-----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, HpmqQKu+LIoSk1ANe94s/aXsmNNsidVYt4enXhD4VPNVBYbfnQJtcumc7wpFUh+6 YcN+hyJOxgt0dynmno/1Dw== 0000950131-97-005833.txt : 19970926 0000950131-97-005833.hdr.sgml : 19970926 ACCESSION NUMBER: 0000950131-97-005833 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970925 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/A SEC ACT: SEC FILE NUMBER: 000-18114 FILM NUMBER: 97685334 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/A 1 AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K-A [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, manufactures and markets wide-format (up to 54" wide prints) digital high resolution color printers and chemical-free film imagers ("filmsetters"): and related image processing equipment for professional printing applications. In addition, the Company sells related consumable products ("consumables") for its installed base of printing products, consisting primarily of ink, media, (such as specialty papers, canvas, vinyl, etc., film, toner (ink-like powder) and process units (which facilitate transfer of toner to the media surface). The Company's products combine advanced computer technology with the Company's own sophisticated software, hardware and proprietary printers ("engines") to produce professional-quality printed output at an affordable cost. DisplayMaker /(R)/ Professional , Design Winder/TM/ & DisplayMaker Express Big Color /(R)/ wide- format, digital inkjet color printers are designed to be cost-effective solutions for the short-run digital computer printing of photo-realistic, wide- format color output. The Company's Halon/(TM)/ product allows users to transfer digital data from the image processing computer and software (the print server) to various color laser copiers including those produced by Canon, Kodak and Xerox. The PressMate/(R)/-FS, a proprietary desktop chemical-free Filmsetter/(TM)/, is capable of film output generated without the use of chemicals (dry film) typically associated with developing film, with effective resolution of 2400 dots per inch. The ColorMark/(R)/ Pro 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 Halon32 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 (raster image processor) which is capable of supporting a combination of products including DisplayMaker Professional, DesignWinder or PressMate-FS. Until 1993, the Company's principal products were monochrome laser printers that were based on printer hardware or "engines" manufactured by others but included proprietary software (including "TurboRes") and hardware designed to generate significantly higher effective resolution. This resolution, commonly expressed in terms of "dots per inch" (the number of digitally placed dots on a line), approached the resolution used in professional typesetting previously dominated by photographic processes and was described as "plain-paper typesetting." Although the Company believes that it was a market leader in very high resolution laser printing and continued to enhance its products, from 1991 though 1996, many of the Company's competitors, significantly including Hewlett Packard, increased the performance of their printer offerings, impacting the volume and margins achieved on sales in the high resolution laser printer marketplace. The Company focused its research and development efforts on other sectors of the printing market during this period (and on the development of proprietary printing hardware) and ceased activity promoting its plain-paper typesetting products entirely in the fourth quarter of fiscal 1996, which resulted in a decline in sales of plain-paper typesetting products. The bulk of the decline in sales from plain-paper typesetting products during this period was replaced by sales of new, large-format color ink-jet printers developed by the Company. The Company introduced its large-format (36 inch), photo-realistic color printer, the DisplayMaker Professional, in 1993. Although still based on a printer "engine" developed by others, the DisplayMaker Professional integrates a high performance computer print server and the Company's own software with a proprietary ink delivery system ("Big Ink/(TM)/") to enhance speed, functionality and the quality of output to generate photo-realistic, poster-sized prints. As the market grew and demand increased, competitors have licensed the printer "engines" from the Company's supplier and have introduced their own competing product, again impacting margins. As part of its longer term strategy to reduce its susceptibility to new market entrants, the Company began development of several proprietary printer "engines" in 1994. The first of these products addresses a niche in the long-run, laser typesetting market by eliminating the need for the use of photographic processes and chemicals in creating an image on a photographic film used to create a metal printing plate. In 1994, the Company introduced a proprietary printer engine and associated software, PressMate, that uses heat-sensitive film rather than photosensitive film that allows dry process imaging on the desk-top rather than chemical development in the darkroom. The Company enhanced this printer and introduced a reconfigured version as the "PressMate-FS" in August, 1995. During the past three years, the Company has also developed two new products using proprietary printer engines to address the wide-format printing market. The first of these products, the DisplayMaker Express, is a 54 inch wide, photo-realistic roll fed color printer that uses phase-change inks (solid inks that are melted during the printing process), which was introduced in 1995. The second product with a proprietary printer engine, the DesignWinder, was introduced in September 1996. The DesignWinder is a drum-based, 8 head, sheet fed, high speed printer that produces wide format (36 inch by 44 inches) prints in approximately 6 minutes. Since 1994, the Company has also introduced the ColorMark Pro Print Servers, RIPStations (raster image processing stations), and the Halon copier interface to enhance and expand the utility, functionality and applications for the color products. The primary users of the Company's products are commercial printers, reprographic service bureaus, photo labs, quick printers, exhibit builders, in-house print shops, printers, publishers, government and educational facilities, and corporate marketing departments. Applications include point of purchase signs, trade show exhibit graphics, banners, billboards, courtroom graphics, pre-press positional proofing (proofs or other quick output to demonstrate concepts for advertising or graphics layouts), digital photo imaging and backlit signage. The Company's products are primarily sold through the Company's direct telemarketing sales force, supplemented by a network of dealers and value-added resellers 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 Hoofdoorp, The Netherlands. MARKET According to a market survey conducted by IT Strategies, a firm which specializes in research regarding emerging color printing markets with emphasis in wide-format color graphics, color labels and packaging, textiles and next- generation digital color presses/print systems, 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 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 appearance of an 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 variety of media or other materials used for signage or display. Electrostatic printers generally are more expensive to purchase than inkjet printers or thermal printers and require the use of special 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, 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 (the printer engine including ink and media delivery systems) designed, manufactured, and marketed 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 the U.S. and Canada. To develop additional media, ink and film for use with the Company's proprietary print engines to enhance printing applications and market expansion. 