-----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, BswqiFnflLGzMcHtTTOq4JfBLRHzlv45VGdaMYg9Oi9JrfFdw+Hz0C7Wv6QYRAAr v9NV4PrvX7kWXK8uwYVqWA== 0000801529-99-000001.txt : 19990318 0000801529-99-000001.hdr.sgml : 19990318 ACCESSION NUMBER: 0000801529-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINTWARE INC CENTRAL INDEX KEY: 0000801529 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411522267 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20729 FILM NUMBER: 99566675 BUSINESS ADDRESS: STREET 1: 1270 STREET 2: 1270 EAGAN INDUSTRIAL ROAD CITY: ST PAUL STATE: MN ZIP: 55121 BUSINESS PHONE: 6124561400 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________________to____________________ Commission file Number 0-20729 ______________ PRINTWARE, INC. _______________________________________________________ (Exact name of registrant as specified in its charter.) Minnesota 41-1522267 ____________________________ __________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1270 Eagan Industrial Road, St. Paul, MN 55121 ________________________________________ _____ (Address of principal executive offices) (Zip Code) (651) 456-1400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value ("Common Stock") Based upon the $3.156 per share closing sales price of the registrant's common stock as of February 26, 1999, the aggregate value of the shares of Common Stock held by nonaffiliates as of such date was approximately $9,178,443. Common Stock - 4,834,516 shares outstanding as of March 15, 1999. Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] 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 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] DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the parts indicated of this Annual Report on Form 10-K:
Parts of Annual Report Documents Incorporated on Form 10-K by Reference _________________________________ ______________________ Part III Item 10. Directors and Reference is made to the Executive Officers Registrant's definitive proxy of the Registrant. statement ("Proxy Statement"), which will be filed with the Securities and Exchange Commission ("Commission") within 120 days after December 31, 1998. Item 11. Executive Compensation. Reference is made to the Registrant's Proxy Statement. Item 12. Security Ownership of Reference is made to the Certain Beneficial Registrant's Proxy Statement. Owners and Management. Item 13. Certain Relationships Reference is made to the and Related Transactions. Registrant's Proxy Statement.
PART I This Annual Report on Form 10-K contains forward-looking statements that are not statements of historical fact. Forward-looking statements by their nature involve substantial risks and uncertainties, and actual results may differ materially from such statements. Factors that may affect the Company's revenues, use of capital, expenses and/or operating profits include, but are not limited to, the introduction of competing products with performance equivalent to or exceeding that of the Company's products, a claim (whether or not successfully made) that the Company's products infringe a patent held by another company or individual, any performance problems involving the Company's products, changes in technology that could cause the Company's products to become obsolete, the departure of key members of management and/or key employees, and general economic conditions. ITEM 1. BUSINESS. Printware designs, builds and markets "Computer-to-Plate" systems which are used by the printing industry to create printing plates directly from computer data. Computer-to-Plate systems are referred to as "Plate- setters," which replace the traditional process of typesetting, paste-up, camera work and processing film. The key benefits of Computer-to-Plate technology are: - Lower costs from savings in supplies and labor - Faster turnaround times - Electronic job archiving The heart of Printware's Platesetters is a high-resolution laser marker system, the key technology obtained from The 3M Company ("3M") in 1985. The system is based on a resonant galvanometer, which management believes has certain performance advantages over conventional systems which use rotating multifaceted mirrors. The Company's system uses a proprietary method where a mirror mounted on a resonating torsion bar, in conjunction with microprocessor-controlled electronics, precisely controls the laser raster scan. The method was first used in Printware's laser printers, then later in its Platesetters. Printware was organized in 1985 and began deliveries in 1987 of its first product, a high resolution laser based printer. In 1988 Printware began selling its first Platesetter, based on electrostatic technology. Printware subsequently expanded its product line with filmsetters and new laser printer models. In 1993, however, Printware began to focus exclusively on Computer-to-Plate products and phased out its other product lines, resulting in a significant improvement in profitability. In 1995, Printware completed development of and began to deliver photographic (silver-halide) Platesetters to serve a broader range of users. The Company added a line of lower-cost silver-halide models in 1997 under the Printware "PlateStream" brand name. CUSTOMERS Sales to Deluxe Corporation ("Deluxe") accounted for $1.19 million, $4.31 million and $4.12 million of revenue in 1998, 1997 and 1996, respectively, which constituted 17.0%, 61.8% and 55.5% of 1998, 1997 and 1996 revenue, respectively. Sales to Mitsubishi, principally the SDP-1800 silver-halide platesetter, accounted for $601,000, $275,000 and $1.07 million of revenue in 1998, 1997 and 1996, respectively, which constituted 8.6%, 3.9% and 14.4% of 1998, 1997 and 1996 revenue, respectively. In 1998 the Company lost Deluxe as a supply customer and completed its known production requirements for Mitsubishi. REVENUES FROM DELUXE. The Company has sold both equipment and consumable supplies to Deluxe. In 1994 the Company entered into a purchase agreement with Deluxe under which Deluxe agreed to purchase from the Company a minimum annual amount of plate material for each of the years 1995, 1996 and 1997 at a fixed price. At the expiration of that agreement at the end of 1997, there was no renewal of the agreement, therefore this supplies business was eliminated. During the period from 1991 to 1995, the Company sold to Deluxe various Platesetters, film imagers and other equipment under certain development and purchase order contracts. The Company has no current commitments from Deluxe under equipment contracts. PRODUCTS The Company's principal products are silver-halide Platesetters. The Company also sells service, training, and supplies for its older models of Platesetters. SILVER-HALIDE PLATESETTERS. These products use versatile commodity silver-halide plate material for a wide range of printing applications. They consist of two integrated modules: an imager module, where a laser "writes" the digital image on the plate; and a processor module, where the plate is developed and fixed, similar to conventional photography. The units are loaded with silver-halide plate material on large rolls. Imaged plates exit the machine into a tray already dried, cut to size and press-ready. These units are also available with integrated punches compatible with press registration systems. Printware sells these products under its PlateStream brand name. Current PlateStream models include a model for 13" wide plates, and the PlateStream 46 for 18" plates. End-user pricing is $50,000 to $80,000 depending on the model and configuration. A model for 18" wide plates is also sold by Mitsubishi under its brand name as the SDP-1800. The Company's Platesetters include raster image processors (RIPS). RIPs convert computer-based information into digital images which are used by Platesetters to produce printing plates. The Company's RIPs are fully compatible with the industry-standard PostScript language and most popular networks. The Company has several RIP models, sold under its "ZAPrip" brand name, using interpreter software from leading developers. SUPPLIES. Printware sells supplies for its installed base of older electrostatic Platesetters, consisting primarily of digital electrostatic plate material. This type of Platesetter is no longer a significant part of the Company's product mix. Most of the supplies are sold in the check-printing industry. Weakness in this industry has had a negative impact on supplies sales and is likely to continue to adversely affect revenues. MARKETING From 1996 to 1997, the Company relied exclusively on Mitsubishi to market the Company's silver-halide Platesetters. In 1997 and 1998, in order to provide lower-priced products to reach a broader market, the Company introduced its PlateStream line of silver-halide Platesetters. The products are sold through graphic arts dealers and Printware's own sales force. In late 1998, Printware established a field-sales force with offices in the New York, Los Angeles and Dallas metropolitan areas. LEASING The Company has long known that many prospects for its $50,000 to $80,000 Platesetters are more concerned with monthly payment affordability than simply with price. Therefore with the 1997 introduction of the PlateStream products, the Company began to offer leases that it finances through leveraging of its strong balance sheet. The Company believes these leases have been instrumental in the successful growth of the PlateStream line, and plans to continue its leasing activities for the foreseeable future. RESEARCH AND DEVELOPMENT In 1998 the Company's research and development focused primarily on improvements to its Platesetter PlateStream