SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
Annual report pursuant to Section 13 or 15(d) of the Securities
_X_ Exchange Act of 1934 for the fiscal year ended JULY 31, 1995 or
Transition report pursuant to Section 13 or 15(d) of the
___ Securities Exchange Act of 1934
COMMISSION FILE NO.(0-16566)
_______________________________
VARITRONIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1442400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 INTERCHANGE NORTH
300 HIGHWAY 169 SOUTH
MINNEAPOLIS, MINNESOTA 55426
(Address of principal executive offices) (Zip Code)
612-542-1500
(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, par value $.01 per share
_______________________________
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.
As of October 16, 1995, 2,336,328 shares of Common Stock of the
registrant were outstanding. The aggregate market value of Common Stock
beneficially owned by non-affiliates on that date was $17,007,000, based upon
the last reported sale price of the Common Stock at that date by the NASDAQ
National Market System.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Annual Report on Form 10-K incorporates by reference
information from the Registrant's Annual Report to Shareholders for the year
ended July 31, 1995 (1995 Annual Report). Part III of this Annual Report on Form
10-K incorporates by reference information from the Registrant's Proxy Statement
for its Annual Meeting of Shareholders to be held December 1, 1995 (1995 Proxy
Statement).
PART I
ITEM 1. BUSINESS
GENERAL
Varitronic Systems, Inc. (the "Company"), develops, manufactures and
markets supply-consuming lettering, labeling, signage and presentation systems
which enhance the quality, professionalism and effectiveness of a wide range of
communications. The lettering and labeling systems generate professional quality
type-on-tape in a variety of colors and in sizes ranging from one-half to four
inches. The PosterPrinter(R) machine, targeted for the presentation market,
enlarges standard-sized originals to poster or banner-sized documents. In
addition, a PosterPrinter machine sold with a computer interface allows the end
user to print computer generated originals from a personal computer using
specific application software. In fiscal 1995, the Company introduced
VintageColorTM, a wide-format, graphics printing system which produces output in
24 or 36 inch widths up to 100 feet long. This new product is directed towards
the wide-format color printing market and is designed to meet the demands of
full-color printing. The Company also offers a broad line of consumable supplies
and accessories which are used with all of its products.
PRODUCTS
LETTERING AND LABELING SYSTEMS
The Company markets lettering and labeling systems which generate
letter-quality print in a variety of colors and styles using thermal transfer
technology. Thermal transfer technology is the process by which colored carbons
and resins are transferred to the face of an adhesive-backed tape using heat and
pressure to print letters, numbers and symbols. The following systems are
currently sold by the Company: (1) The EasyStep(R) 4000 was introduced in
October 1992 and retails for $3,495. The EasyStep 4000 produces print on
adhesive-backed tape in sizes ranging from one-half to four inches. The
receiving tape is formulated for several applications including standard,
removable and cold storage. Durable, custom labels generated by the EasyStep
4000 may include multiple lines of text, graphics, symbols or bar codes. Bar
codes are available in five popular symbologies and are suitable for laser
scanning from as far away as 150 feet. The EasyStep 4000 allows downloading
existing information from a personal computer directly to the EasyStep 4000 for
printing. The primary market for the EasyStep 4000 is the industrial labeling
and signage market. Sales of this product line, including consumable supplies
and accessories, were approximately 32% of total net sales for fiscal 1995. (2)
In December 1994, the Company launched the EasyStep(R) 2500/ProPartnerTM
labeling systems. The EasyStep 2500 is portable, generates type in sizes ranging
from one-half inch to two and one-fourth inches, operates on AC or battery
power, and has substantially all of the other features of the EasyStep 4000. The
ProPartner is similiar to the EasyStep 2500, but does not operate on battery
power and has fewer software features. The EasyStep 2500 retails for $2,795, and
the ProPartner has a retail price of $2,195. The market for the EasyStep 2500 is
industrial labeling, while the ProPartner is targeted for the presentation and
general purpose labeling markets. Sales of the EasyStep 2500/ProPartner product
line, including consumable supplies and accessories, were approximately 6% of
total net sales for fiscal 1995.
POSTERPRINTER MACHINES
The Company is currently selling the third generation PosterPrinter
machine, the ProImageTM. The enhanced features of the ProImage include higher
print resolution, and photo and reverse printing. The ProImage can be sold with
a computer interface, the ProLynxTM, which allows the end user to print computer
generated originals from a Macintosh or other personal computer system using
specific application software. Accessories for the ProLynx include a modem and a
scanner option. Approximately 75% of ProImage machines sold domestically in
fiscal 1995 included the ProLynx computer interface. The ProImage retails for
$3,795, and the ProImage with a ProLynx interface retails for $4,295. The
ProImage machines are manufactured by Fuji Photo Film Co., Ltd. ("Fuji") in
Japan. The Company has the exclusive right to distribute the ProImage in the
United States and certain other countries pursuant to a contract with Itochu
Corporation ("Itochu"), a Japanese trading company. The Company has
non-exclusive distribution rights for the sale of the ProImage in certain
European countries under a letter agreement with Itochu. Sales of the
PosterPrinter product line, including consumable supplies and accessories, were
approximately 34% of fiscal 1995 total net sales. See further discussion of this
contract under "Manufacturing, Sources of Supply and Distribution Rights"
herein.
CONSUMABLE SUPPLIES AND ACCESSORIES
The Company has developed a wide range of supplies for use in its
lettering and labeling systems. Supplies housed in plastic cassettes are offered
in a variety of colored carbons, resins, and receiving tapes. There are 11
lettering and labeling systems for which the Company is currently selling
consumable supplies. The Company also sells rolls of specialty paper in many
colors which are used with the PosterPrinter machines. The sale of high-margin,
consumable supplies is a significant part of the Company's business. Overall,
supply sales comprised approximately 64% of fiscal 1995 net sales, 65% of fiscal
1994 net sales and 62% of fiscal 1993 net sales. Sales of supplies used with the
EasyStep 4000, the EasyStep 2500/ProPartner, and the PosterPrinter machines
increased by almost 54% from fiscal 1994. The machines using these supplies are
currently sold by the Company. Sales of supplies used with the Company's mature
lettering systems decreased by approximately 24% in fiscal 1995 compared to
fiscal 1994. The decrease in sales of these supplies was expected due to the
aging of the installed base of lettering systems.
The Company offers accessories for use with all of its machines.
Accessory products, which include items such as font cards, machine carrying
cases, poster framing kits and plastic sleeves, comprised approximately 5%-6% of
net sales in each of the past three fiscal years.
MARKETING AND BACKLOG
The Company has identified two key markets for sales of its products -
industrial labeling and signage, and general presentations. For the industrial
labeling and signage market, the Company developed the EasyStep 4000 to meet the
need for durable, on-demand labeling and signage in manufacturing plants,
warehouses and other industrial applications. The EasyStep 2500 was developed as
a portable, lower cost alternative to the EasyStep 4000 for the industrial
labeling market. The primary differences between these two labeling systems are
price, print size and portability.
The products sold in the presentation market satisfy a wide range of
communication and meeting needs. Key users include trainers, educators,
consultants, sales and marketing professionals, and attorneys. The top selling
product in this market has been the PosterPrinter machine, or the PosterPrinter
machine with a Lynx computer interface, which is often sold in combination with
a lettering system. The ProPartner was developed to meet the general purpose
labeling needs in the presentation market.
The Company entered into the full-color, wide-format, and short-run
printing market in fiscal 1995, with the introduction of the VintageColor
graphics printing system. The Company's marketing strategy for the VintageColor
product line is to capitalize on strong indications of interest internationally
and to focus on direct sales to service bureaus and national quick printer
accounts domestically. The Company does not expect a significant sales
contribution from the VintageColor in fiscal 1996.
The Company distributes its products worldwide. In the United States,
the Company markets products under its own trademarks through approximately 395
independent dealerships. The Company also has private label agreements with
several distributors for the sale of certain labeling systems. During fiscal
1995, worldwide net sales to W.H. Brady, Inc., a private label distributor,
totaled approximately 20% of net sales. Internationally, the Company markets its
products in 42 countries through approximately 109 independent distributors.
Export sales, primarily to Europe, comprised approximately 25%, 23% and 24% of
consolidated fiscal 1995, 1994 and 1993 net sales, respectively. The Company has
no significant foreign operations.
As of September 30, 1995 and 1994, the Company's order backlog was
approximately $4,488,000 and $4,238,000, respectively. Substantially all of the
current backlog is expected to be shipped during fiscal 1996.
COMPETITION
The Company markets its labeling products to the industrial labeling
and signage markets. These markets require large formats which are provided by
the Company's stand-alone industrial labeling and signage systems which generate
labels and signage on-demand. Competitive systems which offer wide format output
are primarily peripherals which require a computer and graphic software to
generate labeling and signage. The Company has enhanced its product line by
providing unique application software and supply offerings that better meet the
customers' needs than the competition.
The Company's PosterPrinter product line faces competition from more
expensive color systems. The Company believes that the current ProImage
PosterPrinter product line, with its scanning and modem capabilities and the
ProLynx personal computer interface, increase the versatility of this product
thereby offering a better value compared to competitive products.
The VintageColor printing system competes with comparable systems
manufactured by several companies. The Company believes it has established a
unique marketing position by providing a predictable, accurate color from scan
to output. No other company focuses on providing color control throughout the
whole process of image creation to print. This has been accomplished by
incorporating certain color management software throughout the system that is
integrally tied into the VintageColor application software, inks and media.
The Company believes that it competes favorably in its target markets
by offering innovative, high-quality products and comprehensive marketing
support programs designed to increase dealer and distributor sales.
PATENTS AND TRADEMARKS
The Company has obtained patents and trademarks on some of its products
and has additional patents pending. The Company is not dependent on any single
patent or trademark and believes that the expiration of patents or other losses
of patent or trademark protection would not materially impact its ability to
compete effectively.