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 (solid ink blocks which are melted for application), 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 additional markets for inkjet users by expanding the uses and potential applications for 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 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 exclusive rights for certain wide-format applications. The DisplayMaker Express prints over 100 square feet per hour, or an E-size (34 inches by 44 inches) print in approximately six minutes. DisplayMaker Express is capable of producing prints 54 inches wide and in excess of 150 feet in length. 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 printer functionality and print 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 (dots per inch) resolution prints up to 33.5 inches by 47.25 inches in size utilizing its patent-pending ColorSpan Wide Gamut(TM) printing technique which uses additional inks to address more discreet colors within the color gamut. The high-precision, spinning drum-based design provides superior dot placement accuracy and repeatability, setting a new standard in Big Color print quality, unattainable in traditional inkjet plotter devices (print engines that use a moving print head traveling perpendicular to a moving web of paper to attain print coverage). 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. Halon32. The Halon32 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 driven by the Company's ColorMark Pro 1600 print server, a raster image processor that is based on a 166 MHz, 32-bit superscalar microprocessor. The ColorMark Pro 1600 features advanced file spooling (a queue method) for multiple users, "RIP Saver(R)" (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 several devices simultaneously including one DesignWinder, up to two DisplayMaker Professionals, one DisplayMaker Express, up to two PressMate-FS's or up to two color laser copiers with Halon32 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 engine 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 signed a supply agreement with 3M Commercial Graphics Division to supply 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 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. 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,/(TM)/ and TransWhite(R) translucent backlit film (used on back-lighted signs) for use with the DisplayMaker Professional. As part of the ColorMark system, the 500 ml Big Ink packs, and 150 ml ColorMark ink pucks, or blocks, ship with ColorMark profilers (recyclable circuit boards) that plug into the ColorMark Docking Station, and provide information to ensure accurate, consistent color output from print to print. The domestic price per dye-based Big Ink pack is $199 per color. The 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(R) requires specially developed ThermalRes film rolls which are also supplied by the Company. This unique specialty film is manufactured to the Company's specifications. The domestic price is $295 for a 90-foot roll of ThermalRes film. 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 require toner and process units 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-A. 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 U.S. and Canada and value-added resellers Internationally. As of June 30, 1996, the Company employed a 73 person telemarketing sales force including sales professionals focused in part 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 the U.S. and Canada. 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 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 Europe, 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 resellers. Resellers are granted the right to purchase LaserMaster products at discounted prices from list price and distribute those products within a specified territory outside the United States. Reseller agreements require the reseller to promote, market and support LaserMaster products and are typically for a one year period with automatic one year renewals. Either party may terminate the agreement with or without cause, with a 30 day written notice. The Company may appoint other resellers and may sell directly to customers inside these territories. 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. See Note 13 of Notes to Consolidated Financial Statements for additional information regarding International operations. 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. 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-A. 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-A. 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. Some of the competing manufacturers and vendors in this market include Hewlett-Packard Co., ENCAD, Inc., RasterGraphics Inc., Versatec, Inc., Electronics for Imaging, Inc., Iris Graphics, Inc., Calcomp, Inc., Roland, Mutoh, Epson, Summagraphics, 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, high-speed, high- resolution Big Color product, DesignWinder, in September 1996. This product is based on a drum and uses eight printheads to achieve a new level of quality for a liquid inkjet printer output. 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. Digital printers, used with software that permits manipulation of images and text, can create photo-realistic output without the use of the photographic process, eliminating the need for chemical production facilities. The electrostatic printers that compete with the Company's Big Color products are expensive, costing from $50,000 to over $200,000, and can involve significant maintenance and operating costs. They can also require controlled environments and sophisticated front-end processing systems. Although electrostatic printers provide significantly faster printing speeds and lower per-square-foot consumables costs than those of the Company's products, the Company believes it competes favorably with such devices on the basis of lower initial purchase price, easier operation, higher quality output and lower ongoing maintenance and environmental requirements. 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-A. 