<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. (Fee required).
For the fiscal year ended December 31, 1997.
[ ] Transition report under Section 13 or 15(d) of the Securities Act of
1934. (No fee required).
For the transition period from ____________ to ______________.
Commission file number: 0-11744.
PUBLISHERS EQUIPMENT CORPORATION
----------------------------------------------
(Name of Small Business Issuer In Its Charter)
Texas 75-1653425
-------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
16660 Dallas Parkway, Suite 1100, Dallas, TX 75248
-------------------------------------------- ----------
(Address of principal executive offices) (zip code)
(214) 931-2312
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of each class On Which Registered
------------------- ---------------------
<S> <C>
None --
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
--------------------------
Common Stock, No Par Value
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to Form 10-KSB. [ ]
The issuers revenues for the fiscal year ended December 31, 1997 were
$13,556,622.
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 12, 1998, based on the closing sales price of the
common stock on the Nasdaq Stock Market on that date was approximately
$1,652,000.
Indicated below is the number of shares outstanding of each class of
the issuer's common stock as of March 12, 1998.
<TABLE>
<CAPTION>
Title of each class of common stock Number Outstanding
- ----------------------------------- ------------------
<S> <C>
Common Stock, No Par Value 5,220,253
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of the issuer
to be held during 1998 are incorporated hereby by reference in Part III.
Page 1 of 39 sequentially numbered pages.
<PAGE> 2
PUBLISHERS EQUIPMENT CORPORATION
INDEX TO THE DECEMBER 31, 1997 FORM 10-KSB
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 5
Item 3. Legal Proceedings..................................... 6
Item 4. Submission of Matters to a Vote of
Security Holders...................................... 6
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters....................... 6
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................... 7
Item 7. Financial Statements and Supplementary
Data.................................................. 11
Item 8. Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.................................. 24
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act..................... 24
Item 10. Executive Compensation................................ 24
Item 11. Security Ownership of Certain
Beneficial Owners and Management...................... 24
Item 12. Certain Relationships and Related
Transactions.......................................... 25
Item 13. Exhibits, Lists and Reports on
Form 8-K.............................................. 25
</TABLE>
2
<PAGE> 3
PART I
Item 1. Business
General
Publishers Equipment Corporation (the "Company") serves the single-width
newspaper, commercial and semi-commercial printing markets through its
wholly-owned subsidiary, King Press Corporation ("King Press"). King Press,
acquired by the Company in 1984, manufactures and markets single-width web
offset presses worldwide and has been an active force in the market since the
early 1960's. Single-width printing equipment prints two newspaper pages
across at one time and is generally utilized by daily, weekly, and bi-weekly
newsp__ers, as well as by commercial and semi-commercial printers. The markets
for single-width equipment consist of a large number of individual equipment
users that produce a wide variety of products that includes newspapers, flyers,
inserts, brochures and catalogs.
Until the mid-1960's, publishers and printers in the United States utilized
equipment employing the "letterpress" printing process. During the 1960's,
many newspapers replaced their letterpress equipment with "offset" printing
equipment because of its capability to produce sharper images and better
quality color, qualities important to advertisers who provide a newspaper's
principal source of revenue. The transition to offset presses occurred rapidly
in the single-width newspaper industry due to a relatively low capital
investment in existing letterpresses and a less demanding operating
environment. Today, the vast majority of single-width equipment in production
worldwide by publishers and printers employs the offset printing process.
Suppliers of single-width web offset equipment, including the Company, have
continued to make equipment improvements that enhance speed, productivity and
color capabilities in response to the demands of a changing mix of equipment
users and their changing equipment needs.
The Company was incorporated under the laws of the state of Texas in 1979 and
maintains its principal executive offices at 16660 Dallas Parkway, Suite 1100,
Dallas, Texas 75248, telephone number (972) 931-2312. As of December 31, 1997,
the Company employed 111 persons. King Press' manufacturing personnel are
represented by the International Association of Machinists and Aerospace
Workers of the AFL-CIO under a five-year contract that expires November 20,
2000. All subsequent references to the Company include Publishers Equipment
Corporation and its wholly-owned subsidiary, King Press, unless the context
requires otherwise.
Principal Customers and Marketing
The Company markets its single-width equipment products through sales offices
in the U.S. as well as through independent international sales agents located
in over 50 countries. In recent years the Company has realigned its
international dealer
3
<PAGE> 4
network to increase effectiveness and expand into new market areas. During
1997, the Company derived more than one- third of its revenues from foreign
sales, which included customers in South America and Europe. During 1996, the
Company derived approximately one-half of its revenues from foreign sales,
which included customers in the Middle East and Europe. (See Item 6. Results
of Operations. Revenues.) In addition, the Company's executive officers
engage in sales activities for its single-width equipment products.
The Company's revenues are derived from sales to a broad base of small
newspapers as well as commercial and semi- commercial printers. During 1997,
two customers accounted for approximately 23 percent of the Company's revenues.