line. Projects included a "MicroPlate" PlateStream, Dual Cassette PlateStream, new punch configurations and software programs to enhance workflow efficiency. COMPETITION The growth in the Computer-to-Plate business has attracted considerable competition. The Company's competitors and potential competitors are established companies that have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing and marketing products which perform better and are less expensive than the Company's products, or that will render the Company's products and technology obsolete or noncompetitive in other ways. The Company divides its competition into four categories: other Platesetters; film imagers; digital printers and presses; and supplies competitors. OTHER PLATESETTERS. The Company faces significant competition from other silver-halide Platesetters. Management believes the most significant of these competitors include A. B. Dick Company and Purup-Eskofot A/S. The Company believes that its advantages over those products include higher speed, less plate waste, and high-speed integrated punching. There are many competitive Platesetters that use metal plates. Most of the competitive devices are relatively expensive and use expensive supplies. Most competitive metal Platesetters are geared towards larger format high-end color printing. Printware's products are focused at mainstream, smaller presses and mid-range quality, which management believes currently accounts for most printing. FILM IMAGERS. Digital film imagers are used in the traditional multi-step platemaking process being obviated by Platesetters. Several film imager manufacturers are attempting to adapt film imagers to image plates directly. Competitors in this category include the Agfa division of Bayer Corp., PrePress Systems and ECRM Incorporated. From discussions with customers, the Company believes that such "plate-enabled" film imagers represent a slow, awkward approach, compared to the Company's Platesetters. The Company's systems are self-contained, providing so-called "dry-to-dry" operation. The Company's Platesetters are faster than most film imagers and, unlike film imagers, have virtually no plate waste. DIGITAL PRINTERS AND PRESSES. This category includes high-speed and direct digital presses and xerographic/laser printers. Xerographic devices can replace offset printing in certain applications, but are currently limited to lower-quality applications. These devices also have a higher variable cost per impression than Computer-to-Plate technology. Companies in this area include Check Technology Corporation, Xerox Corporation, and Indigo N.V. Direct digital presses integrate platemaking with presses. Companies in this area include Presstek, Inc., and Xeikon N.V. These devices are expensive, and tie up the press while the plate is imaged. Management believes that competitors in this category are making efforts to improve the quality and reduce the cost of their systems, and there can be no assurance that systems marketed by the Company will sustain their advantage. SUPPLIES COMPETITION. Printware has competitors which sell plate supplies for the Company's electrostatic Platesetters. The most significant competitive material is made by a Japanese paper mill and sold through a U.S. distributor. Printware has addressed the competitive threat with lower prices where appropriate and programs to improve the quality and consistency of its supplies. The Company believes that competitive materials are inferior to Printware supplies in certain respects, such as image quality and dimensional stability, but not inferior in other respects. The Company does not see long- term growth potential in this market, and anticipates continued competitive pricing pressure in its supplies business. PROPRIETARY RIGHTS PATENTS AND TRADE SECRETS. Printware's policy is to attempt to protect its technology by seeking patents, maintaining certain trade secrets and continuing technological innovation. As of December 31, 1998, the Company had rights to 19 patents, consisting of 13 granted to Printware and six licensed from 3M. The 3M patents expire between 2002 and 2004; the royalties which the Company paid to 3M in 1998, 1997, and 1996 for licenses of these patents were not material to the Company. The Company's own patents begin to expire in 2004. In addition to patents, the Company relies on trade secrets and other unpatented proprietary technology. Printware seeks to protect its trade secrets and proprietary know-how with confidentiality agreements with employees and suppliers. There can be no assurance that the Company's patent portfolio will provide a competitive advantage in the future, or that the Company's agreements will adequately protect its trade secrets. TRADEMARKS. The Company achieved a registered trademark for the PlateStream mark in 1998 from the U.S. Patent and Trademark office. The Company had previously had the ZAPrip mark registered. The Company believes its registered trademarks may be valuable to developing and protecting its brand name recognition, which in turn may be instrumental in growing its market share. PRODUCT SUPPLY AGREEMENTS The Company has non-exclusive rights to raster image processing software used in the ZAPrip and to the plate processor module used in its silver-halide Platesetters. The Company has the exclusive right to sell the proprietary plate materials made by its suppliers. All of the product supply agreements to which the Company is a party can be canceled by either party under certain circumstances. Such cancellation would seriously jeopardize the Company's ability to provide products that are critical to the Company's revenues. SUPPLIERS The Company has a number of single source suppliers for materials that are critical to production of its products. These include the suppliers of the Company's electrostatic paper plate material, electrostatic metal plate material, electrostatic liquid toner and certain key components used in Platesetters, and/or ZAPrip raster image processors. Any significant interruption of supply from any of these vendors would have a material adverse effect on the Company. ITEM 2. PROPERTIES Printware's manufacturing operation consists of the assembly, integration, testing and quality audits of equipment. The Company purchases all of its supplies and many of the hardware components it uses from third-party vendors, some of which are single-source vendors. Printware's principal manufacturing areas include laser markers, transport mechanisms, electronics/RIPs and final assembly/test. Printware makes extensive use of computer-aided design and transmits most of its fabricated part drawings to its suppliers electronically. The Company believes that this use of technology shortens turnaround time and improves quality. Printware's offices and manufacturing facility are located at 1270 Eagan Industrial Road, St. Paul, Minnesota. The Company occupies 35,410 square feet pursuant to a lease which expires July 31, 2005 with an option to cancel on July 31, 2003. The lease was amended on February 6, 1998. Management believes that this facility will be adequate for Printware's needs until the expiration of the lease. Monthly rent expense is currently $13,131, based on the February 6, 1998 amendment plus a pro-rata share of real estate taxes and common area maintenance. EMPLOYEES As of December 31, 1998, Printware had 54 employees, including 48 full- time employees and 6 part-time or contract employees. Of the 48 full-time employees, 19 were in manufacturing, 12 were in marketing, sales and customer service, 10 were in research and development and 7 were in general and administrative functions. Management considers the future success of the Company to be dependent in part upon its continued ability to maintain a highly-skilled workforce and to attract, motivate and retain qualified employees. No Printware employees are covered by collective bargaining agreements and the Company considers its relationship with its employees to be good. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various legal actions in the normal course of business. Management is of the opinion that the outcome of such actions will not have a significant effect on the Company's financial position or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market, under the symbol PRTW. The high and low closing interdealer sales prices for each quarter since trading commenced on July 2, 1996 are as follows: first quarter 1998 high of $4.00 and low of $3.06; second quarter 1998 high of $4.13 and low of $2.75; third quarter 1998 high of $3.25 and low of $2.69; fourth quarter high of $3.00 and low of $2.81; first quarter 1997 high of $4.50 and low of $3.875; second quarter 1997 high of $4.25 and a low of $3.125; third quarter 1997 high of $5.00 and low of $3.25; fourth quarter 1997 high of $4.92 and low of $3.25; third quarter 1996 high of $6.63 and low of $4.88; fourth quarter 1996 high of $5.00 and low of $4.50. As of December 31, 1998 the Company had approximately 1400 shareholders of record and beneficial shareholders. The Company has not paid and does not presently intend to pay any dividends on its Common Stock. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information is qualified by and should be read in conjunction with the Company's financial statement and notes thereto included elsewhere in this Annual Report on Form 10-K. Years Ended December 31, ____________________________________________________________ 1998 1997 1996 1995 1994 __________ __________ __________ __________ ___________ Statement of Operations Data: Revenues from nonaffiliates $5,805,476 $2,672,051 $3,299,499 $4,889,761 $ 3,775,958 Revenues from affiliates 1,191,145 4,314,111 4,116,536 3,498,387 2,850,967 __________ __________ __________ __________ ___________ Total revenues 6,996,621 6,986,162 7,416,035 8,388,148 6,626,925 Cost of revenues 4,133,932 3,912,367 4,350,696 5,003,956 4,102,401 __________ __________ __________ __________ ___________ Gross Profit 2,862,689 3,073,795 3,065,339 3,384,192 2,524,524 Research and development expenses 713,169 865,392 789,824 757,131 956,807 Selling, general and administrative expenses 1,582,057 1,241,823 982,250 1,072,878 945,533 __________ __________ __________ __________ ___________ Income from operations 567,463 966,580 1,293,265 1,554,183 622,184 Other income, net 802,467 780,289 429,027 261,742 22,918 __________ __________ __________ __________ ___________ Income before income taxes and extraordinary item 1,369,930 1,746,869 1,722,292 1,815,925 645,102 Income tax (benefit) expense (564,141) (412,100) (661,112) 22,500 2,000 __________ __________ __________ __________ ___________ Income before extra- ordinary item 1,934,071 2,158,969 2,383,404 1,793,425 643,102 Extraordinary income -- -- -- -- 140,927 __________ __________ __________ __________ ___________ Net income (1) $1,934,071 $2,158,969 $2,383,404 $1,793,425 $ 784,029 ========== ========== ========== ========== =========== Net income per common share: Basic $ .39 $ .44 $ .56 $ .48 $ .21 ========== ========== ========== ========== =========== Diluted $ .39 $ .44 $ .56 $ .49 $ .21 ========== ========== ========== ========== =========== Weighted average common shares outstanding - Basic 4,913,213 4,875,054 4,226,504 3,626,437 3,618,040 ========== ========== ========== ========== =========== Weighted average common shares outstanding (2) - Diluted 4,917,818 4,889,195 4,237,629 3,699,814 3,680,934 ========== ========== ========== ========== =========== December 31, ____________________________________________________________ 1998 1997 1996 1995 1994 __________ __________ __________ ___________ ___________ Balance Sheet Data: Cash and cash equivalents $ 653,696 $ 347,819 $ 231,708 $2,568,852 $ 860,668 Current assets 15,809,547 15,360,571 14,304,514 5,087,328 3,255,959 Working capital 14,709,673 14,451,317 12,979,851 4,151,595 2,292,562 Total assets 18,515,318 16,547,379 14,574,989 5,252,401 3,476,928 Shareholders' equity 17,415,444 15,638,125 13,250,326 4,316,668 2,513,531 (1) The 1994 net income includes an extraordinary item of $140,927 consisting of a gain on extinguishment of debt. The net income per common share, basic and diluted, attributable to such extraordinary gain was $.04 and $.04, respectively. (2) EPS was restated for years prior to 1997. See Note 1 to the financial statements for an explanation of the determination of weighted average common shares outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE 3 YEARS ENDED DECEMBER 31, 1998 MANAGEMENT'S DISCUSSION AND ANALYSIS Introduction This discussion summarizes significant factors that affected the operating results and financial condition of Printware, Inc. for the three years ended December 31, 1998. Statements made in this report concerning the Company's or management's intentions, expectations or predictions about future results or events are "forward-looking statements" within the meaning of the Private Securities Reform Act of 1995. Such statements are necessarily subject to risks and uncertainties that could cause actual results to vary from stated expectations, and such variations could be material and adverse. Overall Summary In early 1998, the Company began to experience a rapid transition in the mix of its products being sold. To help clarify the transition, the Company defined "Supplies" as plate material, toner, and other various chemicals used in its original line of model 1440 Platesetters. "Equipment" was defined as all products and services except Supplies. Equipment revenues in 1998, led by the PlateStream line of platesetters, increased 91% over 1997 more than offsetting a 59% decrease in Supplies sales. Supplies sales dropped in early 1998 due to loss of business from Deluxe Corporation, the Company's affiliate. As a result, affiliate revenues dropped to 17% in 1998 from 62% in 1997 and 56% in 1996. Net income in 1998 was $1.93 million including a net income tax benefit of $564,000, compared to $2.16 million including a net income tax benefit of $412,000 in 1997. Earnings per share were $.39 in 1998, compared to $.44 in 1997 Results of Operations The table shown below summarizes the percentage of revenues for various items in the Company's statements of operations for the periods indicated.
Years Ended December 31, _____________________________________ 1998 1997 1996 _______ _______ _______ Equipment revenues 75.0% 39.4% 36.3% Supplies revenues 25.0 60.6 63.7 _______ _______ _______ Total revenues 100.0 100.0 100.0 Cost of revenues 59.1 56.0 58.7 _______ _______ _______ Gross margin 40.9 44.0 41.3 Research and development 10.2 12.4 10.7 Selling, general and administrative 22.6 17.8 13.2 _______ _______ _______ Income from operations 8.1 13.8 17.4 Other income, net 11.5 11.2 5.8 _______ _______ _______ Income before income taxes 19.6 25.0 23.2 Income taxes (benefit) (8.0) (5.9) (8.9) _______ _______ _______ Net income 27.6% 30.9% 32.1% ======= ======= =======
Revenues--Total 1998 revenues were flat at $7.00 million compared to $6.99 million in 1997, after a decrease of 6% from $7.42 million in 1996. The flat 1998 masks the strong 91% increase in Equipment sales to total 75% of revenues, up from 39% in 1997 and 36% in 1996. Sales of the private-label Mitsubishi platesetter were 6% of revenues in 1998 compared to 4% in 1997 and 10% in 1996. Supplies revenues in 1998 were down 59% compared to 1997, which in turn were down 10% over 1996. Supplies revenues declined to 25% of 1998 revenues compared to 61% in 1997 and 64% in 1996. Gross margin--Gross margin was 41% in 1998 compared to 44% in 1997 and 41% in 1996. The costs of doubling PlateStream production capacity, introducing the PlateStream MicroPlate and Dual-Cassette PlateStream models and new punch options, shifting towards increased lower-margin distributor and Mitsubishi platesetter sales, and higher occupancy costs in the second half of the year all contributed to the lower gross margin. Research and development (R&D)--R&D expenses in 1998 decreased $152,000 or 18% from 1997, which in turn showed an increase of $76,000 or 9% compared to 1996. The decreased expenses in 1998 were due to a reduced design activity compared to 1997 with the completion of the design of key PlateStream models. Selling, general and administrative (SG&A)--SG&A expenses in 1998 increased $340,000 or 27% over 1997 after an increase of $260,000 or 26% over 1996. The majority of the increases were due to investment spending on PlateStream marketing and sales activities. Selling expenses in 1998 increased $241,000 over 1997 following a $273,000 increase over 1996. Other expenses that increased in 1998 were occupancy costs and those related to facility improvements. Other income--Other income in 1998 was interest of $802,000 compared to $780,000 in 1997 and $429,000 in 1996. The increase in 1998 was in the face of lower interest rates and the financing of $1.38 million of additional PlateStream leases. Interest from these leases is classified as operating income. The 1997 increase was mostly due to a full year's interest earned on the proceeds of the mid-1996 initial public offering. Income tax benefit--The Company recorded income tax benefits of $590,000, $450,000, and $730,000 in the fourth quarters of 1998, 1997, and 1996. The tax benefits were due to reductions of the valuation allowance of deferred tax assets relating to net operating loss carryforwards. These tax benefits were caused by the combination of the Company's continued profitability since 1994 and its net operating losses incurred before 1994. In 1998 the Company recognized a net tax benefit of $564,000, compared to net tax benefits of $412,000 in 1997 and $661,000 in 1996. Net income--Net income was $1.93 million compared to $2.16 million in 1997 and $2.38 million in 1996. The decrease in 1998 was mostly due to lower gross margin and to increased investment spending in marketing and sales to enable the continued growth of PlateStream sales in 1998, 1999, and beyond. Financial Condition Liquidity--Cash provided by operating activities was $1.10 million in 1998, compared to $1.44 million in 1997 and $1.71 million in 1996. Working capital was $14.7 million at December 31, 1998 compared to $14.5 million and $13.0 million on that date in 1997 and 1996. The Company increased its long-term investment in PlateStream leases by $1.38 million in 1998. Capital Resources--The Company had no long-term debt or lines of credit as of December 31, 1998 as it believes its working capital is adequate for its current needs. Impact of Inflation--To date, inflation has not had a material effect on the Company's operations. Outlook--The Company foresees a further revenue shift in 1999 from Supplies to Equipment. Success of PlateStream sales is seen as central to the Company's future revenues and profitability. The growing installed base of PlateStream line will also generate growing after-market service revenues. The Company plans over the next several years to continue to significantly increase its investment spending to expand PlateStream distribution, and to add new products using incremental innovation. The Company will also continue helping PlateStream sales growth by offering leases at below-market rates by leveraging the Company's strong balance sheet. The resulting sales-type leases will be recognized as revenue as if