MANUFACTURING, SOURCES OF SUPPLY AND DISTRIBUTION RIGHTS
The Company assembles the EasyStep 4000 machine and the EasyStep 2500/
ProPartner machine at its manufacturing and distribution facility located in
Brooklyn Park, Minnesota. Most of the component parts for each machine are
sourced from domestic suppliers, while the plastic cabinetry is custom molded by
local vendors.
The supply cartridges used in the EasyStep 4000 and the EasyStep 2500/
ProPartner are assembled at the Company's Brooklyn Park facility. The Company
also assembles supply cartridges used in several other systems which are less
significant contributors to sales. The plastic parts used in the domestic
production of supply cartridges are molded to Company specification by domestic
vendors. The Company manufactures bulk tape and colored resin for use in certain
of its labeling systems. Additionally, some bulk tape and carbon and resin rolls
are manufactured by a number of domestic and Japanese vendors. The Company slits
the bulk rolls to the required widths at its own facility. The Company imports
finished supply cartridges used in several mature thermal transfer lettering and
labeling systems from Japan. These purchases are denominated in Japanese yen.
The Company purchases and retains ownership of the specialized tooling and
applicable patents and trademarks associated with its products.
The Company has not experienced difficulty in securing inventory for
its lettering and labeling systems from its suppliers. However, if necessary,
the Company believes alternative sources would be available from other suppliers
and operations would not be materially disrupted.
The Company has exclusive distribution rights in the United States,
Canada, Mexico and certain South American countries for the ProImage
PosterPrinter product line under a distribution agreement with Itochu. The
Company has met the minimum order requirements under the agreement and continues
to maintain exclusive distribution rights in the noted countries. The
distribution agreement expires December 31, 1995. The Company is currently
negotiating a contract with Itochu for distribution of the next generation
PosterPrinter machine. The Company has non-exclusive distribution for the 220
volt ProImage in certain European countries under a letter agreement with
Itochu. This letter agreement incorporates substantially all of the terms and
conditions of the distribution agreement referred to above. In fiscal 1995,
international sales of the PosterPrinter product line were approximately 15% of
total PosterPrinter product line sales. The specialty paper supplies used in the
PosterPrinter machines are made in Japan and purchased from Itochu. Worldwide
sales of the PosterPrinter machines, supplies and accessories accounted for
approximately 34% of fiscal 1995 net sales, 32% of fiscal 1994 net sales and 30%
of fiscal 1993 net sales. The Company is reliant on the manufacturer, Fuji, as a
single source supplier, to produce and deliver machines and supply products
necessary to meet market demands. Failure to obtain these products would have a
material effect on the Company's operations. To date, the Company has not
experienced any difficulty in obtaining these products from Fuji.
RESEARCH AND DEVELOPMENT
The Company is engaged in ongoing research and development utilizing a
combination of internal and external resources to maintain a consistent offering
of reliable, competitive products. Research and development expenses were
approximately $2,528,000 in fiscal 1995, $2,247,000 in fiscal 1994 and
$1,390,000 in fiscal 1993.
EMPLOYEES
As of July 31, 1995, the Company had 280 employees. Subsequent to July
31, 1995, the Company terminated 42 full-time employees as part of a cost
reduction plan. The Company also employs temporary personnel as needed on a
contract basis. The Company has never experienced any work stoppage due to labor
disagreements. No employees are represented by labor unions.
ITEM 2. PROPERTIES
The Company leases space for all of its operations under four separate
facility leases. All leased properties are located in suburban Minneapolis,
Minnesota. The Company believes that its existing properties are adequate for
its present needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending or threatened legal, governmental,
administrative or other proceedings to which the Company is a party or to which
any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended July 31, 1995.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, the year first
appointed as an executive officer, and the position held as of the date hereof
are as follows:
<TABLE>
<CAPTION>
Year First
Appointed as
an Executive
Name and Age Officer Position
<S> <C> <C>
Scott F. Drill, 42 1983 Chairman, President, Chief Executive Officer and
Treasurer
Timothy P. Fitzgerald, 55 1995 Vice President of Operations
David C. Grey, 39 1994 Vice President of Business Development
Roger A. Larson, 54 1986 Vice President of Domestic Sales and Marketing
Kevin B. McGourty, 38 1984 Vice President of Product Planning
Lynn R. McKee, 41 1991 Vice President of Human Resources
Deborah L. Moore, 39 1986 Vice President of Corporate Development and
Secretary
Monte J. Mosiman, 39 1990 Vice President of International and OEM Sales
Norbert F. Nicpon, 52 1983 Vice President of Finance and Administration
and Chief Financial Officer
</TABLE>
All of the above-named executive officers, except Timothy P.
Fitzgerald, have been actively engaged in the business of the Company for the
past five years in the capacity indicated above or in a substantially similar
capacity.
Mr. Fitzgerald began employment with the Company as an executive
officer on November 28, 1994. From 1987 to 1994, Mr. Fitzgerald was President
and Chief Executive Officer of International Data Engineering, Inc., a
privately-held manufacturer of optical storage systems.
Officers serve until their successors are appointed or until their
prior resignation, removal or incapacity.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information under the caption "Common Stock and Corporate
Information" on page 16 of the Company's 1995 Annual Report is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial information in the table "Selected Financial Data" on
page 7 of the Company's 1995 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 4-6 of the Company's
1995 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto and
the report of its independent accountants on pages 8-15 of the Company's 1995
Annual Report are incorporated herein by reference, as is the information set
forth under the caption "Quarterly Financial Data (unaudited)" on page 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant.
The information under the caption "Election of Directors" in the
Company's 1995 Proxy Statement is incorporated herein by reference.
(b) Executive Officers of the Registrant.
Information concerning Executive Officers of the Company is included in
this report under Item 4A, "Executive Officers of the Registrant".
(c) Compliance With Section 16(a) of the Exchange Act.
The information under the caption "Compliance With Section 16(a) of the
Exchange Act" in the Company's 1995 Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors", "Summary
Compensation Table", "Option Grants in Fiscal 1995", "Aggregated Option
Exercises in Fiscal 1995 and Fiscal Year-End Option Values", and "Termination of
Employment and Change of Control Arrangement" in the Company's 1995 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1995 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the
Company's 1995 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The following financial statements and report of independent
accountants are incorporated herein by reference from pages 8-15 of the
Company's 1995 Annual Report:
Report of Independent Accountants
Consolidated Statements of Operations for the years ended
July 31, 1995, 1994 and 1993
Consolidated Balance Sheets as of July 31, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
July 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the years
ended July 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE:
The following supplemental schedule and independent accountants report
are included herein, and should be read in conjunction with the consolidated
financial statements referred to above:
Report of Independent Accountants
Supplemental Schedule:
II Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
3. EXHIBITS:
The exhibits to this Report are listed in the Exhibit Index herein.
A copy of any of these exhibits will be furnished at a reasonable cost to
any person who was a shareholder of the Company as of October 3, 1995. Such
request should be sent to Varitronic Systems, Inc., 300 Interchange North, 300
Highway 169 South, Minneapolis, Minnesota 55426, Attention: Investor Relations.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of the year
ended July 31, 1995.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Varitronic Systems, Inc.:
Our report on the consolidated financial statements of Varitronic
Systems, Inc. has been incorporated by reference in this Form 10-K from page 15
of the 1995 Annual Report to Shareholders of Varitronic Systems, Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index under Item 14.(a)2.
of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Minneapolis, Minnesota
September 1, 1995 COOPERS & LYBRAND L.L.P.
SCHEDULE II
<TABLE>
<CAPTION>
VARITRONIC SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
BALANCE AT CHARGED TO CHARGED DEDUCTIONS
BEGINNING COSTS AND TO OTHER FROM BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS RESERVES END OF YEAR
<S> <C> <C> <C> <C> <C>
Year Ended July 31, 1995:
Allowance for uncollectible accounts(A) $ 200,000 $ 73,866 $ -- $ 73,866 $ 200,000
Allowance for dealer program credits(A) 250,000 475,368 -- 465,368 260,000
Allowance for inventory valuation(B) 675,000 1,270,000 -- 250,000 1,695,000
TOTAL $1,125,000 $1,819,234 $ -- $ 789,234 $2,155,000
Year Ended July 31, 1994:
Allowance for uncollectible accounts(A) $ 175,000 $ 340,553 $ -- $ 315,553 $ 200,000
Allowance for dealer program credits(A) 325,000 370,636 -- 445,636 250,000
Allowance for inventory valuation(B) 550,000 175,000 -- 50,000 675,000
TOTAL $1,050,000 $ 886,189 $ -- $ 811,189 $1,125,000
Year Ended July 31, 1993:
Allowance for uncollectible accounts(A) $ 200,000 $ 7,550 $ -- $ 32,550 $ 175,000
Allowance for dealer program credits(A) 310,000 863,618 -- 848,618 325,000
Allowance for inventory valuation(B) 500,000 325,000 -- 275,000 550,000
TOTAL $1,010,000 $1,196,168 $ -- $1,156,168 $1,050,000
</TABLE>
(A) Deducted from accounts receivable.
(B) Deducted from inventories.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VARITRONIC SYSTEMS, INC.
By: /s/ Scott F. Drill October 26, 1995
Scott F. Drill, Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Scott F. Drill October 26, 1995
Scott F. Drill
Principal Executive Officer
and Director
/s/ Norbert F. Nicpon October 26, 1995
Norbert F. Nicpon
Principal Financial Officer
and Principal Accounting
Officer
/s/ Anton J. Christianson October 26, 1995
Anton J. Christianson
Director
/s/ Raymond F. Good October 26, 1995
Raymond F. Good
Director
/s/ Reid V. MacDonald October 26, 1995
Reid V. MacDonald
Director
The above people signing as directors represent a majority of the
members of the Board of Directors.