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 is fully utilizing its current facilities and will likely need to acquire additional space when its new product, DesignWinder, reaches production quantities expected in the Fall of 1996. Additional facilities are readily available within or near the current campus at rates comparable to what the Company is currently paying. 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-A 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 currently involved in a dispute regarding liability for the value of certain components lost by a carrier prior to delivery to the Company. At this time the liability of the shipper, the carrier, or the insurers of the shipped, the carrier and the Company has not been determined. 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............................ 7.625 5.125 Second Quarter........................... 7.50 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-A 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. As a result of these actions, operating expenses should be approximately $200,000 per month lower in fiscal 1997 than in fiscal 1996. Some of these expenses may be incurred again as DesignWinder and other new products are introduced in the marketplace. 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. At June 30, 1996, the Company had approximately $5.9 million in net deferred tax assets. Realization of approximately $3.6 million in deferred tax assets related to federal net operating loss carryforwards and federal research and development credits will require the Company to generate future taxable income of approximately $11 million within the next 15 years to receive full taxable benefit. The remaining $2.3 million in deferred tax assets can be recovered by future reversals of existing taxable temporary differences. The Company expects to generate sufficient taxable income within the next 15 years to recover the entire $5.9 million in net deferred tax assets. 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. 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. As part of this agreement, the commercial finance company required that the loan to TMI be subordinated to the rights and security interest of the lender, and that a forbearance agreement restrict repayment of the TMI debt to permit repayments of specified amounts only if certain financial conditions were met, of upon the sale of common stock. In consideration for agreeing to such subordination and forbearance, TMI was issued a warrant to purchase 277,953 shares of the Company's common stock at an exercise price of $6.35 per share 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 the private placement of common stock to repayment of LMC's indebtedness to TMI under the note to TMI in the principal amount of $1.765 million, as permitted by the subordination and forbearance agreement. 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 and certain officers Additionally, the Company 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 may also be required to lease additional space when DesignWinder reaches production levels. Management expects that the proceeds from the private placements will allow the Company to carry out its business plan for fiscal 1997. This plan includes the introduction of new proprietary print engine, DesignWinder, and new consumable offerings in late calendar 1996 along with at least one additional print engine and consumables into the next fiscal year. Management believes this plan is achievable and will result in sufficient cash flow to fund operations. 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 Secretary 1995 161,667 34,100/2/ 1994 127,500 35,000 - ---------------------------------------------------------------------------------------------------------------------- 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. Jean-Louis Gassee has significant expertise in the personal computer industry and in the management of research and development of hardware and software products. His expertise in the trends and issues in this industry was not available within the Company and could only be obtained through a relationship with a specialized consultant or highly compensated employee, if one could be identified and retained. Mr. Gassee consulted with the Company on a number of issues including industry trends, and product development issues. An additional $15,000 of consulting fees was incurred for services provided by Mr. Meyer during fiscal 1996. John Meyer is an independent consultant whose background is in desktop publishing software and hardware. Mr. Meyer consulted with the Company on technology management matters. Mr. Parr was paid $8,000 in consulting fees for services provided during fiscal 1996. Mr. Parr is the former General Counsel of the Company and has expertise not found within the company in the area of corporate finance. Mr. Parr provided consultation services regarding financing matters. The consulting fees paid to Messrs. Gassee, Meyer and Parr were determined and set based on anticipated consulting services and the market costs therefor. The Company believes that the consulting fees paid to Messrs. Gassee, Meyer and Parr represent the approximate market value for the consulting services performed and that which might be obtained from similar arrangements with non-affiliates. EMPLOYMENT AGREEMENTS At June 30, 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. 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 September 30, 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 shareholde rs listed below have sole investment and voting power with respect to their shares.
Number of Beneficially Owned Percent of Shares Name of Beneficial Owner Shares Outstanding - ------------------------ ------ ----------- Sihl-Zurich Paper Mill on Sihl AG (1) 2,742,858 17.7% Melvin L. Masters (2) 2,625,525 16.9% 6425 Beach Road Eden Prairie, MN 55344 Lawrence J. Lukis (3) 2,199,531 14.2% 3250 Fox Street Long Lake, MN 55356 General Electric Capital Corporation (4) 881,542 5.7% Ralph D. Rolen (5) 107,774 * Jean-Louis Gassee (6) 85,000 * Robert J. Wenzel (7) 53,050 * James E. Retterath (8) 28,750 *
29
Thomas D. Ryan (9) 12,000 * All officers and directors as a group (8 persons) (10) 5,165,779 33.3%