During 1996, two customers accounted for approximately 46 percent of the
Company's revenues.
Equipment and Services
The Company's line of single-width offset equipment products meets the needs of
printers and publishers ranging from cost effective presses for newspaper
production to heatset equipment that meets the high quality requirements of
commercial printers.
<TABLE>
<CAPTION>
Product Application
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<S> <C>
News King Printing Press Newspaper, Small
and Add-On Units
Litho King Printing Press Newspaper, Small
and Add-On Units and Mid-Size
Color King Printing Press Newspaper; Semi-
and Add-On Units Commercial, Heatset
and Non-Heatset
Process King Printing Press Commercial, Heatset
and Add-On Units and Non-Heatset
Media King Printing Press Newspaper, Mid-Size;
and Add-On Units Semi-Commercial, Heatset
and Non-Heatset
</TABLE>
The Company warrants the performance of its products for a period of one year
against defects in both materials and workmanship, in addition to supplemental
contractual warranties and performance guarantees as agreed to with individual
customers. Because of the complex nature of printing presses, the Company's
contracts provide for a continuing involvement with its customers' operations
following the completion of a project in order to assure that the performance
of the equipment meets both contractual obligations and customer requirements.
During 1997, approximately $475,000 was charged to operations for warranty
costs, compared to approximately $282,000 charged to operations for warranty
costs in 1996.
4
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Product Development
The Company separately funds research and development activities as required to
accomplish its stated goals. In 1990, a heat-set version of the Process King
was introduced for the European market. In 1992, the Company introduced an
improved steel side-framed News King printing unit. In 1993, the Company
introduced the Media King, a modular four-high stackable unit targeted for use
by printers and publishers requiring four color capability in a compact press
arrangement, and the Litho King, a highly featured version of the Company's
News King unit. The first installation of Media King units was completed in
late 1994 for a West European customer. In 1995, 1996 and 1997, the Company's
research and development activities were directed primarily at improvements and
modifications to its current product lines, including the adaptation of
equipment for the printing requirements of the emerging former East Block
countries. The Company's new and redesigned products are designed to enable
the Company to compete effectively in both domestic and international markets.
The Company, in addition, conducts research and development activities in
connection with customer contracts for new and improved equipment, with the
cost of these activities included in the contract price. Currently, research
and development activities are directed towards new single-width equipment
products that will complement the Company's current products and services, as
well as improvements to the Company's current product lines.
During 1997, the Company spent approximately $133,000 on research and
development activities not connected with customer contracts. During 1996, the
Company spent approximately $67,000 on such research and development
activities.
Competition
King Press' operations compete on a worldwide basis, principally with U.S.
based Harris Graphics of Harris-Heidelberg; Goss Graphic Systems, a former
division of Rockwell International Corporation and MAN Roland, Inc. The
Company believes its single-width presses provide a price/performance
combination superior to its competitors.
Item 2. Properties
The Company leases 1,925 square feet for its principal executive offices at
16660 Dallas Parkway, Suite 1100, Dallas, Texas, which is used for its
corporate management offices. The lease on this office expires in 1999, at
which time the Company expects to negotiate a renewal of the lease.
The Company owns a 137,000 square foot office and manufacturing facility in
Joplin, Missouri, which is used as the principal offices of King Press.
5
<PAGE> 6
Item 3. Legal Proceedings
The Company has from time to time become involved in various claims and
lawsuits incidental to their businesses. In the opinion of management of the
Company, any ultimate liability arising out of currently pending claims and
lawsuits will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock has traded on the Nasdaq Stock Market under the
symbol PECN since January 7, 1986 and prior to that time in the
over-the-counter market. The following table sets forth the range of the daily
high and low sales prices for the common stock, as reported by the National
Association of Securities Dealers, Inc. through NASDAQ for all periods after
January 1, 1993.
<TABLE>
<CAPTION>
Stock
------------------
High Low
---- ---
<S> <C> <C> <C>
1996
First Quarter.......... 0.28 0.13
Second Quarter......... 0.81 0.28
Third Quarter.......... 0.56 0.34
Fourth Quarter......... 0.56 0.25
1997
First Quarter.......... 0.56 0.26
Second Quarter......... 0.40 0.25
Third Quarter.......... 0.43 0.25
Fourth Quarter......... 0.34 0.25
1998
First Quarter.......... 0.38 0.25
(Through March 12, 1998)
</TABLE>
As of March 12, 1998, there were approximately 432 record holders of the
Company's common stock.
The Company has not paid any dividends on its common stock since its inception.
Periodically, the Company will consider the payment of dividends in light of
the Company's earnings, capital requirements, financial condition and other
factors, but there is no assurance that the Company will decide to pay
dividends in the future. The loan agreement pertaining to the Company's
revolving line of credit includes restrictions on the payment of dividends.
