<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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____________________to____________________
Commission file Number 0-20729
______________
PRINTWARE, INC.
_______________________________________________________
(Exact name of registrant as specified in its charter.)
Minnesota 41-1522267
____________________________ __________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Eagan Industrial Road, St. Paul, MN 55121
________________________________________ _____
(Address of principal executive offices) (Zip Code)
(651) 456-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
stock, no par value ("Common Stock")
Based upon the $3.156 per share closing sales price of the
registrant's common stock as of February 26, 1999, the aggregate
value of the shares of Common Stock held by nonaffiliates as of
such date was approximately $9,178,443.
Common Stock - 4,834,516 shares outstanding as of March 15, 1999.
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained, herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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<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, 1998.
Item 11. Executive Compensation. Reference is made to the
Registrant's Proxy Statement.
Item 12. Security Ownership of Reference is made to the
Certain Beneficial Registrant's Proxy Statement.
Owners and Management.
Item 13. Certain Relationships Reference is made to the
and Related Transactions. Registrant's Proxy Statement.
</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
- Electronic job archiving
The heart of Printware's Platesetters is a high-resolution laser marker
system, the key technology obtained from The 3M Company ("3M") in 1985. The
system is based on a resonant galvanometer, which management believes has
certain performance advantages over conventional systems which use rotating
multifaceted mirrors. The Company's system uses a proprietary method where a
mirror mounted on a resonating torsion bar, in conjunction with
microprocessor-controlled electronics, precisely controls the laser raster
scan. The method was first used in Printware's laser printers, then later in
its Platesetters.
Printware was organized in 1985 and began deliveries in 1987 of its first
product, a high resolution laser based printer. In 1988 Printware began
selling its first Platesetter, based on electrostatic technology. Printware
subsequently expanded its product line with filmsetters and new laser
printer models. In 1993, however, Printware began to focus exclusively on
Computer-to-Plate products and phased out its other product lines, resulting
in a significant improvement in profitability. In 1995, Printware completed
development of and began to deliver photographic (silver-halide) Platesetters
to serve a broader range of users.
The Company added a line of lower-cost silver-halide models in 1997 under the
Printware "PlateStream" brand name.
<PAGE>
CUSTOMERS
Sales to Deluxe Corporation ("Deluxe") accounted for $1.19 million, $4.31
million and $4.12 million of revenue in 1998, 1997 and 1996, respectively,
which constituted 17.0%, 61.8% and 55.5% of 1998, 1997 and 1996 revenue,
respectively. Sales to Mitsubishi, principally the SDP-1800 silver-halide
platesetter, accounted for $601,000, $275,000 and $1.07 million of revenue
in 1998, 1997 and 1996, respectively, which constituted 8.6%, 3.9% and 14.4%
of 1998, 1997 and 1996 revenue, respectively. In 1998 the Company lost
Deluxe as a supply customer and completed its known production requirements
for Mitsubishi.
REVENUES FROM DELUXE. The Company has sold both equipment and consumable
supplies to Deluxe. In 1994 the Company entered into a purchase agreement
with Deluxe under which Deluxe agreed to purchase from the Company a
minimum annual amount of plate material for each of the years 1995, 1996 and
1997 at a fixed price. At the expiration of that agreement at the end of 1997,
there was no renewal of the agreement, therefore this supplies business was
eliminated.
During the period from 1991 to 1995, the Company sold to Deluxe various
Platesetters, film imagers and other equipment under certain development and
purchase order contracts. The Company has no current commitments from Deluxe
under equipment contracts.
PRODUCTS
The Company's principal products are silver-halide Platesetters.
The Company also sells service, training, and supplies for its older models
of Platesetters.
SILVER-HALIDE PLATESETTERS. These products use versatile commodity
silver-halide plate material for a wide range of printing applications. They
consist of two integrated modules: an imager module, where a laser "writes"
the digital image on the plate; and a processor module, where the plate is
developed and fixed, similar to conventional photography. The units are
loaded with silver-halide plate material on large rolls. Imaged plates
exit the machine into a tray already dried, cut to size and press-ready.
These units are also available with integrated punches compatible with press
registration systems. Printware sells these products under its PlateStream
brand name. Current PlateStream models include a model for 13" wide plates,
and the PlateStream 46 for 18" plates. End-user pricing is $50,000 to $80,000
depending on the model and configuration. A model for 18" wide plates is
also sold by Mitsubishi under its brand name as the SDP-1800.
<PAGE>
The Company's Platesetters include raster image processors (RIPS). RIPs convert
computer-based information into digital images which are used by Platesetters
to produce printing plates. The Company's RIPs are fully compatible with the
industry-standard PostScript language and most popular networks. The Company
has several RIP models, sold under its "ZAPrip" brand name, using interpreter
software from leading developers.
SUPPLIES. Printware sells supplies for its installed base of older
electrostatic Platesetters, consisting primarily of digital electrostatic plate
material. This type of Platesetter is no longer a significant part of the
Company's product mix. Most of the supplies are sold in the check-printing
industry. Weakness in this industry has had a negative impact on supplies
sales and is likely to continue to adversely affect revenues.
MARKETING
From 1996 to 1997, the Company relied exclusively on Mitsubishi to market
the Company's silver-halide Platesetters. In 1997 and 1998, in order to
provide lower-priced products to reach a broader market, the Company
introduced its PlateStream line of silver-halide Platesetters. The
products are sold through graphic arts dealers and Printware's own sales force.
In late 1998, Printware established a field-sales force with offices in the
New York, Los Angeles and Dallas metropolitan areas.
LEASING
The Company has long known that many prospects for its $50,000 to $80,000
Platesetters are more concerned with monthly payment affordability than simply
with price. Therefore with the 1997 introduction of the PlateStream products,
the Company began to offer leases that it finances through leveraging
of its strong balance sheet. The Company believes these leases have been
instrumental in the successful growth of the PlateStream line, and
plans to continue its leasing activities for the foreseeable future.
RESEARCH AND DEVELOPMENT
In 1998 the Company's research and development focused primarily on
improvements to its Platesetter PlateStream line. Projects included a
"MicroPlate" PlateStream, Dual Cassette PlateStream, new punch configurations
and software programs to enhance workflow efficiency.
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COMPETITION
The growth in the Computer-to-Plate business has attracted considerable
competition. The Company's competitors and potential competitors are
established companies that have significantly greater financial, technical and
marketing resources than the Company. There can be no assurance that the
Company's competitors will not succeed in developing and marketing products
which perform better and are less expensive than the Company's products, or
that will render the Company's products and technology obsolete or
noncompetitive in other ways. The Company divides its competition into four
categories: other Platesetters; film imagers; digital printers and presses;
and supplies competitors.
OTHER PLATESETTERS. The Company faces significant competition from other
silver-halide Platesetters. Management believes the most significant of these
competitors include A. B. Dick Company and Purup-Eskofot A/S. The Company
believes that its advantages over those products include higher speed, less
plate waste, and high-speed integrated punching. There are many competitive
Platesetters that use metal plates. Most of the competitive devices are
relatively expensive and use expensive supplies. Most competitive metal
Platesetters are geared towards larger format high-end color printing.
Printware's products are focused at mainstream, smaller presses and mid-range
quality, which management believes currently accounts for most printing.
