<PAGE>
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________________to____________________
Commission file Number 0-20729
______________
PRINTWARE, INC.
_______________________________________________________
(Exact name of registrant as specified in its charter.)
Minnesota 41-1522267
____________________________ __________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Eagan Industrial Road, St. Paul, MN 55121
________________________________________ _____
(Address of principal executive offices) (Zip Code)
(612) 456-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
stock, no par value ("Common Stock")
Based upon the $3.25 per share closing sales price of the
registrant's common stock as of January 30, 1998, the aggregate
value of the shares of Common Stock held by nonaffiliates as of
such date was approximately $8,312,385.
Common Stock - 4,914,939 shares outstanding as of March 5, 1998.
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
<PAGE>
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts
indicated of this Annual Report on Form 10-K:
<CAPTION>
Parts of Annual Report Documents Incorporated
on Form 10-K by Reference
_________________________________ ______________________
<S> <C>
Part III
Item 10. Directors and Reference is made to the
Executive Officers Registrant's definitive proxy
of the Registrant. statement ("Proxy Statement"),
which will be filed with the
Securities and Exchange
Commission ("Commission") within
120 days after December 31, 1997.
Item 11. Executive Compensation. Reference is made to the
Registrant's Proxy Statement.
Item 12. Security Ownership of Reference is made to the
Certain Beneficial Registrant's Proxy Statement.
Owners and Management.
Item 13. Certain Relationships Reference is made to the
and Related Transactions. Registrant's Proxy Statement.
</TABLE>
<PAGE>
PART I
This Annual Report on Form 10-K contains forward-looking statements that
are not statements of historical fact. Forward-looking statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially from such statements. Factors that may affect the Company's
revenues, use of capital, expenses and/or operating profits include, but are
not limited to, the introduction of competing products with performance
equivalent to or exceeding that of the Company's products, a claim (whether or
not successfully made) that the Company's products infringe a patent held by
another company or individual, any performance problems involving the
Company's products, changes in technology that could cause the Company's
products to become obsolete, the departure of key members of management and/or
key employees, and general economic conditions.
ITEM 1. BUSINESS.
Printware designs, builds and markets "Computer-to-Plate" systems which
are used by the printing industry to create printing plates directly
from computer data. Computer-to-Plate systems are referred to as "Plate-
setters", which replace the traditional process of typesetting, paste-up,
camera work and processing film.
The key benefits of Computer-to-Plate technology are:
- Lower costs from savings in supplies and labor
- Faster turnaround times
- Fewer pieces of equipment
- Fewer environmental limitations on by-product disposal
The heart of Printware's Platesetters is a high-resolution laser marker
system, the key technology obtained from The 3M Company ("3M") in 1985. The
system is based on a resonant galvanometer, which management believes has
certain performance advantages over conventional systems which use rotating
multifaceted mirrors. The Company's system uses a proprietary method where a
mirror mounted on a resonating torsion bar, in conjunction with
microprocessor-controlled electronics, precisely controls the laser raster
scan. The method was first used in Printware's laser printers, then later in
its Platesetters.
Printware was organized in 1985 and began deliveries in 1987 of its first
product, a high resolution laser based printer. In 1988 Printware began
selling its first Platesetter, based on electrostatic technology. Printware
subsequently expanded its product line with filmsetters and new laser
printer models. In 1993, however, Printware began to focus exclusively on
Computer-to-Plate products and phased out its other product lines, resulting
in a significant improvement in profitability. In 1995, Printware completed
development of and began to deliver photographic (silver-halide) Platesetters)
to serve a broader range of users. This type of Platesetter has been marketed
since 1995 by Mitsubishi Imaging Inc. ("Mitsubishi") as the model SDP-1800.
<PAGE>
The Company added a line of lower-cost silver-halide models in 1997 under the
Printware "PlateStream" brand name.
INDUSTRY OVERVIEW
According to Printing Industries of America ("PIA"), a trade association,
there were approximately 52,400 printing firms in the United States in 1995.
The Company believes that most of the printing presses installed at these
firms are small format (18" wide or less), which is the segment of
the printing industry that the Company serves.
CUSTOMERS
Sales to Deluxe Corporation ("Deluxe") accounted for $4.31 million, $4.12
million and $3.50 million of revenue in 1997, 1996 and 1995, respectively,
which constituted 61.8%, 55.5% and 41.7% of 1997, 1996 and 1995 revenue,
respectively. Sales to Mitsubishi, principally the SDP-1800 silver-halide
platesetter, accounted for $275,000, $1.07 million and $1.46 million of
revenue in 1997, 1996 and 1995, respectively, which constituted 3.9%, 14.4%
and 17.5% of 1997, 1996 and 1995 revenue, respectively. The loss of Deluxe
or Mitsubishi as a customer, or a substantial reduction in their purchases,
would have a material adverse effect on the Company. The Company provided
a majority of the Platesetter supplies used by Deluxe under a multi-year
contract that expired at the end of 1997.
REVENUES FROM DELUXE. The Company sells both equipment and consumable
supplies to Deluxe. In 1994 the Company entered into a purchase agreement
with Deluxe under which Deluxe has agreed to purchase from the Company an
increased, minimum annual amount of this plate material for each of the
years 1995, 1996 and 1997 at a fixed price. With the expiration of that
agreement at the end of 1997, there can be no assurance that such revenues
will not be reduced or eliminated. The price of such sales may also be
substantially reduced in the future, which could have a material adverse
effect on the Company.
During the period from 1991 to 1995, the Company sold to Deluxe various
Platesetters, film imagers and other equipment under certain development and
purchase order contracts. The Company has no current commitments from Deluxe
under these equipment contracts, except to retrofit certain Deluxe equipment
with the results of a software research and development contract with Deluxe
which the Company is performing.
PRODUCTS
The Company makes two lines of Platesetters, silver-halide and
electrostatic. The Company also sells service, training, and proprietary
supplies.
SILVER-HALIDE PLATESETTERS. These products use versatile commodity
silver-halide plate material for a wide range of printing applications. They
consist of two integrated modules: an imager module, where a laser "writes"
the digital image on the plate; and a processor module, where the plate is
developed and fixed, similar to conventional photography. The units are
loaded with silver-halide plate material on large rolls. Imaged plates
exit the machine into a tray already dried, cut to size and press-ready.
These units are also available with integrated punches compatible with press
registration systems. A model for 18"-wide plates is sold by Mitsubishi under
its brand name as the SDP-1800, primarily through a network of large domestic
graphic arts dealers. A lower-cost silver-halide platesetter line, developed
in 1997, is sold under Printware's own PlateStream brand name. Current
PlateStream models include a model for 13" wide plates, and the PlateStream
46 for 18" plates. The Printware-branded products have started to be sold
worldwide through a combination of direct sales and regional dealers.
<PAGE>
ELECTROSTATIC (MODEL 1440) PLATESETTERS. This product line has three
models: one for economical paper-based plates; another for durable metal
plates; and a third for either paper or metal. The Model 1440 serves niche
markets such as check printing, social printing, envelope printing and the
emerging newspaper market. The units have an area to load a roll of plate
material stock, or in the case of the metal plate version, a plate sheet
feeder. Imaged plates exit the machine into a tray or into optional post-
processing modules. Electrostatic Platesetter sales have been declining
over the years and are expected to continue to decline as printers shift to
newer technology such as silver-halide.
Printware Platesetters have a speed of approximately two plates per minute,
which the Company believes is among the fastest products of their type. The
resolution of the Company's silver-halide Platesetters had been 1800 dots per
inch (dpi), and was extended to 2400 dpi in 1997. This resolution is
suitable for medium-quality color and photographs. The Model 1440 resolution
is 1200 dpi, which is suitable for text, graphics and low to medium-quality
photographs. End-user pricing is $50,000 to $100,000 for silver-halide
Platesetters and $80,000 to $150,000 for electrostatic Platesetters, depending
on the specific model and configuration.