* Less than 1% (1) Includes warrants to purchase 1,371,429 shares. (2) Includes 411,428 shares and warrants to purchase 963,667 shares owned by TMI; 274,286 shares owned by GRAMPI; 228,572 shares and warrants to purchase 228,572 shares owned by GRAMPI #2. (3) Includes shares owned by Donna Lukis, Mr. Lukis' spouse. Includes 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. (4) Includes warrants to purchase 471,286 shares. (5) 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. (6) Includes 60,000 shares issuable to Mr. Gassee under options which are exercisable. (7) 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. (8) Includes 28,750 shares issuable to Mr. Retterath under options which are exercisable or will become exercisable within 60 days. (9) Includes 10,000 shares issuable to Mr. Ryan under options which are exercisable or will become exercisable within 60 days. (10) Includes 151,483 shares issuable under options which are exercisable or will become exercisable within 60 days and warrants to purchase 1,192,239 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has the following arrangements with certain of its directors, executive officers or five percent shareholders; (1) The Company leases space it currently occupies in Shady View I & II, with 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. The Company leases 168,034 square feet of space under this agreement which has a term of fifteen years and a monthly base rate as of December 1995, of $82,216. The base rate escalates periodically over the term of the lease. The Company is also required to pay its pro-rata share of property taxes, utilities and essentially all other operating expenses. There is no renewal option. Rent expense under this lease was $1,355,000 in fiscal 1996 of which $119,765 had not been paid as of June 30, 1996. (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 note bears interest at prime rate plus 1.75%. Accrued interest on June 30, 1996 totaled $14,507. 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 in the event either LMC is unable to repay such indebtedness before January 17, 1998, or an event of default occurs. This transaction was submitted to and approved by the shareholders at the Company's annual meeting in May 1996. (5) In September 1996, the Company issued 914,286 shares of restricted common stock in a private placement to TimeMasters, Inc., GRAMPI and GRAMPI #2 (together as a group known as the TimeMasters group), which is controlled by Melvin L. Masters, the Company's CEO. The shares were issued at the market price of $4.375 per share and were paid by promissory notes totaling $4 million 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, (see item (1) above). The Company anticipates applying one of the notes in the amount of $1.8 million, to repayment of LMC's indebtedness to TMI (see item (4) above) by offset. 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 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 10, 1997 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 and Principal Financial Officer - ------------------------ Timothy Thurn /s/ Mark Pederson Controller - ------------------------ Mark Pederson 33 EX-99 2 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-Q are statements which are intended as "forward- looking statements" within the meaning of the Act. The words or phrases "expects", "will continue", "is anticipated", "management believes", "estimate", "projects", "hope" or expressions of a similar nature denote forward-looking statements. Those statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from those results presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on forward-looking statements. Readers should also be advised that the factors listed below have affected the Company's performance in the past and could affect future performance. Those factors include, but are not limited to, the risk that a product may not ship when expected or may contain technical difficulties; uncertain demand for new or existing products; the impact of competitor's advertising, products or pricing; availability or reliability of component parts, including sole source parts; manufacturing limitations; availability of sources of financing; economic developments, both domestically and internationally; new accounting standards; and, the impact of the initiation, defense and resolution of litigation. Other factors include the following: CASH NEEDS. Although the Company has a credit agreement with a commercial finance company that has adequately financed its cash requirements in the past, net operating losses in fiscal 1996 and manufacturing and inventory requirements for current and new printer engines have resulted in a need for additional financing. In September 1996 projected cash requirements in excess of available sources required the issuance of private placements of common stock and warrants to purchase common stock in the Company. There can be no assurances that cash availability under the credit agreement and proceeds from the private placements will be adequate, or that other sources of financing would be available to the Company on favorable terms, or at all, if the Company's operations are further affected by declining revenue from a lack of sales or significant returns of existing products, introduction difficulties with new product lines, or by market conditions in general. In addition, there can be no assurance that the Company can achieve profitability on a quarterly or annual basis in the future. PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE. The pre-press and wide-format color printing industries are highly competitive and are characterized by frequent technological advances and new product introductions and enhancements. Accordingly, the Company believes that its future success depends upon its ability to enhance current products, to develop and introduce new and superior products on a timely basis and at acceptable pricing, to respond to evolving customer requirements, and to design and build products which achieve general market acceptance. Any quality, durability or reliability problems with existing or new products, regardless of materiality, or any other actual or perceived problems with the Company's products could have a material adverse effect on market acceptance of such new products. Any quality problems with components could result in "epidemic" failures of the products in the field causing return and refund requests that would likely have a material effect on the financial results of the Company and future sales potential. There can be no assurance that such problems or perceived problems will not arise with respect to any existing products or that even in the absence of such problems, the Company's products will achieve market acceptance. In addition, the market anticipation or the announcement of new products and technologies could 1 cause customers to defer purchases of the Company's existing products, which could have a material adverse effect on the Company's business and financial condition. The Company is currently undertaking a number of development projects and introduced a new product, DesignWinder, during September 1996. Although the Company has had successes introducing new products, some products have experienced limited market acceptance, the introductions of some products have been delayed, and the quality and reliability reputation of certain products may unfavorably affect new products. There can be no assurance that the Company will be successful with the DesignWinder or future product introductions, that future market introductions will be timely and competitive, that future products will be priced appropriately, or that future products will achieve market acceptance. The Company's inability to achieve market acceptance, for technological or other reasons, could have a material adverse effect on the Company's financial condition. The Company has undertaken to assist the manufacuturer of certain components of the