Company's manufacturing plans, sales staffing levels and marketing expenditures are primarily based on sales forecasts. Accordingly, deviations from these sales forecasts may cause significant fluctuations in operating results from quarter to quarter and may result in unanticipated quarterly earnings shortfalls or losses. Historically, a large percentage of orders have been received and shipped near the end of each month. If anticipated sales and shipments do not occur, expenditure and inventory levels may be disproportionately high and operating results could be adversely affected. Dependence on Consumables Revenues. The Company anticipates it will derive an increasing percentage of its revenues and operating income from the sale of ink, paper, film and other consumables to its customers. To the extent sales of the Company's consumables are reduced because its customers are unsuccessful in marketing their own printing services, or substitute third-party consumables for those of the Company, the Company's results of operations could be adversely affected. Further, although the Company's consumables are manufactured specifically to operate with its printing products to produce optimum results, there can be no assurances that other manufacturers of printing inks and papers will not develop products that can be sold and compete with the Company's printing products, or that other products will not produce results which are satisfactory to the customer at a lower cost. The Company alleges that at least one manufacturer has improperly used the Company's trade secrets to commence such competition. Although the Company has commenced legal action against such manufacturer for misappropriation of trade secrets, there can be no assurances that other manufacturers will not independently and legitimately develop competing consumable products. In addition, 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. 4 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. The Company has been granted three United States patents for inventions related to its TurboRes(R) approach to enhancing the vertical resolution of conventional laser printer engines and three United States patents relating to the Company's Big Ink/(TM)/ Delivery System. Additional patent applications are pending relating to the Company's TurboRes, ThermalRes/(TM)/, FastPort/(TM)/, Big Ink Delivery System, oversized A3 printing, high-resolution imaging and image enhancement and wide-format printing technologies and techniques. There can be no assurance that patents will be issued from any of these pending applications, although the ThermalRes process and mechanical aspects of the PressMate engine received U.S. patent coverage during May 1996. With regard to current patents or patents that may be issued, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or that issued patents will not be challenged, invalidated or violated, requiring expenditures of cash to pursue and enforce the Company's rights in the patented technology. Applications to patent the basic TurboRes, ThermalRes and Big Ink Delivery System approaches and related technologies have been filed in selected foreign countries. Patent applications filed in foreign countries are subject to laws, rules and procedures which differ from those of the United States, and there can be no assurance that foreign patents will be granted as a result of these applications. Furthermore, even if these patent applications result in the issuance of foreign patents, some foreign countries provide significantly less patent protection than the United States. 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 5 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. There can be no assurance that others will not independently develop similar products, duplicate the Company's products or design products that circumvent any patents used by the Company. No assurance can be given that the Company's processes or products will not infringe patents or proprietary rights of others or that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. If the company does not obtain such licenses, it could encounter delay 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. If the outcome of any such litigation is adverse to the Company, the Company's business could be adversely affected. Litigation and Litigation Costs. The Company and three of its officers are currently subject to various claims in a securities lawsuit relating to a decline in the market price of the Company's common stock in December 1994. The Company is vigorously contesting the action against itself and its officers. The Company is obligated to indemnify its officers for the costs of their defense and to advance such costs prior to final disposition to the extent that such indemnification is requested and to the extent certain statutory requirements are met. Further, the Company has instituted action against a competitor for patent infringement, misappropriation of trade secrets and other causes of action. The competitor counter-claimed for false advertising, patent misuse, and unfair competition by LaserMaster. The Company believes these counter-claims are without merit. Such competitor has also published an allegation that the Company's consumables sales practices are in violation of trade and antitrust laws. Although the Company does not believe any of its practices violate applicable trade or anti-trust laws, there is no assurance that claims or actions will not be commenced by customers, competitors or governmental authorities based on trade or anti-trust claims which could affect the Company's operations and cash position. The Company is also engaged in various actions related to transactional matters, customers credit and product quality and/or warranty issues. Some of these actions include claims against the Company for punitive, exemplary or multiple damages. An award of punitive damages may not bear a direct 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 may have an adverse impact on the Company's operations and may result in a distraction or diversion of management's attention, thereby adversely affecting the operations by the Company. International Operations. The Company expects that international revenues will continue to represent a substantial portion of its total revenues. International operations are subject to various risks, including exposure to currency fluctuations, political and economic instability, differing economic conditions and trends, unexpected changes in regulatory requirements and 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. 6 Fluctuations in currency exchange rates could result in lower sales volume reported in U.S. dollars. Fluctuations in foreign exchange rates are unpredictable and may be substantial. From time to time the Company has engaged in limited foreign currency hedging transactions. There can be no assurance that the Company will be successful if it engages in such practices to a significant degree in the future. Dependence on Key Personnel. The Company's success depends to a significant extent upon certain key personnel, including Mr. Masters, its Chief Executive Officer and President, and Mr. Lukis, its Chief Technical Officer. The loss of either of these individuals, or other key management or technical personnel, could adversely affect the Company's business. The Company maintains key person life insurance in the amount of $2,000,000, payable to the Company, on each of Mr. Masters and Mr. Lukis. In addition, the Company has certain non-compete and continuation contracts with key personnel, which are currently under review by the Company's Board of Directors in an effort to recruit and retain key personnel. The Company also depends on its ability to attract and retain highly skilled personnel. Competition for employees in this market is high and there can be no assurance that the Company will be able to attract and retain the employees needed. In addition, past financial performance of the Company may limit the ability to hire and retain management professionals. Environmental. The Company is subject to local and federal laws and regulations regarding the use, storage and disposition of inks used with the Company's print products. Although the Company believes it is in compliance with all such laws and regulations, and the Company is not aware of any notice or complaint alleging any violation of such laws or regulations, there can be no assurance that there will not be some accidental contamination, disposal or injury from the use, storage, or disposition of inks or other materials used in the Company's operations. In the event of such accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on the Company's financial condition. In addition, there can be no assurance that the Company will not be required to comply with environmental claims, laws, or regulations in the future which could result in significant costs which could materially adversely affect the Company's financial condition. 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. 7 -----END PRIVACY-ENHANCED MESSAGE-----