<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.
DIGITAL PRINTERS AND PRESSES. This category includes high-speed and
direct digital presses and xerographic/laser printers. Xerographic devices
can replace offset printing in certain applications, but are currently
limited to lower-quality applications. These devices also have a higher
variable cost per impression than Computer-to-Plate technology. Companies
in this area include Check Technology Corporation, Xerox Corporation, and
Indigo N.V. Direct digital presses integrate platemaking with presses.
Companies in this area include Presstek, Inc., and Xeikon N.V. These
devices are expensive, and tie up the press while the plate is imaged.
Management believes that competitors in this category are making efforts
to improve the quality and reduce the cost of their systems, and there can
be no assurance that systems marketed by the Company will sustain their
advantage.
SUPPLIES COMPETITION. Printware has competitors which sell plate supplies
for the Company's electrostatic Platesetters. The most significant
competitive material is made by a Japanese paper mill and sold through a U.S.
distributor. Printware has addressed the competitive threat with lower prices
where appropriate and programs to improve the quality and consistency of its
supplies. The Company believes that competitive materials are inferior to
Printware supplies in certain respects, such as image quality and dimensional
stability, but not inferior in other respects. The Company does not see long-
term growth potential in this market, and anticipates continued competitive
pricing pressure in its supplies business.
<PAGE>
PROPRIETARY RIGHTS
PATENTS AND TRADE SECRETS. Printware's policy is to attempt to protect
its technology by seeking patents, maintaining certain trade secrets and
continuing technological innovation. As of December 31, 1998, the Company had
rights to 19 patents, consisting of 13 granted to Printware and six licensed
from 3M. The 3M patents expire between 2002 and 2004; the royalties which the
Company paid to 3M in 1998, 1997, and 1996 for licenses of these patents were
not material to the Company. The Company's own patents begin to expire in
2004. In addition to patents, the Company relies on trade secrets and other
unpatented proprietary technology. Printware seeks to protect its trade
secrets and proprietary know-how with confidentiality agreements with
employees and suppliers. There can be no assurance that the Company's patent
portfolio will provide a competitive advantage in the future, or that the
Company's agreements will adequately protect its trade secrets.
TRADEMARKS. The Company achieved a registered trademark for the
PlateStream mark in 1998 from the U.S. Patent and Trademark office. The
Company had previously had the ZAPrip mark registered. The Company believes
its registered trademarks may be valuable to developing and protecting its
brand name recognition, which in turn may be instrumental in growing its
market share.
PRODUCT SUPPLY AGREEMENTS
The Company has non-exclusive rights to raster image processing software
used in the ZAPrip and to the plate processor module used in its silver-halide
Platesetters. The Company has the exclusive right to sell the proprietary
plate materials made by its suppliers. All of the product supply agreements
to which the Company is a party can be canceled by either party under certain
circumstances. Such cancellation would seriously jeopardize the Company's
ability to provide products that are critical to the Company's revenues.
SUPPLIERS
The Company has a number of single source suppliers for materials that are
critical to production of its products. These include the suppliers of the
Company's electrostatic paper plate material, electrostatic metal plate
material, electrostatic liquid toner and certain key components used in
Platesetters, and/or ZAPrip raster image processors. Any significant
interruption of supply from any of these vendors would have a material adverse
effect on the Company.
<PAGE>
ITEM 2. PROPERTIES
Printware's manufacturing operation consists of the assembly, integration,
testing and quality audits of equipment. The Company purchases all of its
supplies and many of the hardware components it uses from third-party vendors,
some of which are single-source vendors. Printware's principal manufacturing
areas include laser markers, transport mechanisms, electronics/RIPs and final
assembly/test. Printware makes extensive use of computer-aided design and
transmits most of its fabricated part drawings to its suppliers
electronically. The Company believes that this use of technology shortens
turnaround time and improves quality.
Printware's offices and manufacturing facility are located at 1270 Eagan
Industrial Road, St. Paul, Minnesota. The Company occupies 35,410 square feet
pursuant to a lease which expires July 31, 2005 with an option to cancel on
July 31, 2003. The lease was amended on February 6, 1998. Management
believes that this facility will be adequate for Printware's needs until the
expiration of the lease. Monthly rent expense is currently $13,131, based on
the February 6, 1998 amendment plus a pro-rata share of real estate taxes and
common area maintenance.
EMPLOYEES
As of December 31, 1998, Printware had 54 employees, including 48 full-
time employees and 6 part-time or contract employees. Of the 48 full-time
employees, 19 were in manufacturing, 12 were in marketing, sales and customer
service, 10 were in research and development and 7 were in general and
administrative functions. Management considers the future success of the
Company to be dependent in part upon its continued ability to maintain a
highly-skilled workforce and to attract, motivate and retain qualified
employees. No Printware employees are covered by collective bargaining
agreements and the Company considers its relationship with its employees
to be good.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions will
not have a significant effect on the Company's financial position or its
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders during the fourth quarter of
1998.
<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
1998 high of $4.00 and low of $3.06; second quarter 1998 high of $4.13 and low
of $2.75; third quarter 1998 high of $3.25 and low of $2.69; fourth quarter
high of $3.00 and low of $2.81; first quarter 1997 high of $4.50 and low of
$3.875; second quarter 1997 high of $4.25 and a low of $3.125; third quarter
1997 high of $5.00 and low of $3.25; fourth quarter 1997 high of $4.92 and low
of $3.25; third quarter 1996 high of $6.63 and low of $4.88; fourth quarter
1996 high of $5.00 and low of $4.50.
As of December 31, 1998 the Company had approximately 1400 shareholders
of record and beneficial shareholders.
The Company has not paid and does not presently intend to pay any
dividends on its Common Stock.
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<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,
____________________________________________________________
1998 1997 1996 1995 1994
__________ __________ __________ __________ ___________
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues from nonaffiliates $5,805,476 $2,672,051 $3,299,499 $4,889,761 $ 3,775,958
Revenues from affiliates 1,191,145 4,314,111 4,116,536 3,498,387 2,850,967
__________ __________ __________ __________ ___________
Total revenues 6,996,621 6,986,162 7,416,035 8,388,148 6,626,925
Cost of revenues 4,133,932 3,912,367 4,350,696 5,003,956 4,102,401
__________ __________ __________ __________ ___________
Gross Profit 2,862,689 3,073,795 3,065,339 3,384,192 2,524,524
Research and development
expenses 713,169 865,392 789,824 757,131 956,807
Selling, general and
administrative expenses 1,582,057 1,241,823 982,250 1,072,878 945,533
__________ __________ __________ __________ ___________
Income from operations 567,463 966,580 1,293,265 1,554,183 622,184
Other income, net 802,467 780,289 429,027 261,742 22,918
__________ __________ __________ __________ ___________
Income before income taxes
and extraordinary item 1,369,930 1,746,869 1,722,292 1,815,925 645,102
Income tax (benefit) expense (564,141) (412,100) (661,112) 22,500 2,000
__________ __________ __________ __________ ___________
Income before extra-
ordinary item 1,934,071 2,158,969 2,383,404 1,793,425 643,102
Extraordinary income -- -- -- -- 140,927
__________ __________ __________ __________ ___________
Net income (1) $1,934,071 $2,158,969 $2,383,404 $1,793,425 $ 784,029
========== ========== ========== ========== ===========
Net income per common share:
Basic $ .39 $ .44 $ .56 $ .48 $ .21
========== ========== ========== ========== ===========
Diluted $ .39 $ .44 $ .56 $ .49 $ .21
========== ========== ========== ========== ===========
Weighted average common shares
outstanding - Basic 4,913,213 4,875,054 4,226,504 3,626,437 3,618,040
========== ========== ========== ========== ===========
Weighted average common shares
outstanding (2) - Diluted 4,917,818 4,889,195 4,237,629 3,699,814 3,680,934
========== ========== ========== ========== ===========
December 31,
____________________________________________________________
1998 1997 1996 1995 1994
__________ __________ __________ ___________ ___________
<C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 653,696 $ 347,819 $ 231,708 $2,568,852 $ 860,668
Current assets 15,809,547 15,360,571 14,304,514 5,087,328 3,255,959
Working capital 14,709,673 14,451,317 12,979,851 4,151,595 2,292,562
Total assets 18,515,318 16,547,379 14,574,989 5,252,401 3,476,928
Shareholders' equity 17,415,444 15,638,125 13,250,326 4,316,668 2,513,531
<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>
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ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE 3 YEARS ENDED
DECEMBER 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
This discussion summarizes significant factors that affected the operating
results and financial condition of Printware, Inc. for the three years ended
December 31, 1998.