purchases had occurred, with the interest received over the multi-year leases recognized as operating revenues. Year 2000("Y2K") The Year 2000 problem is due to the past software practice of coding years using only two digits. This is predicted to cause many computer-related malfunctions because year "00" will be taken to mean year 1900 rather than 2000. In 1998, the Company began to investigate Y2K compliance in areas of its Platesetter products, business computer systems (Information Technology or "IT"), production equipment, vendor readiness, non-IT systems, and contingency plans. The Company's Y2K readiness status is: current platesetter products are Y2K compliant, though some RIPs produced from 1993 through 1996 may be non- compliant; the central IT software system was certified Y2K compliant by a third party; equipment used in production does not use dates to control operations; compliance/impact assessments of the voice mail, PBX, security, and alarm non-IT systems is in progress; statements of compliance were received from the RIP software vendors. To complete readiness and remediation by mid-1999, the Company plans to: assess and remedy compliance with personal productivity PCs and their applications; complete assessment of the non-IT systems; complete assessment of ancillary software packages sold by the Company; send compliance questionnaires to other significant vendors and assess results. The Company has spent approximately $15,000 to date on its Y2K related activities, and estimates $50,000 to be adequate for its related 1999 activities. The Company does not anticipate purchasing Y2K liability insurance. Because of the current state of Y2K readiness and the date insensitivity of its products, the Company believes the most likely worst-case scenario to be short term delays in receiving production inventory. The Company anticipates developing a contingency plan by mid-1999, based on its knowledge at that time. The Company's most-likely contingency plan is projected to primarily be the ordering of extra production inventory to be received near year-end thereby averting key vendor or transport interruptions going into 2000. Although the Company does not at this time expect a significant impact on its financial position, results of operations, and cash flows, our internal Y2K review has not been completed and there can be no assurance that the systems of other companies or the systems of the Company will not have a corresponding adverse effect on the Company. Financial Statements The accompanying financial statements and related information are the responsibility of management. They have been prepared in conformity with generally accepted accounting principles and include amounts that are based on our best estimates and judgments. The financial information contained elsewhere in this report is consistent with that in the financial statements. The Company maintains internal accounting control systems that are adequate to provide reasonable assurance that the assets are safeguarded from loss or unauthorized use. These systems produce records adequate for preparation of financial information. The audit committee has reviewed all financial data included in this report. The audit committee is composed entirely of outside directors and meets periodically with management and with the independent auditors on financial reporting matters. The role of the independent auditors is to render an independent, professional opinion on management's financial statements as required by generally accepted auditing standards.
QUARTERLY RESULTS OF OPERATIONS FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER _______ _______ _______ _______ 1998 Revenue $ 1,675 $ 1,721 $ 1,767 $ 1,834 Cost of Revenues 925 975 1,066 1,169 _______ _______ _______ _______ Gross Profit 750 746 701 665 Operating Income 166 168 153 80 _______ _______ _______ _______ Net Income $ 366 $ 389 $ 347 $ 832 ======= ======= ======= ======= Per Share-Basic $ .07 $ .08 $ .07 $ .17 ======= ======= ======= ======= Average Shares Outstanding 4,915 4,922 4,922 4,886 ======= ======= ======= ======= 1997 Revenue $ 1,847 $ 1,925 $ 1,623 $ 1,591 Cost of Revenues 1,041 1,054 892 925 _______ _______ _______ _______ Gross Profit 806 871 731 666 Operating Income 265 299 194 209 _______ _______ _______ _______ Net Income $ 460 $ 495 $ 388 $ 816 ======= ======= ======= ======= Per Share-Basic $ .09 $ .10 $ .08 $ .17 ======= ======= ======= ======= Average Shares Outstanding 4,852 4,853 4,889 4,908 ======= ======= ======= ======= (1) During the fourth quarter 1998 and 1997, the Company recorded an income tax benefit of $590,000 and $450,000, respectively, from the reduction of the deferred tax asset valuation allowance. (2) Earnings per share amounts presented for 1998 and 1997 have been restated for the adoption of SFAS 128.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA. See Financial Statements and Notes. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in, or disagreements with, the accountants for the Company which require reporting under Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated herein by reference to the sections entitled "Item 1: Election of Directors" contained in the Company's proxy statement to be filed with the Securities and Exchange Commissions (the "Commission") within 120 days of December 31, 1998 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated herein by reference to the section following "Compensation Committee Report on Executive Compensation" contained in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership Of Certain Beneficial Owners and Management" contained in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated herein by reference to the section entitled "Meetings and Compensation of Directors" contained in the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 1998. The following exhibits are hereby incorporated into this Annual Report on Form 10-K by reference to exhibits with the same exhibit number filed with the Company's Registration Statement on Form S-1 (Commission file No. 333-03629), as amended, which became effective on July 2, 1996 ("Registration Statement"): Exhibits Exhibit 23. Independent Auditors' Consent Exhibit 27. Financial Data Schedule PRINTWARE, INC. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRINTWARE, INC. Registrant Date: March 16, 1999 /s/ DANIEL A. BAKER ________________________ Daniel A. Baker PRESIDENT & CHIEF EXECUTIVE OFFICER (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant on the dates in the capacities indicated.
Name Title Dates _____________________ _______________ ______________ /s/ Daniel A. Baker President & Chief March 16, 1999 - -------------------------- Executive Officer Daniel A. Baker (Principal Executive Officer) ______________ /s/ Thomas W. Petschauer Executive Vice President March 16, 1999 - -------------------------- & Chief Financial Officer Thomas W. Petschauer (Principal Financial Officer) ______________ /s/ Allen L. Taylor Director of the Board March 16, 1999 - -------------------------- ______________ Allen L. Taylor /s/ Michael C. Berg Director of the Board March 16, 1999 - -------------------------- ______________ Michael C. Berg /s/ Victor H. Weiss Director of the Board March 16, 1999 - -------------------------- ______________ Victor H. Weiss /s/ Brian D. Shiffman Secretary March 16, 1999 - -------------------------- ______________ Brian D. Shiffman /s/ Cordell E. Lomen Controller March 16, 1999 - -------------------------- ______________ Cordell E. Lomen
INDEPENDENT AUDITORS' REPORT To The Board of Directors and Shareholders of Printware, Inc.: We have audited the accompanying balance sheets of Printware, Inc. (the Company) as of December 31, 1998 and 1997 and the related statements of operations and comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Printware, Inc. at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Deloitte & Touche LLP ________________________ Minneapolis, Minnesota January 22, 1999 PRINTWARE, INC. BALANCE SHEETS DECEMBER 31, 1998 and 1997
December 31, December 31, 1998 1997 ASSETS ____________ ___________ CURRENT ASSETS: Cash and cash equivalents $ 653,696 $ 347,819 Investments 11,529,160 11,867,661 Receivables from nonaffiliates 1,201,788 564,568 Receivables from affiliates -- 359,619 Inventories 2,162,019 1,941,634 Prepaid expenses 19,322 14,849 Deferred income taxes 243,562 264,421 ___________ ___________ Total current assets 15,809,547 15,360,571 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization 217,000 134,965 INTANGIBLE ASSETS, net of accumulated amortization 24,919 28,078 LEASE RECEIVEABLES--LONG TERM 1,002,852 173,765 DEFERRED INCOME TAXES 1,461,000 850,000 ___________ ___________ TOTAL ASSETS $18,515,318 $16,547,379 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 512,251 $ 457,200 Accrued expenses 516,068 412,017 Deferred revenues 71,555 40,037 ___________ ___________ Total current liabilities 1,099,874 909,254 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred Stock, no specified par value; 1,000,000 shares authorized; none issued and outstanding -- -- Common Stock, no par value, authorized 15,000,000 shares: issued and outstanding 4,834,516 and 4,914,939 shares at December 31, 1998, and 1997, respectively 22,001,144 22,174,940 Accumulated deficit (4,721,026) (6,655,097) Unearned compensation on stock options (410) (3,507) Accumulated other comprehensive income 135,736 121,789 ___________ ___________ Total shareholders' equity 17,415,444 15,638,125 ___________ ___________ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,515,318 $16,547,379 =========== =========== See notes to financial statements.