RASTER IMAGE PROCESSORS (RIPS). RIPs convert computer-based information
into digital images which are used by Platesetters to produce printing plates.
The Company's RIPs are fully compatible with the industry-standard PostScript
language and most popular networks. The Company has several RIP models, sold
under its "ZAPrip" brand name, using interpreter software from leading
developers.
SUPPLIES. Printware sells supplies for its electrostatic Platesetters,
Consisting primarily of digital plate material. Most of these are sold in the
check-printing industry. Weakness in this industry has had a negative impact
on supplies sales and is likely to continue to adversely affect revenues.
MARKETING
From 1995 to 1997, the Company relied exclusively on Mitsubishi to market
the Company's silver-halide Platesetters. In 1997, in order to provide
lower-priced products to reach a broader market, the Company introduced the
Printware PlateStream line of silver-halide Platesetters. The Company
launched a marketing campaign for its PlateStream silver-halide Platesetter
designed to build Printware brand awareness with mainstream volume printers.
The Company's goal is to significantly expand distribution of its products
in order to reach a broader customer base. Management envisions this
expansion taking place gradually as the Computer-to-Plate market grows. The
Company has begun to utilize a portion of the net proceeds of its initial
public offering to expand its distribution by hiring additional sales and
marketing personnel, marketing promotion, trade shows and to finance
equipment leases.
RESEARCH AND DEVELOPMENT
In 1997 the Company's research and development focused primarily on the
development of its new PlateStream line of Platesetters. With that effort
substantially complete, the Company has programs underway or planned
to add more performance and functionality to its Platesetters. The
Company believes that these programs are necessary to maintain its
competitive advantage.
<PAGE>
COMPETITION
The growth in the Computer-to-Plate business has attracted considerable
competition. The Company's competitors and potential competitors are
established companies that have significantly greater financial, technical and
marketing resources than the Company. There can be no assurance that the
Company's competitors will not succeed in developing and marketing products
which perform better and are less expensive than the Company's products, or
that will render the Company's products and technology obsolete or
noncompetitive in other ways. The Company divides its competition into four
categories: other Platesetters; film imagers; enhanced xerographic/laser
printers; and supplies competitors.
OTHER PLATESETTERS. The Company faces significant competition from other
silver-halide Platesetters. Management believes the most significant of these
competitors include A. B. Dick Company and Purup-Eskofot A/S. The Company
believes that its advantages over those products include higher speed, less
plate waste, and high-speed integrated punching. There are many competitive
Platesetters that use metal plates. Some of these products compete with the
metal-plate versions of the Company's electrostatic Platesetters, as well as
providing an alternative to the Company's silver-halide Platesetters. Most
of the competitive devices are relatively expensive and use expensive
supplies. Most competitive metal Platesetters are geared towards high-end
color printing. Printware's products are focused at mainstream, smaller
presses and mid-range quality, which management believes currently accounts
for most printing.
<PAGE>
FILM IMAGERS. Digital film imagers are used in the traditional multi-step
platemaking process being obviated by Platesetters. Several film imager
manufacturers are attempting to adapt film imagers to image plates directly.
Competitors in this category include the Agfa division of Bayer Corp.,
PrePress Systems and ECRM Incorporated. From discussions with customers, the
Company believes that such "plate-enabled" film imagers represent a slow,
awkward approach, compared to the Company's Platesetters. The Company's
systems are self-contained, providing so-called "dry-to-dry" operation. The
Company's Platesetters are faster than most film imagers and, unlike film
imagers, have virtually no plate waste.
XEROGRAPHIC/LASER PRINTERS. Enhanced xerographic/laser printers can
replace offset printing in certain applications, but are currently limited to
lower-quality applications such as overseas check printing and low-quality
business forms. These devices also have a higher variable cost per impression
than Computer-to-Plate technology. Companies in this area include Check
Technology Corporation, Delphax Systems and Xerox Corporation. Management
believes that competitors in this area are making efforts to improve the
quality and reduce the cost of their systems, and there can be no assurance
that systems marketed by the Company will sustain their advantage.
SUPPLIES COMPETITION. Printware has competitors which sell plate supplies
for the Company's electrostatic Platesetters. The most significant
competitive material is made by a Japanese paper mill and sold through a U. S.
distributor. There have also been several less significant competitors in
this market from time to time. Printware has addressed the competitive threat
with lower prices where appropriate and programs to improve the quality and
consistency of its supplies. The Company believes that competitive materials
are inferior to Printware supplies in certain respects, such as image quality
and dimensional stability, but not inferior in other respects. The Company
does not see long-term growth potential in this market, and anticipates
continued competitive pricing pressure in its supplies business.
PROPRIETARY RIGHTS
PATENTS AND TRADE SECRETS. Printware's policy is to attempt to protect
its technology by seeking patents, maintaining certain trade secrets and
continuing technological innovation. As of December 31, 1997, the Company had
rights to 19 patents, consisting of 13 granted to Printware and six licensed
from 3M. The 3M patents expire between 2002 and 2004; the royalties which the
Company paid to 3M in 1997, 1996, and 1995 for licenses of these patents were
not material to the Company. The Company's own patents begin to expire in
2004. In addition to patents, the Company relies on trade secrets and other
unpatented proprietary technology. Printware seeks to protect its trade
secrets and proprietary know-how with confidentiality agreements with
employees and suppliers. There can be no assurance that the Company's patent
portfolio will provide a competitive advantage in the future, or that the
Company's agreements will adequately protect its trade secrets.
PRODUCT SUPPLY AGREEMENTS
The Company has non-exclusive rights to raster image processing software
used in the ZAPrip and to the plate processor module used in its silver-halide
Platesetters. The Company has the exclusive right to sell the proprietary
plate materials made by its suppliers. All of the product supply agreements
<PAGE>
to which the Company is a party can be canceled by either party under certain
circumstances. Such cancellation would seriously jeopardize the Company's
ability to provide products that are critical to the Company's revenues.
SUPPLIERS
The Company has a number of single source suppliers for materials that are
critical to production of its products. These include the suppliers of the
Company's Model 1440 paper plate material, Model 1440 metal plate material,
Model 1440 liquid toner and certain key components used in Platesetters,
and/or ZAPrip raster image processors. Any significant interruption of
supply from any of these vendors would have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
Printware's manufacturing operation consists of the assembly, integration,
testing and quality audits of equipment. The Company purchases all of its
supplies and many of the hardware components it uses from third-party vendors,
some of which are single-source vendors. Printware's principal manufacturing
areas include laser markers, transport mechanisms, electronics/RIPs and final
assembly/test. Printware makes extensive use of computer-aided design and
transmits most of its fabricated part drawings to its suppliers
electronically. The Company believes that this use of technology shortens
turnaround time and improves quality.
Printware's offices and manufacturing facility are located at 1270 Eagan
Industrial Road, St. Paul, Minnesota. The Company occupies 35,410 square feet
pursuant to a lease which expires July 31, 2005. The lease was amended
February 6, 1998 after the financial report date. Management believes that
this facility will be adequate for Printware's needs until the expiration of
the lease. Monthly rent expense is currently $7,029 but increases to $13,131
on August 1, 1998, based on the February 6, 1998 amendment plus a pro-rata
share of real estate taxes and common area maintenance.