Statements made in this report concerning the Company's or management's
intentions, expectations or predictions about future results or events are
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995. Such statements are necessarily subject to risks and
uncertainties that could cause actual results to vary from stated expectations,
and such variations could be material and adverse.
Overall Summary
In early 1998, the Company began to experience a rapid transition in the
mix of its products being sold. To help clarify the transition, the Company
defined "Supplies" as plate material, toner, and other various chemicals used
in its original line of model 1440 Platesetters. "Equipment" was defined as
all products and services except Supplies.
Equipment revenues in 1998, led by the PlateStream line of platesetters,
increased 91% over 1997 more than offsetting a 59% decrease in Supplies sales.
Supplies sales dropped in early 1998 due to loss of business from Deluxe
Corporation, the Company's affiliate. As a result, affiliate revenues
dropped to 17% in 1998 from 62% in 1997 and 56% in 1996.
Net income in 1998 was $1.93 million including a net income tax benefit of
$564,000, compared to $2.16 million including a net income tax benefit of
$412,000 in 1997. Earnings per share were $.39 in 1998, compared to $.44
in 1997
Results of Operations
The table shown below summarizes the percentage of revenues for various
items in the Company's statements of operations for the periods indicated.
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<TABLE>
<CAPTION>
Years Ended December 31,
_____________________________________
1998 1997 1996
_______ _______ _______
<S> <C> <C> <C>
Equipment revenues 75.0% 39.4% 36.3%
Supplies revenues 25.0 60.6 63.7
_______ _______ _______
Total revenues 100.0 100.0 100.0
Cost of revenues 59.1 56.0 58.7
_______ _______ _______
Gross margin 40.9 44.0 41.3
Research and development 10.2 12.4 10.7
Selling, general and administrative 22.6 17.8 13.2
_______ _______ _______
Income from operations 8.1 13.8 17.4
Other income, net 11.5 11.2 5.8
_______ _______ _______
Income before income taxes 19.6 25.0 23.2
Income taxes (benefit) (8.0) (5.9) (8.9)
_______ _______ _______
Net income 27.6% 30.9% 32.1%
======= ======= =======
</TABLE>
Revenues--Total 1998 revenues were flat at $7.00 million compared to
$6.99 million in 1997, after a decrease of 6% from $7.42 million in 1996.
The flat 1998 masks the strong 91% increase in Equipment sales to total
75% of revenues, up from 39% in 1997 and 36% in 1996. Sales of the
private-label Mitsubishi platesetter were 6% of revenues in 1998 compared
to 4% in 1997 and 10% in 1996. Supplies revenues in 1998 were down 59%
compared to 1997, which in turn were down 10% over 1996. Supplies revenues
declined to 25% of 1998 revenues compared to 61% in 1997 and 64% in 1996.
Gross margin--Gross margin was 41% in 1998 compared to 44% in 1997 and
41% in 1996. The costs of doubling PlateStream production capacity,
introducing the PlateStream MicroPlate and Dual-Cassette PlateStream models
and new punch options, shifting towards increased lower-margin distributor
and Mitsubishi platesetter sales, and higher occupancy costs in the second
half of the year all contributed to the lower gross margin.
Research and development (R&D)--R&D expenses in 1998 decreased $152,000
or 18% from 1997, which in turn showed an increase of $76,000 or 9% compared
to 1996. The decreased expenses in 1998 were due to a reduced design
activity compared to 1997 with the completion of the design of key
PlateStream models.
<PAGE>
Selling, general and administrative (SG&A)--SG&A expenses in 1998
increased $340,000 or 27% over 1997 after an increase of $260,000 or 26%
over 1996. The majority of the increases were due to investment spending on
PlateStream marketing and sales activities. Selling expenses in 1998
increased $241,000 over 1997 following a $273,000 increase over 1996.
Other expenses that increased in 1998 were occupancy costs and those
related to facility improvements.
Other income--Other income in 1998 was interest of $802,000
compared to $780,000 in 1997 and $429,000 in 1996. The increase in 1998
was in the face of lower interest rates and the financing of $1.38 million
of additional PlateStream leases. Interest from these leases is classified
as operating income. The 1997 increase was mostly due to a full year's
interest earned on the proceeds of the mid-1996 initial public offering.
Income tax benefit--The Company recorded income tax benefits of
$590,000, $450,000, and $730,000 in the fourth quarters of 1998, 1997,
and 1996. The tax benefits were due to reductions of the valuation
allowance of deferred tax assets relating to net operating loss carryforwards.
These tax benefits were caused by the combination of the Company's continued
profitability since 1994 and its net operating losses incurred before 1994.
In 1998 the Company recognized a net tax benefit of $564,000, compared to
net tax benefits of $412,000 in 1997 and $661,000 in 1996.
Net income--Net income was $1.93 million compared to $2.16 million in
1997 and $2.38 million in 1996. The decrease in 1998 was mostly due to
lower gross margin and to increased investment spending in marketing and
sales to enable the continued growth of PlateStream sales in 1998, 1999,
and beyond.
Financial Condition
Liquidity--Cash provided by operating activities was $1.10 million in
1998, compared to $1.44 million in 1997 and $1.71 million in 1996. Working
capital was $14.7 million at December 31, 1998 compared to $14.5 million and
$13.0 million on that date in 1997 and 1996. The Company increased its
long-term investment in PlateStream leases by $1.38 million in 1998.
Capital Resources--The Company had no long-term debt or lines of credit
as of December 31, 1998 as it believes its working capital is adequate for its
current needs.
Impact of Inflation--To date, inflation has not had a material effect on
the Company's operations.