PRINTWARE, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Years Ended December 31 ____________________________________ 1998 1997 1996 __________ __________ __________ REVENUES FROM NONAFFILIATES $5,805,476 2,672,051 $3,299,499 REVENUES FROM AFFILIATES 1,191,145 4,314,111 4,116,536 __________ __________ __________ TOTAL REVENUES 6,996,621 6,986,162 7,416,035 COST OF REVENUES 4,133,932 3,912,367 4,350,696 __________ __________ __________ GROSS MARGIN 2,862,689 3,073,795 3,065,339 OPERATING EXPENSES: Research and development 713,169 865,392 789,824 Selling, general and administrative 1,582,057 1,241,823 982,250 __________ __________ __________ Total 2,295,226 2,107,215 1,772,074 __________ __________ __________ INCOME FROM OPERATIONS 567,463 966,580 1,293,265 OTHER INCOME (EXPENSE): Interest expense -- -- (236) Interest and other income 802,467 780,289 429,263 __________ __________ __________ INCOME BEFORE INCOME TAXES 1,369,930 1,746,869 1,722,292 INCOME TAX BENEFIT (564,141) (412,100) (661,112) __________ __________ __________ NET INCOME $1,934,071 $2,158,969 $2,383,404 ========== ========== ========== NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: BASIC AND DILUTED $ .39 $ .44 $ .56 ========== ========== ========== OTHER COMPREHENSIVE INCOME, BEFORE TAX: Unrealized gains on securities: Unrealized holding gains arising during period $ 21,458 $ 46,911 $ 140,451 Less reclassification adjustment for gains included in net income -- -- -- __________ __________ __________ OTHER COMPREHENSIVE INCOME, BEFORE TAX 21,458 46,911 140,451 INCOME TAX EXPENSE RELATED TO ITEMS OF OTHER COMPREHENSIVE INCOME (7,511) (16,415) (49,158) __________ __________ __________ OTHER COMPREHENSIVE INCOME, NET OF TAX $ 13,947 $ 30,496 $ 91,293 ========== ========== ========== COMPREHENSIVE INCOME $1,948,018 $2,189,465 $2,474,697 ========== ========== ========== See notes to financial statements.
PRINTWARE, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Unearned Net unrealized compensation gain on avail- Common Stock Accumulated on stock able-for-sale Shares Amount deficit options securities _________ ___________ ____________ ____________ ______________ BALANCE AT 12/31/95 $3,627,013 $15,514,138 ($11,197,470) -- -- Shares issued in public offering (net of issuance cost of $822,447) 1,200,000 6,377,553 -- -- -- Shares issued pursuant to exercise of stock options 42,455 127,365 -- -- -- Shares redeemed and retired (21,274) (113,922) -- -- -- Shares issued for services performed for the Company 2,500 7,500 -- -- -- Compensation on issuance of stock options -- 71,962 -- $(71,962) -- Stock option compensation earned 60,465 Unrealized gain on available-for-sale securities, net of tax -- -- -- -- $91,293 Net income -- -- 2,383,404 -- -- __________ ___________ ____________ ____________ ______________ BALANCE AT 12/31/96 4,850,694 21,984,596 (8,814,066) (11,497) 91,293 Shares issued pursuant to employee stock purchase plan 18,943 51,757 -- -- -- Shares issued pursuant to exercise of stock options 40,302 123,587 -- -- -- Shares issued pursuant to exercise of warrants 5,000 15,000 -- -- -- Stock option compensation earned -- -- -- 7,990 -- Unrealized gain on available-for-sale securities, net of tax -- -- -- -- 30,496 Net income -- -- 2,158,969 -- -- __________ ___________ ___________ ____________ _____________ BALANCE AT 12/31/97 4,914,939 22,174,940 (6,655,097) (3,507) 121,789 Shares issued pursuant to employee stock purchase plan 29,822 74,255 -- -- -- Shares redeemed and retired (110,245) (248,051) -- -- -- Stock option Compensation earned -- -- -- 3,097 --Unrealized gain on available-for-sale securities, net of tax -- -- -- -- 13,947 Net income -- -- 1,934,071 -- -- __________ ___________ ___________ ____________ ____________ BALANCE AT 12/31/98 4,834,516 $22,001,144 $(4,721,026) $ (410) $ 135,736 ========== =========== ============ ============ ============ See notes to financial statements.
PRINTWARE, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Years Ended December 31, _______________________________________ 1998 1997 1996 ___________ ___________ ___________ OPERATING ACTIVITIES: Net income $ 1,934,071 $ 2,158,969 $ 2,383,404 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 61,187 56,913 63,653 Common Stock issued for services -- -- 7,500 Stock option compensation earned 3,097 7,990 60,465 Gain on sale of available-for-sale securities -- -- (19,502) Deferred income taxes (590,141) (450,000) (730,000) Changes in operating assets and liabilities: Receivables from nonaffiliates (637,220) 128,779 (182,262) Receivables from affiliates 359,619 107,417 (204,381) Inventories (220,385) (178,839) (35,453) Prepaid expenses (4,473) 25,185 (22,640) Accounts payable 55,051 (64,286) 84,634 Accrued expenses 104,051 (41,432) (15,659) Deferred revenues 31,518 (309,691) 319,955 ___________ ___________ ___________ Net cash provided by operating activities 1,096,375 1,441,005 1,709,714 INVESTING ACTIVITIES: Purchases of available-for-sale securities (2,115,865) (2,521,355) (12,912,217) Maturities and sales of available- for-sale securities 2,468,313 1,259,363 2,513,418 Increase in lease receivables (829,087) (173,765) -- Purchases of property and equipment (140,063) (79,481) (39,055) ___________ ___________ ___________ Net cash used in investing activities (616,702) (1,515,238) (10,437,854) FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 74,255 190,344 6,504,918 Common Stock redeemed and retired (248,051) -- (113,922) ___________ ___________ ___________ Net cash (used in) provided by financing activities (173,796) 190,344 6,390,996 ___________ ___________ ___________ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 305,877 116,111 (2,337,144) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 347,819 231,708 2,568,852 ___________ ___________ ___________ CASH AND CASH EQUIVALENTS, END OF YEAR $ 653,696 $ 347,819 $ 231,708 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid during the period for: Interest $ -- $ -- $ 236 =========== =========== =========== Income taxes $ 34,100 $ 35,900 $ 75,900 =========== =========== =========== See notes to financial statements.