EMPLOYEES
As of December 31, 1997, Printware had 42 employees, including 38 full-
time employees and 4 part-time or contract employees. Of the 38 full-time
employees, 12 were in manufacturing, 9 were in marketing, sales and customer
service, 10 were in research and development and 7 were in general and
administrative functions. Management considers the future success of the
Company to be dependent in part upon its continued ability to maintain a
highly-skilled workforce and to attract, motivate and retain qualified
employees. No Printware employees are covered by collective bargaining
agreements and the Company considers its relationship with its employees
to be good.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions will
not have a significant effect on the Company's financial position or its
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the fourth quarter of
1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market, under
the symbol PRTW. The high and low closing interdealer sales prices for each
quarter since trading commenced on July 2, 1996 are as follows: first quarter
1997 high of $4.50 and low of $3.875; second quarter 1997 high of $4.25 and
a low of $3.125; third quarter 1997 high of $5.00 and low of $3.25; fourth
quarter 1997 high of $4.92 and low of $3.25; third quarter 1996 high of
$6.63 and low of $4.88; fourth quarter 1996 high of $5.00 and low of $4.50.
As of December 31, 1997 the Company had approximately 200
shareholders of record and approximately 1,200 beneficial shareholders.
The Company has not paid and does not presently intend to pay any
dividends on its Common Stock.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information is qualified by and should be
read in conjunction with the Company's financial statement and notes thereto
included elsewhere in this Annual Report on Form 10-K.
Years Ended December 31,
____________________________________________________________
1997 1996 1995 1994 1993
__________ __________ __________ __________ ___________
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues from nonaffiliates $2,672,051 $3,299,499 $4,889,761 $3,775,958 $ 4,348,484
Revenues from affiliates 4,314,111 4,116,536 3,498,387 2,850,967 2,948,000
__________ __________ __________ __________ ___________
Total revenues 6,986,162 7,416,035 8,388,148 6,626,925 7,296,484
Cost of revenues 3,912,367 4,350,696 5,003,956 4,102,401 5,344,519
__________ __________ __________ __________ ___________
Gross Profit 3,073,795 3,065,339 3,384,192 2,524,524 1,951,965
Research and development
expenses 865,392 789,824 757,131 956,807 1,314,355
Selling, general and
administrative expenses 1,241,823 982,250 1,072,878 945,533 1,851,507
__________ __________ __________ __________ ___________
Income (loss) from operations 966,580 1,293,265 1,554,183 622,184 (1,213,897)
Other income (expense) net 780,289 429,027 261,742 22,918 10,299
__________ __________ __________ __________ ___________
Income before income taxes
and extraordinary item 1,746,869 1,722,292 1,815,925 645,102 (1,203,598)
Income tax (benefit) expense (412,100) (661,112) 22,500 2,000 1,109
__________ __________ __________ __________ ___________
Income (loss) before extra-
ordinary item (1) 2,158,969 2,383,404 1,793,425 643,102 (1,204,707)
Extraordinary income -- -- -- 140,927 --
__________ __________ __________ __________ ___________
Net income (loss) $2,158,969 $2,383,404 $1,793,425 $ 784,029 $(1,204,707)
========== ========== ========== ========== ===========
Net income (loss) per common
share:
Basic $ .44 $ .56 $ .48 $ .21 $ (.33)
========== ========== ========== ========== ===========
Diluted $ .44 $ .56 $ .49 $ .21 $ (.33)
========== ========== ========== ========== ===========
Weighted average common shares
outstanding - Basic 4,875,054 4,226,504 3,626,437 3,618,040 3,614,751
========== ========== ========== ========== ===========
Weighted average common shares
outstanding (2) - Diluted 4,889,195 4,237,629 3,699,814 3,680,934 3,633,942
========== ========== ========== ========== ===========
December 31,
____________________________________________________________
1997 1996 1995 1994 1993
__________ __________ __________ ___________ ___________
<C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 347,819 $ 231,708 $2,568,852 $ 860,668 $ 1,288,821
Current assets 15,360,571 14,304,514 5,087,328 3,255,959 4,371,149
Working capital 14,451,317 12,979,851 4,151,595 2,292,562 1,441,554
Total assets 16,547,379 14,574,989 5,252,401 3,476,928 4,633,747
Shareholders' equity 15,638,125 13,250,326 4,316,668 2,513,531 1,704,152
<FN>
(1) The 1994 net income includes an extraordinary item of $140,927 consisting of a gain on
extinguishment of debt. The net income per common share basic and diluted attributable to
such extraordinary gain was $.04 and $.04, respectively.
(2) EPS was restated for years prior to 1997. See Note 1 to the financial statements for an
explanation of the determination of weighted average common shares outstanding.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE 12 MONTHS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
This discussion summarizes significant factors that affected the operating
results and financial condition of Printware, Inc. for the three years ended
December 31, 1997. References to earnings per share are of the "Basic" type as
defined by SFAS 128. The Company recorded income tax benefits of $450,000 and
$730,000 in the fourth quarters of 1997 and 1996, respectively. The tax
benefits were due to reductions of the valuation allowance relating to
deferred tax assets. These tax benefits were based on the combination of the
Company's recent profit-ability and its net operating losses incurred from
its formation in 1985 until turning profitable in 1994. The Company completed
its initial public offering (IPO) in July 1996, which resulted in net proceeds
of $6.38 million.
Statements made in this report concerning the Company's or management's
intentions, expectations or predictions about future results or events are
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995. Such statements are necessarily subject to risks and
uncertainties that could cause actual results to vary from stated expectations,
and such variations could be material and adverse.
Overall Summary
Despite an increase of 25% in platesetter sales led by the new PlateStream
models, revenues in 1997 decreased 6% from 1996. This decrease was primarily
due to a decline in sales of supplies used in the Company's original model
1440 platesetters by customers in the consolidating check-printing industry.
Pretax income in 1997 was $1.75 million, up from $1.72 million in 1996. Net
income in 1997 was $2.16 million including a net income tax benefit of
$412,000, compared to $2.38 million including a net income tax benefit of
$661,000 in 1996. Basic earnings per share were $.44 in 1997, compared to
$.56 in 1996, the year of the IPO. Shareholders' equity increased to $15.6
million from $13.3 million in 1996.
Results of Operations
The table shown below summarizes the percentage of revenues for various
items in the Company's statements of operations for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
_____________________________________
1997 1996 1995
_______ _______ _______
<S> <C> <C> <C>
Revenues from nonaffiliates 38.2% 44.5% 58.3%
Revenues from affiliates 61.8 55.5 41.7
_______ _______ _______
Total revenues 100.0 100.0 100.0
Cost of revenues 56.0 58.7 59.7
_______ _______ _______
Gross margin 44.0 41.3 40.3
Research and development 12.4 10.7 9.0
Selling, general and administrative 17.8 13.2 12.8
_______ _______ _______
Income from operations 13.8 17.4 18.5
Other income, net 11.2 5.8 3.1
_______ _______ _______
Income before income taxes 25.0 23.2 21.6
Income taxes (benefit) (5.9) (8.9) 0.2
_______ _______ _______
Net income 30.9% 32.1% 21.4%
======= ======= =======
</TABLE>
Revenues--Total 1997 revenues decreased 6% to $6.99 million from
$7.42 million in 1996, after a decrease of 12% from $8.39 million in 1995.
The 1997 decrease was primarily due to a reduction of supplies sales to
customers in the consolidating check-printing industry. Supplies revenues
in 1997 were down 10% compared to 1996, which in turn were up 7% over 1995.
Supplies declined to about 61% of 1997 total revenues compared to 64% and
55% in 1996 and 1995, respectively. Platesetter revenues were up a strong
25% mostly due to the new PlateStream and PlateStream 46 models. Sales to
Mitsubishi of their private-label platesetter were 4% of total revenues
compared to 10% in 1996 and 20% in 1995. Nonaffiliate revenues in 1997
decreased $630,000 from 1996 after a decrease of $1.59 million from 1995.
Affiliate revenues increased $200,000 over 1996 following an increase of
$618,000 over 1995 due to increases of a mix of products, supplies and
services.