<TABLE>
<CAPTION>
VARITRONIC SYSTEMS, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JULY 31, 1995
ITEM NO. DESCRIPTION METHOD OF FILING
<S> <C> <C>
3A. Restated Articles of Incorporated by reference to
Incorporation of Exhibit 3A to the Company's
registrant. Registration Statement on Form
S-1 (File No. 33-17589)
3B. Restated Bylaws of Incorporated by reference to
registrant. Exhibit 3B to the Company's
Registration Statement on Form
S-1 (File No. 33-17589)
3C. Certificate of Adoption of Incorporated by reference to
Amendment No. 1 to Exhibit 3C to the Company's
Restated Bylaws. Registration Statement on Form
S-1 (File No. 33-17589)
10A. Restated Incentive Stock Incorporated by reference to
Option Plan, as amended Exhibit 10A to the Company's
on August 24, 1993. Form 10-K for the fiscal year
ended July 31, 1993
10B. Lease of November 22, 1991, Incorporated by reference to
for the registrant's Exhibit 10B to the Company's
corporate offices in Form 10-K for the fiscal year
Minneapolis, Minnesota. ended July 31, 1992
10C. Lease of July 31, 1987, Incorporated by reference to
for the registrant's Exhibit 10AA to the Company's
manufacturing and Registration Statement on Form
distribution facility in S-1 (File No. 33-17589)
Brooklyn Park, Minnesota.
10D. Assignment of Patent Rights Incorporated by reference to
and Know-How Agreement from Exhibit 10CC to the Company's
Thomas K. McGourty and Registration Statement on Form
Lawrence F. McGourty, S-1 (File No. 33-17589)
relating to thermal transfer
strip lettering machine and
cassette system, dated May 15,
1985, as amended.
10E. Distribution Agreement for Incorporated by reference to
ProImage PosterPrinter Exhibit 10E to the Company's
by and between Itochu Form 10-K for the fiscal year
Corporation, Tokyo and the ended July 31,1994
registrant, dated November
1, 1993, as amended August 10,
1994 (confidential treatment
requested).
10F. Amended and Restated Incorporated by reference to
Employment Agreement. Exhibit 10F to the Company's
Form 10-K for the fiscal year
ended July 31, 1993
10G. $10,000,000 Revolving Credit Incorporated by reference to
Agreement and Promissory Exhibit 10H to the Company's
Note with Norwest Bank Form 10-K for the fiscal year
Minneapolis, N.A., dated ended July 31, 1993
January 31, 1992, as amended
September 17, 1992 and April
19, 1993.
10H. 1994 Incentive Stock Option Incorporated by reference to
Plan, dated October 25, 1994. Exhibit 10H to the Company's
Form 10-K for the fiscal year
ended July 31, 1994
10I. Nonqualified Stock Option Incorporated by reference to
Plan and Agreement. Exhibit 10A to the Company's
Form 10-Q for the quarter
ended October 31,1994
10J. Sixth Amendment to the Filed herewith
$10,000,000 Revolving Credit
Agreement and Promissory Note
with Norwest Bank, Minneapolis,
N.A., dated July 31, 1995.
11. Schedule Regarding Filed herewith
Computation of Earnings
per Share.
13. Annual Report to Shareholders, Filed herewith
pages 4-16.
23. Consent of Independent Filed herewith
Accountants.
27. Financial Data Schedules. Filed herewith
</TABLE>
SIXTH AMENDMENT TO
TERM LOAN AND CREDIT AGREEMENT
THIS SIXTH AMENDMENT is made as of the 31st day of July, 1995, and is by and
between Varitronic Systems, Inc., a Minnesota corporation (the "Borrower"), and
Norwest Bank Minnesota, National Association, a national banking association
(the "Bank").
REFERENCE IS HEREBY MADE to that certain Revolving Credit Agreement dated as of
January 31, 1992, as amended by a First Amendment dated September 17, 1992, by a
Second Amendment dated April 19, 1993, by a Third Amendment dated January 24,
1994, by a Fourth Amendment dated September 7, 1994, and by a Fifth Amendment
dated December 31, 1994 (as amended, the "Credit Agreement"), made between the
Borrower and the Bank. Capitalized terms not otherwise defined herein shall have
the respective meanings ascribed to them in the Credit Agreement.
WHEREAS, the Borrower has requested the Bank to reduce the Credit from
$10,000,000.00 to $6,000,000.00 and to have $4,000,000.00 of the outstanding
principal of the Credit become a term loan to the Borrower (the "Loan") to be
evidenced by a Term Note by the Borrower to the Bank (the "Term Note") and
subject to the terms and conditions of the Credit Agreement; and,
WHEREAS, the Bank is willing to grant the Borrower's requests, subject to the
provisions of this Sixth Amendment;
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration received, it is agreed as follows:
1. All references in the Credit Agreement to the Note shall refer to the
Promissory Note a copy of which is attached to this Sixth Amendment as
Exhibit A.
2. The definition of "Interest Period" set forth in Article I, Definitions of
the Credit Agreement is amended in its entirety as follows:
"Interest Period" means with respect to a CD Rate quotation, a period of
30, 60, 90 or 180 days beginning on a Domestic Business Day as elected by
the Borrower, or, with respect to a LIBO Rate quotation for an Advance
under the Revolving Loans, a period of one to six months beginning on a
Eurodollar Business Day as elected by the Borrower; provided, however, that
no Interest Period for an Advance under the Revolving Loans shall end after
December 31, 1996. In addition Interest Period means with respect to a LIBO
Rate Quotation for the Term Loan, a period of 90 to 360 days beginning on a
Eurodollar Business Day as elected by the Borrower, or, with respect to a
Cost of Funds Rate quotation for the Term Loan, a period of one year or
more from the date the quotation is requested; provided, however, that no
Interest Period for the Term Loan shall end after July 31, 1999.
3. The definition of "Loan Documents" set forth in Article I, Definitions of
the Credit Agreement is amended in its entirety as follows:
"Loan Documents" means this Agreement, the Note, the Term Note, the Master
Agreement for Documentary Letters of Credit, the Master Agreement for
Standby Letters of Credit and all Applications for Letters of Credit.
4. The definition of "Revolving Advance Commitment" in Article I, Definitions
of the Credit Agreement is amended by deleting the amount of "$10,000,000"
and substituting the amount of "$6,000,000".
5. Article I, Definitions of the Credit Agreement is amended by the addition
of the following:
"Cost of Funds Rate" means the rate determined by the Bank to represent the
Bank's direct and indirect cost of acquiring funds with a term equal to the
applicable Interest Period for the Cost of Funds in an amount equal to the
outstanding principal amount of the Term Loan.
"Term Note" has the meaning Specified in Section 2.15.
"Notes" means the Note and the Term Note.
6. Section 2.05 Revolving Advance Commitment Fees of Article II of the Credit
Agreement is amended in its entirety as follows:
Section 2.05 Revolving Advance Commitment Fees. The Borrower agrees to pay
to the Bank a commitment fee at the rate of .125% per annum on the amount
of the Revolving Advance Commitment from the date hereof to and including
the Commitment Termination Date, payable quarterly in arrears on the last
day of each September, December, March and June during the term of the
Revolving Advance Commitment, commencing September 30, 1995, provided that
the commitment fee remaining unpaid shall be due and payable on the
Commitment Termination Date.
7. Article II Amount and Terms of the Revolving Loans of the Credit Agreement
is amended by the addition of the following:
Section 2.15 Term Loan Amount. The Bank agrees to provide a term loan to
the Borrower in the amount of Four Million and No/100 Dollars
($4,000,000.00) (the "Term Loan"). The Borrower's obligation to repay
outstandings under the Term Loan will be evidenced by a promissory note
(the "Term Note") dated as of July 31, 1995, in the form of Exhibit B which
is attached to this Sixth Amendment and made a part hereof.
Section 2.16 Term Loan Availability Period. The Term Loan shall consist of
the amount outstanding under the Note as of July 31, 1995 up to a maximum
amount of $4,000,000.00 or, if there is less than $4,000,000.00 outstanding
under the Note on July 31, 1995, the amount outstanding under the Note and
an amount disbursed by the Bank to the Borrower so that the total principal
amount outstanding under the Term Note equals $4,000,000.00.
Section 2.17 Optional Interest Rates for the Term Loan.
(a) Floating Rate. Unless the Borrower elects the LIBO Rate Option or
the Cost of Funds Rate Option pursuant to this Section, the outstanding
principal balance of the Term Loan shall bear interest at the Floating Rate
from time to time in effect plus one-half of one percent (.50%), each
change in the interest rate to become effective on the day the
corresponding change in the Floating Rate becomes effective. According to
the terms of the Term Note, the Borrower may elect interest rates based on
the LIBO Rate Option or Bank's Cost of Funds Rate Option. The following
terms and conditions must be satisfied to elect these options.
(b) LIBO Rate Option and Cost of Funds Rate Option. At the election of
the Borrower, which may be exercised from time to time, the Borrower may
request in writing or by telephone that the Bank quote the Cost of Funds
Rate or LIBO Rate which would be applicable for the principal balance
outstanding of the Term Loan and for the Interest Period indicated by the
Borrower in its quotation request; provided, however, that the Borrower may
not request a Cost of Funds Rate or LIBO Rate quotation at any time that a
Default or Event of Default has occurred and is continuing. A request for a
Cost of Funds Rate quotation must be received by the Bank before 11:00 a.m.
