UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
Commission file Number 000-20729
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)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
Common Stock, no Par Value--3,298,679 shares as of
August 14, 2001.
PART I--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
PRINTWARE, INC.
PRINTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying condensed balance sheet as of June 30, 2001 and the
condensed statements of operations and comprehensive income for the three
and six months ended June 30, 2001 and July 1, 2000, and the condensed
statements of cash flows for the six months ended June 30, 2001 and July 1,
2000 are unaudited. In the opinion of management, such unaudited financial
statements include all adjustments, consisting of only normal, recurring
accruals, necessary for a fair presentation thereof. The results of
operations for any interim period are not necessarily indicative of the
results for the year.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivatives and Hedging Activities - an Amendment of SFAS No. 133," effective January 1, 2001. The Standards require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged items are recognized in earnings. The change in a derivative's fair value related to the ineffective portion of a hedge, if any, will be immediately recognized in earnings. Printware has entered into one investment transaction during the second quarter of 2 001 in which a portion of the investment has been deemed to be a derivative financial instrument, not designated as a hedging instrument. Changes in the fair value of the derivative portion of this instrument must be periodically reflected through income (see discussion relating to the Company's investment in Select Comfort Corporation securities in Note 3).
3. SIGNIFICANT INVESTMENT TRANSACTIONS
During 2001, the Company made investments in marketable equity securities, convertible debentures with detachable warrants and an investment fund. In accordance SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments which are classified as available for sale securities and are not deemed to be derivative financial instruments are shown on the balance sheet at market value. The related unrealized gains or losses are reflected as a separate component of shareholders' equity, net of income tax effects. The Company's investments in marketable equity securities and the investment fund have been deemed to be available for sale securities and are reflected on the accompanying balance sheet as a current assets in "other investments". The convertible debentures are reflected in the accompanying balance sheet as non-current assets in "other long-term investments".
On March 1, 2001, the Company made a $2,000,000 investment in the
Whitebox Statistical Arbitrage Fund, LLC (See Note 10), a managed fund that
generates investment performance through statistical arbitrage trading
activities in large, highly liquid marketable equity securities.
On June 6,2001, the Company made a $1,500,000 investment in convertible debentures and detached warrants of Select Comfort Corporation (Nasdaq: SCSS). The convertible debentures are 5-year notes and bear interest at the rate of 8% per annum. They may be converted into Select Comfort Corporation common stock at any time during the 5-year period at $1.00 per share. During the quarter ended June 30, 2001, an unrealized gain of $1,021,200 was recognized as part of other comprehensive income in the statement of operations.
Also in connection with the Company's investment in Select Comfort Corporation convertible debentures, Printware, Inc. acquired detached warrants to purchase 600,000 shares of Select Comfort Corporation common stock at any time during the five year period subsequent to June 5, 2001 for $1.00 per share. The applicable investment agreements provide that Printware may exercise all or any portion of its warrant rights on a cashless exercise basis, if it so elects. Based on the provisions of SFAS No. 133, the Company has accounted for these warrants as derivative financial instruments. Periodic changes in the fair value of these warrants are being recognized as nonoperating income or loss in the statements of operations. The warrants were valued at $143,160 on June 6, 2001 and at $551,640 on June 30, 2001 and are reflected in "available for sale securities." As a result, $408,480 has been reflected in nonoperating income in the Company's Statements of Operations. The increase in fair value is attributed to an increase in the quoted market price of Select Comfort Corporation's common stock.
These investments were purchased for investment purposes only. The
Company has no relationship to Select Comfort Corporation other than that of
an investor.
From time to time, the Company has invested and may invest in other
businesses or companies other than its core business of manufacturing and
marketing computer-to-plate prepress technologies.
10. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2001, the Company issued 3,442
shares of its Common Stock at $1.93 per share, 5,301 shares at $2.02 and
3,658 shares at $1.97 per share in connection with the Company's Employee
Stock Purchase Plan. The Company also repurchased 5,800 shares of Common
Stock in the open market at an average cost of $2.28 per share.
11. Related Party Transactions
Included in other investments on the accompanying balance sheet is the
Company's investment of $2,000,000 in the Whitebox Statistical Arbitrage
Fund, LLC. A director of the Company is Chief Executive Officer of Whitebox
Advisors,LLC, which is a general partner of Whitebox Statistical Arbitrage
Fund, LLC. The investment has been recorded at its estimated fair value,
which approximates cost plus net realized investment income, on June 30, 2001
of $2,059,000. The Company recognized investment income during the second
quarter period of $34,000 relating to this investment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED
JUNE 30, 2001 AND JULY 1, 2000
Total revenues for the second quarter in 2001 were $1,592,000, an increase
of 1% or $11,000 from revenues of $1,581,000 for the second quarter in 2000.