PRINTWARE, INC. NOTES TO FINANCIAL STATEMENTS NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Printware, Inc. ("Printware" or the "Company") designs, builds and markets "computer-to-plate" systems that are used by the offset printing industry to create printing plates directly from computer data. These systems replace the traditional process of typesetting, paste-up, camera work and processing film to produce a printing plate. Revenue Recognition Revenue for equipment and supply sales is recognized at the time of shipment to customers. Revenue from sales-type leases is recognized at the time of customer acceptance. Revenue from development projects and their related costs are recognized as the work is performed. Revenue related to installation, training and support is recognized when the services are performed. Revenue from development projects, installation, training and support is less than 10% of total revenues for the years ended December 31, 1998, 1997 and 1996. Net Income Per Common And Common Equivalent Share In 1997 the Company adopted Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share." SFAS 128 requires the disclosure of Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using income available to common shareholders divided by the weighted average common shares outstanding during the year. Diluted EPS is similar to Basic EPS except that the weighted average common shares outstanding is increased to give effect to all dilutive potential common shares that were outstanding during the period. The total weighted average number of common and common equivalent shares outstanding has been adjusted to give effect to the reverse stock split authorized by the Company's shareholders effective April 25, 1996. See table below.
1998 1997 1996 ___________ ___________ ___________ Income available to common shareholders $ 1,934,071 $ 2,158,969 $ 2,383,404 =========== =========== =========== Weighted average shares outstanding 4,913,213 4,875,054 4,226,504 =========== =========== =========== Basic EPS $ .39 $ .44 $ .56 =========== =========== =========== Weighted average shares outstanding 4,913,213 4,875,054 4,226,504 Dilutive shares issuable from stock options 4,605 14,141 11,125 __________ ___________ __________ Total shares 4,917,818 4,889,195 4,237,629 ========== =========== ========== Diluted EPS $ .39 $ .44 $ .56 ========== =========== ==========
Combined options and warrants to purchase 460,470, 452,270 and 421,159 shares of Common Stock at exercise prices ranging from $3.88 to $7.20 were outstanding during 1998,1997, and 1996, respectively, but were not included in the computation of the diluted EPS because the options' exercise price was greater than the average market price of the common shares. Cash Equivalents Cash equivalents consist primarily of investments in commercial paper and certificates of deposit, which have original maturities of three months or less. Investments The Company classifies and accounts for debt and equity securities in accordance with (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's portfolio is classified as available for sale; thus, securities are recorded at fair market value and any associated unrealized gain or loss, net of tax, is included as a separate component of shareholders' equity, "Net unrealized gain on available-for-sale securities." Gains or losses on securities are computed based on the cost of specific securities sold. A summary of amortized costs and market values on available-for-sale securities as of December 31, 1998 and 1997 consists of the following:
1998 - ------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Description Cost Gain Loss Value _____________________ ___________ __________ __________ ___________ Corporate Bonds $10,145,121 $ 185,170 $ (6,509) $10,323,782 Municipal & Agency Bonds 1,175,214 30,164 -- 1,205,378 ___________ _________ __________ ___________ Totals $11,320,335 $ 215,334 $ (6,509) $11,529,160 =========== ========= ========== =========== 1997 - ------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Description Cost Gain Loss Value _____________________ ___________ __________ __________ ___________ Corporate Bonds $ 8,985,675 $ 161,536 $ (2,289) $ 9,144,922 Municipal & Agency Bonds 1,707,059 28,120 -- 1,735,179 Others 987,560 -- -- 987,560 ___________ _________ __________ ___________ Totals $11,680,294 $ 189,656 $ (2,289) $11,867,661 =========== ========= ========== ===========
Maturities of available-for-sale securities at December 31, 1998 and 1997 are as follows:
1998 1997 Fair Market Fair Market Description Value Value _____________________ ___________ ___________ Less Than 1 Year $ 2,018,500 $ 2,451,075 From 1 to 5 Years 9,510,660 9,416,586 ___________ ___________ Total $11,529,160 $11,867,661 =========== ===========
Credit Risk The Company generally does not require collateral for its trade accounts receivable. The Company manages credit risk by regularly evaluating creditworthiness of its customers. Accounts receivable for which collectibility is not assured are reserved for through establishment of an allowance for doubtful accounts. Customer accounts considered by management to be uncollectible are written off. In 1997 the Company introduced a new lease-sale program whereby credit- worthy customers were allowed to purchase platesetter equipment for $1 at the end of up to 60 month sales-type leases. This program continued during 1998. Inventories Inventories are valued at the lower of cost (determined on a first-in, first- out basis) or market. Inventories are periodically reviewed for obsolescence or surplus stock. Items considered obsolete or surplus are written off or a valuation reserve is established to write such inventories down to their net realizable value. The Company has recorded inventory valuation reserves of $488,000 and $523,000 at December 31, 1998 and 1997, respectively. The Company is dependent on several key suppliers for plate material and raster image processing software. All of the Company's agreements with these suppliers can be canceled by either party under certain circumstances. Property and Equipment Property and equipment are recorded at cost. Office equipment, software, machinery and equipment and tooling are depreciated on a straight-line basis over five years. Motor vehicles are depreciated on a straight-line basis over three years. Leasehold improvements are amortized on a straight-line basis over the term of the lease. Impairment of Long-Lived Assets Management periodically reviews the carrying value of long-term assets for potential impairment by comparing the carrying value of these assets to the estimated undiscounted future cash flows expected to result from the use of these assets. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset with fair value being determined using discounted cash flows. To date, management has determined that no impairment of these assets exists. Intangible Assets Intangible assets are recorded at cost and are being amortized on a straight-line basis over 17 years for patents and between two and five years for license rights. Research and Development Expenditures Research and development expenditures are charged to expense as incurred. Accounting for Warranty Costs The Company records estimated future warranty costs when the equipment is shipped to customers. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications were made to the 1997 financial statements to conform to the classifications used in 1998. These reclassifications had no effect on the operating results previously reported. Financial Risks and Uncertainties In accordance with American Institute of Certified Public Accountants Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertainties," the Company has disclosed in the financial statements certain financial risks and uncertainties to which it is subject, including concentration of sales to a limited number of customers, certain suppliers of raw materials and other key components included in its manufactured equipment and the use of estimates to review the carrying value of long-lived assets. The nature of the Company's operations exposes the Company to certain business risks. The market for "Computer-to-Plate" systems is highly competitive and subject to rapid technological change and evolving industry standards that may affect both the operations, operating results and financial condition of the Company and its customers. Recently Issued Accounting Standards In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for the Company's year ending December 31, 2001. Management believes that adoption of this statement will not have a material impact on its financial condition or results of operations. 2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