(Minneapolis time) on the Domestic Business Day before the first day of the
proposed Interest Period and a request for a LIBO Rate quotation must be
received by the Bank before 10:00 a.m. (Minneapolis time) on the day two
Eurodollar Business Days before the first day of the proposed Interest
Period. The Borrower shall immediately either accept or reject the
quotation by telephone. If the Borrower does not immediately accept either
the LIBO Rate or the Cost of Funds quotation, the quotation shall be deemed
to have been rejected. Upon acceptance of either the LIBO Rate or Cost of
Funds Rate quotation, the quoted rate shall be the interest rate applicable
for the proposed Interest Period to the outstanding principal balance of
the Term Loan. At the termination of such Interest Period, the interest
rate applicable to the principal balance of the Term Loan shall revert to
the Floating Rate plus .50% unless a new Cost of Funds Rate or LIBO Rate
quotation is accepted by the Borrower. Notwithstanding anything contained
in this Section to the contrary, the Bank shall have no obligation to quote
a LIBO Rate for any Interest Period if the Bank, in its sole discretion,
determines that deposits in amounts equal to the amount for which the
quotation has been requested and maturing at the end of the proposed
Interest Period are not readily available to the Bank from major banks in
the London interbank market.
Section 2.18 Payments. All principal, interest and fees due under the Term
Note will be paid to the Bank by the direct debit of available funds on
deposit in the Borrower's account with the Bank. The Bank will debit the
account on the dates the payments become due. If a due date does not fall
on a day on which the Bank is open for substantially all of its business (a
"Banking Day", except as otherwise provided), the Bank will debit the
account on the next Banking Day, and interest will continue to accrue
during the extended period. If there are insufficient funds in the account
on the day the Bank enters any debit authorized by this Agreement, the
debit will be reversed and the payment will be due immediately without
necessity of demand by direct remittance of immediately available funds.
For amounts bearing interest at the LIBO Rate (if any) a Banking Day is a
day on which the Bank is open for business and on which dealings in U.S.
dollar deposits are carried on in the London interbank market.
8. The first paragraph of Article V Affirmative Covenants of the Credit
Agreement is amended by deleting the term "Note" and substituting the term
"Notes".
9. Section 5.10 Current Ratio of Article V of the Credit Agreement is deleted
and substituted therefor is the following:
Section 5.10 Quick Ratio The Borrower will at all times maintain the ratio
of its Consolidated Current Assets less consolidated inventories to
Consolidated Current Liabilities at not less than 1.0 to 1.0.
10. Section 5.11 Tangible Net Worth of Article V of the Credit Agreement is
amended in its entirety as follows:
Section 5.11 Tangible Net Worth The Borrower will at all times maintain
Consolidated Tangible Net Worth at an amount not less than $18,000,000 plus
50% of cumulative annual net income of the Borrower for fiscal year ending
July 31, 1996 and 75% of cumulative annual net income of the Borrower
annually thereafter. Cumulative annual net income shall be net of maximum
stock repurchases of $2,500,000 over the term of the Agreement. For
purposes of this Section 5.11, a loss in any fiscal year of the Borrower
will be included as zero for purposes of the calculation hereunder.
11. Section 5.12 Ratio of Earnings to Debt Service of Article V of the Credit
Agreement is amended in its entirety as follows:
Section 5.12 Ratio of Earnings to Debt Service. The Borrower will at all
times maintain the ratio of (i) its net income before interest expense and
income tax, plus (A) depreciation and, plus (B) all lease payments in
respect of capital and operating leases which have a term in excess of one
year, to (ii) the sum of its interest expenses, plus (A) all lease payments
in respect of capital and operating leases and, plus (B) the current
portion of any Long-Term Debt, all determined on the basis of the four
preceding fiscal quarters of the Borrower, at not less than 1.30 to 1.00.
For purposes of this Section 5.12, twenty percent (20%) of the outstanding
principal balance of the Advances will at all times be included in the
current portion of Long-Term Debt.
12. The first paragraph of Article VI Negative Covenants of the Credit
Agreement is amended by deleting the term "Note" and substituting the term
"Notes".
13. Section 7.01(a) under Events of Default of Article VII of the Credit
Agreement is amended in its entirety as follows:
(a) Default in the payment of any principal of or interest on either of
the Notes when such payment becomes due and payable; or
14. Section 7.02 of the Rights and Remedies of the Credit Agreement is amended
so that each time the term "Note" is used it is deleted and the term
"Notes" is substituted.
15. Simultaneously with the execution of this Sixth Amendment, the Borrower
shall deliver to the Bank upon request, a Norwest Corporate Certificate of
Authority, in form and content acceptable to the Bank; and,
16. The Borrower hereby represents and warrants to the Bank as follows:
A. The Credit Agreement constitutes a valid, legal and binding obligation
owed by the Borrower to the Bank, subject to no counterclaim, defense,
offset, abatement or recoupment.
B. As of the date of this Sixth Amendment, (i) all of the representations
and warranties contained in the Credit Agreement are true, and (ii)
there exists no Event of Default and no event which, with the giving
of notice or the passage of time, or both, could become an Event of
Default.
C. The execution, delivery and performance of this Sixth Amendment by the
Borrower are within its corporate powers, have been duly authorized,
and are not in contravention of law or the terms of the Borrower's
Articles of Incorporation or By-laws, or of any undertaking to which
the Borrower is a party or by which it is bound.
E. All financial statements delivered to the Bank by or on behalf of the
Borrower, including any schedules and notes pertaining thereto, have
been prepared in accordance with Generally Accepted Accounting
Principles consistently applied, and fully and fairly present the
financial condition of the Borrower at the dates thereof and the
results of operations for the periods covered thereby, and there have
been no material adverse changes in the financial condition or
business of the Borrower from April 30, 1995 to the date hereof.
17. Except as modified by this Sixth Amendment, the Credit Agreement remains
unchanged and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Sixth Amendment
as of the date first written above.
NORWEST BANK MINNESOTA,
VARITRONIC SYSTEMS, INC. NATIONAL ASSOCIATION
By: /s/ Norbert F. Nicpon By: /s/ Lynn Hultstrand
Its: Vice President Its:
EXHIBIT B
[GRAPHIC OMMITTED - NORWEST LOGO]
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION TERM NOTE
$4,000,000.00 Minneapolis, Minnesota
FOR VALUE RECEIVED, Varitronic Systems, Inc. (the "Borrower") promises to pay to
the order of Norwest Bank Minnesota, National Association (the "Bank"), at its
principal office or such other address as the Bank or holder may designate from
time to time, the principal sum of FOUR MILLION AND NO/100 DOLLARS
($4,000,000.00), or the amount shown on the Bank's records to be outstanding,
plus interest (calculated on the basis of actual days elapsed in a 360-day year)
accruing on the unpaid balance at the annual rate of interest defined below.
Absent manifest error the Bank's records will be conclusive evidence of the
principal and accrued interest owing hereunder.
This Term Note is issued pursuant to a Revolving Credit Agreement dated January
31, 1992 as amended of even date herewith between the Bank and the Borrower (the
"Agreement"). The Agreement, and any amendments or substitutions thereto,
contain additional terms and conditions including default and acceleration
provisions. The terms of the Agreement are incorporated into this Term Note by
reference. Capitalized terms not expressly defined herein shall have the
meanings given them in the Agreement.
INTEREST RATE.
BASE RATE OPTION. Unless the Borrower chooses the Cost of Funds Option or the
LIBO Rate Option defined below, the principal balance outstanding under this
Term Note will bear interest at an annual rate equal to the Base Rate, floating
plus .50% (the "Floating Rate Option"). The Floating Rate is the "base" or
"prime" rate of interest established by the Bank from time to time at its
principal office in Minneapolis, Minnesota.
COST OF FUNDS OPTION. Subject to the terms and conditions of the Agreement, the
Borrower may elect that all of the principal balance of this Term Note bear
interest at the Bank's cost of funds plus 2.15% (the "Cost of Funds Option").
The Bank's Cost of Funds is the rate determined by the Bank to represent the
Bank's direct and indirect cost of acquiring funds with a term equal to the
applicable Cost of Funds Interest Period, in an amount equal to the principal
balance outstanding of this Term Note.
LIBO RATE OPTION. Subject to the terms and conditions of the Agreement the
Borrower may elect that all of the principal balance of this Term Note bear
interest at the LIBO Rate plus 2.15% (the "LIBO Rate Option"). The LIBO Rate
will be computed in accordance with the terms of the Credit Agreement.
INTEREST AFTER MATURITY. The unpaid principal balance and interest due under
this Term Note after maturity (whether this Term Note matures by demand,
acceleration or lapse of time) shall bear interest until paid at the Base Rate
plus 2.15%, floating. The Base Rate is the "base" or "prime" rate of interest
established by the Bank from time to time at its principal office in
Minneapolis, Minnesota.
REPAYMENT TERMS
INTEREST. Interest will be payable quarterly in arrears on the last day of each
quarter, beginning October 31, 1995.
PRINCIPAL. Principal will be payable in 16 successive quarterly installments as
follows starting on October 31, 1995 and continuing on the last day of each
quarter thereafter until and including July 31, 1999 when all outstanding
principal and accrued but unpaid interest will be due and payable:
October 31, 1995 and January 31, 1996 $ 150,000.00
April 30, 1996 and July 31, 1996 $ 200,000.00
October 31, 1996 until and including January 31, 1998 $ 250,000.00
April 30, 1998 until and including July 31, 1999 $ 300,000.00
PREPAYMENT. While under the Floating Rate Option, the Borrower may prepay this
Term Note in full or in part at any time without penalty. Each prepayment of
this Term Note under the LIBO Rate Option or Cost of Funds Option, whether
voluntary or by reason of acceleration, will be accompanied by accrued interest
on the prepaid portion and a prepayment fee equal to the amount, if any, by
which:
(i) the additional interest that would have been payable on the amount
prepaid if it had not been paid until the last day of the interest period,
exceeds
(ii) the interest that would have been recoverable by the Bank by
reinvesting the amount prepaid from the prepayment date to the last day of the
relevant interest period in U.S. Government Securities.