Gross margin--Gross margin increased to 44% in 1997 compared to 41%
in 1996 and 40% in 1995. Tight expenditure control and a shift in product
mix towards higher-margin PlateStreams away from lower-margin supplies and
Mitsubishi platesetters was primarily responsible for the increase.
Research and development (R&D)--R&D expenses in 1997 increased $75,000
or 9% over 1996, which in turn showed an increase of $33,000 or 4% compared
to 1995. The increased expenses in 1997 were due to the design of both
PlateStreams and their introduction into production. In 1996 the Company
began the PlateStream design after the mid-year IPO.
<PAGE>
Selling, general and administrative (SG&A)--SG&A expenses in 1997
increased $260,000 or 26% over 1996 after a decrease of $91,000 or 8%
from 1995. The bulk of the changes were due to marketing and sales
activities. Selling expenses in 1997 increased $273,000 over 1996
following a $65,000 decrease compared to 1995. The 1997 increase
was due to investment spending on PlateStream marketing and sales
activities. The decrease in 1996 was largely due to reduced promotion/
trade show expenses and commissions.
Other income (expense)--Other income in 1997 was $780,000 compared to
$429,000 and $262,000 in 1996 and 1995, respectively. The 1997 increase
was due to a full year's interest earned on the investment of the IPO
proceeds and the excess cash from operations. The increase in 1996 was
mostly due to additional interest following the IPO.
Income tax (benefit) expense--In 1997 the Company recognized an income
tax benefit that resulted in a net tax benefit of $412,000, compared to a
net tax benefit of $661,000 and a tax expense of $23,000 in 1996 and 1995,
respectively. The tax benefits were realized from reductions of the valuation
allowance relating to deferred tax assets.
Net income--Net income increased to $2.16 million compared to $2.38
million in 1996 and $1.79 million in 1995. The decrease in 1997 was due to
a lower income tax benefit compared to 1996, as pretax income was up $25,000
over 1996.
Financial Condition
Liquidity--Cash provided by operating activities was $1.44 million in
1997, compared to $1.71 million in 1996 and $1.72 million in 1995. Working
capital was $14.5 million at December 31, 1997 compared to $13.0 million and
$4.15 million on that date in 1996 and 1995, respectively. The 1997 current
ratio was 17 to 1, compared to 10 to 1 for 1996 and 5 to 1 for 1995.
The increases came from operating profits, IPO proceeds, and interest income.
Capital Resources--The Company had no long-term debt or lines of credit
as of December 31, 1997 as it believes its working capital is adequate for its
current needs.
Outlook--The Company foresees a continuing revenue shift from supplies for
its original model 1440 platesetters. Success of the new PlateStream line of
platesetters is seen as critical to the Company's future revenues and profit-
ability. The PlateStreams will generate after-market service revenues, with
no supplies sales anticipated. The Company plans to significantly increase
its investment spending to expand distribution of the PlateStreams, and to
continue to add additional products using incremental innovation over the next
several years. The new leasing division was formed to help grow sales of
PlateStreams by offering favorable rates through use of the Company's
strong balance sheet. The resulting sales-type leases will be recognized
as revenue as if purchases had occurred, with interest revenues spread over
the multi-year terms of the leases. If the Company improves its profitability,
it will recognize future income tax benefits relating to deferred tax assets.
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue. The Company
presently believes, with modification to existing software, the Year 2000
problem will not pose significant operational problems and the costs are not
anticipated to be material to its financial position or results of operations
in any given year.
The accompanying financial statements and related information are the
responsibility of management. They have been prepared in conformity with
generally accepted accounting principles and include amounts that are based
on our best estimates and judgments. The financial information contained
elsewhere in this report is consistent with that in the financial statements.
The Company maintains internal accounting control systems that are
adequate to provide reasonable assurance that the assets are safeguarded from
loss or unauthorized use. These systems produce records adequate for
preparation of financial information.
<PAGE>
The audit committee has reviewed all financial data included in this
report. The audit committee is composed entirely of independent directors and
meets periodically with management and with the independent auditors on
financial reporting matters.
The role of the independent auditors is to render an independent,
professional opinion on management's financial statements as required by
generally accepted auditing standards.
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
_______ _______ _______ _______
<S> <C> <C> <C> <C>
1997
Revenue $ 1,847 $ 1,925 $ 1,623 $ 1,591
Cost of Revenues 1,041 1,054 892 925
_______ _______ _______ _______
Gross Profit 806 871 731 666
Operating Income 265 299 194 209
_______ _______ _______ _______
Net Income 460 495 388 816
======= ======= ======= =======
Per Share-Basic $ .09 $ .10 $ .08 $ .17
======= ======= ======= =======
Average Shares
Outstanding 4,852 4,853 4,889 4,908
======= ======= ======= =======
1996
Revenue $ 1,832 $ 1,897 $ 1,676 $ 2,011
Cost of Revenues 1,110 1,002 966 1,273
_______ _______ _______ _______
Gross Profit 722 895 710 738
Operating Income 305 441 261 286
_______ _______ _______ _______
Net Income 331 464 405 1,183
======= ======= ======= =======
Per Share-Basic $ .09 $ .13 $ .08 $ .24
======= ======= ======= =======
Average Shares
Outstanding 3,629 3,630 4,801 4,850
======= ======= ======= =======
(1) During the fourth quarter 1997 and 1996, the company recorded a $450,000
and $730,000 income tax benefit from the reduction of the deferred tax asset
valuation allowance.
(2) Earnings per share amounts presented for 1996 and 1995 have been
restated for the adoption of SFAS 128.
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
See Financial Statements and Notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in, or disagreements with, the accountants for
the Company which require reporting under Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated herein by reference
to the sections entitled "Item 1: Election of Directors" contained in the
Company's proxy statement to be filed with the Securities and Exchange
Commissions (the "Commission") within 120 days of December 31, 1997 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the section following "Compensation Committee Report on Executive
Compensation" contained in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership Of Certain Beneficial Owners and
Management" contained in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the section entitled "Meetings and Compensation of Directors" contained in the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter ended December 31, 1997.
The following exhibits are hereby incorporated into this Annual Report on
Form 10-K by reference to exhibits with the same exhibit number filed with the
Company's Registration Statement on Form S-1 (Commission file No. 333-03629),
as amended, which became effective on July 2, 1996 ("Registration Statement"):
Exhibits
Exhibit 23. Independent Auditors' Consent
Exhibit 27. Financial Data Schedule
<PAGE>
PRINTWARE, INC.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRINTWARE, INC.
Registrant
Date: March 11, 1997 /s/ DANIEL A. BAKER
________________________
Daniel A. Baker, Ph.D.,
PRESIDENT
& CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant on
the dates in the capacities indicated.