December 31, ____________________________________ 1998 1997 ___________ ___________ Receivables from Nonaffiliates: Trade $ 836,692 $ 556,311 Leases--current 407,220 37,328 Employees 2,741 3,794 Allowance for doubtful accounts (44,865) (32,865) ___________ ___________ Total receivables $ 1,201,788 $ 564,568 =========== =========== Inventories: Raw materials $ 1,210,327 $ 994,359 Work-in-process 387,357 260,035 Finished goods 564,335 687,240 ___________ ___________ Total inventories $ 2,162,019 $ 1,941,634 =========== =========== Property and Equipment: Office equipment $ 488,894 $ 430,633 Software 108,107 108,107 Machinery and equipment 310,051 281,494 Leasehold improvements 125,107 74,762 Tooling and spares 337,661 334,761 Motor vehicles 23,708 23,708 __________ ___________ Total property and equipment 1,393,528 1,253,465 Less accumulated depreciation and amortization (1,176,528) (1,118,500) __________ ___________ Net property and equipment $ 217,000 $ 134,965 =========== =========== Intangible Assets: License rights $ 560,020 $ 560,020 Patents 53,701 53,701 ___________ ___________ Total intangible assets 613,721 613,721 Less accumulated amortization (588,802) (585,643) ___________ ___________ Net intangible assets $ 24,919 $ 28,078 =========== =========== Accrued Expenses: Accrued payroll and related $ 45,040 $ 44,070 Accrued vacation and benefits 173,740 157,954 Accrued professional services 221,174 143,135 Accrued warranty reserve 45,142 36,650 Accrued income taxes -- 15,000 Accrued other 30,972 15,208 ___________ ___________ Total accrued expenses $ 516,068 $ 412,017 =========== ===========
3. SHAREHOLDERS' EQUITY On April 25, 1996 the Company's shareholders approved a one-for-four reverse stock split, effective immediately. All references in the financial statements to the number of shares, per share amounts, stock option plan data and the statements of shareholders' equity have been restated to reflect the split. On April 25, 1996 the Company's shareholders approved an amendment to the Company's Articles of Incorporation, whereby the authorized stock of the Company was stated as 15,000,000 shares of Common Stock, no par value and 1,000,000 shares of Preferred Stock, no specified par value. The Company's Board of Directors may designate any series and fix any relative rights and preferences of the Preferred Stock. The authorized shares have been restated in the financial statements to reflect the impact of this amendment. There were no shares of Preferred Stock issued or outstanding at December 31, 1998. On July 2, 1996 the Company issued 1,200,000 shares of Common Stock at a price of $6.00 per share as part of its initial public offering. During 1998 no employees exercised their stock options. During the years ended December 31, 1997 and 1996 certain employees exercised stock options and purchased a total of 40,302 and 42,455 shares of Common Stock, respectively, at $3.00 per share. In November 1998 the Company purchased and retired 110,245 shares of the Company's stock from a shareholder for $2.25 per share. The Company issued 2,500 shares of Common Stock valued at $7,500 as consideration for services rendered during the year ended December 31, 1996. Prior to July 2, 1996 Common Stock values were based on management's estimates of the fair value of the Company's Common Stock and prices after July 2, 1996 were based on the fair market value of the Company's stock on The Nasdaq Stock Market. Stock Options On April 25, 1996 the Company's shareholders approved and on April 16, 1998 approved an amendment to the stock option plan (the 1996 Stock Plan) which provides for the granting of options and restricted stock to certain officers, employees, directors and consultants to purchase up to 500,000 shares (1,000,000 as amended) of Common Stock. The 1996 Stock Plan also provides for the automatic grant of an option for 1,000 shares (5,000 shares as amended) of the Company's Common Stock, exercisable for a period of five years, to each non-employee director, upon the adoption of the 1996 Stock Plan and upon the election or re-election as a member of the Board of Directors. Such Board of Directors options will be issued with an exercise price equal to the fair market value of the Common Stock on the date the option is granted. Under this plan the Company has issued options to purchase 20,000, 3,000 and 2,000 shares under the plan for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's prior incentive stock option plans provided that stock options to purchase an aggregate of 375,000 shares of Common Stock may be granted to certain officers and employees. The exercise price could not be less than 100% of the fair market value of the Common Stock on the date the option was granted. No additional options under the Company's prior plans will be granted. All options become exercisable either 100% after three years from date of grant, 100% on date of grant or 100% one year after date of grant. All of these options expire either five, six or ten years from the date of grant. Stock option activity during the years ended December 31, 1998, 1997 and 1996 is summarized below:
Year Ended December 31, __________________________________________________________________________ 1998 1997 1996 _____________________ ______________________ _____________________ Wgtd. Avg. Wgtd. Avg. Wgtd. Ave. Shares Exer.Price Shares Exer. Price Shares Exer. Price _______ __________ ________ ___________ ________ ___________ Outstanding at beginning of year 386,924 $ 5.38 337,440 $ 5.15 102,972 $ 3 00 Granted 192,550 3.14 95,870 5.06 278,681 5.61 Canceled (13,836) 3.39 (6,084) 3.83 (1,758) 3.00 Exercised 0 0 (40,302) 3.00 (42,455) 3.00 _______ __________ ________ ___________ ________ __________ Outstanding at end of year 565,638 $ 4.66 386,924 $ 5.38 337,440 $ 5.15 ======= ========== ======== =========== ======== =========== Options exercisable at year end 314,120 $ 5.23 212,079 $ 5.28 178,084 $ 5.01 ======= ========== ======== =========== ======== ===========
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Wgtd. Avg. Options Exercise Outstanding Contractual Wgtd. Avg. Exercisable Wgtd. Avg. Prices at 12/31/98 Life (Yrs.) Exer. Price at 12/31/98 Exer. Price ________ ___________ __________ ___________ ___________ ___________ $ 2.88 23,100 5.53 $ 2.88 10,000 $ 2.88 3.00 49,718 3.72 3.00 48,784 3.00 3.13 149,350 7.05 3.13 200 3.13 3.88 13,000 4.33 3.88 13,000 3.88 5.13 90,470 6.48 5.13 42,136 5.13 6.00 240,000 3.83 6.00 200,000 6.00 ___________ __________ ___________ ___________ ___________ 565,638 5.24 $ 4.66 314,120 $ 5.23 =========== ========== =========== =========== ===========
The estimated fair value of options granted during 1998, 1997 and 1996 were $3.14, $4.00, and $4.09 respectively. The Company applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its stock option plans. Total compensation costs of $71,962 have been recognized for stock option grants during the year ended December 31, 1996 under the provisions of APB 25. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards No. 123, the Company's net income and earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been reduced to the pro forma amounts as indicated below. The fair value of options granted under the Company's stock option plans during 1998, 1997 and 1996 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 22% to 75%, risk- free interest rates between 4.2% and 7.7% and expected lives between 5 and 10 years.