Any prepayment will be applied to the most remote installment of principal due
under this Term Note.
ADDITIONAL TERMS AND CONDITIONS. The Borrower agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses incurred by
the Bank in the event this Term Note is not duly paid. Demand, presentment,
protest and notice of nonpayment and dishonor of this Term Note are expressly
waived. This Term Note will be governed by the substantive laws of the State of
Minnesota.
VARITRONIC SYSTEMS, INC.
BY: /s/ Norbert F. Nicpon
ITS: Vice President
EXHIBIT A
PROMISSORY NOTE
$6,000,000.00 July 31, 1995
FOR VALUE RECEIVED, the undersigned, VARITRONIC SYSTEMS, INC., a Minnesota
corporation, promises to pay on December 31, 1996 to the order of Norwest Bank
Minnesota, National Association (the "Bank") at the Bank's St. Paul Office or at
any other place designated at any time by the holder hereof, in lawful money of
the United States of America and in immediately available funds, the principal
sum of SIX MILLION AND NO/100 DOLLARS ($6,000,000.00), or so much thereof as is
disbursed and remains outstanding hereunder as shown by the Bank's liability
record on the dates payments are due hereunder, together with interest on the
unpaid balance hereof from the date hereof until this Note is fully paid at the
rate or rates and times determined in accordance with the provisions of the
Credit Agreement described below. Interest on this Note shall be calculated on
the basis of actual number of days elapsed in a 360-day year.
This Note constitutes the Note issued pursuant to the provisions of that
certain Revolving Credit Agreement dated as of January 31, 1992, as amended by a
First Amendment dated as of September 17, 1992, by a Second Amendment dated
April 19, 1993, by a Third Amendment dated January 24, 1994, by a Fourth
Amendment dated September 7, 1994, by a Fifth Amendment dated December 31, 1994,
and by a Sixth Amendment of even date herewith (as amended, the "Credit
Agreement"), made between the undersigned and the Bank. Reference is hereby made
to the Credit Agreement for statements of the terms pursuant to which the
indebtedness evidenced hereby was created, may be prepaid voluntarily, may be
reborrowed and may be accelerated.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred by
the holder hereof in the event this Note is not duly paid. The holder hereof may
change any terms of payment of this Note, including extensions of time and
renewals, and release any security for, or any party to, this Note, without
notifying or releasing any accommodation maker, endorser or guarantor from
liability in connection with this Note. Presentment or other demand for payment,
notice of dishonor and protest are hereby waived by the undersigned and each
endorser or guarantor. This Note shall be governed by the substantive laws of
the State of Minnesota.
VARITRONIC SYSTEMS, INC.
By: /s/ Norbert F. Nicpon
Its: Vice President
EXHIBIT 11
<TABLE>
<CAPTION>
VARITRONIC SYSTEMS, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
YEAR ENDED JULY 31,
1995 1994 1993
Primary
<S> <C> <C> <C>
Net income $ 542,945 $1,689,780 $2,620,911
Weighted average number of common shares
outstanding during the period 2,320,743 2,615,291 2,781,381
Add common equivalent shares for
outstanding options to purchase stock
using the treasury stock method 18,960 26,377 16,124
Total common and common equivalent
shares outstanding 2,339,703 2,641,668 2,797,505
Primary income per common share $.23 $.64 $.94
Fully Diluted
Net income $ 542,945 $1,689,780 $2,620,911
Weighted average number of common shares
outstanding during the period 2,320,743 2,615,291 2,781,381
Add common equivalent shares for
outstanding options to purchase stock
using the treasury stock method 22,243 34,804 32,539
Total common and common equivalent
shares outstanding 2,342,986 2,650,095 2,813,920
Fully diluted income per common share $.23 $.64 $.93
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Varitronic Systems, Inc.
RESULTS OF OPERATIONS
The following table sets forth selected information derived from the
Consolidated Statements of Operations.
Year Ended July 31, 1995 1994 1993
Net sales 100.0% 100.0% 100.0%
Cost of sales 67.5 61.0 60.6
Gross margin 32.5 39.0 39.4
Operating expenses:
Marketing and sales 14.1 15.0 15.2
General and administrative 11.4 13.2 13.2
Product development 5.1 5.0 3.0
Total operating expenses 30.6 33.2 31.4
Income from operations 1.9 5.8 8.0
Other (expense) income, net (0.7) (0.2) 0.7
Income before income taxes 1.2 5.6 8.7
Provision for income taxes 0.1 1.8 2.9
Net income 1.1% 3.8% 5.8%
In the fourth quarter of fiscal 1995, the Company recorded a charge to earnings
of $1,647,000 for asset valuation allowances and a reduction in work force. This
charge had a negative effect on gross margin, and increased general and
administrative expenses and marketing and sales expenses. See further discussion
regarding this charge below.
NET SALES: FISCAL 1995 VERSUS FISCAL 1994 Net sales in fiscal 1995 increased by
$4,707,000 or 10.5 percent from fiscal 1994 due to continued strong sales of the
EasyStep(R) 4000 and PosterPrinter(R) product lines. Sales of the EasyStep 4000
Label and Sign Maker product line increased by 46.0 percent over fiscal 1994
while sales of the PosterPrinter product line increased by 18.2 percent in that
same period. These two product lines represented over 66 percent of total net
sales in fiscal 1995 compared to 56 percent of total net sales in fiscal 1994.
The successful launch of the EasyStep(R) 2500/ProPartner(R) product line in
December 1994 also contributed to increased net sales. The VintageColor(TM)
graphics printing system, which was introduced late in the fourth quarter of
fiscal 1995, is a wide format, full-color printing system which produces output
in 24 or 36 inch widths up to 100 feet long. The VintageColor system includes an
inkjet printer, raster image processor software and other options including a
pre-configured color server, color calibrated scanners and a variety of print
media and inks. Sales of this product line were approximately $225,000 in fiscal
1995. The Company does not expect significant revenue in fiscal 1996 from the
VintageColor product line. Sales of the Company's mature product lines,
consisting primarily of sales of consumable supplies, decreased by 28.6 percent
from the previous fiscal year. The Company expects this trend to continue in
fiscal 1996.
Machine sales increased by 16.2 percent from the prior fiscal year. Sales of
the PosterPrinter and EasyStep 2500/ProPartner machines comprised the majority
of this increase. Sales of consumable supplies increased by 8.5 percent from
fiscal 1994. Increased sales of EasyStep 4000 and PosterPrinter supplies, and
initial sales of EasyStep 2500/ProPartner supplies offset the decrease in sales
of supplies used with older labeling and lettering systems. International sales
increased by $2,416,000 or 24.0 percent from the prior year due to increased
sales of the EasyStep 4000 and PosterPrinter product lines. International sales
represented 25.2 percent of current year sales compared with 22.5 percent in the
previous year.
The sales forecast for fiscal 1996 does not include the introduction of a
major new product but includes line extensions for two of the current machines
and a full year of sales of the EasyStep 2500/ProPartner and the VintageColor
product lines. In addition, fiscal 1996 revenues will include the benefit of
recently announced price increases for various products.
FISCAL 1994 VERSUS FISCAL 1993 Net sales in fiscal 1994 decreased
by $605,000 or 1.3 percent from fiscal 1993 due to a 10.5 percent decrease in
machine sales. Declining sales of mature lettering products were not offset by
anticipated sales of the EasyStep 2500/ProPartner product line due to
production-related issues which delayed the product launch into fiscal 1995.
Sales of the EasyStep 4000 product line increased by 51.3 percent over fiscal
1993. Fiscal 1993 net sales included only ten months of sales since the product
was launched in October 1992. Sales of the PosterPrinter product line increased
slightly in fiscal 1994 due to the second quarter introduction of the third
generation PosterPrinter, the ProImage(R). Overall, sales of mature thermal
lettering and labeling products declined by 21.2 percent in fiscal 1994 compared
to fiscal 1993.
Consumable supply sales increased by 4.1 percent. Increased sales of supplies
used with the PosterPrinter and EasyStep 4000 machines were offset by decreased
sales of supplies used with older labeling and lettering systems. International
sales decreased by $680,000 or 6.3 percent from the prior year due to decreased
sales of the mature products noted above, and represented 22.5 percent of fiscal
1994 net sales compared with 23.7 percent in fiscal 1993.
<PAGE> 4
GROSS MARGIN: FISCAL 1995 VERSUS FISCAL 1994 Gross margin decreased from 39.0
percent in fiscal 1994 to 32.5 percent in fiscal 1995. Fiscal 1995 included an
inventory valuation charge of $1,270,000 (2.6% negative margin points) to cover
inventory that was obsolete, slow-moving or outside of current quality
specifications. Additional factors which contributed to the decline in gross
margin include the continued rising cost of imported inventory, an increase in
production costs, and the continuing decline in sales of high-margin mature
supply products. The cost of imported inventory continued to increase throughout
the year as the value of the dollar declined against the Japanese yen.
PosterPrinter machines and supplies, and supplies used in certain lettering
machines are imported from Japan and are purchased with Japanese yen. Although
the Company hedges these foreign purchases using forward exchange contracts, the
decline in the value of the dollar continued to have an adverse effect on gross
margins during the fiscal year. Production costs increased due to the Company's
investment in additional personnel and equipment to expand in-house
manufacturing capabilities. Expanded product testing and quality assurance
processes also added to the increase in production costs.
Although the Company has taken steps to improve production efficiency and has
increased prices on the majority of its products, gross margin is not expected
to improve in fiscal 1996 over fiscal 1995. Even though the dollar has begun to
strengthen against the yen, the Company has inventory and purchase commitments
for foreign sourced product which was purchased and/or hedged at a weaker
dollar. This more costly inventory will continue to impact margins beyond the
first half of fiscal 1996. Additionally, continued anticipated declines in sales
of high-margin mature supply products will impact 1996 gross margins.