Outlook--The Company foresees a further revenue shift in 1999 from Supplies
to Equipment. Success of PlateStream sales is seen as central to the Company's
future revenues and profitability. The growing installed base of PlateStream
line will also generate growing after-market service revenues. The Company
plans over the next several years to continue to significantly increase its
investment spending to expand PlateStream distribution, and to add new products
using incremental innovation. The Company will also continue helping
PlateStream sales growth by offering leases at below-market rates by leveraging
the Company's strong balance sheet. The resulting sales-type leases will be
recognized as revenue as if purchases had occurred, with the interest received
over the multi-year leases recognized as operating revenues.
<PAGE>
Year 2000("Y2K")
The Year 2000 problem is due to the past software practice of coding
years using only two digits. This is predicted to cause many computer-related
malfunctions because year "00" will be taken to mean year 1900 rather than 2000.
In 1998, the Company began to investigate Y2K compliance in areas of its
Platesetter products, business computer systems (Information Technology or
"IT"), production equipment, vendor readiness, non-IT systems, and contingency
plans.
The Company's Y2K readiness status is: current platesetter products are
Y2K compliant, though some RIPs produced from 1993 through 1996 may be non-
compliant; the central IT software system was certified Y2K compliant by a
third party; equipment used in production does not use dates to control
operations; compliance/impact assessments of the voice mail, PBX, security,
and alarm non-IT systems is in progress; statements of compliance were
received from the RIP software vendors. To complete readiness and remediation
by mid-1999, the Company plans to: assess and remedy compliance with personal
productivity PCs and their applications; complete assessment of the non-IT
systems; complete assessment of ancillary software packages sold by the
Company; send compliance questionnaires to other significant vendors and assess
results.
The Company has spent approximately $15,000 to date on its Y2K related
activities, and estimates $50,000 to be adequate for its related 1999
activities. The Company does not anticipate purchasing Y2K liability
insurance. Because of the current state of Y2K readiness and the date
insensitivity of its products, the Company believes the most likely
worst-case scenario to be short term delays in receiving production
inventory.
The Company anticipates developing a contingency plan by mid-1999, based on
its knowledge at that time. The Company's most-likely contingency plan is
projected to primarily be the ordering of extra production inventory to be
received near year-end thereby averting key vendor or transport interruptions
going into 2000.
Although the Company does not at this time expect a significant impact on
its financial position, results of operations, and cash flows, our internal
Y2K review has not been completed and there can be no assurance that the
systems of other companies or the systems of the Company will not have a
corresponding adverse effect on the Company.
Financial Statements
The accompanying financial statements and related information are the
responsibility of management. They have been prepared in conformity with
generally accepted accounting principles and include amounts that are based
on our best estimates and judgments. The financial information contained
elsewhere in this report is consistent with that in the financial statements.
The Company maintains internal accounting control systems that are
adequate to provide reasonable assurance that the assets are safeguarded from
loss or unauthorized use. These systems produce records adequate for
preparation of financial information.
<PAGE>
The audit committee has reviewed all financial data included in this
report. The audit committee is composed entirely of outside directors and
meets periodically with management and with the independent auditors on
financial reporting matters.
The role of the independent auditors is to render an independent,
professional opinion on management's financial statements as required by
generally accepted auditing standards.
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
_______ _______ _______ _______
<S> <C> <C> <C> <C>
1998
Revenue $ 1,675 $ 1,721 $ 1,767 $ 1,834
Cost of Revenues 925 975 1,066 1,169
_______ _______ _______ _______
Gross Profit 750 746 701 665
Operating Income 166 168 153 80
_______ _______ _______ _______
Net Income $ 366 $ 389 $ 347 $ 832
======= ======= ======= =======
Per Share-Basic $ .07 $ .08 $ .07 $ .17
======= ======= ======= =======
Average Shares
Outstanding 4,915 4,922 4,922 4,886
======= ======= ======= =======
1997
Revenue $ 1,847 $ 1,925 $ 1,623 $ 1,591
Cost of Revenues 1,041 1,054 892 925
_______ _______ _______ _______
Gross Profit 806 871 731 666
Operating Income 265 299 194 209
_______ _______ _______ _______
Net Income $ 460 $ 495 $ 388 $ 816
======= ======= ======= =======
Per Share-Basic $ .09 $ .10 $ .08 $ .17
======= ======= ======= =======
Average Shares
Outstanding 4,852 4,853 4,889 4,908
======= ======= ======= =======
(1) During the fourth quarter 1998 and 1997, the Company recorded an
income tax benefit of $590,000 and $450,000, respectively, from the
reduction of the deferred tax asset valuation allowance.
(2) Earnings per share amounts presented for 1998 and 1997 have been
restated for the adoption of SFAS 128.
</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, 1998 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to
the section following "Compensation Committee Report on Executive
Compensation" contained in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership Of Certain Beneficial Owners and
Management" contained in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to
the section entitled "Meetings and Compensation of Directors" contained in the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter ended December 31, 1998.
The following exhibits are hereby incorporated into this Annual Report on
Form 10-K by reference to exhibits with the same exhibit number filed with the
Company's Registration Statement on Form S-1 (Commission file No. 333-03629),
as amended, which became effective on July 2, 1996 ("Registration Statement"):
Exhibits
Exhibit 23. Independent Auditors' Consent
Exhibit 27. Financial Data Schedule
<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 16, 1999 /s/ DANIEL A. BAKER
________________________
Daniel A. Baker
PRESIDENT
& CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant on
the dates in the capacities indicated.
<TABLE>
<CAPTION>
Name Title Dates
_____________________ _______________ ______________
<S> <C> <C> <C>
/s/ Daniel A. Baker President & Chief March 16, 1999
- -------------------------- Executive Officer
Daniel A. Baker (Principal Executive Officer) ______________
/s/ Thomas W. Petschauer Executive Vice President March 16, 1999
- -------------------------- & Chief Financial Officer
Thomas W. Petschauer (Principal Financial Officer) ______________
/s/ Allen L. Taylor Director of the Board March 16, 1999
- -------------------------- ______________
Allen L. Taylor
/s/ Michael C. Berg Director of the Board March 16, 1999
- -------------------------- ______________
Michael C. Berg
/s/ Victor H. Weiss Director of the Board March 16, 1999
- -------------------------- ______________
Victor H. Weiss
/s/ Brian D. Shiffman Secretary March 16, 1999
- -------------------------- ______________
Brian D. Shiffman
/s/ Cordell E. Lomen Controller March 16, 1999
- -------------------------- ______________
Cordell E. Lomen
</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, 1998 and 1997 and the related statements of
operations and comprehensive income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Printware, Inc. at December 31, 1998 and
1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
________________________
Minneapolis, Minnesota
January 22, 1999
<PAGE>
<TABLE>
PRINTWARE, INC.