6
<PAGE> 7
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Position and Liquidity
King Press was supported in 1997 by a secured $3,500,000 working line of credit
that expires May 31, 1998. The loan agreement pertaining to the line of credit
included restrictions on indebtedness, liens, the disposal of assets and
required that certain financial ratios be maintained. At December 31, 1997,
King Press had $2,154,000 outstanding under the revolving line of credit, and
was in compliance with all provisions of the loan agreement.
The Company expects to receive an extension of its line of credit at its
maturity in May 1998. The Company is also seeking an increase in its line of
credit that may require a restructuring of its current line or that may include
other credit sources. The Company is pursuing such a restructuring but there
can be no assurances that it will occur.
In recent years, the Company has taken steps to conserve working capital that
included operating at reduced manpower levels and restricting discretionary
spending, including capital expenditures. The increase in principal amount
available being pursued under an expanded working capital line of credit is
being sought to support anticipated increases in sales activity as market
conditions for printing equipment improve, and fund necessary capital
expenditures to maintain the Company's plant and equipment.
The Company's backlog at December 31, 1997, totaled $6,600,000, compared to
$3,800,000 at December 31, 1996.
Results of Operations
Revenues. Revenues of $13,557,000 for 1997 compare to $16,569,000 for 1996, a
decrease of approximately 18 percent. Revenues derived from sales to foreign
customers decreased approximately 43 percent in 1997 compared to 1996,
accounting for 36 percent of total revenues in 1997 compared to 52 percent in
1996. The Company attributes the reduction in foreign revenues in 1997
primarily to the currency collapse in South East Asia, which resulted in
negotiations for four pending contracts with customers in this area being
placed on hold. The Company is maintaining contact with these sales prospects
and exploring financing options available, but it is uncertain when, or if,
these orders will be finalized.
South East Asia, as well as the Middle East and former East Bloc countries,
have in recent times been the most rapidly emerging markets for printing
equipment in the world. Included in 1997 revenues is an equipment order
delivered to a customer in the
7
<PAGE> 8
Slovak Republic in the third quarter, which follows a very large order for a
customer in the United Arab Emirates delivered in the fourth quarter of 1996.
The equipment for the Slovak Republic has four color capability for book
production, while the order for the United Arab Emirates consists of combined
newspaper and commercial press equipment for newspaper production having glossy
heatset page content. Newspapers in many foreign countries are increasing the
glossy heatset page content of their products, which must be produced on
commercial press equipment. The Company believes that this development offers
a significant business opportunity for its cost effective newspaper and
commercial press equipment, which can be sold separately or in combination.
As the currency crisis in South East Asia worsened during 1997, the Company
concentrated its international sales efforts in the Middle East, where
prospects in Kuwait, Oman and Saudi Arabia are currently being pursued. In
July 1997, the Company completed contractual arrangements for a large press
order for a customer in Saudi Arabia. This order, like the earlier order for
the United Arab Emirates, consists of combined newspaper and commercial press
equipment. The equipment was originally scheduled for delivery in the first
quarter 1998, but is now being rescheduled. The delay in shipment of this
order results from the order being placed on hold by the Company in December
1997 while the customer's request to restructure the contract payment schedule
is being negotiated. The Company will agree to restructure the payment terms
of this important contract up to its working capital requirement limitations,
but not beyond. The outcome of these negotiations, or their ultimate effect on
contract status, can not be predicted and, as a result, the Company is
identifying other opportunities for this equipment, if necessary. The
inability to deliver this order in 1998, which is included in the Company's
backlog at December 31, 1997 (See Item 6. Financial Position and Liquidity),
would reduce revenues for 1998 by approximately $3 million.
The Company expects sales to foreign customers to remain a significant
component of its total revenues in 1998 and beyond, but consummation of such
contracts is subject to delays resulting from financing availability in various
foreign markets and the selection of equipment suppliers under very competitive
conditions. In addition, the Company's competitive position relative to
foreign equipment suppliers is affected by currency exchange rates, which
during 1997 and entering 1998 have been adverse as a result of the relatively
strong U.S. dollar. Such delays in contract booking and the competitive nature
of international markets result in an irregular pattern in the booking of
foreign orders, but the Company expects foreign sales to be a growing component
of its total revenues.
Revenues derived from sales to domestic customers increased approximately 9
percent in 1997 compared to 1996, as the factors fundamental to the health of
domestic printing equipment markets remained favorable. Trade publications
report that advertising expenditures, which represent the major source of
income for the
8
<PAGE> 9
Company's customer base, increased approximately 9 percent in 1997 over 1996,
and newsprint cost, which represents the single largest component of a
newspaper's operating expense, remained relatively stable. The Company's
domestic revenues for 1997 were derived primarily from contracts valued at less
than $1 million, and included only one contract valued greater than this
amount. This broad base of domestic customers is an encouraging indicator for
domestic printing equipment markets.