DisplayMaker Express with quality and yield issues. In addition, the Company is aware of intermittent customer issues with the performance and formulation of the inks used in the DisplayMaker Express. The Company is taking steps to address these issues. However, failure to address quality or functionality issues, or some other failure of the product to perform as expected by the customer may result in customer requests for compensatory supplies or other requests which could have a material adverse effect on the Company's financial performance. The Company is dependent on a sole source supplier for the printheads for the PressMate-FS. The Company has experienced availability and issues with quality consistency from this supplier. If the Company is unable to resolve the availability and quality issues, the Company's production and product quality requirements will be adversely affected. Various potential actions by any of the Company's competitors, especially those with a substantial market presence, could have a material adverse effect on the Company's business, financial condition and results of operations. Such actions may include reduction of product price, increased promotion, announcement or accelerated introduction of new or enhanced products, product giveaways, product bundling or other competitive actions. Additionally, a competitor's entry into the wide-format market in such ways as to compete more directly and effectively with the Company's products could adversely affect operational results. COMPETITION. The computer printer industry is intensely competitive and rapidly changing. Some of the Company's existing competitors, as well as a number of potential new competitors, have longer operating histories, greater technical resources, more established and larger sales and marketing organizations, greater name recognition, larger customer bases and significantly greater financial resources than the Company, which may result in a competitive advantage. Suppliers of large-format print engines and systems compete on the basis of print quality, color, print time, print size, product features, including ease of use, service, and price. Competitive product sales practices such as price reductions, increased promotion, product giveaways and bundling, or announcement or accelerated introduction of new or enhanced products could have a material adverse effect on the sales and financial condition of the Company. New product introductions and changes in pricing structure by competitors have had, and can be expected to continue to have, a significant impact on the demand for the Company's products. In particular, the high- resolution laser printer market in which the Company's plain-paper typesetters compete has become increasingly competitive as the resolution of commodity laser printers sold for general purpose business printing, such as those manufactured by Hewlett-Packard, has improved. The Company anticipates decreasing demand for its products in this market and decreasing revenue from sales of plain-paper typesetting products. In addition, the manufacturer of the printing engine for the Company's DisplayMaker Professional sells its own branded products in direct competition with the Company's products and continues to sell its engines to other systems integrators and 2 distributors that compete directly with the Company. It is possible that the Company's sales of certain products will compete with, or displace sales of other products sold by the Company. Also, it is possible the companies that supply the Company with consumable products such as ink and media will compete with the Company by selling directly to users or sell to competitors who may offer the products to the users. Further, a number of competitors have introduced consumables which they allege to be compatible with the Company's products and have priced the consumables below the LaserMaster-branded consumables. Although the Company believes that its Big Color products possess certain advantages over the competitors' products, the increased competition has impacted sales volumes and margins and may continue to impact volumes and margins in the future. The Company has generally competed in these markets by introducing technologically advanced products that create new market demand and products which offer optimum performance characteristics. There can be no assurance that the Company will be able to continue to innovate to the extent necessary to maintain a competitive advantage in these markets or that other competitors will not achieve sufficient product performance to achieve customer satisfaction with their products offering better pricing or other competitive features. The Company's PressMate-FS, DisplayMaker Express and DesignWinder products are based on relatively new technology, are complex and must be reliable and durable to achieve market acceptance and enhance revenue opportunities. Development and production of new, complex technologies and products often have associated difficulties and delays. Consequently, customers may experience unanticipated reliability and durability problems that arise only as the product is subjected to extended use over a prolonged period of time. The Company and certain DisplayMaker Express users have encountered certain operational problems which the Company is addressing. However, there can be no assurance that the Company has completely resolved these operational problems or that the Company will successfully resolve any future problems in the manufacture or operation of the DisplayMaker Express printers or any new product. Failure by the Company to resolve manufacturing or operational problems with the DisplayMaker Express printer or any new product in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON COMPONENT AVAILABILITY AND COSTS. Certain components used in the Company's current and planned products, including printer marking engines and other printer components, are currently available from sole sources, and certain other components are available from only a limited number of sources. The Company has in the past experienced delays as a result of the failure of certain suppliers to meet requested delivery schedules and standards of product performance and quality. In addition, recent losses from operations of the Company have restricted cash availability and the ability to keep supplier debt current or within the established credit limits. The requirement to bring certain component suppliers' debt obligations current, or other restrictions in credit terms of such component suppliers, could result in an inability to manufacture certain product lines and thereby adversely affect the financial performance of the Company. The Company's inability to obtain sufficient supply of components, or to develop alternative sources, could result in delays in product introductions, interruptions in product shipments, the need to redesign products to accommodate substitute components or the need to substitute alternative components which may not have the same performance capabilities, any of which could have a material adverse effect on the Company's