<TABLE>
<CAPTION>
Name Title Dates
_____________________ _______________ ______________
<S> <C> <C> <C>
/s/ Daniel A. Baker President & Chief March 11, 1998
- -------------------------- Executive Officer
Daniel A. Baker (Principal Executive Officer) ______________
/s/ Thomas W. Petschauer Executive Vice President March 11, 1998
- -------------------------- & Chief Financial Officer
Thomas W. Petschauer (Principal Financial Officer) ______________
/s/ Allen L. Taylor Co-Chairman of the Board March 11, 1998
- -------------------------- ______________
Allen L. Taylor
/s/ Donald V. Mager Co-Chairman of the Board March 11, 1998
- -------------------------- ______________
Donald V. Mager
/s/ Brian D. Shiffman Secretary March 11, 1998
- -------------------------- ______________
Brian D. Shiffman
/s/ Cordell E. Lomen Controller March 11, 1998
- -------------------------- ______________
Cordell E. Lomen
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of Printware, Inc.:
We have audited the accompanying balance sheets of Printware, Inc. (the
Company) as of December 31, 1997 and 1996 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Printware, Inc. at December 31, 1997 and
1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
________________________
Minneapolis, Minnesota
January 23, 1998
<PAGE>
<TABLE>
PRINTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 1997 and 1996
<CAPTION>
December 31, December 31,
1997 1996
ASSETS ____________ ___________
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 347,819 $ 231,708
Investments 11,867,661 10,558,752
Receivables from nonaffiliates 564,568 693,347
Receivables from affiliates 359,619 467,036
Inventories 1,941,634 1,762,795
Prepaid expenses 14,849 40,034
Deferred income taxes 264,421 550,842
___________ ___________
Total Current Assets 15,360,571 14,304,514
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 134,965 109,239
INTANGIBLE ASSETS, net of accumulated
amortization 28,078 31,236
LEASE RECEIVEABLES--LONG TERM 173,765 --
DEFERRED INCOME TAXES 850,000 130,000
___________ ___________
TOTAL ASSETS $16,547,379 $14,574,989
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 457,200 $ 521,486
Accrued expenses 412,017 453,449
Deferred revenues 40,037 349,728
___________ ___________
Total Current Liabilities 909,254 1,324,663
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no specified par value;
1,000,000 shares authorized;
none issued and outstanding -- --
Common Stock, no par value, authorized
15,000,000 shares: issued and outstanding
4,914,939 and 4,850,694 at
December 31, 1997, and 1996, respectively 22,174,940 21,984,596
Accumulated deficit (6,655,097) (8,814,066)
Unearned compensation on stock options (3,507) (11,497)
Net unrealized gain on available-
for-sale securities 121,789 91,293
___________ ___________
Total shareholders' equity 15,638,125 13,250,326
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $16,547,379 $14,574,989
=========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Years Ended December 31
____________________________________
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
REVENUES FROM NONAFFILIATES $2,672,051 $3,299,499 $4,889,761
REVENUES FROM AFFILIATES 4,314,111 4,116,536 3,498,387
__________ __________ __________
TOTAL REVENUES 6,986,162 7,416,035 8,388,148
COST OF REVENUES 3,912,367 4,350,696 5,003,956
__________ __________ __________
GROSS MARGIN 3,073,795 3,065,339 3,384,192
OPERATING EXPENSES:
Research and development 865,392 789,824 757,131
Selling, general and administrative 1,241,823 982,250 1,072,878
__________ __________ __________
Total 2,107,215 1,772,074 1,830,009
__________ __________ __________
INCOME FROM OPERATIONS 966,580 1,293,265 1,554,183
OTHER INCOME (EXPENSE):
Net gain on arbitration award -- -- 192,335
Interest expense -- (236) (3,333)
Interest and other income 780,289 429,263 72,740
__________ __________ __________
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,746,869 1,722,292 1,815,925
INCOME TAX (BENEFIT) EXPENSE (412,100) (661,112) 22,500
__________ __________ __________
NET INCOME 2,158,969 2,383,404 1,793,425
========== ========== ==========
NET INCOME PER COMMON SHARE:
BASIC $ .44 $ .56 $ .49
========== ========== ==========
DILUTED $ .44 $ .56 $ .48
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 4,875,054 4,226,504 3,626,437
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 4,889,195 4,237,629 3,699,814
========== ========== =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Unearned Net unrealized
compensation gain on avail-
Common Stock Accumulated on stock able-for-sale
Shares Amount deficit options securities
_________ ___________ ____________ ____________ ______________
<S> <C> <C> <C> <C> <C>
BALANCE AT 12/31/94 3,623,776 $15,504,426 $(12,990,895) $ -- $ --
Shares issued pursuant to
exercise of stock options 737 2,212 -- -- --
Shares issued for
services performed for
the Company 2,500 7,500 -- -- --
Net income -- -- 1,793,425 -- --
__________ ___________ ____________ ____________ ______________
BALANCE AT 12/31/95 3,627,013 15,514,138 (11,197,470) -- --
Shares issued in public
Offering (net of issuance
cost of $822,447) 1,200,000 6,377,553 -- -- --
Shares issued pursuant to
exercise of stock options 42,455 127,365 -- -- --
Shares redeemed and
retired (21,274) (113,922) -- -- --
Shares issued for
services performed for
the Company 2,500 7,500 -- -- --
Compensation on issuance
of stock options -- 71,962 -- (71,962) --
Stock option compensation
earned 60,465
Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- 91,293
Net income -- -- 2,383,404 -- --
__________ ___________ ____________ ____________ ______________
BALANCE AT 12/31/96 4,850,694 21,984,596 (8,814,066) (11,497) 91,293
Shares issued pursuant
to employee stock
purchase plan 18,943 51,757 -- -- --
Shares issued pursuant
to exercise of
stock options 40,302 123,587 -- -- --
Shares issued pursuant
to exercise of warrants 5,000 15,000 -- -- --
Stock option compensation
earned -- -- -- 7,990 --
Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- $ 30,496
Net income -- -- 2,158,969 -- --
__________ ___________ ___________ ____________ ______________
BALANCE AT 12/31/97 4,914,939 $22,174,940 $(6,655,097) $ (3,507) $ 121,789
========== =========== ============ ============ ==============
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Years Ended December 31,
_______________________________________
1997 1996 1995
___________ ___________ ___________
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,158,969 $ 2,383,404 $ 1,793,425
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 56,913 63,653 71,271
Common Stock issued for services -- 7,500 7,500
Stock option compensation earned 7,990 60,465 --
Gain on sale of available-for-sale
securities -- (19,502) --
Deferred income taxes (450,000) (730,000) --
Changes in operating assets and
liabilities:
Receivables from nonaffiliates 128,779 (182,262) (234,795)
Receivables from affiliates 107,417 (204,381) (31,003)
Inventories (178,839) (35,453) 116,356
Prepaid expenses 25,185 (22,640) 26,257
Accounts payable (64,286) 84,634 (8,207)
Accrued expenses (41,432) (15,659) 126,120
Deferred revenues (309,691) 319,955 (145,577)
___________ ___________ ___________
Net cash provided by
operating activities 1,441,005 1,709,714 1,721,347
INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (2,521,355) (12,912,217) --
Sale of available-for-sale
securities 1,259,363 2,513,418 --
Increase in lease receivables (173,765) -- --
Purchases of property and equipment (79,481) (39,055) (15,375)
___________ ___________ ___________
Net cash used in
investing activities (1,515,238) (10,437,854) (15,375)
FINANCING ACTIVITIES:
Proceeds from issuance of
Common Stock 190,344 6,504,918 2,212
Common Stock redeemed and retired -- (113,922) --
___________ ___________ ___________
Net cash provided by financing
activities 190,344 6,390,996 2,212
___________ ___________ ___________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 116,111 (2,337,144) 1,708,184
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 231,708 2,568,852 860,668
___________ ___________ ___________
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 347,819 $ 231,708 $ 2,568,852
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for:
Interest $ -- $ 236 $ 3,333
=========== =========== ===========
Income taxes $ 35,900 $ 75,900 $ 15,488
=========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Printware, Inc. ("Printware" or the "Company") designs, builds and markets
"Computer-to-Plate" systems that are used by the offset printing industry to
create printing plates directly from computer data. These systems replace the
traditional process of typesetting, paste-up, camera work and processing film
to produce a printing plate.
Revenue Recognition
Revenue for equipment and supply sales is recognized at the time of shipment
to customers. Revenue from sales-type leases is recognized at the time of
customer acceptance. Revenue from development projects and their related costs
are recognized as the work is performed. Revenue related to installation,
training and support is recognized when the services are performed. Revenue
from development projects, installation, training and support is less than 10%
of total revenues for the years ended December 31, 1997, 1996 and 1995.
Net Income Per Common Share
For earnings per common share in 1997 the Company adopted Statement of
Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share".