The Company expects the growth of its domestic revenues to continue, but at a
moderate rate. Over capacity exists in certain commercial market segments and
newspaper readership growth is affected by demographic trends and the business
mix of major newspapers, with both positive and negative results. Newspaper
readership growth has slowed, principally among younger age groups, in favor of
other media news sources. One response of newspaper producers has been to
reduce costs by eliminating circulation to outlying areas. This negative
development affecting print demand, however, has been accompanied by a positive
development that offers attractive business opportunities for the Company. In
recent years, the business mix of major newspapers has included an increasing
content of short press run products such as circulars and inserts, which are
delivered to target markets. These short run products are produced more cost
effectively, with less waste, on single-width press equipment as produced by
the Company. The Company delivered equipment for this purpose to Gannett
Company, a leading U.S. newspaper group, in 1996 and expects similar orders in
the future.
Gross Profit. Gross profit of $3,021,000, or 22.3 percent of revenues, for
1997 compares to $3,164,000, or 19.1 percent of revenues, for 1996. The
improvement in gross profit expressed as a percent of revenues in 1997 is the
result of improved profit margins on contracts. The large order for Gannett
Company included in 1996 sales was strategically priced at a reduced gross
profit level for a new application of the Company's equipment. The presence of
this low margin contract in 1996 is the principal cause of the reduced gross
profit expressed as a percentage of revenues in 1996.
Selling, General and Administrative Expense. Selling, general and
administrative expense of $2,503,000, or 18.5 percent of revenues for 1997
compares to $2,435,000, or 14.7 percent of revenues, for 1996. The increase in
selling, general and administrative expense expressed as a percent of revenues
in 1997 compared to 1996 is a result of increased research and development
expenditures, higher commissions on foreign sales and the lower level of
revenues in 1997 compared to 1996. The Company's research and development
activities are directed towards new single-width equipment products that will
complement its current products, as well as improvements to its current product
lines.
9
<PAGE> 10
The Company maintained cost containment measures in 1997 that were adopted in
recent years in response to reduced business activity in printing equipment
markets.
Other Income (Expense). Interest expense of $333,000 for 1997 compares to
$276,000 for 1996, reflecting primarily an increased level of borrowing by King
Press under its working capital line of credit. Interest income of $3,000 in
1997 compares to $10,000 in 1996, and is derived primarily from short term
money market investments. Net other expense of $8,000 for 1997 compares to net
other income of $2,000 for 1996.
Provision For Taxes. The Company utilized available net operating loss
carryforwards to offset federal and state income tax liabilities for 1997 and
1996. (See Note 7 of Notes to Consolidated Financial Statements).
Net Income. Net income of $180,000, or 1.3 percent of revenues, for 1997
compares to net income of $465,000, or 2.8 percent of revenues, for 1996.
Year 2000. The Company is currently in the process of evaluating its
information technology infrastructure for Year 2000 compliance. The Company
does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not anticipate any
material disruption in its operations as a result of any failure by the Company
to be in compliance.
10
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Item 7. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
and Financial Statement Schedules: Page
----
<S> <C>
Report of Independent Public Accountants. . . 12
Consolidated Balance Sheet as of
December 31, 1997 . . . . . . . . . . . . . 13
Consolidated Statements of Income -
two years in the period ended
December 31, 1997 . . . . . . . . . . . . . 14
Consolidated Statements of Shareholders'
Equity - two years in the period
ended December 31, 1997 . . . . . . . . . . 15
Consolidated Statements of Cash Flows -
two years in the period ended
December 31, 1997 . . . . . . . . . . . . . 16
Notes to Consolidated Financial
Statements. . . . . . . . . . . . . . . . . 17
</TABLE>
11
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Publishers Equipment Corporation:
We have audited the accompanying consolidated balance sheet of Publishers
Equipment Corporation (a Texas corporation) as of December 31, 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1997. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Publishers Equipment
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for each of the two years in the period then ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 6, 1998
12
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PUBLISHERS EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31,
1997
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 37,822
Trade accounts receivable (net of allowance for
doubtful accounts of $73,189) ...................................... 1,385,732
Inventories (Note 3) .................................................... 8,257,440
Prepaid expenses and other current assets ............................... 119,159
------------
Total current assets ................................................ 9,800,153
------------
Property, plant and equipment, at cost (Note 5):
Land .................................................................... 30,138
Building ................................................................ 1,555,309
Transportation equipment ................................................ 51,112
Furniture and fixtures .................................................. 806,642
Machinery and tools ..................................................... 1,682,067
------------
4,125,268
Less accumulated depreciation ........................................... 3,045,640
------------
Net property, plant and equipment ................................... 1,079,628
------------
$ 10,879,781
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .................................................. $ 1,390,949
Accrued liabilities ..................................................... 829,130
Accrued warranty expense (Note 4) ....................................... 390,957
Customer deposits ....................................................... 1,168,370
Deferred installation revenue ........................................... 124,640
Short-term debt (Note 5) ................................................ 2,154,000
------------
Total current liabilities ........................................... 6,058,046
------------
Long-term debt .............................................................. 1,000,000
------------
Other liabilities ........................................................... 153,847
------------
Contingencies and commitments (Note 6)
Shareholders' equity (Notes 8 and 9):
Preferred stock, no par value; 1,000,000 authorized; Series A
convertible preferred stock, 250,000 shares authorized, 43,602
issued,
liquidation value of $6.88 per share (Note 8) ...................... 300,000
Common stock, no par value; 9,000,000 shares authorized
5,251,433 issued ................................................... 19,014,871
Treasury stock, 45,714 shares at cost ................................... (168,496)
Retained deficit ........................................................ (15,478,487)
------------
Total shareholders' equity ....................................... 3,667,888
------------
$ 10,879,781
============
</TABLE>
See accompanying notes.