operating results. A substantial portion of the total manufacturing cost of the Company's typesetting and Big Color products is represented by certain components, particularly dynamic random access memory chips ("DRAMs"), the prices of which have fluctuated significantly in recent years. Significant increases or decreases in the price or reductions in the availability of DRAMs or other components, could have a material affect on the Company's operating results. In addition, the Company is dependent upon a third-party supplier for the inkjet engine used in its DisplayMaker Professional product. The Company believes that it will be able to purchase adequate 3 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 and hot melt ink used in DisplayMaker Express. The Company has experienced availability and quality issues with this supplier that have affected shipping schedules and customer satisfaction and have negatively impacted operating results in the past. While the Company has taken strong corrective measures in dealing with this supplier, there can be no assurance that this supplier will be able to meet the Company's production requirements in the future or that the quality of on-going product supply will be acceptable. The Company sells consumable print media and inks for use with its Big Color product line, and film used with the PressMate-FS. The Company depends on the availability of consumable products to support its installed base of print engines. There is no assurance that the suppliers of these consumables will continue to offer their products to the Company, or that the consumable products will continue to be available to the Company at the same quantity, pricing and terms. The unavailability of consumable products or negative changes in quality could adversely impact the market acceptance of the Company's new and existing products, and may adversely affect sales of consumables. UNCERTAINTY REGARDING DEVELOPMENT OF WIDE-FORMAT MARKET; UNCERTAINTY REGARDING MARKET ACCEPTANCE OF 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, customer preferences can change rapidly and new technology can quickly render existing technology obsolete. Failure by the Company to respond effectively to changes in the Wide-Format market, to develop or acquire new technology or to successfully conform to industry standards could have a material adverse effect on the business and financial condition and results of operations of the Company. The Company's products currently target the high-performance production segment of the Wide-Format printing market. The future success of the Company will likely depend on its ability to develop and market new products that provide superior performance at acceptable prices within this segment. In addition, the Company's future success will likely depend on the Company's ability to successfully introduce lower-cost products aimed at a broader segment of the Wide-Format market. Any quality, durability or reliability problems with such new products, regardless of materiality, or any other actual or perceived problems with new Company products, could have a material adverse effect on market acceptance of such products. There can be no assurance that such problems or perceived problems will not arise, or that even in the absence of such problems, new Company products will receive market acceptance. In addition, the announcement by the Company of new products and technologies could cause customers to defer purchases of the Company's existing products, which could have a material adverse effect on the Company's business, financial condition and results of operations. RETURNS RESERVES. The Company has established reserves for the return of merchandise. The amount of the 4 returns reserve is based on historical data regarding returns of products. For new products there may be insufficient information to accurately predict return rate and therefore the required reserve may not be sufficient. Additionally, there is no assurance that there will not be an unknown or unanticipated problem with a product or any component thereof, or a defect or shortage of repair components or the consumable media or inks that are needed to use the product which could cause the actual returns to exceed the reserves. Returns of a product which exceed reserves could have an adverse effect on the financial operations and results of the Company. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly results of operations have fluctuated and are expected to continue to fluctuate significantly. These fluctuations have been caused by various factors, including, but not limited to: The timing of new product announcements; product introductions and price reductions by the Company and its competitors; the availability and cost of key components and materials for the Company's products; fluctuations and availability in customer financing; the relative percentages of sales of consumables and printer architectures; risks related to international sales and trade; and general economic conditions. In addition, the Company's operating results are influenced by the seasonal buying patterns of its customers, which have in the past generally resulted in reduced revenues and earnings during the Company's first fiscal quarter. Further, the Company's customers typically order products on an as-needed basis, and virtually all of the Company's sales in any given quarter result from orders received in that quarter. Certain products require significant capital expenditures, causing some customers to delay their purchasing decision. Delays in purchases of low - - volume, high-cost printers may cause significant fluctuations in the sales volume for a given period. Also, the Company's manufacturing plans, sales staffing levels and marketing expenditures are primarily based on sales forecasts. Accordingly, deviations from these sales forecasts may cause significant fluctuations in operating results from quarter to quarter and may result in unanticipated quarterly earnings shortfalls or losses. Historically, a large percentage of orders have been received and shipped near the end of each month. If anticipated sales and shipments do not occur, expenditure and inventory levels may be disproportionately high and operating results could be adversely affected. DEPENDENCE ON CONSUMABLES REVENUES. The Company anticipates it will derive an increasing percentage of its revenues and operating income from the sale of ink, paper, film and other consumables to its customers. To the extent sales of the Company's consumables are reduced because its customers are unsuccessful in marketing their own printing services, or customers substitute third-party consumables for those of the Company, the Company's results of operations could be adversely affected. Further, although the Company's consumables are manufactured specifically to operate with its printing products to produce optimum results, there can be no assurances that other manufacturers of printing inks and papers will not develop products that can be sold and compete with the Company's printing products, or that other products will not produce results which are satisfactory to the customer at a lower cost. The Company alleges that at least one manufacturer has improperly used the Company's trade secrets to commence such competition. Although the Company has commenced legal action against such manufacturer for misappropriation of trade secrets, there can be no assurances that other manufacturers will not independently and legitimately develop competing consumable products. In addition, product quality issues, limitations in the availability of sole source consumables or changes in credit or trade terms from sole sources could adversely affect the sales of consumables. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company's ability to compete effectively will depend, in part, on its ability to maintain the proprietary nature of its technologies through patents, copyrights and trade secrets. Important features of the Company's products are incorporated in proprietary software, some of which is licensed from others and some of which is owned by the Company. The Company attempts to protect its proprietary software with a combination of patents, copyrights, trademarks and trade secrets, employee and third-party nondisclosure agreements and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to reverse- 5 engineer or obtain and use information that the Company regards as proprietary. Further, the Company's intellectual property may not be subject to the same level of protection in all countries where the products are sold. There can be no assurance that the measures taken by the Company will be adequate to protect the intellectual property or that others will not independently develop or patent products similar or superior to those developed, patented or planned by the Company, or that others will not be able to design products which circumvent any patents relied upon by the Company. The Company has been granted three United States patents for inventions related to its TurboRes(R) approach to enhancing the vertical resolution of conventional laser printer engines and three United States patents relating to the Company's Big Ink Delivery System. Additional patent applications are pending relating to the Company's TurboRes, ThermalRes(TM), FastPort(TM), Big Ink Delivery System, oversized A3 printing, high-resolution imaging and image enhancement and wide- format printing technologies and techniques. There can be no assurance that patents will be issued from any of these pending applications, although the ThermalRes process and mechanical aspects of the PressMate engine received U.S. patent coverage during May 1996. With regard to current patents or patents that may be issued, there can be no assurance that the claims allowed will be sufficiently broad to protect the Company's technology or that issued patents will not be challenged, invalidated or violated, requiring expenditures of cash to pursue and enforce the Company's rights in the patented technology. Applications to patent the basic TurboRes, ThermalRes and Big Ink Delivery System approaches and related technologies have been filed in selected foreign countries. Patent applications filed in foreign countries are subject to laws, rules and procedures which differ from those of the United States, and there can be no assurance that foreign patents will be granted as a result of these applications. Furthermore, even if these patent applications result in the issuance of foreign patents, some foreign countries provide significantly less patent protection than the United States. Additionally, patent, copyright and trademark protection has not been sought, or may not be available in all foreign countries. Although the Company has not received any notices from third parties alleging intellectual or proprietary property infringement, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertion will not require the Company to expend funds defending such claims or requiring the Company to enter into royalty arrangements on such terms as may be available, which may adversely affect financial performance of the company. Any claim that the Company's current or future products or manufacturing processes infringes on the proprietary rights of others, with or without merit, could result in costly litigation which could adversely affect the financial performance of the company. The Company is actively pursuing development of new and unique print solutions and processes, media and inks. Although the research and development process involves an analysis of protected proprietary rights in any technology that is being pursued, there is no assurance that competitors or others will not interpret any such products or processes developed by the Company as violating protected intellectual rights and pursue legal action, which could be costly and may affect the financial performance of the Company. In addition, although the Company does not have any knowledge of violations of its intellectual property rights, there can be no assurance that the Company will not be forced to take action to protect its intellectual property portfolio. Such enforcement activity could require the expenditure of significant cash resources and could affect the financial performance of the Company. Although the Company has not received notices from third parties alleging infringement claims that the Company believes would have a material adverse effect on the Company's business, there can be no assurance that third parties will not claim that the Company's current or future products or manufacturing processes infringe the proprietary rights of others. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into a royalty or licensing agreements. Such royalty or 6 licensing agreements, if required, may not be available on terms acceptable to the Company, or at all, which could have a material adverse effect upon the Company's business, financial condition and results of operations. If the company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. In addition, the Company could incur substantial costs in defending itself in suits brought against the Company on such patents or in bringing suits to protect the Company's patents against infringement, which could adversely affect the Company's financial condition or results. If the outcome of any such litigation is adverse to the Company, the Company's business and financial results could be adversely affected. LITIGATION AND LITIGATION COSTS. The Company and three of its officers are currently subject to various claims in a securities lawsuit relating to a decline in the market price of the Company's common stock in December 1994. The Company is vigorously contesting the action against itself and its officers. The Company is obligated to indemnify its officers for the costs of their defense and to advance such costs prior to final disposition to the extent that such indemnification is requested and to the extent certain statutory requirements are met. Further, the Company has instituted action against a competitor for patent infringement, misappropriation of trade secrets and other causes of action. The competitor has