Earnings per share amounts presented for 1996 and 1995 have been restated
for the adoption of SFAS 128. SFAS 128 requires the disclosure of Basic and
Diluted Earnings per Share (EPS). Basic EPS is calculated using income
available to common shareholders divided by the weighted average common
shares outstanding during the year. Diluted EPS is similar to Basic EPS
except that the weighted average common shares outstanding is increased
to give effect to all dilutive potential common shares that were outstanding
during the period. The total weighted average common shares outstanding
has been adjusted to give effect to the reverse stock split authorized by
the Company's shareholders effective April 25, 1996. See table below.
<TABLE>
<CAPTION>
1997 1996 1995
___________ ___________ ___________
<S> <C> <C> <C>
Income available to common shareholders $ 2,158,969 $ 2,383,404 $ 1,793,425
=========== =========== ===========
Weighted average shares outstanding 4,875,054 4,226,504 3,626,437
=========== =========== ===========
Basic EPS $ .44 $ .56 $ .49
=========== =========== ===========
Weighted average shares
outstanding 4,875,054 4,226,504 3,626,437
Dilutive shares issuable from stock
options 14,141 11,125 73,377
__________ ___________ __________
Total shares 4,889,195 4,237,629 3,699,814
========== =========== ==========
Diluted EPS $ .44 $ .56 $ .48
========== =========== ==========
Combined options and warrants to purchase 452,270, 421,159 and nil shares of
common stock at exercise prices of $4.63 to $7.20 were outstanding during 1997,
1996, and 1995, respectively, but were not included in the computation of the
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Cash Equivalents
Cash equivalents consist primarily of investments in commercial paper and
certificates of deposit, which have original maturities of three months or
less.
Investments
The Company classifies and accounts for debt and equity securities in
accordance with (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". The Company's portfolio is classified as available
for sale; thus, securities are recorded at fair market value and any
associated unrealized gain or loss, net of tax, is included as a separate
component of shareholders' equity, "Net unrealized gain on available-for-sale
securities." Gains or losses on securities are computed based on the cost
of specific securities sold. The Company had no available-for-sale
securities at December 31, 1995. A summary of amortized costs and market
values on available-for-sale securities as of December 31, 1997 and 1996
consists of the following:
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Description Cost Gain Loss Value
_____________________ ___________ __________ __________ ___________
<S> <C> <C> <C> <C>
Corporate Bonds $ 8,985,675 $ 161,536 $ (2,289) $ 9,144,922
Municipal & Agency Bonds 1,707,059 28,120 -- 1,735,179
Others 987,560 -- -- 987,560
___________ _________ __________ ___________
Totals $11,680,294 $ 189,656 $ (2,289) $11,867,661
=========== ========= ========== ===========
1996
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Description Cost Gain Loss Value
_____________________ ___________ __________ __________ ___________
<S> <C> <C> <C> <C>
Corporate Bonds $ 8,473,369 $ 127,475 $ (503) $ 8,600,341
Municipal & Agency Bonds 1,508,981 14,650 (1,171) 1,522,460
Others 435,951 -- -- 435,951
___________ _________ __________ ___________
Totals $10,418,301 $ 142,125 $ (1,674) $10,558,752
=========== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
Fair Market Fair Market
Description Value Value
_____________________ ___________ ___________
<S> <C> <C>
Less Than 1 Year $ 2,451,075 $ 435,951
From 1 to 5 Years 9,416,586 10,122,801
___________ ___________
Total $11,867,661 $10,558,752
=========== ===========
</TABLE>
Credit Risk
The Company generally does not require collateral for its trade accounts
receivable. The Company manages credit risk by regularly evaluating
creditworthiness of its customers. Accounts receivable for which
collectibility is not assured are reserved for through establishment of
an allowance for doubtful accounts. Customer accounts considered by
management to be uncollectible are written off.
During 1997 the Company introduced a new lease-sale program whereby credit-
worthy customers were allowed to purchase platesetter equipment for $1 at
the end of up to 60 month sales-type leases.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-
out basis) or market. Inventories are periodically reviewed for obsolescence
or surplus stock. Items considered obsolete or surplus are written off or a
valuation reserve is established to write such inventories down to their net
realizable value. The Company has recorded inventory valuation reserves of
$523,000 and $471,000 at December 31, 1997 and 1996, respectively.
The Company is dependent on several key suppliers for plate material and
raster image processing software. All of the Company's agreements with these
suppliers can be canceled by either party under certain circumstances.
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Office equipment, software,
machinery and equipment and tooling are depreciated on a straight-line basis
over five years. Motor vehicles are depreciated on a straight-line basis over
three years. Leasehold improvements are amortized on a straight-line basis
over the term of the lease.
Impairment of Long-Lived Assets
Management periodically reviews the carrying value of long-term assets for
potential impairment by comparing the carrying value of these assets to the
estimated undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related, expected future net cash flows
be less than the carrying value, an impairment loss would be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset with fair value being determined
using discounted cash flows. To date, management has determined that no
impairment of these assets exists.
Intangible Assets
Intangible assets are recorded at cost and are being amortized on a straight-
line basis over 17 years for patents and between two and five years for
license rights.
Research and Development Expenditures
Research and development expenditures are charged to expense as incurred.
Accounting for Warranty Costs
The Company records estimated future warranty costs when the equipment is
shipped to customers.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to the 1996 amounts to conform with the
1997 financial statement presentation.
Financial Risks and Uncertainties
In accordance with American Institute of Certified Public Accountants
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties", the Company has disclosed in the financial statements certain
financial risks and uncertainties to which it is subject, including
concentration of sales to a limited number of customers, certain suppliers of
raw materials and other key components included in its manufactured equipment
and the use of estimates to review the carrying value of long-lived assets.
The nature of the Company's operations exposes the Company to certain business
risks. The market for "Computer-to-Plate" systems is highly competitive and
subject to rapid technological change and evolving industry standards that may
affect both the operations, operating results and financial condition of the
Company and its customers.
<PAGE>
2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
December 31,
____________________________________
1997 1996
___________ ___________
<S> <C> <C>
Receivables from Nonaffiliates:
Trade $ 556,311 $ 719,804
Leases--current 37,328 --
Employees 3,794 696
Allowance for doubtful accounts (32,865) (27,153)
___________ ___________
Total receivables $ 564,568 $ 693,347
=========== ===========
Inventories:
Raw materials $ 994,359 $ 846,613
Work-in-process 260,035 196,279
Finished goods 687,240 719,903
___________ ___________
Total inventories $ 1,941,634 $ 1,762,795
=========== ===========
Property and Equipment:
Office equipment $ 430,633 $ 406,643
Software 108,107 103,105
Machinery and equipment 281,494 244,650
Leasehold improvements 74,762 74,762
Tooling and spares 334,761 334,761
Motor vehicles 23,708 10,063
__________ ___________
Total property and equipment 1,253,465 1,173,984
Less accumulated depreciation and
amortization (1,118,500) (1,064,745)
__________ ___________
Net property and equipment $ 134,965 $ 109,239
=========== ===========
Intangible Assets:
License rights $ 560,020 $ 560,020
Patents 53,701 53,701
___________ ___________
Total intangible assets 613,721 613,721
Less accumulated amortization (585,643) (582,485)
___________ ___________
Net intangible assets $ 28,078 $ 31,236
=========== ===========
Accrued Expenses:
Accrued payroll and related $ 44,070 $ 88,692
Accrued vacation and benefits 157,954 147,656
Accrued professional services 143,135 158,379
Accrued warranty reserve 36,650 35,940
Accrued income taxes 15,000 --
Accrued other 15,208 22,782
___________ ___________
Total accrued expenses $ 412,017 $ 453,449
=========== ===========
</TABLE>
<PAGE>
3. SHAREHOLDERS' EQUITY
On April 25, 1996 the Company's shareholders approved a one-for-four reverse
stock split, effective immediately. All references in the financial
statements to the number of shares, per share amounts, stock option plan data
and the statements of shareholders' equity have been restated to reflect the
split. On April 25, 1996 the Company's shareholders approved an amendment to
the Company's Articles of Incorporation, whereby the authorized stock of the
Company was stated as 15,000,000 shares of Common Stock, no par value and
1,000,000 shares of Preferred Stock, no specified par value. The Company's
Board of Directors may designate any series and fix any relative rights and
preferences of the Preferred Stock. The authorized shares have been restated
in the financial statements to reflect the impact of this amendment. There
were no shares of Preferred Stock issued or outstanding at December 31, 1997.