13
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PUBLISHERS EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Years ended December 31,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Revenues ............................... $ 13,556,622 $ 16,568,599
Cost of revenues ....................... 10,535,937 13,404,351
------------ ------------
Gross profit ........................... 3,020,685 3,164,248
Selling, general and administrative
expenses (Note 10) ................. 2,503,365 2,435,037
------------ ------------
Operating profit ....................... 517,320 729,211
Other income (expense):
Interest expense .................... (332,781) (276,397)
Interest income ..................... 3,178 9,772
Other income (expense), net ......... (7,545) 2,043
------------ ------------
Income before taxes .................... 180,172 464,629
Provision for income taxes ............. -- --
------------ ------------
Net income ............................. $ 180,172 $ 464,629
============ ============
Earnings per share (Note 2):
Basic ............................... $ 0.03 $ 0.09
Diluted ............................. $ 0.03 $ 0.09
Weighted average shares outstanding:
Basic ............................... 5,205,719 5,191,185
Diluted ............................. 5,298,349 5,249,321
</TABLE>
See accompanying notes.
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PUBLISHERS EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1996 and 1997
- -------------------------------------------------------------------------------------------------------------------------
Series A
Convertible
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 ........... 72,670 $ 500,000 5,222,365 $18,814,871 45,714 $ (168,496)
Issuance of shares upon conversion
of preferred stock (Note 8) ........ (14,534) (100,000) 14,534 100,000 -- --
Net income ........................... -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ........... 58,136 400,000 5,236,899 18,914,871 45,714 (168,496)
Issuance of shares upon conversion
of preferred stock (Note 8) ........ (14,534) (100,000) 14,534 100,000 -- --
Net income ........................... -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ........... 43,602 $ 300,000 5,251,433 $19,014,871 45,714 $ (168,496)
========== ========== ========== =========== ========== ==========
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Retained Deficit Total
---------------- -----
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 ........... $(16,123,288) 3,023,087
Issuance of shares upon conversion
of preferred stock (Note 8) ........ -- --
Net income ........................... 464,629 464,629
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 ........... (15,658,659) 3,487,716
Issuance of shares upon conversion
of preferred stock (Note 8) ........ --
Net income ........................... 180,172 180,172
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ........... $(15,478,487) $3,667,888
============ ==========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
15
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PUBLISHERS EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations ...................................... $ 180,172 $ 464,629
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ........................... 230,994 238,138
Change in assets and liabilities:
Increase in accounts receivable ......................... (503,167) (68,158)
Decrease (increase) in inventories ...................... (812,983) 1,898,740
Decrease in other current assets ........................ 10,150 17,572
Increase (decrease) in accounts payable and
accrued liabilities ............................... 803,870 (1,081,672)
Increase in accrued warranty expense .................... 216,136 51,243
Increase (decrease) in customer deposits ................ 536,430 (1,602,280)
Increase (decrease) in deferred installation revenue .... (253,310) 396,450
----------- -----------
Net cash provided by operations ................................. 408,292 314,662
Cash flows from investing activities:
Additions to property, plant and equipment .............. (1,105) (223,120)
----------- -----------
Net cash used in investing activities ........................... (1,105) (223,120)
Cash flows from financing activities:
Total borrowings ............................................. 7,645,000 9,455,000
Total repayments ............................................. (8,162,604) (9,489,400)
----------- -----------
Net cash used in financing activities ........................... (517,604) (34,400)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............... (110,417) 57,142
Cash and cash equivalents at beginning of period ................... 148,239 91,097
----------- -----------
Cash and cash equivalents at end of period ......................... $ 37,822 $ 148,239
=========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 17
PUBLISHERS EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Publishers Equipment Corporation (the "Company") is a multinational
manufacturer of single-width newspaper, commercial and semi-commercial printing
presses. The Company markets its products through it's wholly-owned
subsidiary, King Press Corporation ("King Press"). King Press was acquired by
the Company in 1984 and has served printing equipment markets since the early
1960's. Presses are sold primarily to small newspapers as well as commercial
and semi-commercial printers and publishers located throughout the world.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements of the
Company include the accounts of Publishers Equipment Corporation and King Press
Corporation. All significant intercompany transactions are eliminated.