BALANCE SHEETS
DECEMBER 31, 1998 and 1997
<CAPTION>
December 31, December 31,
1998 1997
ASSETS ____________ ___________
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 653,696 $ 347,819
Investments 11,529,160 11,867,661
Receivables from nonaffiliates 1,201,788 564,568
Receivables from affiliates -- 359,619
Inventories 2,162,019 1,941,634
Prepaid expenses 19,322 14,849
Deferred income taxes 243,562 264,421
___________ ___________
Total current assets 15,809,547 15,360,571
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 217,000 134,965
INTANGIBLE ASSETS, net of accumulated
amortization 24,919 28,078
LEASE RECEIVEABLES--LONG TERM 1,002,852 173,765
DEFERRED INCOME TAXES 1,461,000 850,000
___________ ___________
TOTAL ASSETS $18,515,318 $16,547,379
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 512,251 $ 457,200
Accrued expenses 516,068 412,017
Deferred revenues 71,555 40,037
___________ ___________
Total current liabilities 1,099,874 909,254
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, no specified par value;
1,000,000 shares authorized;
none issued and outstanding -- --
Common Stock, no par value, authorized
15,000,000 shares: issued and outstanding
4,834,516 and 4,914,939 shares at
December 31, 1998, and 1997, respectively 22,001,144 22,174,940
Accumulated deficit (4,721,026) (6,655,097)
Unearned compensation on stock options (410) (3,507)
Accumulated other comprehensive income 135,736 121,789
___________ ___________
Total shareholders' equity 17,415,444 15,638,125
___________ ___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,515,318 $16,547,379
=========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
Years Ended December 31
____________________________________
1998 1997 1996
__________ __________ __________
<S> <C> <C> <C>
REVENUES FROM NONAFFILIATES $5,805,476 2,672,051 $3,299,499
REVENUES FROM AFFILIATES 1,191,145 4,314,111 4,116,536
__________ __________ __________
TOTAL REVENUES 6,996,621 6,986,162 7,416,035
COST OF REVENUES 4,133,932 3,912,367 4,350,696
__________ __________ __________
GROSS MARGIN 2,862,689 3,073,795 3,065,339
OPERATING EXPENSES:
Research and development 713,169 865,392 789,824
Selling, general and administrative 1,582,057 1,241,823 982,250
__________ __________ __________
Total 2,295,226 2,107,215 1,772,074
__________ __________ __________
INCOME FROM OPERATIONS 567,463 966,580 1,293,265
OTHER INCOME (EXPENSE):
Interest expense -- -- (236)
Interest and other income 802,467 780,289 429,263
__________ __________ __________
INCOME BEFORE INCOME TAXES 1,369,930 1,746,869 1,722,292
INCOME TAX BENEFIT (564,141) (412,100) (661,112)
__________ __________ __________
NET INCOME $1,934,071 $2,158,969 $2,383,404
========== ========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
BASIC AND DILUTED $ .39 $ .44 $ .56
========== ========== ==========
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 21,458 $ 46,911 $ 140,451
Less reclassification adjustment for
gains included in net income -- -- --
__________ __________ __________
OTHER COMPREHENSIVE INCOME, BEFORE TAX 21,458 46,911 140,451
INCOME TAX EXPENSE RELATED TO ITEMS
OF OTHER COMPREHENSIVE INCOME (7,511) (16,415) (49,158)
__________ __________ __________
OTHER COMPREHENSIVE INCOME, NET OF TAX $ 13,947 $ 30,496 $ 91,293
========== ========== ==========
COMPREHENSIVE INCOME $1,948,018 $2,189,465 $2,474,697
========== ========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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 12/31/95 $3,627,013 $15,514,138 ($11,197,470) -- --
Shares issued in public
offering (net of issuance
cost of $822,447) 1,200,000 6,377,553 -- -- --
Shares issued pursuant to
exercise of stock options 42,455 127,365 -- -- --
Shares redeemed and
retired (21,274) (113,922) -- -- --
Shares issued for
services performed for
the Company 2,500 7,500 -- -- --
Compensation on issuance
of stock options -- 71,962 -- $(71,962) --
Stock option compensation
earned 60,465
Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- $91,293
Net income -- -- 2,383,404 -- --
__________ ___________ ____________ ____________ ______________
BALANCE AT 12/31/96 4,850,694 21,984,596 (8,814,066) (11,497) 91,293
Shares issued pursuant
to employee stock
purchase plan 18,943 51,757 -- -- --
Shares issued pursuant
to exercise of
stock options 40,302 123,587 -- -- --
Shares issued pursuant
to exercise of warrants 5,000 15,000 -- -- --
Stock option compensation
earned -- -- -- 7,990 --
Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- 30,496
Net income -- -- 2,158,969 -- --
__________ ___________ ___________ ____________ _____________
BALANCE AT 12/31/97 4,914,939 22,174,940 (6,655,097) (3,507) 121,789
Shares issued pursuant
to employee stock
purchase plan 29,822 74,255 -- -- --
Shares redeemed and
retired (110,245) (248,051) -- -- --
Stock option
Compensation earned -- -- -- 3,097 --Unrealized gain on
available-for-sale
securities, net of tax -- -- -- -- 13,947
Net income -- -- 1,934,071 -- --
__________ ___________ ___________ ____________ ____________
BALANCE AT 12/31/98 4,834,516 $22,001,144 $(4,721,026) $ (410) $ 135,736
========== =========== ============ ============ ============
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRINTWARE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
Years Ended December 31,
_______________________________________
1998 1997 1996
___________ ___________ ___________
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,934,071 $ 2,158,969 $ 2,383,404
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 61,187 56,913 63,653
Common Stock issued for services -- -- 7,500
Stock option compensation earned 3,097 7,990 60,465
Gain on sale of available-for-sale
securities -- -- (19,502)
Deferred income taxes (590,141) (450,000) (730,000)
Changes in operating assets and
liabilities:
Receivables from nonaffiliates (637,220) 128,779 (182,262)
Receivables from affiliates 359,619 107,417 (204,381)
Inventories (220,385) (178,839) (35,453)
Prepaid expenses (4,473) 25,185 (22,640)
Accounts payable 55,051 (64,286) 84,634
Accrued expenses 104,051 (41,432) (15,659)
Deferred revenues 31,518 (309,691) 319,955
___________ ___________ ___________
Net cash provided by
operating activities 1,096,375 1,441,005 1,709,714
INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (2,115,865) (2,521,355) (12,912,217)
Maturities and sales of available-
for-sale securities 2,468,313 1,259,363 2,513,418
Increase in lease receivables (829,087) (173,765) --
Purchases of property and equipment (140,063) (79,481) (39,055)
___________ ___________ ___________
Net cash used in
investing activities (616,702) (1,515,238) (10,437,854)
FINANCING ACTIVITIES:
Proceeds from issuance of
Common Stock 74,255 190,344 6,504,918
Common Stock redeemed and retired (248,051) -- (113,922)
___________ ___________ ___________
Net cash (used in) provided by
financing activities (173,796) 190,344 6,390,996
___________ ___________ ___________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 305,877 116,111 (2,337,144)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 347,819 231,708 2,568,852
___________ ___________ ___________
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 653,696 $ 347,819 $ 231,708
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for:
Interest $ -- $ -- $ 236
=========== =========== ===========
Income taxes $ 34,100 $ 35,900 $ 75,900
=========== =========== ===========
<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, 1998, 1997 AND
1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Printware, Inc. ("Printware" or the "Company") designs, builds and markets
"computer-to-plate" systems that are used by the offset printing industry to
create printing plates directly from computer data. These systems replace
the traditional process of typesetting, paste-up, camera work and processing
film to produce a printing plate.