On July 2, 1996 the Company issued 1,200,000 shares of Common Stock at a price
of $6.00 per share as part of its initial public offering.
During the years ended December 31, 1997, 1996 and 1995, certain employees
exercised stock options and purchased a total of 40,302, 42,455 and 737 shares
of Common Stock, respectively, at $3.00 per share.
The Company issued 2,500 shares of Common Stock valued at $7,500 as
consideration for services rendered during each of the years ended
December 31, 1996, 1995.
Prior to July 2, 1996 Common Stock values were based on management's estimates
of the fair value of the Company's Common Stock and prices after July 2, 1996
were based on the fair market value of the Company's stock on The Nasdaq Stock
Market.
Stock Options
On April 25, 1996 the Company's shareholders approved a new stock option plan
(the 1996 Stock Plan) which provides for the granting of options and
restricted stock to certain officers, employees, directors and consultants to
purchase up to 500,000 shares of Common Stock. The 1996 Stock Plan also
provides for the automatic grant of an option for 1,000 shares of the
Company's Common Stock, exercisable for a period of five years, to each non-
employee director, upon the adoption of the 1996 Stock Plan and upon the
election or re-election as a member of the Board of Directors. Such Board of
Directors options will be issued with an exercise price equal to the fair
market value of the Common Stock on the date the option is granted. Under this
plan the Company has issued options to purchase 3,000 and 2,000 shares under the
plan for the years ended December 31, 1997 and 1996, respectively.
The Company's prior incentive stock option plans provided that stock options
to purchase an aggregate of 375,000 shares of Common Stock may be granted to
certain officers and employees. The exercise price could not be less than
100% of the fair market value of the Common Stock on the date the option was
granted. No additional options under the Company's prior plans will be
granted. All options become exercisable either 100% after three years from
date of grant, 100% on date of grant or 100% one year after date of grant.
All of these options expire either five, six or ten years from the date of
grant.
Stock option activity during the years ended December 31, 1997, 1996 and 1995
is summarized below:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
__________________________________________________________________________
1997 1996 1995
_____________________ ______________________ ______________________
Wgtd. Avg. Wgtd. Avg. Wgtd. Ave.
Shares Exer.Price Shares Exer. Price Shares Exer. Price
_______ __________ ________ ___________ ________ ___________
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 337,440 $ 5.15 102,972 $ 3.00 82,406 $ 3 00
Granted 95,870 5.06 278,681 5.61 23,087 3.00
Canceled (6,084) 3.83 (1,758) 3.00 (1,784) 3.00
Exercised (40,302) 3.00 (42,455) 3.00 (737) 3.00
_______ __________ ________ ___________ ________ ___________
Outstanding at
end of year 386,924 $ 5.38 337,440 $ 5.15 102,972 $ 3.00
======= ========== ======== =========== ======== ===========
Options exercisable
at year end 212,079 $ 5.28 178,084 $ 5.01 79,548 $ 3.00
======= ========== ======== =========== ======== ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Wgtd. Avg. Options
Exercise Outstanding Contractual Wgtd. Avg. Exercisable Wgtd. Avg.
Prices at 12/31/97 Life (Yrs.) Exer. Price at 12/31/97 Exer. Price
________ ___________ __________ ___________ ___________ ___________
<C> <C> <C> <C> <C> <C>
$ 3.00 51,654 6.95 $ 3.00 48,779 $ 3.00
3.88 3,000 4.33 3.88 3,000 3.88
4.63 900 5.69 4.63 -- 4.63
5.13 90,470 8.53 5.13 -- 5.13
5.63 900 4.67 5.63 300 5.63
6.00 240,000 4.83 6.00 160,000 6.00
___________ __________ ___________ ___________ ___________
386,924 5.98 $ 5.38 212,079 $ 5.28
=========== ========== =========== =========== ===========
</TABLE>
<PAGE>
The estimated fair value of options granted during 1997, 1996 and 1995 were
$4.00, $4.09 and $1.52, respectively. The Company applies Accounting
Principles Board Opinion No. 25 (APB 25) and related interpretations in
accounting for its stock option plans. Total compensation costs of $71,962
have been recognized for stock option grants during the year ended
December 31, 1996 under the provisions of APB 25. Had compensation cost
for the Company's stock option plans been determined based on the fair value
at the grant dates for awards under those plans consistent with Statement of
Financial Accounting Standards No. 123, the Company's net income and earnings
per share for the years ended December 31, 1997, 1996 and 1995 would have been
reduced to the pro forma amounts as indicated below.
The fair value of options granted under the Company's stock option plans
during 1997 and 1996 was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used: no dividend yield, expected volatility of 71% to 75%, risk-free interest
rates between 5.4% and 7.7% and expected lives between 5 and 10 years.
<TABLE>
<CAPTION>
1997 1996 1995
___________ ___________ ___________
<S> <C> <C> <C>
Net income:
As reported $ 2,158,969 $ 2,383,404 $ 1,793,425
Pro forma 1,821,742 1,747,096 1,761,112
Net income per share - Basic:
As reported $ .44 $ .56 $ .48
Pro forma .37 .41 .49
Net income per share - Diluted:
As reported $ .44 $ .56 $ .48
Pro forma .37 .41 .48
</TABLE>
<PAGE>
Warrants
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Aggregate
Number of Price per Exercise
Shares Share Price
_________ __________ _________
<S> <C> <C> <C>
Balance at December 31, 1995 5,000 $ 3.00 $ 15,000
Issued July 2, 1996 120,000 7.20 864,000
_________ __________ _________
Balance at December 31, 1996 125,000 3.00-7.20 879,000
Exercised August 28, 1997 (5,000) 3.00 (15,000)
_________ __________ _________
Balance at December 31, 1997 120,000 $ 7.20 $ 864,000
========= ========== =========
</TABLE>
In connection with the Company's initial public offering, the Representative
of the Underwriters was granted warrants to purchase up to 120,000 shares of
Common Stock at $7.20 per share, exercisable commencing July 2, 1997 and
expiring July 2, 2001.
Restricted Stock
The Company has entered into a restricted stock compensation plan with an
officer of the Company under which the Company issued 10,000 shares of
restricted Common Stock to the officer over a four year period, provided that
the officer remained an employee of the Company as of the anniversary date
of the plan. Under this plan the last 2,500 shares were issued as of
December 31, 1996. Compensation expense related to these restricted stock
issuances has been recorded in the statements of operations.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was adopted on April 25, 1996 and provides for the issuance of up to 100,000
shares of Common Stock. With certain exceptions, all employees of the Company
who have been employed by the Company for at least six months and who are
employed at least 20 hours per week and at least five months per year,
including officers and directors who are employees, are eligible to
participate in the Stock Purchase Plan. The Stock Purchase Plan consists of
periodic offerings. Each offering under the Stock Purchase Plan will be for
a period determined by a stock purchase committee appointed by the Board of
Directors, but not to exceed 27 months. An employee may elect to have up to a
maximum of 10% deducted from his or her regular salary for the purpose of
purchasing shares under the Stock Purchase Plan. The price at which the
employee's shares are purchased is the lower of (a) 85% of the closing price
of the Common Stock on the day that the offering commences or (b) 85% of the
closing price of the Common Stock on the day that the offering terminates. In
1997 18,943 shares were issued under the Stock Purchase Plan.