REVENUE RECOGNITION - Revenues from sales of manufactured presses and parts are
recognized when shipped.
ACCOUNTS RECEIVABLE - A majority of the Company's accounts receivable are due
from companies in the printing industry. Credit is extended based on
evaluation of the customer's financial condition and, generally, collateral is
not required.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out)
or market.
DEPRECIATION - Depreciation is determined for financial reporting by the
straight-line method using the following estimated useful lives:
<TABLE>
<S> <C>
Building 30 years
Transportation equipment 3 years
Furniture and fixtures 3 to 10 years
Machinery and tools 2 to 20 years
</TABLE>
For income tax purposes, depreciation is determined by accelerated methods.
RESEARCH AND DEVELOPMENT COSTS - The costs and expenses related to basic
research, engineering, and product development are expensed as incurred.
During 1997 and 1996, research and development costs aggregated approximately
$133,000 and $67,000, respectively.
17
<PAGE> 18
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
INCOME TAXES - Deferred income taxes are provided for differences in the
recognition of income and expenses for financial statement and tax reporting
purposes (See Note 7).
EARNINGS PER SHARE - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", effective December 31, 1997,
and all earnings per share amounts disclosed herein have been calculated under
the provisions of SFAS No. 128. Basic earnings per common share were computed
by dividing net income by the weighted average number of shares of common stock
outstanding during the reporting period. Diluted earnings per common share
were determined on the assumed exercise of dilutive options and the assumed
conversion of convertible preferred stock, as determined by applying the
treasury stock method.
CASH EQUIVALENTS - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. INVENTORIES
<TABLE>
<CAPTION>
Year ended
December 31,
1997
- --------------------------------------------------------
<S> <C>
Raw materials................ $ 103,177
Work-in process.............. 870,131
Finished goods............... 7,662,301
Used presses................. 485,799
----------
9,121,408
Less inventory reserves (863,968)
----------
$8,257,440
==========
</TABLE>
18
<PAGE> 19
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
4. WARRANTY
The Company warrants the performance of its products for a period of one year
against defects in both materials and workmanship, in addition to supplemental
contractual warranties and performance guarantees as agreed to with individual
customers.
Warranty expense provided was approximately $475,000 in 1997 and $383,000 in
1996, and is included in cost of revenues in the accompanying Consolidated
Statements of Income. During 1996, a reduction to the Company's warranty
reserve of approximately $101,000 was made to bring this reserve in line with
the estimated liability for equipment in warranty at year end. This reserve
activity resulted in a net warranty expense of $282,000 in 1996.
5. DEBT
<TABLE>
<CAPTION>
Year ended
December 31,
1997
- -----------------------------------------------------------------
<S> <C>
Amounts outstanding under
the King Press bank revolving line
of credit, interest at U.S. Prime
plus 1.0% (9.50% at December 31, 1997)
due May 31, 1998, secured by all real
and personal property of King Press.... $2,154,000
Subordinated note, convertible into
common stock at $7.50 per share
(subject to anti-dilution provisions),
interest at German Prime rate due
December 31, 1999 unsecured ........... 1,000,000
----------
3,154,000
Less current maturities................. 2,154,000
----------
$1,000,000
==========
</TABLE>
At December 31, 1997, King Press may borrow up to $3,500,000 at the U.S. Prime
rate of interest plus 1.0 percent under a revolving credit line expiring May
31, 1998. At December 31, 1997, King Press had $2,154,000 outstanding under
the revolving credit line. The loan agreement pertaining to the revolving line
of credit includes restrictions on indebtedness, liens, disposal of assets and
requires that certain financial ratios be maintained. At December 31, 1997,
the Company was in compliance with all provisions of the loan agreement.
19
<PAGE> 20
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
The Company paid interest of approximately $352,000 in 1997 and $248,000 in
1996.
6. CONTINGENCIES
The Company has from time to time become involved in various claims and
lawsuits incidental to its business. In the opinion of management, any
liability arising out of currently pending claims and lawsuits will not have a
material adverse effect on the consolidated financial condition or results of
operations of the Company.
7. INCOME TAXES
The Company applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS 109 requires
recognition of deferred tax liabilities and assets for the expected future
consequences of events that have been included in a company's financial
statement and tax returns in different years. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
The Company had no provision for Federal or state income taxes for 1997 or
1996. The following is a reconciliation of the U.S. Federal statutory rate to
the effective tax rate.
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
U.S. Federal statutory rate 34% 34%
Utilization of net operating loss carryforwards (34%) (34%)
--- ---
0% 0%
=== ===
</TABLE>
At December 31, 1997, the Company had deferred tax liabilities of $153,000,
deferred tax assets of $5,871,000 and a valuation allowance of $5,718,000. The
principal temporary differences included above are long term capital loss
carryforwards ($2,581,000), net operating loss carryforwards ($1,637,000),
general business credits ($424,000), minimum tax credit ($109,000), uniform
inventory cost capitalization ($426,000), depreciation $131,000 and accruals
($1,887,000).