FISCAL 1994 VERSUS FISCAL 1993 Gross margin decreased from 39.4 percent in
fiscal 1993 to 39.0 percent in fiscal 1994. Consumable supply margins decreased
due to the increased cost of imported supplies for the PosterPrinter and certain
lettering machines. Additionally, increased sales of lower margin supplies used
with the Company's newer machines also reduced overall supply margins. Machine
gross margins improved due to higher gross margins on machines currently being
sold compared to the lower margin mature lettering and labeling machines sold in
fiscal 1993.
OPERATING EXPENSES: FISCAL 1995 VERSUS FISCAL 1994 Total operating expenses for
fiscal 1995 increased by $256,000 or 1.7 percent from fiscal 1994. The increase
in marketing and sales expenses was due to the launch of the VintageColor
printing system. In addition, $255,000 of the fourth quarter charge was recorded
in marketing and sales expenses to reflect a decrease in the value of certain
assets supporting the VintageColor product line. General and administrative
expenses decreased by $275,000. Fiscal 1995 included a $247,000 charge for the
reduction in work force. Fiscal 1994 included $341,000 in bad debt expense
principally due to the bankruptcy filing of one independent domestic dealer and
$250,000 in acquisition related costs. Product development expenses increased by
$281,000 compared to fiscal 1994, primarily due to final development of the
EasyStep 2500/ProPartner machine, in-house supply development projects, and
software development for the VintageColor printing system. The Company expects
that overall operating expenses for fiscal 1996 will be below fiscal 1995 levels
due to the reduction in work force and other decreases in planned operating
expenses.
FISCAL 1994 VERSUS FISCAL 1993 Total operating expenses for fiscal 1994
increased by $619,000 or 4.3 percent from fiscal 1993. General and
administrative expenses for 1994 included $341,000 in bad debt expense and
$250,000 of costs incurred in connection with acquisition discussions with Kroy,
Inc. Other general and administrative expenses decreased by $665,000 due to a
reduction in outside professional fees and certain compensation expenses. The
increase in product development expense of $857,000 was due to the development
efforts on the EasyStep 2500/ProPartner product line. Marketing and sales
expenses decreased by $165,000 due to a decrease in promotional spending.
OTHER (EXPENSE) INCOME, NET: Other expense was $313,000 in fiscal 1995 and
$90,000 in fiscal 1994 compared to other income of $334,000 in fiscal 1993.
Other expense in fiscal 1995 and 1994 consisted principally of interest expense
on borrowings under the line of credit. Other income in fiscal 1993 included
gains of $392,000 realized on the sale of Insignia Systems, Inc. common stock.
INCOME TAXES: The Company's effective income tax rates were 12.1 percent in
fiscal 1995, 32.1 percent in fiscal 1994 and 33.6 percent in fiscal 1993. As a
result of the lower level of pre-tax income, the current year's effective income
tax rate includes greater benefits realized from the Company's foreign sales
corporation and from research and experimentation tax credits. The research and
experimentation tax credit expired June 30, 1995. If the credit is not
reinstated, the Company's effective tax rate for fiscal 1996 will not include
this benefit.
INFLATION: To date, inflation has not had a material effect on the Company's
operations.
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL POSITION: The Company continues to maintain a strong financial
position. Cash provided by operating activities was $2,917,000 in fiscal 1995,
$3,287,000 in fiscal 1994 and $1,438,000 in fiscal 1993. In fiscal 1995 cash
provided by operating activities included $543,000 of net income and $3,168,000
of non-cash expenses. Working capital was $17,366,000 at July 31, 1995 and
$14,466,000 at July 31, 1994. The current ratio was 4.1 to 1.0 at July 31, 1995
and 3.0 to 1.0 at July 31, 1994. The improvement in the current ratio and
working capital as of July 31, 1995 was due to a restructuring of the Company's
$10,000,000 unsecured bank line of credit to a $6,000,000 unsecured line of
credit and a $4,000,000 term loan with varying principal installments due
through July 31, 1999. As of July 31, 1995, $3,300,000 of the term loan was
classified as long-term debt.
The Company believes cash from operations as well as its line of credit
facility will be adequate to meet its operational, capital expenditure and share
repurchase needs for at least the next 12 months.
CAPITAL EXPENDITURES: The Company expended $2,074,000 for capital additions
during fiscal 1995, compared with $2,365,000 and $1,862,000 in fiscal 1994 and
fiscal 1993, respectively. Approximately $850,000 of fiscal 1995 capital
additions were for computer hardware, and approximately $470,000 was for
leasehold improvements and furniture and fixtures for the Company's additional
facility leased in fiscal 1995. Budgeted capital additions for fiscal 1996 total
approximately $1,100,000.
SHARE REPURCHASE PROGRAM: Since fiscal 1990, the Company's Board of Directors
has approved resolutions authorizing the Company to repurchase up to 3,800,000
of its common shares outstanding. The Company repurchased 111,500 shares at a
total cost of $921,969 during fiscal 1995. There were 300,000 shares authorized
for repurchase as of July 31, 1995.
LINE OF CREDIT: The Company maintains an unsecured $6,000,000 bank line of
credit for working capital and other corporate purposes. During fiscal 1995,
borrowings under the line of credit reached a high of $5,200,000.
REPORT OF MANAGEMENT
Varitronic Systems, Inc.
The management of Varitronic Systems, Inc. is responsible for the integrity of
the information contained in the annual report including the consolidated
financial statements. These statements have been prepared in conformity with
generally accepted accounting principles appropriate to the circumstances of the
Company and include amounts based on estimates and judgments of management.
The Company maintains internal accounting controls designed to provide
reasonable assurance that the financial records are accurate, that the assets of
the Company are safeguarded, and that the financial statements present fairly
the consolidated financial position and consolidated results of operations and
cash flows of the Company. The Company's independent accountants, Coopers &
Lybrand L.L.P., have considered the Company's internal control structure to the
extent they deemed necessary in expressing an opinion on the consolidated
financial statements.
The Audit Committee of the Board of Directors, which consists of three
outside directors, reviews the scope of the audit and the findings of the
Company's independent accountants. The Audit Committee meets periodically with
the independent accountants to review accounting, auditing and financial
reporting matters.
Coopers & Lybrand L.L.P. has audited the consolidated financial statements
prepared by management. The report of our independent accountants appears
herein.
/s/ Scott F. Drill
Scott F. Drill
Chairman, President and Chief Executive Officer
/s/ Norbert F. Nicpon
Norbert F. Nicpon
Vice President of Finance and Chief Financial Officer
<PAGE> 6
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Varitronic Systems, Inc.
1995 1994 1993 1992 1991
Year Ended July 31,
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net sales ............................ $49,525 $44,819 $45,423 $36,094 $39,165
Income from operations ............... 931 2,580 3,612 1,691 4,446
Net income ........................... 543 1,690 2,621 1,452 2,913
Weighted average common shares ....... 2,321 2,615 2,781 3,356 3,651
BALANCE SHEET
Working capital ...................... $17,366 $14,466 $16,455 $16,593 $20,297
Property and equipment, net .......... 4,514 4,264 3,109 2,777 1,672
Total assets ......................... 27,565 25,940 24,037 22,351 25,355
Long-term debt ....................... 3,300 -- -- -- --
Stockholders' equity ................. 18,580 18,731 19,563 19,469 22,494
PER COMMON SHARE
Net income ........................... $ .23 $ .65 $ .94 $ .43 $ .80
Book value ........................... 7.98 7.78 7.37 6.47 6.11
Dividends declared ................... -- -- -- -- --
SIGNIFICANT RATIOS/OTHER
Return on net sales .................. 1.1% 3.8% 5.8% 4.0% 7.4%
Return on average assets ............. 2.0% 6.8% 11.3% 6.1% 12.2%
Return on average stockholders' equity 2.9% 8.8% 13.4% 6.9% 13.9%
Current ratio ........................ 4.1 3.0 4.7 6.8 8.1
Number of employees .................. 280 245 231 209 217
</TABLE>
(Amounts in thousands, except per common share and ratio amounts,
and number of employees)
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Varitronic Systems, Inc.
1995 1994 1993
<S> <C> <C> <C>
Year Ended July 31,
Net sales ................................ $ 49,525,329 $ 44,818,582 $ 45,423,143
Cost of sales ............................ 33,456,920 27,357,819 27,549,116
Gross margin ................... 16,068,409 17,460,763 17,874,027
Operating expenses:
Marketing and sales ................. 6,974,971 6,724,866 6,889,721
General and administrative .......... 5,634,215 5,908,771 5,982,307
Product development ................. 2,528,200 2,247,355 1,390,447
Total operating expenses ....... 15,137,386 14,880,992 14,262,475
Income from operations ......... 931,023 2,579,771 3,611,552
Gain on sale of investment ............... -- -- 391,898
Interest expense, net .................... (313,078) (89,991) (57,539)
Income before income taxes ..... 617,945 2,489,780 3,945,911
Provision for income taxes ............... 75,000 800,000 1,325,000
Net income ..................... $ 542,945 $ 1,689,780 $ 2,620,911
Net income per common share .............. $ .23 $ .65 $ .94
Weighted average common shares outstanding 2,321,000 2,615,000 2,781,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Varitronic Systems, Inc.