4. LEASES
The Company leases office and manufacturing space of 35,410 square feet under
a noncancelable operating lease which expires on July 31, 1998 and contains an
option to renew for up to three additional years. The Company is also
responsible for all taxes, utilities and assessments. Rent expense for all
leases was $84,000, $84,000 and $87,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997, future minimum lease payments due in 1998, excluding
taxes and utilities, were $50,000.
<PAGE>
5. LEASE RECEIVABLES
In 1997, the Company began leasing equipment under sales-type lease agreements.
The lease receivable balances were as follows:
<TABLE>
<CAPTION>
Year Ended
____________________________________ 1997
__________
<S> <C>
Payments to be received under sales-
type leases $ 252,240
Unearned income (41,147)
Current portion (37,328)
__________
Lease receivable-long term $ 173,765
==========
</TABLE>
Minimum future rentals due on lease receivables at December 31, 1997 are
Summarized below:
<TABLE>
<CAPTION>
Year Ending
December 31,
___________
<C>
<S> <C>
1998 $ 50,856
1999 50,856
2000 50,856
2001 50,856
2002 48,816
________
Total $252,240
========
</TABLE>
6. DEFERRED REVENUES
In 1996 the Company entered into an agreement with a customer, who is a
shareholder, to build certain equipment. The Company has shipped $252,635 and
$80,735 of equipment to this customer as of December 31, 1997 and 1996 under
this contract.
The balances remaining under all the agreements at December 31, 1997 and 1996
were $40,037 and $349,728, respectively.
7. MAJOR CUSTOMERS AND EXPORT REVENUES
Revenues to one customer, excluding the related party total revenues, amounted
to $275,000 (3.9%), $1,066,000 (14.4%) and $1,464,000 (17.5%) for the years
ended December 31, 1997, 1996 and 1995, respectively. No other customer
accounted for 10% or more of total revenues for these periods.
The Company's export revenues did not exceed 10% of total revenues for the
years ended December 31, 1997, 1996 and 1995.
8. INCOME TAXES
The Company records income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
For income tax purposes, the Company had net operating loss carryforwards of
approximately $6,800,000 as of December 31, 1997. If not used, these
carryforwards will begin to expire in 2003. Under the Tax Reform Act of 1986,
certain future changes in ownership resulting from the sale or issuance of
stock may limit the amount of net operating loss carryforwards which can be
utilized on an annual basis.
Deferred tax assets and liabilities represent temporary differences between
the basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets are primarily comprised of reserves which have
been deducted for financial statement purposes, but have not been deducted for
income tax purposes and the tax effect of net operating loss carryforwards.
The Company annually estimates the amount of deferred tax assets which it
expects to realize based on historical averages of pretax accounting income
and estimates of future pretax accounting income. The Company has recorded
a valuation allowance to reduce recorded deferred tax assets to the amount
of deferred tax benefit expected to be realized.
Deferred taxes as of December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
___________ ___________
<S> <C> <C>
Current deferred taxes:
Inventory reserves $ 183,000 $ 165,000
Accrued vacation 47,000 39,000
Accrued professional fees 50,100 55,400
Unrealized gain on investments (65,579) (49,158)
Tax net operating loss carryforwards 19,600 318,500
Other 30,300 22,100
___________ ___________
Total $ 264,421 $ 550,842
=========== ===========
<PAGE>
Long-term deferred taxes:
<S> <C> <C>
Tax net operating loss carryforwards $ 2,345,400 $ 2,656,500
Tax credit carryforwards 91,400 76,500
Sales-type leases 21,300 --
Valuation allowance (1,608,100) (2,603,000)
___________ ___________
Total $ 850,000 $ 130,000
=========== ===========
</TABLE>
<PAGE>
A reconciliation of the expected federal income taxes, using the effective
statutory federal rate of 35%, with the provision (benefit) for income taxes
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
__________ ___________ ___________
<S> <C> <C> <C>
Provision for income taxes:
Expected federal expense (benefit) $ 611,400 $ 602,800 $ 635,000
State taxes, net of federal benefit 10,500 7,900 2,000
Change in valuation allowance (994,900) (1,358,000) (587,000)
AMT 27,000 44,500 --
Other (66,100) 41,688 (27,500)
__________ ___________ ___________
Total $ (412,100) $ (661,112) $ 22,500
========== =========== ===========
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996 and
1995 consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
__________ _________ _________
<S> <C> <C> <C>
Current tax provision:
Federal $ 27,400 $ 60,988 $ 16,150
State 10,500 7,900 6,350
Deferred primarily federal (450,000) (730,000) --
__________ _________ _________
Income tax (benefit) expense $ (412,100) $(661,112) $ 22,500
========== ========= =========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company sells products to two of its shareholders and also contracts for
certain products and production services with these shareholders. A summary of
these transactions with affiliates as of and for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
___________ ___________ ___________
<S> <C> <C> <C>
Total revenues $ 4,314,000 $ 4,117,000 $ 3,498,000
Total purchases of production
services 1,000 7,000 44,000
Accounts receivable 360,000 467,000 263,000
Accounts payable -- 1,000 --
</TABLE>
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
During 1995, the Company received a favorable arbitration award from a dispute
with A. B. Dick Company, a former customer. The Company recognized a gain of
$192,000 after expenses of approximately $142,000 in this dispute. This gain
is included in the statements of operations under other income (expense).
The Company is involved in various other legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions will
not have a significant effect on the Company's financial position or results
of operations.
11. 401(k) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") became effective
August 1, 1994. The 401(k) Plan is intended to qualify under Section 401(k)
of the Internal Revenue Code. All employees employed by the Company in the
United States for at least 30 hours per week are eligible to participate in
the 401(k) Plan as of the next calendar quarter following one year after date
of hire by the Company. Each eligible employee may contribute to the 401(k)
Plan, through payroll deductions, up to 15% of his or her salary, subject to
statutory limitations. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company of up to 2% of the
compensation paid by the Company to each employee in the previous calendar
quarter. The Company's contributions are made at the discretion of the Board
of Directors, within the limits of the 401(k) Plan. The Company has made a
contribution of 1% of the compensation of each participating employee each
quarter since the adoption of the 401(k) Plan. The Company's contributions to
the 401(k) Plan were $14,585, $13,411 and $13,352 for the years ended December
31, 1997, 1996 and 1995, respectively.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-25813 of Printware, Inc. on Form S-8 of our report dated January 23, 1998
appearing in this Annual Report on Form 10-K of Printware, Inc. for the year
ended December 31, 1997.
/s/ Deloitte & Touche LLP
________________________
Minneapolis, Minnesota
March 5, 1998
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] Dec-31-1997
[PERIOD-START] Jan-01-1997
[PERIOD-END] Dec-31-1997
[CASH] 348
[SECURITIES] 11868
[RECEIVABLES] 924
[ALLOWANCES] (33)
[INVENTORY] 1942
[CURRENT-ASSETS] 15361
[PP&E] 1253
[DEPRECIATION] 1119
[TOTAL-ASSETS] 16547
[CURRENT-LIABILITIES] 909
[BONDS] 0
[COMMON] 22293
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] (6655)
[TOTAL-LIABILITY-AND-EQUITY] 16547
[SALES] 6986
[TOTAL-REVENUES] 6986
[CGS] 3912
[TOTAL-COSTS] 3912
[OTHER-EXPENSES] 967
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (780)
[INCOME-PRETAX] 1747
[INCOME-TAX] (412)
[INCOME-CONTINUING] 2159
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2159
<EPS-BASIC> .44
[EPS-DILUTED] .44
</TABLE>