20
<PAGE> 21
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
The Company has long term capital loss carryforwards for U.S. tax purposes of
$7,592,000, net operating loss carryforwards of $4,814,000 and general business
credit carryforwards of $424,000. The long term capital loss carryforwards,
the net operating loss carryforward and general business credit carryforwards
expire beginning in 2001, 2004 and 1998, respectively.
8. PREFERRED STOCK
In connection with the acquisition of a Swedish subsidiary whose operations
were discontinued in 1991, the Company issued 145,349 shares of its Series A
Convertible Preferred Stock ("Series A"), no par value, to AB Bonnierforetagen.
The terms of the Series A shares provide that such shares shall be nonvoting
stock with a nonparticipating liquidation preference of $6.88 per share. The
Series A shares shall be entitled to receive dividends at the same rate as the
common stock on an "as converted" basis. The terms of the Series A further
provide that all of the issued shares will be converted to common stock ratably
over a 10 year period commencing January 1, 1991. The Series A will not be
convertible at the option of the holder unless and until the occurrence of
certain events, such as a merger, recapitalization or change in control of the
Company. The Series A shares are convertible at a rate of one share of
preferred stock for one share of common stock and the conversion rate is
subject to certain anti-dilution adjustments. On each January 1, 1992, 1993,
1994, 1995, 1996, 1997 and 1998, 14,534 shares of the Series A converted to
14,534 shares of common stock. As a result of the foregoing, the Company has
reserved 43,602 common shares for issuance upon conversion of the outstanding
Series A shares.
9. STOCK OPTIONS AND PREEMPTIVE RIGHTS
The Company has granted incentive stock options to key employees and directors
of the Company at prices equal to the greater of $0.25 or market value at date
of grant. The stock options are exercisable in 25% cumulative annual
installments beginning at the date of grant.
21
<PAGE> 22
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
A summary of option transactions in 1996 and 1997 follows:
<TABLE>
<CAPTION>
Options Total Option
(Shares) Price
- -------------------------------------------------------------------
<S> <C> <C>
Outstanding at
December 31, 1995............... 174,250 $ 179,313
Granted........................... 3,000 3,000
Cancelled......................... ( 40,000) ( 44,063)
Exercised......................... -- --
---------- ----------
Outstanding at
December 31, 1996............... 137,250 $ 138,250
Granted........................... 202,242 50,561
Cancelled......................... ( 7,500) ( 8,500)
Exercised......................... -- --
---------- ----------
Outstanding at
December 31, 1997............... 331,992 $ 180,311
---------- ----------
Exercisable at end of 1997........ 178,811
Common stock reserved for
options at end of 1997.......... 122,983
Exercise price of options
outstanding at end of 1997...... $ 0.25 - $ 1.00
</TABLE>
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock - Based Compensation" (SFAS
No. 123). SFAS No. 123 established financial accounting and reporting
standards for stock-based compensation plans and to transactions in which an
entity issues its equity instruments to acquire goods and services from
non-employees. Since the effect of SFAS No. 123 is not material, the Company
has made no disclosure of pro forma net income and earnings per share as if
SFAS No. 123 had been adopted.
22
<PAGE> 23
PUBLISHERS EQUIPMENT CORPORATION
NOTES (Continued)
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan available to the employees of the Company after
six months of service. The plan provides for voluntary contributions from
participating employees. A participant may elect to make contributions up to
the maximum permissible amount (the lesser of $30,000 or 25% of the
participant's annual compensation) on a before tax basis. The 401(k) plan
allows the Company to make voluntary contributions to the accounts of
participating employees. The Company made no contributions to the 401(k) plan
for 1997 or 1996. The Company pays all fees and expenses incurred for
administration of the 401(k) plan.
Employees of the Company participate in defined contribution pension plans.
Contributions to the pension plans are based on hours worked and wages earned.
Contributions to the plans are funded currently. The costs of the pension
plans were approximately $187,000 in 1997 and $193,000 in 1996.
11. EXPORT SALES
Included in revenues are export sales to foreign customers which aggregated
approximately $4,838,000 in 1997 and $8,550,000 in 1996.
12. SIGNIFICANT CUSTOMERS
During 1997, two customers accounted for approximately 23 percent of the
Company's revenues. During 1996, two customers accounted for approximately 46
percent of the Company's revenues.
23
<PAGE> 24
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Executive Officers Of The Company
<TABLE>
<CAPTION>
Name Age Present Position
-------- -------- --------------------
<S> <C> <C>
Evans Kostas 62 Chairman of the Board
Chief Executive Officer
and President
Roger R. Baier 55 Chief Financial Officer
and Vice President
Finance
</TABLE>
Both of the Executive Officers of the Company have served in their present
capacities for the Company for at least the past five years.