1995 1994
<S> <C> <C>
July 31,
ASSETS
Current assets:
Cash ............................................................ $ 1,347,139 $ 209,844
Accounts receivable, net ........................................ 9,058,870 8,902,523
Inventories ..................................................... 11,327,130 11,736,803
Deferred income taxes ........................................... 830,000 520,000
Other current assets ............................................ 487,892 306,322
Total current assets ........................................ 23,051,031 21,675,492
Property and equipment, net .......................................... 4,513,837 4,264,098
Total assets ................................................ $27,564,868 $25,939,590
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 3,918,169 $ 2,992,734
Accrued liabilities ............................................. 1,066,511 1,216,335
Current maturities on long-term debt ............................ 700,000 --
Borrowings under line of credit ................................. -- 3,000,000
Total current liabilities ................................... 5,684,680 7,209,069
Long-term debt, less current maturities .............................. 3,300,000 --
Commitments
Stockholders' equity:
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,328,153 and 2,408,123 shares
issued and outstanding .......................................... 23,281 24,081
Additional paid-in capital ...................................... 228,376 --
Retained earnings ............................................... 18,328,531 18,706,440
Total stockholders' equity .................................. 18,580,188 18,730,521
Total liabilities and stockholders' equity .................. $27,564,868 $25,939,590
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 9
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Varitronic Systems, Inc.
1995 1994 1993
Year Ended July 31,
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income .............................................. $ 542,945 $ 1,689,780 $ 2,620,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 1,824,371 1,209,180 1,583,297
Provision for uncollectible accounts receivable .... 73,866 340,553 7,550
Provision for inventory valuation allowance ........ 1,270,000 175,000 325,000
Deferred income taxes .............................. (310,000) (110,000) 70,000
Other .............................................. 12,000 25,000 110,625
Changes in operating assets and liabilities:
Accounts receivable ............................ (230,213) (110,838) (2,705,427)
Inventories .................................... (860,327) (1,210,584) (938,321)
Other current assets ........................... (181,570) 43,621 273,254
Accounts payable ............................... 925,435 1,105,556 (331,559)
Accrued liabilities ............................ (149,824) 130,019 422,633
Net cash provided by operating activities ...... 2,916,683 3,287,287 1,437,963
INVESTING ACTIVITIES
Additions to property and equipment ..................... (2,074,110) (2,364,765) (1,862,228)
Other ................................................... -- -- 142,733
Net cash used by investing activities .......... (2,074,110) (2,364,765) (1,719,495)
FINANCING ACTIVITIES
Repayments under line of credit ......................... (8,600,000) (4,000,000) (4,500,000)
Borrowings under line of credit ......................... 5,600,000 5,500,000 6,000,000
Proceeds from long-term debt ............................ 4,000,000 -- --
Repurchases of common stock ............................. (921,969) (2,710,688) (3,039,639)
Proceeds from sale of common stock under incentive
stock option plan and employee stock purchase plan ...... 216,691 163,282 410,357
Net cash provided (used) by financing activities 294,722 (1,047,406) (1,129,282)
Net increase (decrease) in cash ......................... 1,137,295 (124,884) (1,410,814)
Cash at beginning of year .......................... 209,844 334,728 1,745,542
Cash at end of year ................................ $ 1,347,139 $ 209,844 $ 334,728
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for interest .................. $ 323,000 $ 81,000 $ 66,000
Cash paid during the year for income taxes .............. $ 836,000 $ 441,000 $ 1,141,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Varitronic Systems, Inc.
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
<S> <C> <C> <C>
BALANCE, JULY 31, 1992........................... 3,011,227 $ 30,112 -- $ 19,438,406
Stock options exercised.......................... 55,400 554 $ 334,296
Common stock issued through
employee stock purchase plan..................... 15,441 155 75,352
Income tax benefit from exercise of stock options 103,000
Repurchases of common stock...................... (427,300) (4,273) (497,721) (2,537,645)
Net income....................................... 2,620,911
BALANCE, JULY 31, 1993........................... 2,654,768 26,548 14,927 19,521,672
Stock options exercised.......................... 9,267 92 60,070
Common stock issued through
employee stock purchase plan..................... 21,088 211 102,909
Income tax benefit from exercise of stock options 25,000
Repurchases of common stock...................... (277,000) (2,770) (202,906) (2,505,012)
Net income....................................... 1,698,780
BALANCE, JULY 31, 1994........................... 2,408,123 24,081 -- 18,706,440
Repurchases of common stock...................... (111,500) (1,115) (920,854)
Stock options exercised to purchase 20,166
shares of common stock, less 6,038, shares
exchanged as payment and subsequently retired.... 14,128 141 83,425
Common stock issued through
employee stock purchase plan..................... 17,402 174 132,951
Income tax benefit from exercise of stock options 12,000
Net income....................................... 542,945
BALANCE, JULY 31, 1995........................... 2,328,153 $ 23,281 $ 228,376 $ 18,328,531
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Varitronic Systems, Inc.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION: Varitronic Systems, Inc. (the Company) develops,
manufactures and markets labeling and presentation products which enhance the
quality, professionalism and effectiveness of a wide range of communications.
The Company sells its products to independent domestic dealers and domestic
private label and international distributors.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
INVENTORIES: Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market.
PROPERTY AND EQUIPMENT: Depreciation and amortization of property and equipment
is recorded using the straight-line method over the shorter of the estimated
useful asset lives of generally five years, or lease terms for leasehold
improvements. The cost of specialized tooling is capitalized and depreciated
using the straight-line method over the estimated life of the related product
which is generally two to four years.
INCOME TAXES: Deferred income taxes are recorded to reflect the tax consequences
in future years of differences between the financial reporting and income tax
bases of assets and liabilities using enacted tax laws and statutory rates.
Income tax expense is the sum of the tax currently payable and the change in
deferred taxes during the period.
ADVERTISING EXPENSE: The costs of advertising are expensed as incurred.
Advertising expense of $1,142,000, $1,050,000, and $1,170,000 was incurred for
the years ended July 31, 1995, 1994, and 1993, respectively.
FOREIGN EXCHANGE CONTRACTS: The Company enters into foreign exchange contracts
to hedge inventory purchase commitments which are denominated in Japanese yen.
These contracts are accounted for as hedging transactions. Gains or losses on
the contracts are deferred and are recognized in cost of sales when the
inventory purchased with the contract yen is sold. As of July 31, 1995, the
Company had outstanding foreign currency contracts with a face amount of
$4,357,000, and a fair value of $4,233,000, based on the closing currency rate
at July 31, 1995.
REVENUE RECOGNITION: The Company recognizes revenue upon shipment of product.
NET INCOME PER COMMON SHARE: Net income per common share is based on the
weighted average number of common shares outstanding during each period. Common
stock equivalents did not have a dilutive effect on net income per common share
during each of the past three fiscal years.
USE OF ESTIMATES: The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
2. OTHER FINANCIAL STATEMENT DATA
The following provides additional disclosures for selected information from the
consolidated balance sheets and consolidated statements of operations.
July 31, 1995 1994
ACCOUNTS RECEIVABLE:
Trade receivables ............ $ 9,408,870 $ 9,352,523
Less allowances for doubtful
accounts and dealer
program credits .............. (350,000) (450,000)
$ 9,058,870 $ 8,902,523
Inventories:
Finished goods ............... $ 5,237,054 $ 4,935,609
Raw materials and
component parts .............. 7,785,076 7,476,194
13,022,130 12,411,803
Less valuation allowance ..... (1,695,000) (675,000)
$ 11,327,130 $ 11,736,803
PROPERTY AND EQUIPMENT,
AT COST:
Tooling and production
equipment .................... $ 5,123,822 $ 4,757,176
Office furniture and data
processing equipment ......... 4,141,811 2,767,282
Other equipment .............. 862,934 819,981
Leasehold improvements ....... 997,480 707,498
11,126,047 9,051,937
Less accumulated depreciation
and amortization ............. (6,612,210) (4,787,839)
$ 4,513,837 $ 4,264,098
Accrued liabilities:
Accrued compensation,
including termination benefits $ 533,365 $ 190,699
Accrued vacation ............. 307,634 269,525
Other ........................ 225,512 756,111
$ 1,066,511 $ 1,216,335
<PAGE> 12
3. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
During fiscal 1995, the Company restructured its $10,000,000 unsecured bank line
of credit to a $6,000,000 unsecured line of credit and a $4,000,000 unsecured
term loan.
REVOLVING CREDIT AGREEMENT: The Company has available an unsecured bank line of
credit in the maximum amount of $6,000,000 through December 1996. Borrowings
bear interest at the bank's base rate, which was 8.75% at July 31, 1995. The
Company is obligated to pay an annual commitment fee of .125% on the total bank
line. Restrictive covenants under this agreement include, among others,
requirements to not exceed a debt to net worth ratio of 1:1, and to maintain a
minimum amount of tangible net worth. In addition, the Company cannot pay
dividends on its common stock, and has limits on the amount of purchases of
Company stock under the share repurchase program. The Company also has available
a letter of credit commitment of $5,000,000 under the line of credit agreement.
As of July 31, 1995, letters of credit outstanding were $2,776,000. Letters of
credit outstanding were $2,730,000 at July 31, 1994.
LONG-TERM DEBT: The term loan has varying quarterly principal installments
ranging from $150,000 during fiscal 1996 to $300,000 during fiscal 1999. Fixed
and variable interest rate options are available under the terms of this debt
agreement. The interest rate was 8.03% at July 31, 1995 and was fixed through
October 31, 1995.
Maturities on long-term debt are as follows:
Year Ending July 31,
1996.................................... $ 700,000
1997.................................... 1,000,000
1998.................................... 1,100,000
1999.................................... 1,200,000
4. EMPLOYEE BENEFIT PLANS
STOCK OPTIONS: In fiscal 1995, the Company adopted the 1994 Incentive Stock
Option Plan which replaced the Restated Incentive Stock Option Plan, and
reserved 100,000 shares of common stock for issuance under the new plan. Options
granted under the previous plan are exercisable through 1998. Options are
granted at prices equal to fair market value on the date of grant and become
exercisable on a cumulative basis over a three-year period from the date of
grant. As of July 31, 1995, 47,831 options were exercisable.