Revenue Recognition
Revenue for equipment and supply sales is recognized at the time of shipment
to customers. Revenue from sales-type leases is recognized at the time of
customer acceptance. Revenue from development projects and their related
costs are recognized as the work is performed. Revenue related to
installation, training and support is recognized when the services are
performed. Revenue from development projects, installation, training and
support is less than 10% of total revenues for the years ended December 31,
1998, 1997 and 1996.
Net Income Per Common And Common Equivalent Share
In 1997 the Company adopted Statement of Financial Accounting Standard
No. 128 (SFAS 128), "Earnings per Share." SFAS 128 requires the disclosure
of Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using
income available to common shareholders divided by the weighted average
common shares outstanding during the year. Diluted EPS is similar to Basic
EPS except that the weighted average common shares outstanding is increased
to give effect to all dilutive potential common shares that were outstanding
during the period. The total weighted average number of common and common
equivalent shares outstanding has been adjusted to give effect to the reverse
stock split authorized by the Company's shareholders effective April 25, 1996.
See table below.
<TABLE>
<CAPTION>
1998 1997 1996
___________ ___________ ___________
<S> <C> <C> <C>
Income available to common shareholders $ 1,934,071 $ 2,158,969 $ 2,383,404
=========== =========== ===========
Weighted average shares outstanding 4,913,213 4,875,054 4,226,504
=========== =========== ===========
Basic EPS $ .39 $ .44 $ .56
=========== =========== ===========
Weighted average shares outstanding 4,913,213 4,875,054 4,226,504
Dilutive shares issuable from stock
options 4,605 14,141 11,125
__________ ___________ __________
Total shares 4,917,818 4,889,195 4,237,629
========== =========== ==========
Diluted EPS $ .39 $ .44 $ .56
========== =========== ==========
</TABLE>
<PAGE>
Combined options and warrants to purchase 460,470, 452,270 and 421,159 shares
of Common Stock at exercise prices ranging from $3.88 to $7.20 were
outstanding during 1998,1997, and 1996, respectively, but were not included
in the computation of the diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
Cash Equivalents
Cash equivalents consist primarily of investments in commercial paper and
certificates of deposit, which have original maturities of three months or
less.
Investments
The Company classifies and accounts for debt and equity securities in
accordance with (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company's portfolio is classified as available
for sale; thus, securities are recorded at fair market value and any
associated unrealized gain or loss, net of tax, is included as a separate
component of shareholders' equity, "Net unrealized gain on available-for-sale
securities." Gains or losses on securities are computed based on the cost
of specific securities sold. A summary of amortized costs and market
values on available-for-sale securities as of December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Description Cost Gain Loss Value
_____________________ ___________ __________ __________ ___________
<S> <C> <C> <C> <C>
Corporate Bonds $10,145,121 $ 185,170 $ (6,509) $10,323,782
Municipal & Agency Bonds 1,175,214 30,164 -- 1,205,378
___________ _________ __________ ___________
Totals $11,320,335 $ 215,334 $ (6,509) $11,529,160
=========== ========= ========== ===========
1997
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Description Cost Gain Loss Value
_____________________ ___________ __________ __________ ___________
<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
=========== ========= ========== ===========
</TABLE>
<PAGE>
Maturities of available-for-sale securities at December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
Fair Market Fair Market
Description Value Value
_____________________ ___________ ___________
<S> <C> <C>
Less Than 1 Year $ 2,018,500 $ 2,451,075
From 1 to 5 Years 9,510,660 9,416,586
___________ ___________
Total $11,529,160 $11,867,661
=========== ===========
</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.
In 1997 the Company introduced a new lease-sale program whereby credit-
worthy customers were allowed to purchase platesetter equipment for $1 at
the end of up to 60 month sales-type leases. This program continued
during 1998.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-
out basis) or market. Inventories are periodically reviewed for obsolescence
or surplus stock. Items considered obsolete or surplus are written off or a
valuation reserve is established to write such inventories down to their net
realizable value. The Company has recorded inventory valuation reserves of
$488,000 and $523,000 at December 31, 1998 and 1997, respectively.
The Company is dependent on several key suppliers for plate material and
raster image processing software. All of the Company's agreements with
these suppliers can be canceled by either party under certain circumstances.
<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 1997 financial statements to
conform to the classifications used in 1998. These reclassifications had no
effect on the operating results previously reported.
Financial Risks and Uncertainties
In accordance with American Institute of Certified Public Accountants
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties," the Company has disclosed in the financial statements certain
financial risks and uncertainties to which it is subject, including
concentration of sales to a limited number of customers, certain suppliers of
raw materials and other key components included in its manufactured equipment
and the use of estimates to review the carrying value of long-lived assets.
The nature of the Company's operations exposes the Company to certain
business risks. The market for "Computer-to-Plate" systems is highly
competitive and subject to rapid technological change and evolving industry
standards that may affect both the operations, operating results and financial
condition of the Company and its customers.
Recently Issued Accounting Standards
In August 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and hedging activities
and is effective for the Company's year ending December 31, 2001. Management
believes that adoption of this statement will not have a material impact on
its financial condition or results of operations.
<PAGE>
2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
December 31,
____________________________________
1998 1997
___________ ___________
<S> <C> <C>
Receivables from Nonaffiliates:
Trade $ 836,692 $ 556,311
Leases--current 407,220 37,328
Employees 2,741 3,794
Allowance for doubtful accounts (44,865) (32,865)
___________ ___________
Total receivables $ 1,201,788 $ 564,568
=========== ===========
Inventories:
Raw materials $ 1,210,327 $ 994,359
Work-in-process 387,357 260,035
Finished goods 564,335 687,240
___________ ___________
Total inventories $ 2,162,019 $ 1,941,634
=========== ===========
Property and Equipment:
Office equipment $ 488,894 $ 430,633
Software 108,107 108,107
Machinery and equipment 310,051 281,494
Leasehold improvements 125,107 74,762
Tooling and spares 337,661 334,761
Motor vehicles 23,708 23,708
__________ ___________
Total property and equipment 1,393,528 1,253,465
Less accumulated depreciation and
amortization (1,176,528) (1,118,500)
__________ ___________
Net property and equipment $ 217,000 $ 134,965
=========== ===========
Intangible Assets:
License rights $ 560,020 $ 560,020
Patents 53,701 53,701
___________ ___________
Total intangible assets 613,721 613,721
Less accumulated amortization (588,802) (585,643)
___________ ___________
Net intangible assets $ 24,919 $ 28,078
=========== ===========
Accrued Expenses:
Accrued payroll and related $ 45,040 $ 44,070
Accrued vacation and benefits 173,740 157,954
Accrued professional services 221,174 143,135
Accrued warranty reserve 45,142 36,650
Accrued income taxes -- 15,000
Accrued other 30,972 15,208
___________ ___________
Total accrued expenses $ 516,068 $ 412,017
=========== ===========
</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, 1998.
On July 2, 1996 the Company issued 1,200,000 shares of Common Stock at a
price of $6.00 per share as part of its initial public offering.
During 1998 no employees exercised their stock options. During the years
ended December 31, 1997 and 1996 certain employees exercised stock options
and purchased a total of 40,302 and 42,455 shares of Common Stock,
respectively, at $3.00 per share.
In November 1998 the Company purchased and retired 110,245 shares of the
Company's stock from a shareholder for $2.25 per share.