[The remaining information required by Part III, Items 9, 10, 11 and 12 are set
forth in the Proxy Statement to be delivered to Shareholders in connection with
the Company's Annual Meeting of Shareholders presently scheduled to be held on
June 19, 1998, which information is incorporated herein by reference.]
Item 10. Executive Compensation
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information concerning Security Ownership of Certain Beneficial Owners and
Management is set forth in the Proxy Statement under the heading "Security
Ownership of Management and Principal Shareholders", which information is
incorporated herein by reference.
24
<PAGE> 25
Item 12. Certain Relationships and Related Transactions
The information concerning Certain Relationships and Related Transactions is
set forth in the Proxy Statement under the heading "Certain Transactions",
which information is incorporated herein by reference.
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits.
See Index to Exhibits.
(b) Reports on Form 8-K.
Not applicable.
25
<PAGE> 26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PUBLISHERS EQUIPMENT CORPORATION
By: /s/ Evans Kostas
-------------------------------- Date: March 16, 1998
Evans Kostas -------------------
Chairman of the Board,
President and Chief Executive Officer
In accordance with the Exchange Act, the report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Evans Kostas Chairman of the Board March 16, 1998
- -------------------- President and Chief --------------
Evans Kostas Executive Officer
/s/ Roger R. Baier Vice President-Finance March 13, 1998
- -------------------- and Treasurer (Principal --------------
Roger R. Baier Financial and Accounting
Officer)
/s/ Simon Bonnier
- -------------------- Director March 17, 1998
Simon Bonnier ---------------
/s/ James K. Feeney
- -------------------- Director March 19, 1998
James K. Feeney --------------
/s/ Robert S. Hamilton
- -------------------- Director March 16, 1998
Robert S. Hamilton --------------
/s/ Ole B. Rygh
- -------------------- Director March 19, 1998
Ole B. Rygh --------------
/s/ Reinhart Siewert
- -------------------- Director March 16, 1998
Reinhart Siewert --------------
</TABLE>
26
<PAGE> 27
PUBLISHERS EQUIPMENT CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
3.1 Articles of Incorporation of the
Company, together with Articles
of Amendment and Form of Amendment *
3.2 Articles of Amendment to Articles
of Incorporation of the Company,
filed with the Office of the Secre-
tary of State of Texas on June 2,
1988 **
3.3 Certificate of Correction of
Articles of Incorporation of the
Company, filed with the Office of
the State of Texas on April 9, 1990 ***
3.4 Amended and Restated Bylaws of the
Company ***
10.1 Loan Agreement, dated as of May
9, 1997, between the Company and
Mercantile Bank of Joplin, N.A. P
10.2 Promissory Note, dated as of May
9, 1997, between the Company and
Mercantile Bank of Joplin, N.A. P
10.3 Publishers Equipment Corporation
Stock Option Plan, as Amended ***
10.4 Purchase Agreement for 7%
Convertible Subordinated Notes
Due 1993, dated as of December
6, 1986, by and among the
Company, Windmoller & Holscher
and Koenig & Bauer AG ****
10.5 Employment Agreement, dated as
of May 2, 1988, as Amended by
and between the Company and
Robert S. Hamilton ****
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<S> <C> <C>
22 Subsidiaries of the Company 28
Jurisdiction
Name of Incorporation
---- ----------------
King Press
Corporation Missouri
Applied Graphics,
Inc. Texas
24 Consent of Independent Public
Accountants 39
27 Financial Data Schedule
</TABLE>
- -----------------------------
* Incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-1 (Registration No. 2-28017).
** Incorporated by reference from the Exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1988.
*** Incorporated by reference from the Exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1989.
**** Incorporated by reference from the Exhibits to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1992.
28
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-8142) pertaining to the Stock Option Plan of Publishers
Equipment Corporation, and in the related Prospectus, of our report dated March
6, 1998, with respect to the financial statements and schedules of Publishers
Equipment corporation included in this Annual Report (Form 10-KSB) for the year
ended December 31, 1997.
/s/ ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 37,822
<SECURITIES> 0
<RECEIVABLES> 1,385,732
<ALLOWANCES> 0
<INVENTORY> 8,257,440
<CURRENT-ASSETS> 9,800,153
<PP&E> 1,079,628
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,879,781
<CURRENT-LIABILITIES> 6,058,046
<BONDS> 0
0
300,000
<COMMON> 19,014,871
<OTHER-SE> 15,478,487
<TOTAL-LIABILITY-AND-EQUITY> 10,879,781
<SALES> 0
<TOTAL-REVENUES> 13,556,622
<CGS> 10,535,937
<TOTAL-COSTS> 10,535,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332,781
<INCOME-PRETAX> 180,172
<INCOME-TAX> 0
<INCOME-CONTINUING> 180,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,172
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