counter-claimed for false advertising, patent misuse, and unfair competition by LaserMaster. The Company believes these counter-claims are without merit. Such competitor has also published an allegation that the Company's consumables sales practices are in violation of trade and antitrust laws. During the second quarter of fiscal 1997 the court held that the competitor's ink delivery system does not infringe on the Company's patent on the Big Ink delivery system. Although the Company does not believe any of its practices violate applicable trade or anti-trust laws, there is no assurance that claims or actions will not be commenced by customers, competitors or governmental authorities based on trade or anti-trust claims which could affect the Company's operations and cash position. The Company is also engaged in various actions related to transactional matters, customers credit and product quality and/or warranty issues. Some of these actions include claims against the Company for punitive, exemplary or multiple damages. An award of punitive damages may not bear a direct relationship to the actual or compensatory damages claimed from the Company. Although the Company does not believe there are any actions pending or threatened against the Company which would have a material adverse impact on the financial position of the company, there is no assurance that there will not be an adverse award of multiple punitive or exemplary damages which could adversely affect the cash position of the company. Any litigation which the Company is involved in may have an adverse impact on the Company's operations and may result in a distraction or diversion of management's attention, thereby adversely affecting the operations by the Company. INTERNATIONAL OPERATIONS. The Company expects that international revenues will continue to represent a substantial portion of its total revenues. International operations are subject to various risks, including exposure to currency fluctuations, political and economic instability, differing economic conditions and trends, differing trade and business laws, unexpected changes in applicable laws, rules, regulatory requirements or tariffs, difficulty in staffing and managing foreign operations, longer customer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences and varying degrees of intellectual property protection. Fluctuations in currency exchange rates could result in lower sales volume reported in U.S. dollars. Fluctuations in foreign exchange rates are unpredictable and may be substantial. From time to time the Company has engaged in limited foreign currency hedging transactions. There can be no assurance that the Company will be successful if it engages in such practices to a significant 7 degree in the future. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon certain key personnel, including Mr. Masters, its Chief Executive Officer and President, and Mr. Lukis, its Chief Technical Officer. The loss of either of these individuals, or other key management or technical personnel, could adversely affect the Company's business. The Company maintains key person life insurance in the amount of $2,000,000, payable to the Company, on each of Mr. Masters and Mr. Lukis. In addition, the Company has certain non-compete and continuation contracts with key personnel, which are currently under review by the Company's Board of Directors in an effort to recruit and retain key personnel. The Company also depends on its ability to attract and retain highly skilled personnel. Competition for employees in this market is high and there can be no assurance that the Company will be able to attract and retain the employees needed. In addition, past financial performance of the Company may limit the ability to hire and retain management professionals. ENVIRONMENTAL. The Company is subject to local and federal laws and regulations regarding the use, storage and disposition of inks used with the Company's print products. Although the Company believes it is in compliance with all such laws and regulations, and the Company is not aware of any notice or complaint alleging any violation of such laws or regulations, there can be no assurance that there will not be some accidental contamination, disposal or injury from the use, storage, or disposition of inks or other materials used in the Company's operations. In the event of such accident, the Company could be held liable for any damages that result and any such liability could have a material adverse effect on the Company's financial condition. In addition, there can be no assurance that the Company will not be required to comply with environmental claims, laws, or regulations in the future which could result in significant costs which could materially adversely affect the Company's financial condition. TAX LIABILITY. The Company sells its products from its offices in Eden Prairie, Minnesota and reports sales and income tax liability based on sales occurring at that location. It is possible that one or more state or local taxing authorities could determine that there have been taxable transactions occurring within their jurisdiction and seek recovery of taxes for current and/or past periods. In addition, it is possible that local, state or federal taxing authorities will take issue with the reporting or determination of tax liability and seek additional taxes for current and/or past periods. The Company currently has a net operating loss ("NOL") carry forward that may be used to offset future federal taxable income. However, there is no assurance that the NOL will continue to be available as an offset against future federal taxable income or that there will be sufficient taxable income to fully utilize the NOL. VOLATILITY OF STOCK PRICE. The trading price of the Company's common stock is subject to wide fluctuations in response to variations in operating results, changes in the laws or regulations to which the company may be subject, announcements of new products or technological innovations by the Company or its competitors, overall economic conditions and indicators, market conditions unrelated to Company performance, and general conditions in the industry. Factors such as quarterly variation in actual or anticipated operating results, changes in earnings estimates by analysts, and analysts' reactions to Company statements and actions also contribute to stock price fluctuations. In addition, the prices of securities of many high technology companies have experienced significant volatility in recent years for reasons frequently unrelated to the operating performance of the specific companies. These fluctuations may materially affect the market price of the Company's common stock. One time in the past, following fluctuations in the market price of the Company's stock, a securities action was commenced alleging that the Company and certain insiders had knowledge of certain material, adverse information about the Company prior to the time that such information allegedly caused a drop in the market 8 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. 9 -----END PRIVACY-ENHANCED MESSAGE-----