Summary of pro forma net income, earnings per share and Black-Scholes model results. 1998 1997 1996 ___________ ___________ ___________ Net income: As reported $ 1,934,071 $ 2,158,969 $ 2,383,404 Pro forma 1,664,454 1,821,742 1,747,096 Basic and Diluted earnings per share: As reported $ .39 $ .44 $ .56 Pro forma .34 .37 .41 Black-Scholes results: Dividend yield None None None Expected volatility 25.4% 72.0% 75.0% Risk-free interest rate 5.5% 6.7% 7.7% Expected life of options 9.0 years 9.5 years 9.7 years
In connection with the Company's initial public offering, the Representative of the Underwriters was granted warrants to purchase up to 120,000 shares of Common Stock at $7.20 per share, exercisable commencing July 2, 1997 and expiring July 2, 2001. Warrants Warrant activity is summarized as follows:
Aggregate Number of Price per Exercise Shares Share Price _________ __________ _________ Balance at December 31, 1996 125,000 $3.00-7.20 $ 879,000 Exercised August 28, 1997 (5,000) 3.00 (15,000) _________ __________ _________ Balance at December 31, 1997 and 1998 120,000 $ 7.20 $ 864,000 ========= ========== =========
Restricted Stock The Company has entered into a restricted stock compensation plan with an officer of the Company under which the Company issued 10,000 shares of restricted Common Stock to the officer over a four year period, provided that the officer remained an employee of the Company as of the anniversary date of the plan. Under this plan the last 2,500 shares were issued as of December 31, 1996. Compensation expense related to these restricted stock issuances has been recorded in the statements of operations. 1996 Employee Stock Purchase Plan The Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted on April 25, 1996 and provides for the issuance of up to 100,000 shares of Common Stock. With certain exceptions, all employees of the Company who have been employed by the Company for at least six months and who are employed at least 20 hours per week and at least five months per year, including officers and directors who are employees, are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan consists of periodic offerings. Each offering under the Stock Purchase Plan will be for a period determined by a stock purchase committee appointed by the Board of Directors, but not to exceed 27 months. An employee may elect to have up to a maximum of 10% deducted from his or her regular salary for the purpose of purchasing shares under the Stock Purchase Plan. The price at which the employee's shares are purchased is the lower of (a) 85% of the closing price of the Common Stock on the day that the offering commences or (b) 85% of the closing price of the Common Stock on the day that the offering terminates. In 1998 and 1997, 29,822 and 18,943 shares were issued under the Stock Purchase Plan. 4. LEASES During 1998 the Company renewed its lease of its office and manufacturing space totaling 35,410 square feet. The lease expires on July 31, 2005. The Company is also responsible for all taxes, utilities and assessments. Rent expense for all leases was $124,000, $84,000 and $84,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, future minimum lease payments excluding taxes, utilities and assessments are:
Year _____ 1999 $180,000 2000 180,000 2001 180,000 2002 180,000 2003 180,000 _______ $900,000 ========
5. LEASE RECEIVABLES In 1998 the Company increased its efforts in leasing equipment under sales- type lease agreements. At December 31, 1998 and 1997 the lease receivable balances were as follows:
1998 1997 ___________ ___________ Payments to be received under sales- type leases $1,636,612 $ 252,240 Unearned income (226,540) (41,147) Current portion (407,220) (37,328) __________ __________ Lease receivable-long term $1,002,852 $ 173,765 ========== ==========
Minimum future rentals due on lease receivables at December 31, 1998 are Summarized below:
Year Ending December 31, ___________ 1999 $ 407,220 2000 411,960 2001 376,302 2002 295,320 2003 139,816 2004 5,994 __________ Total $1,636,612 ==========
6. DEFERRED REVENUES In 1998 and 1997 the Company began leasing its equipment to customers which causes deferred interest on these leases. The balance of deferred interest at December 31, 1998 and 1997 was $226,540 and $41,147, respectively, and is netted against lease receivables. In 1996 the Company entered into an agreement with a customer, who is a shareholder, to build certain equipment. The Company shipped $27,960 and $252,635 of equipment to this customer during the years ended December 31, 1998 and 1997 under this contract. At December 31, 1998 this contract was complete. The Company has certain contracts with customers concerning services to be performed in future Years. At December 31, 1998 the balance was $71,555. 7. MAJOR CUSTOMERS AND EXPORT REVENUES Revenues from one nonaffililiate customer amounted to $601,000 (8.6%), $275,000 (3.9%) and $1,066,000 (14.4%) for the years ended December 31, 1998, 1997 and 1996, respectively. No other nonaffiliate customer accounted for 10% or more of total revenues for these periods. The Company's export revenues did not exceed 10% of total revenues for the years ended December 31, 1998, 1997 and 1996. 8. INCOME TAXES The Company records income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." For income tax purposes, the Company had net operating loss carryforwards of approximately $5,300,000 as of December 31, 1998. If not used, these carryforwards will begin to expire in 2003. Under the Tax Reform Act of 1986, certain future changes in ownership resulting from the sale or issuance of stock may limit the amount of net operating loss carryforwards which can be utilized on an annual basis. Deferred tax assets and liabilities represent temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets are primarily comprised of reserves which have been deducted for financial statement purposes, but have not been deducted for income tax purposes and the tax effect of net operating loss carryforwards. The Company annually estimates the amount of deferred tax assets which it expects to realize based on historical averages of pretax accounting income and estimates of future pretax accounting income. The Company has recorded a valuation allowance to reduce recorded deferred tax assets to the amount of deferred tax benefit expected to be realized. Deferred taxes as of December 31, 1998 and 1997 are summarized as follows:
1998 1997 ___________ ___________ Current deferred taxes: Inventory reserves $ 171,000 $ 183,000 Accrued vacation 55,000 47,000 Accrued professional fees 77,500 50,100 Unrealized gain on investments (73,089) (65,579) Other 13,151 49,900 ___________ ___________ Total $ 243,562 $ 264,421 =========== =========== Long-term deferred taxes: Tax net operating loss carryforwards $ 1,848,500 $ 2,345,400 Tax credit carryforwards 112,500 91,400 Other -- 21,300 Valuation allowance (500,000) (1,608,100) ___________ ___________ Total $ 1,461,000 $ 850,000 =========== ===========
A reconciliation of the expected federal income taxes, using the effective statutory federal rate of 35%, with the provision (benefit) for income taxes is as follows:
1998 1997 1996 __________ ___________ __________ Provision for income taxes: Expected federal expense $ 479,500 $ 611,400 $ 602,800 State taxes, net of federal benefit 5,000 10,500 7,900 Change in valuation allowance (1,108,100) (994,900) (1,358,000) AMT 21,000 27,000 44,500 Other 38,459 (66,100) 41,688 __________ __________ _________ Total $ (564,141) $ (412,100) $ (661,112) ========== =========== ==========
Income tax expense for the years ended December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996 __________ _________ _________ Current tax provision: Federal $ 21,000 $ 27,400 $ 60,988 State 5,000 10,500 7,900 Deferred primarily federal (590,141) (450,000) (730,000) __________ _________ _________ Income tax benefit $ (564,141) $(412,100) $(661,112) ========== ======== =========
9. RELATED PARTY TRANSACTIONS The Company sells products to two of its shareholders and also contracts for certain products and production services with these shareholders. A summary of these transactions with affiliates as of and for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ___________ ___________ ___________ Total revenues $1,191,000 $ 4,314,000 $ 4,117,000 Total purchases of production services 7,000 1,000 7,000 Accounts receivable -- 360,000 467,000 Accounts payable 7,000 -- 1,000
10. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal actions in the normal course of business. Management is of the opinion that the outcome of such actions will not have a significant effect on the Company's financial position or results of operations. 11. 401(k) PROFIT SHARING PLAN The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") became effective August 1, 1994. The 401(k) Plan is intended to qualify under Section 401(k) of the Internal Revenue Code. All employees employed by the Company in the United States for at least 30 hours per week are eligible to participate in the 401(k) Plan as of the next calendar quarter following one year after date of hire by the Company. Each eligible employee may contribute to the 401(k) Plan, through payroll deductions, up to 15% of his or her salary, subject to statutory limitations. The 401(k) Plan permits, but does not require, additional contributions to the 401(k) Plan by the Company of up to 2% of the compensation paid by the Company to each employee in the previous calendar quarter. The Company's contributions are made at the discretion of the Board of Directors, within the limits of the 401(k) Plan. The Company has made a contribution of 1% of the compensation of each participating employee each quarter since the adoption of the 401(k) Plan through 1997. On January 1, 1998 the Company increased its contributions to 1.5% from 1% of the compensation of each participating employee each quarter. The Company's contributions to the 401(k) Plan were $21,262, $14,585 and $13,411 for the years ended December 31, 1998, 1997 and 1996, respectively. EX-23 2 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-25813 of Printware, Inc. on Form S-8 of our report dated January 22, 1999 appearing in this Annual Report on Form 10-K of Printware, Inc. for the year ended December 31, 1998. /s/ Deloitte & Touche LLP ________________________ Minneapolis, Minnesota March 5, 1999 [ARTICLE] 5 [MULTIPLIER] 1,000 [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] Dec-31-1998 [PERIOD-START] Jan-01-1998 [PERIOD-END] Dec-31-1998 [CASH] 654 [SECURITIES] 11529 [RECEIVABLES] 1247 [ALLOWANCES] (45) [INVENTORY] 2162 [CURRENT-ASSETS] 15809 [PP&E] 1394 [DEPRECIATION] 1177 [TOTAL-ASSETS] 18515 [CURRENT-LIABILITIES] 1100 [BONDS] 0 [COMMON] 22001 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] (4721) [TOTAL-LIABILITY-AND-EQUITY] 18515 [SALES] 6997 [TOTAL-REVENUES] 6997 [CGS] 4134 [TOTAL-COSTS] 2295 [OTHER-EXPENSES] 567 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] (802) [INCOME-PRETAX] 1370 [INCOME-TAX] (564) [INCOME-CONTINUING] 1934 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 1934 .39 [EPS-DILUTED] .39
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