The Company issued 2,500 shares of Common Stock valued at $7,500 as
consideration for services rendered during the year ended December 31,
1996.
Prior to July 2, 1996 Common Stock values were based on management's
estimates of the fair value of the Company's Common Stock and prices after
July 2, 1996 were based on the fair market value of the Company's stock on
The Nasdaq Stock Market.
Stock Options
On April 25, 1996 the Company's shareholders approved and on April 16, 1998
approved an amendment to the stock option plan (the 1996 Stock Plan) which
provides for the granting of options and restricted stock to certain officers,
employees, directors and consultants to purchase up to 500,000 shares
(1,000,000 as amended) of Common Stock. The 1996 Stock Plan also provides
for the automatic grant of an option for 1,000 shares (5,000 shares as
amended) of the Company's Common Stock, exercisable for a period of five
years, to each non-employee director, upon the adoption of the 1996 Stock
Plan and upon the election or re-election as a member of the Board of
Directors. Such Board of Directors options will be issued with an exercise
price equal to the fair market value of the Common Stock on the date the
option is granted. Under this plan the Company has issued options to
purchase 20,000, 3,000 and 2,000 shares under the plan for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company's prior incentive stock option plans provided that stock options
to purchase an aggregate of 375,000 shares of Common Stock may be granted to
certain officers and employees. The exercise price could not be less than
100% of the fair market value of the Common Stock on the date the option was
granted. No additional options under the Company's prior plans will be
granted. All options become exercisable either 100% after three years from
date of grant, 100% on date of grant or 100% one year after date of grant.
All of these options expire either five, six or ten years from the date of
grant.
Stock option activity during the years ended December 31, 1998, 1997 and 1996
is summarized below:
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
__________________________________________________________________________
1998 1997 1996
_____________________ ______________________ _____________________
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 386,924 $ 5.38 337,440 $ 5.15 102,972 $ 3 00
Granted 192,550 3.14 95,870 5.06 278,681 5.61
Canceled (13,836) 3.39 (6,084) 3.83 (1,758) 3.00
Exercised 0 0 (40,302) 3.00 (42,455) 3.00
_______ __________ ________ ___________ ________ __________
Outstanding at
end of year 565,638 $ 4.66 386,924 $ 5.38 337,440 $ 5.15
======= ========== ======== =========== ======== ===========
Options exercisable
at year end 314,120 $ 5.23 212,079 $ 5.28 178,084 $ 5.01
======= ========== ======== =========== ======== ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Wgtd. Avg. Options
Exercise Outstanding Contractual Wgtd. Avg. Exercisable Wgtd. Avg.
Prices at 12/31/98 Life (Yrs.) Exer. Price at 12/31/98 Exer. Price
________ ___________ __________ ___________ ___________ ___________
<C> <C> <C> <C> <C> <C>
$ 2.88 23,100 5.53 $ 2.88 10,000 $ 2.88
3.00 49,718 3.72 3.00 48,784 3.00
3.13 149,350 7.05 3.13 200 3.13
3.88 13,000 4.33 3.88 13,000 3.88
5.13 90,470 6.48 5.13 42,136 5.13
6.00 240,000 3.83 6.00 200,000 6.00
___________ __________ ___________ ___________ ___________
565,638 5.24 $ 4.66 314,120 $ 5.23
=========== ========== =========== =========== ===========
</TABLE>
<PAGE>
The estimated fair value of options granted during 1998, 1997 and 1996 were
$3.14, $4.00, and $4.09 respectively. The Company applies Accounting
Principles Board Opinion No. 25 (APB 25) and related interpretations in
accounting for its stock option plans. Total compensation costs of $71,962
have been recognized for stock option grants during the year ended
December 31, 1996 under the provisions of APB 25. Had compensation cost
for the Company's stock option plans been determined based on the fair value
at the grant dates for awards under those plans consistent with Statement of
Financial Accounting Standards No. 123, the Company's net income and earnings
per share for the years ended December 31, 1998, 1997 and 1996 would have been
reduced to the pro forma amounts as indicated below.
The fair value of options granted under the Company's stock option plans
during 1998, 1997 and 1996 were estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: no dividend yield, expected volatility of 22% to 75%, risk-
free interest rates between 4.2% and 7.7% and expected lives between 5 and
10 years.
<TABLE>
<CAPTION>
Summary of pro forma net income, earnings per share and Black-Scholes model
results.
1998 1997 1996
___________ ___________ ___________
<S> <C> <C> <C>
Net income:
As reported $ 1,934,071 $ 2,158,969 $ 2,383,404
Pro forma 1,664,454 1,821,742 1,747,096
Basic and Diluted earnings per share:
As reported $ .39 $ .44 $ .56
Pro forma .34 .37 .41
Black-Scholes results:
Dividend yield None None None
Expected volatility 25.4% 72.0% 75.0%
Risk-free interest rate 5.5% 6.7% 7.7%
Expected life of options 9.0 years 9.5 years 9.7 years
</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.
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, 1996 125,000 $3.00-7.20 $ 879,000
Exercised August 28, 1997 (5,000) 3.00 (15,000)
_________ __________ _________
Balance at December 31, 1997 and 1998 120,000 $ 7.20 $ 864,000
========= ========== =========
</TABLE>
<PAGE>
Restricted Stock
The Company has entered into a restricted stock compensation plan with an
officer of the Company under which the Company issued 10,000 shares of
restricted Common Stock to the officer over a four year period, provided
that the officer remained an employee of the Company as of the anniversary
date of the plan. Under this plan the last 2,500 shares were issued as of
December 31, 1996. Compensation expense related to these restricted stock
issuances has been recorded in the statements of operations.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was adopted on April 25, 1996 and provides for the issuance of up to 100,000
shares of Common Stock. With certain exceptions, all employees of the
Company who have been employed by the Company for at least six months and
who are employed at least 20 hours per week and at least five months per
year, including officers and directors who are employees, are eligible to
participate in the Stock Purchase Plan. The Stock Purchase Plan consists of
periodic offerings. Each offering under the Stock Purchase Plan will be for
a period determined by a stock purchase committee appointed by the Board of
Directors, but not to exceed 27 months. An employee may elect to have up to
a maximum of 10% deducted from his or her regular salary for the purpose of
purchasing shares under the Stock Purchase Plan. The price at which the
employee's shares are purchased is the lower of (a) 85% of the closing price
of the Common Stock on the day that the offering commences or (b) 85% of the
closing price of the Common Stock on the day that the offering terminates.
In 1998 and 1997, 29,822 and 18,943 shares were issued under the Stock
Purchase Plan.