A summary of changes in outstanding stock options under the plans is as follows:
Options Price
Outstanding Per Share
Balance, July 31, 1992 104,000 $5.00 to $20.25
Canceled (10,000) 6.50 to 20.25
Granted 23,000 5.63 to 8.75
Exercised (55,400) 5.00 to 6.75
Balance, July 31, 1993 61,600 5.63 to 8.75
Canceled (4,000) 9.00
Granted 108,000 9.00 to 9.90
Exercised (9,267) 5.63 to 6.75
Balance, July 31, 1994 156,333 5.63 to 9.90
Canceled (14,000) 6.25 to 9.00
Granted 4,000 9.25
Exercised (20,166) 6.50 to 9.00
Balance, July 31, 1995 126,167 5.63 to 9.90
In fiscal 1995, the Company granted nonqualified options to an officer to
purchase 75,000 shares of common stock at an exercise price of $7.75 per share.
These options become exercisable equally over a three-year period from the date
of the grant. None of these options are currently exercisable.
401(k) PROFIT-SHARING: The Company sponsors the Incentive Plus Plan, a defined
contribution profit-sharing plan, which qualifies under Section 401(k) of the
Internal Revenue Code and covers employees who meet certain age and service
requirements. At the discretion of the Board of Directors, the Company may make
matching contributions up to an amount equal to 50 percent of the contributions
made by each employee, subject to a maximum matching contribution for each
employee of three percent of compensation. For the years ended July 31, 1994 and
1993, $188,000 and $155,000, respectively, was charged to earnings for
contributions to the plan. No matching contribution was made to the plan for the
year ended July 31, 1995.
STOCK PURCHASE PLAN: The Company's Employee Stock Purchase Plan allows
participating employees to contribute 3 to 10 percent of their base salary to
purchase up to 500 shares per year of common stock. The shares are generally
issued by the Company at a price equal to 15% less than the lower of the closing
market price on the first or last day of the plan year. During fiscal 1995, the
Company increased the number of shares reserved for future issuance under the
plan by 75,000 bringing the total reserved shares to 83,086 as of July 31, 1995.
<PAGE> 13
5. OPERATING LEASES
The Company leases office and plant facilities, and automobiles under operating
leases. The facility leases expire in fiscal 1997 and fiscal 1998, have renewal
options of four to ten years and include an allocation of real estate taxes and
other operating expenses.
Estimated future minimum lease payments under noncancelable operating leases
as of July 31, 1995 are as follows:
Year Ending July 31,
1996.................................... $ 944,000
1997.................................... 782,000
1998.................................... 524,000
1999.................................... 16,000
$2,266,000
Rent expense of $898,000, $908,000 and $880,000 was incurred for the years ended
July 31, 1995, 1994 and 1993, respectively.
6. STOCKHOLDERS' EQUITY
COMMON STOCK REPURCHASE: As of July 31, 1995, there were 300,000 shares
remaining for repurchase under Board of Director authorizations.
PREFERRED STOCK: Authorized capital includes 1,000,000 shares of preferred stock
having a par value of $.01 per share with undesignated rights. None of these
preferred shares have been issued.
7. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to one major customer amounted to 20% and 13% of fiscal 1995 and fiscal
1994 net sales, respectively. In fiscal 1993, sales to another major customer
were 11% of net sales.
The Company has no significant foreign operations. Export sales, primarily to
Europe, comprised approximately 25%, 23% and 24% of consolidated fiscal 1995,
1994 and 1993 net sales, respectively.
8. INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended July 31, 1995 1994 1993
Currently payable:
Federal ... $ 365,000 $ 860,000 $ 1,180,000
State ..... 20,000 50,000 75,000
Deferred ....... (310,000) (110,000) 70,000
$ 75,000 $ 800,000 $ 1,325,000
The approximate tax effects of temporary differences are as follows:
July 31, 1995 1994
Inventories ............. $ 735,000 $ 333,000
Excess of tax over
book depreciation ....... (183,000) (83,000)
Accounts receivable ..... 164,000 161,000
Accrued vacation ........ 72,000 61,000
Other ................... 42,000 48,000
Total .............. $ 830,000 $ 520,000
The reconciliation of the federal statutory rate to the effective income tax
rate is as follows:
Year Ended July 31, 1995 1994 1993
Federal income tax at statutory rate ..... 34.0% 34.0% 34.0%
Benefit of foreign sales corporation ..... (15.7) (2.3) (1.2)
Research and experimentation
tax credit ............................... (9.3) (1.5) (.7)
State income taxes, net
of federal benefit ....................... -- .4 1.3
Other .................................... 3.1 1.5 .2
Effective tax rate .................. 12.1% 32.1% 33.6%
9. FOURTH QUARTER PLAN OF TERMINATION AND OTHER ADJUSTMENTS
The Company recorded a charge to earnings of $1,647,000 in the fourth quarter of
fiscal 1995. The Company terminated 42 full-time employees in August 1995
pursuant to a plan of termination in place as of July 31, 1995, and recorded a
related charge of $247,000 in general and administrative expenses. A charge of
$1,145,000 was recorded in cost of sales to increase inventory valuation
reserves, and $255,000 was recorded in marketing and sales expenses to reflect a
decrease in the value of certain assets which support a product introduced for
sale during fiscal 1995. In the fourth quarter, the Company reversed charges
accrued earlier in the 1995 fiscal year of $162,000 for the Company's
discretionary matching portion to its defined contribution 401(k) profit-sharing
plan.
<PAGE> 14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Varitronic Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Varitronic
Systems, Inc. as of July 31, 1995 and 1994, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended July 31, 1995. 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 consolidated financial position of Varitronic
Systems, Inc. as of July 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
July 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
September 1, 1995
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
(Unaudited) Quarter Ended Quarter Ended Quarter Ended Quarter Ended
October 31 January 31 April 30 July 31
<S> <C> <C> <C> <C>
1995
Net sales ................. $ 11,858 $ 12,128 $ 12,332 $ 13,207
Gross margin .............. 4,420 4,439 4,244 2,965(1)
Net income (loss) ......... 574 702 238 (971)
Net income (loss) per share .25 .30 .10 (.42)
1994
Net sales ................. $ 11,003 $ 11,242 $ 11,064 $ 11,510
Gross margin .............. 4,386 4,269 4,234 4,572
Net income ................ 523 277 265 625
Net income per share ...... .20 .10 .10 .25
</TABLE>
(In thousands, except per share amounts)
(1) See Note 9 to financial statements for further disclosure regarding fourth
quarter financial results.
<PAGE> 15
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
SCOTT F. DRILL
Chairman, President, Chief
Executive Officer and Treasurer
Varitronic Systems, Inc.
ANTON J. CHRISTIANSON
Chairman
Cherry Tree Investments, Inc.
RAYMOND F. GOOD
Independent Executive
Consultant
DONALD J. KRAMER
Private Consultant
REID V. MACDONALD
President and Chief
Executive Officer
Faribault Foods, Inc.
JOHN B. ZAEPFEL
Investor and Consultant
EXECUTIVE OFFICERS
SCOTT F. DRILL
Chairman, President, Chief
Executive Officer and Treasurer
TIMOTHY P. FITZGERALD
Vice President of Operations
DAVID C. GREY
Vice President of Business
Development
ROGER A. LARSON
Vice President of Domestic
Sales and Marketing
KEVIN B. MCGOURTY
Vice President of Product
Planning
LYNN R. MCKEE
Vice President of Human
Resources
DEBORAH L. MOORE
Vice President of Corporate
Development and Secretary
MONTE J. MOSIMAN
Vice President of International
and OEM Sales
NORBERT F. NICPON
Vice President of Finance and
Administration and
Chief Financial Officer
COMMON STOCK AND CORPORATE INFORMATION
STOCK LISTING
Varitronic Systems, Inc. common stock is traded on The Nasdaq Stock Market under
the symbol VRSY. As of October 3, 1995, there were 232 holders of record of the
Company's common stock and in excess of 1,500 beneficial owners.
The following table sets forth the high and low prices for trades of VRSY
common stock as reported by Nasdaq for the years ended July 31, 1995 and 1994:
1995 1994
High Low High Low
First Quarter ...... $ 9.00 $ 7.75 $ 14.00 $ 8.25
Second Quarter ..... 10.00 7.75 15.00 9.75
Third Quarter ...... 14.00 9.00 10.75 7.75
Fourth Quarter ..... 13.00 8.75 10.00 6.75
DIVIDEND POLICY
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business. Under the existing bank line of credit, the Company cannot pay cash
dividends on its common stock.
TRANSFER AGENT
AND REGISTRAR
Norwest Bank Minnesota, N.A.
Stock Transfer Department
P.O. Box 738
South St. Paul, MN
55075-0738
800/468-9716
LEGAL COUNSEL
Best & Flanagan
4000 First Bank Place
601 Second Avenue South
Minneapolis, MN 55402-4331
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
650 Third Avenue South
Minneapolis, MN 55402-4333
ANNUAL MEETING
The annual meeting of shareholders will be held on Friday, December 1, 1995 at
9:30 a.m. local time at the Hotel Sofitel, located at 5601 West 78th Street,
Bloomington, Minnesota.
FORM 10-K
A copy of the Company's Form 10-K filed may be obtained without charge by
writing to:
Varitronic Systems, Inc.
Investor Relations
300 Interchange North
300 Highway 169 South
Minneapolis, MN 55426
<PAGE> 16
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8
registration statements of Varitronic Systems, Inc. dated October 25, 1994,
dated July 2, 1990, and dated June 14, 1988 of our reports dated September 1,
1995, on our audits of the consolidated financial statements and financial
statement schedule of Varitronic Systems, Inc. as of July 31, 1995 and 1994, and
for the years ended July 31, 1995, 1994 and 1993, which reports are included in
or incorporated by reference in this Annual Report on Form 10-K.
Minneapolis, Minnesota
October 24, 1995 COOPERS & LYBRAND L.L.P.
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