PRINTWARE, INC.
1270 Eagan Industrial Road
St. Paul, MN 55121
November 2, 2001
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of
1934, we are transmitting herewith the attached Form 10-QSB.
Sincerely,
PRINTWARE, INC.
/s/ CORDELL E. LOMEN
____________________________
Cordell E. Lomen, Controller
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 September 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--3,302,206 shares as of
November 2, 2001.
PART I--FINANCIAL INFORMATION
ITEM 1.--FINANCIAL STATEMENTS
PRINTWARE, INC.
PRINTWARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
1. BASIS OF PRESENTATION
The accompanying condensed balance sheet as of September 30, 2001 and
the condensed statements of operations and comprehensive income for the three
and nine months ended September 30, 2001 and September 30, 2000, and the
condensed statements of cash flows for the nine months ended September 30,
2001 and September 30, 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 one investment, a portion of which is a derivative financial instrument, not d esignated as a hedging instrument. Changes in the fair value of the derivative portion of this instrument are included in other 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 are shown on the balance sheet at market value. The related unrealized gains or losses on available for sale investment not deemed to be derivative financial instruments 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 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 11), a managed fund that generates investment performance through statistical arbitrage trading activities in large, highly liquid marketable equity securities. The investment has been recorded on September 30, 2001 at $2,106,000, its estimated fair value, which approximates cost plus net realized investment income. The Company recognized investment income during the third quarter of $47,400 relating to this investment.
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 September 30, 2001, the Company recorded an unrealized loss of $788,250 as part of other comprehensive income in the statements of operations relating to this investment. For the nine months ended September 30, 2001 the Company recorded an unrealized gain of $232,950 as part of other comprehensive income in the statements of operations relating also to this investment.
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. In accordance with 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 other income or loss in the statements of operations. The warrants were valued at $143,160 on June 6, 2001 and at $236,340 on September 30, 2001 and are reflected in "available for sale securities" in the accompanying balance sheet. As a result, a gain of $93,180 and a loss of $315,300 has been reflected in other income in the Company's statem ents of operations for the nine month period and three month ended September 30, 2001, respectively. The change in fair value of the warrants is attributed to a change in the quoted market price of Select Comfort Corporation's common stock.
10. SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2001, the Company issued
3,527 shares of its Common Stock at $1.66 per share, 3,442 shares at $1.93,
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 6,900
shares of Common Stock in the open market at an average cost of $2.13 per share.
11. Related Party Transactions
Included in other investments on the accompanying balance sheet is the
Company's investment of $2,106,000 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.
12. CONTINGENCIES
On September 27, 2001 the Company entered into an asset purchase agreement
to sell substantially all its operating assets to a third party. The transaction
is subject to approval by the Company's shareholders and a special meeting of
shareholders has been scheduled to vote on the matter on November 14, 2001.
If the Company's shareholders approve the transaction and if the transaction closes under terms outlined in the asset purchase agreement, the Company will record a loss of approximately $240,000 on the sale of operating assets. In addition, if the sale is approved the Company expects to incur transaction and other related costs of approximately $300,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED
SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
Total revenues for the third quarter in 2001 were $1,394,000, an increase
of 32.4% or $341,000 from revenues of $1,053,000 for the third quarter in 2000.
The Company's gross margin was $434,000 in the third quarter 2001 versus
$380,000 in the comparable quarter in 2000. Gross margin as a percentage of
revenue decreased from 36% in the third quarter 2000 to 31% in third quarter
2001. The decreased margin percentage in 2001 was due primarily to last year's
favorable standard cost variances and to changes in the Company's equipment sales mix in 2001.
Research and development expenses decreased slightly to $139,000 in the
third quarter of 2001 from $147,000 in the third quarter in 2000 due to the transfer of an engineer to the position of customer service manager in 2001.
Selling, general and administrative expenses increased to $590,000 in the
third quarter of 2001 from $513,000 in the third quarter in 2000. Selling
expenses increased by approximately $77,000 in the third quarter 2001 versus
the third quarter in 2000 due to a larger sales force. General and
administrative expenses were essentially the same as last year.
Interest and other income in the third quarter of 2001 was a loss of
$165,000 compared to income of $164,000 in the same period of the prior year.
This large decrease was the result of recording $315,300 in unrealized loss on our investment in Select Comfort Corporation warrants. The unrealized loss of value on the Select Comfort Corporation warrants is based on the fair value of such warrants. The fair value of these warrants can fluctuate significantly depending on the market value of the Select Comfort Corporation common stock. It is possible that much or all of the value of the warrants could be lost and it is also possible that the warrants could increase in value significantly.
Net loss for the third quarter of 2001 was $285,000, or $.09 per common
share, up significantly from the loss of $72,000 or $.02 per share in 2000
due to the unrealized loss on investments.
RESULTS OF OPERATIONS FOR THE 9 MONTHS ENDED SEPTEMBER 20, 2001 AND SEPTEMBER 30, 2000
Total revenues for the nine months of 2001 were $4.52 million, an increase
of 16.3% 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 nine month
period of 2001 was 31%, down from 41% for the same period in 2000. This was
caused by favorable standard cost variances caused by lower manufacturing
costs in 2000 and by product mix changes. In addition, the 2000 margins
reflected the unusual impact of a sale of two refurbished platesetters that
had a cost of $29,000 and which were sold for $140,000, representing a gross
margin of 79% on the transaction.
Research and development expenses for the nine months of 2001 decreased
2.5% 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 $122,000 for the
nine months ended September 30, 2001 compared to the same period in 2000.
There was a 23.6% increase in marketing and sales costs due largely to the
addition of sales personnel in 2001. General and administrative expenses
decreased by 29.4% from the nine months 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 $534,000 in the nine months of 2001 compared
to $485,000 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 nine months of 2001 was $15,000 or $.00 per common share,
the same as in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $9.8 million on September 30, 2001, down by $1.7 million from December 31, 2000, largely due to the Company's investment in Select Comfort. Cash, cash equivalents and investments, including available for sale securities of $1.9 million, increased by approximately $2.2 million at September 30, 2001 compared to December 31, 2000 primarily due to collection of proceeds from the sale of the Company's lease 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 and 14A
a. Exhibits
Exhibit 11. Statement re: Computation of per share earnings
b. Reports on Form 8-K
On October 3, 2001 the Company filed 8-K report regarding its
plan to sell its operating assets to a group of investors.
c. Reports on Form 14A
On October 11, 2001 the Company filed a 14A proxy which was also
sent to shareholders in connection with the proposed sale of
the Company's operating assets to a group of investors.
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: November 2, 2001 /s/ MARK G. EISENSCHENK
________________________
Mark G. Eisenschenk
CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
Date: November 2, 2001 /s/ STANLEY GOLDBERG
________________________
Stanley Goldberg
PRESIDENT
& CHIEF EXECUTIVE OFFICER
(Principal Executive Officer)