4. LEASES
During 1998 the Company renewed its lease of its office and manufacturing
space totaling 35,410 square feet. The lease expires on July 31, 2005. The
Company is also responsible for all taxes, utilities and assessments. Rent
expense for all leases was $124,000, $84,000 and $84,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, future minimum lease payments excluding taxes, utilities
and assessments are:
<TABLE>
<CAPTION>
Year
_____
<S> <C> <C>
1999 $180,000
2000 180,000
2001 180,000
2002 180,000
2003 180,000
_______
$900,000
========
</TABLE>
<PAGE>
5. LEASE RECEIVABLES
In 1998 the Company increased its efforts in leasing equipment under sales-
type lease agreements. At December 31, 1998 and 1997 the lease receivable
balances were as follows:
<TABLE>
<CAPTION>
1998 1997
___________ ___________
<S> <C> <C>
Payments to be received under sales-
type leases $1,636,612 $ 252,240
Unearned income (226,540) (41,147)
Current portion (407,220) (37,328)
__________ __________
Lease receivable-long term $1,002,852 $ 173,765
========== ==========
</TABLE>
Minimum future rentals due on lease receivables at December 31, 1998 are
Summarized below:
<TABLE>
<CAPTION>
Year Ending
December 31,
___________
<S> <C> <C>
1999 $ 407,220
2000 411,960
2001 376,302
2002 295,320
2003 139,816
2004 5,994
__________
Total $1,636,612
==========
</TABLE>
6. DEFERRED REVENUES
In 1998 and 1997 the Company began leasing its equipment to customers which
causes deferred interest on these leases. The balance of deferred interest
at December 31, 1998 and 1997 was $226,540 and $41,147, respectively, and is
netted against lease receivables.
In 1996 the Company entered into an agreement with a customer, who is a
shareholder, to build certain equipment. The Company shipped $27,960 and
$252,635 of equipment to this customer during the years ended December 31,
1998 and 1997 under this contract. At December 31, 1998 this contract was
complete.
The Company has certain contracts with customers concerning services to be
performed in future Years. At December 31, 1998 the balance was $71,555.
<PAGE>
7. MAJOR CUSTOMERS AND EXPORT REVENUES
Revenues from one nonaffililiate customer amounted to $601,000 (8.6%),
$275,000 (3.9%) and $1,066,000 (14.4%) for the years ended December 31, 1998,
1997 and 1996, respectively. No other nonaffiliate customer accounted for
10% or more of total revenues for these periods.
The Company's export revenues did not exceed 10% of total revenues for the
years ended December 31, 1998, 1997 and 1996.
8. INCOME TAXES
The Company records income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
For income tax purposes, the Company had net operating loss carryforwards of
approximately $5,300,000 as of December 31, 1998. If not used, these
carryforwards will begin to expire in 2003. Under the Tax Reform Act of 1986,
certain future changes in ownership resulting from the sale or issuance of
stock may limit the amount of net operating loss carryforwards which can be
utilized on an annual basis.
Deferred tax assets and liabilities represent temporary differences between
the basis of assets and liabilities for financial reporting purposes and
tax purposes. Deferred tax assets are primarily comprised of reserves which
have been deducted for financial statement purposes, but have not been
deducted for income tax purposes and the tax effect of net operating loss
carryforwards. The Company annually estimates the amount of deferred tax
assets which it expects to realize based on historical averages of pretax
accounting income and estimates of future pretax accounting income. The
Company has recorded a valuation allowance to reduce recorded deferred tax
assets to the amount of deferred tax benefit expected to be realized.
Deferred taxes as of December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
___________ ___________
<S> <C> <C>
Current deferred taxes:
Inventory reserves $ 171,000 $ 183,000
Accrued vacation 55,000 47,000
Accrued professional fees 77,500 50,100
Unrealized gain on investments (73,089) (65,579)
Other 13,151 49,900
___________ ___________
Total $ 243,562 $ 264,421
=========== ===========
<PAGE>
Long-term deferred taxes:
<S> <C> <C>
Tax net operating loss carryforwards $ 1,848,500 $ 2,345,400
Tax credit carryforwards 112,500 91,400
Other -- 21,300
Valuation allowance (500,000) (1,608,100)
___________ ___________
Total $ 1,461,000 $ 850,000
=========== ===========
</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>
1998 1997 1996
__________ ___________ __________
<S> <C> <C> <C>
Provision for income taxes:
Expected federal expense $ 479,500 $ 611,400 $ 602,800
State taxes, net of federal benefit 5,000 10,500 7,900
Change in valuation allowance (1,108,100) (994,900) (1,358,000)
AMT 21,000 27,000 44,500
Other 38,459 (66,100) 41,688
__________ __________ _________
Total $ (564,141) $ (412,100) $ (661,112)
========== =========== ==========
</TABLE>
Income tax expense for the years ended December 31, 1998, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
__________ _________ _________
<S> <C> <C> <C>
Current tax provision:
Federal $ 21,000 $ 27,400 $ 60,988
State 5,000 10,500 7,900
Deferred primarily federal (590,141) (450,000) (730,000)
__________ _________ _________
Income tax benefit $ (564,141) $(412,100) $(661,112)
========== ======== =========
</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, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
___________ ___________ ___________
<S> <C> <C> <C>
Total revenues $1,191,000 $ 4,314,000 $ 4,117,000
Total purchases of production
services 7,000 1,000 7,000
Accounts receivable -- 360,000 467,000
Accounts payable 7,000 -- 1,000
</TABLE>
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that the outcome of such actions will
not have a significant effect on the Company's financial position or results
of operations.
11. 401(k) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") became effective
August 1, 1994. The 401(k) Plan is intended to qualify under Section 401(k)
of the Internal Revenue Code. All employees employed by the Company in the
United States for at least 30 hours per week are eligible to participate in
the 401(k) Plan as of the next calendar quarter following one year after
date of hire by the Company. Each eligible employee may contribute to the
401(k) Plan, through payroll deductions, up to 15% of his or her salary,
subject to statutory limitations. The 401(k) Plan permits, but does not
require, additional contributions to the 401(k) Plan by the Company of up
to 2% of the compensation paid by the Company to each employee in the
previous calendar quarter. The Company's contributions are made at the
discretion of the Board of Directors, within the limits of the 401(k) Plan.
The Company has made a contribution of 1% of the compensation of each
participating employee each quarter since the adoption of the 401(k) Plan
through 1997. On January 1, 1998 the Company increased its contributions
to 1.5% from 1% of the compensation of each participating employee each
quarter. The Company's contributions to the 401(k) Plan were $21,262,
$14,585 and $13,411 for the years ended December 31, 1998, 1997 and 1996,
respectively.
<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 22,
1999 appearing in this Annual Report on Form 10-K of Printware, Inc. for the
year ended December 31, 1998.
/s/ Deloitte & Touche LLP
________________________
Minneapolis, Minnesota
March 5, 1999
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] Dec-31-1998
[PERIOD-START] Jan-01-1998
[PERIOD-END] Dec-31-1998
[CASH] 654
[SECURITIES] 11529
[RECEIVABLES] 1247
[ALLOWANCES] (45)
[INVENTORY] 2162
[CURRENT-ASSETS] 15809
[PP&E] 1394
[DEPRECIATION] 1177
[TOTAL-ASSETS] 18515
[CURRENT-LIABILITIES] 1100
[BONDS] 0
[COMMON] 22001
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] (4721)
[TOTAL-LIABILITY-AND-EQUITY] 18515
[SALES] 6997
[TOTAL-REVENUES] 6997
[CGS] 4134
[TOTAL-COSTS] 2295
[OTHER-EXPENSES] 567
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (802)
[INCOME-PRETAX] 1370
[INCOME-TAX] (564)
[INCOME-CONTINUING] 1934
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1934
<EPS-BASIC> .39
[EPS-DILUTED] .39
</TABLE>