The Company's gross margin was $457,000 in the second quarter 2001 versus
$684,000 in the comparable quarter in 2000. Gross margin as a percentage of
revenue decreased from 43% in the second quarter 2000 to 29% in second quarter
2001. The decreased margin percentage in 2001 was due primarily to last year's
inclusion of a $34,000 favorable manufacturing variance (which favorably
impacted last year's margin percentage by 5%) and to changes in the
Company's equipment sales mix in 2001.
Research and development expenses decreased slightly to $131,000 in the
second quarter of 2001 from $145,000 in the second quarter in 2000 due to the transfer of an engineer to the position of customer service manager.
Selling, general and administrative expenses decreased to $461,000 in the
second quarter of 2001 from $723,000 in the second quarter in 2000. Selling
expenses increased by approximately $38,000 in the second quarter 2001 versus
the second quarter in 2000 due to a larger sales force. General and
administrative expenses decreased by approximately $300,000 over the same
period primarily due to the occurrence last year of costs related to the shareholder proxy fight.
Interest and other income in the second quarter of 2001 was $564,000
compared to $156,000 in the same period of the prior year. This large increase
was the result of recording $408,480 in unrealized appreciation on our investment in Select Comfort Corporation warrants. The unrealized favorable value or the unfavorable value of the Select Comfort Corporation warrants is based on the fair value of such warrants. The fair value of these warrants can fluctuate significantly depending in large part on the quoted market price of the Select Comfort Corporation common stock. There is no assurance that the magnitude of the unrealized favorable value recorded in the second quarter will recur. In fact, depending upon the financial strength and market prices of Select Comfort Corporation common stock, it is possible that much or all of the value of the warrants could be lost.
Net income for the second quarter of 2001 was $266,000, or $.08 per common
share, up significantly from the loss of $17,000 or $.01 per share in 2000 due largely to the recorded unrealized favorable value on our investments.
RESULTS OF OPERATIONS FOR THE 6 MONTHS ENDED JUNE 20, 2001 AND JULY 1, 2000
Total revenues for the first half of 2001 were $3.12 million, an increase
of 10.3% from the same period in 2000. This increase was primarily due to an
increase in supplies sales.
The Company's gross margin as a percentage of revenue in the first half of
2001 was 31%, down from 42% for the same period in 2000. This was due largely
to unusual equipment sales margins in the first half in 2000, combined with
favorable standard cost variances caused by lower manufacturing costs.
Research and development expenses for the first half in 2001 decreased slightly over the same period in 2000 due primarily to increased activity in
cost reduction of the new SC product introduced in 2001 offset by the transfer of engineer to customer service manager.
Selling, general and administrative expenses decreased $189,000 in the
first half in 2001 compared to the same period in 2000. There was a 20%
increase in marketing and sales costs due largely to the addition of sales
personnel in 2001. General and administrative expenses decreased by 41% from
the first half of 2000 primarily due to improved administrative efficiency and
due to nonreoccurrence of shareholder proxy fight costs incurred in 2000.
Interest and other income was $699,000 in the first half in 2001 compared
to $321,000 in the same period of 2000. The increase in 2001 was due largely to recording of the unrealized favorable value of an investment made this year in Select Comfort Corporation warrants.
The Company's income tax expense is calculated based on the estimated annual rate for the entire year.
Net income for the six months 2001 was $300,000 or $.09 per common share,
up from $87,000 or $.03 per common share in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $9.5 million on June 30, 2001, down by $2.0 million from December 31, 2000, largely due to classifying an investment made during second quarter 2001, valued at $2.9 million as of June 30, 2001, as a non current asset. Cash, cash equivalents and investments, including available for sale securities of $2.4 million, increased by approximately $3.4 million at June 30, 2001 compared to December 31, 2000 primarily due to collection of proceeds from the sale of the Company's lease portfolio and due to unrealized appreciation of the Company's investment portfolio.
The Company had no long-term debt and management believes its working
capital is adequate to meet its current needs.
PART II--OTHER INFORMATION
Item #6 Exhibits and Reports on Form 8-K
a. Exhibits 10.4 Convertible Debt, Warrant and Pledge Agreements By
And Between Select Comfort Corporation and Printware, Inc., et al
Exhibit 11. Statement re: Computation of per share earnings
b. Reports on Form 8-K
On June 14, 2001 the Company filed 8-K report regarding its
Common Stock Repurchase Plan.
PRINTWARE, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINTWARE, INC.
Registrant
Date: August 14, 2001 /s/ MARK G. EISENSCHENK
________________________
Mark G. Eisenschenk
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Date: August 14, 2001 /s/ STANLEY GOLDBERG
________________________
Stanley Goldberg
PRESIDENT
& CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)