AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PRINTWARE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 3577 41-1522267
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
------------------------
1270 EAGAN INDUSTRIAL ROAD
ST. PAUL, MN 55121
(612) 456-1400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
DANIEL A. BAKER, PH.D.
PRINTWARE, INC.
1270 EAGAN INDUSTRIAL ROAD
ST. PAUL, MN 55121
(612) 456-1400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPY TO:
Richard D. McNeil, Esq. Michele D. Vaillancourt, Esq.
Mary S. Giesler, Esq. Trevor V. Gunderson, Esq.
Lindquist & Vennum P.L.L.P. Winthrop & Weinstine, P.A.
4200 IDS Center 3000 Dain Bosworth Plaza
80 South 8th Street 60 South Sixth Street
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 371-3211 (612) 347-0700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE
Common Stock, no par value.............. 1,840,000 $7.00 $12,880,000 $4,441.02
(1) Includes 240,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PRINTWARE, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page; Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Additional Information;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Outside Front Cover Page; Prospectus Summary; Risk
Factors
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Principal and Selling Shareholders; Outside Front
Cover Page; Inside Front Cover Page; Underwriting
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Dividend Policy; Capitalization;
Description of Capital Stock
10. Interest of Named Experts and Counsel................ Not Applicable
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Shareholders; Description of Capital Stock
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 13, 1996
PROSPECTUS
1,600,000 SHARES
[LOGO]
COMMON STOCK
----------------
Of the 1,600,000 shares of Common Stock offered hereby, 1,200,000 are being
sold by Printware, Inc. ("Printware" or the "Company") and 400,000 shares are
being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
the shares by the Selling Shareholders.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company and no assurance can be given that a market will
develop or be maintained after the Offering. It is currently estimated that the
initial public offering price will be between $6.00 and $7.00 per share. See
"Underwriting" for the factors considered in determining the initial public
offering price. The Company has applied for listing of the Common Stock on the
Nasdaq National Market under the symbol "PRTW."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE SENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
Per Share.................. $ $ $ $
Total(3).................. $ $ $ $
(1) The Company and the Selling Shareholders, on a pro rata basis, have agreed
to pay R. J. Steichen & Company, as the representative of the Underwriters
(the "Representative"), a nonaccountable expense allowance equal to 2.0% of
the total Price to Public for all shares purchased. The Company has also
agreed to sell to the Representative, for nominal consideration, a five-year
warrant (the "Representative's Warrant") to purchase up to 120,000 shares of
Common Stock exercisable at a price per share equal to 120% of the per share
Price to Public. The Company and the Selling Shareholders have agreed to
indemnify the Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated offering expenses payable of $393,000, which
includes the portion of the nonaccountable expense allowance described in
Note 1 above which is being paid by the Company.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 240,000 additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ , respectively.
See "Underwriting."
The shares of Common Stock are offered by the Underwriters on a "firm
commitment" basis subject to prior sale when, as and if delivered to and
accepted by the Underwriters and subject to their right to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made on or about , 1996 in Minneapolis, Minnesota.
[LOGO]
The date of this Prospectus is , 1996
[Inside Front Cover Graphics]
Photo: Printware's Model 3240 Platesetter
Text above photo: Printware, Inc. is a leader in Computer-to-Plate
Systems, which produce offset printing plates
faster and less expensively than traditional
methods.
Text below photo: Printware's Model 3240 Platesetter, sold under the
Mitsubishi name, produces photographic offset
printing plates directly from a computer.
PRIOR TO THIS OFFERING, THE COMPANY HAS NOT BEEN SUBJECT TO THE REPORTING
REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934. AFTER COMPLETION OF THIS
OFFERING, THE COMPANY INTENDS TO DISTRIBUTE TO ITS STOCKHOLDERS AN ANNUAL REPORT
CONTAINING AUDITED FINANCIAL STATEMENTS AND QUARTERLY REPORTS CONTAINING
UNAUDITED FINANCIAL INFORMATION FOR THE FIRST THREE QUARTERS OF EACH FISCAL
YEAR.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS. EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) DOES NOT INCLUDE UP TO 120,000 SHARES
OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE REPRESENTATIVE'S WARRANT, AND
(III) REFLECTS A ONE-FOR-FOUR REVERSE SPLIT OF THE COMMON STOCK EFFECTIVE APRIL
25, 1996. SEE "DESCRIPTION OF CAPITAL STOCK." THIS PROSPECTUS CONTAINS FORWARD
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS.
THE COMPANY
Printware, Inc. ("Printware" or the "Company") designs, builds and markets
"Computer-to-Plate" systems which 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. Computer-to-Plate technology provides one-step plate
making (including text, graphics and photographic halftones) directly from
computer data, much as a laser printer makes printed pages directly from
computer data. The key benefits of Computer-to-Plate technology are lower costs,
faster turnaround times, fewer pieces of equipment and fewer environmental
limitations on disposal of by-products. The key hardware element of a
Computer-to-Plate system is called a Platesetter. The Company sells
Platesetters, supplies for use in Platesetters and raster image processors for
connecting the Platesetter to the customer's computer network. Sales of supplies
accounted for approximately 55% of the Company's 1995 revenues.
The Company is a leader in the development and introduction of
Computer-to-Plate systems. To date the Company has sold over 300 Platesetters,
which it believes is more than any other single competitor. The Company's
marketing strategy is to offer a wide range of Computer-to-Plate products to the
broad market of "mainstream" printers who use small format (18" wide or less)
presses, typically for high-volume printing applications such as check printing,
social printing (such as wedding invitations) and envelope printing. The
Company's customers include leading printers such as Deluxe Corporation
("Deluxe"), Pitney Bowes, Thomson Publishing, Liberty Check Printers and
Northrup-Grumman.
The Company currently manufactures two lines of Platesetters in various
configurations. The end-user price ranges from $75,000 to $150,000 for the Model
1440, depending on the configuration, and from $85,000 to $100,000 for the Model
3240. The Company markets the Model 1440 through its own sales force, and the
Model 3240 is marketed by Mitsubishi Imaging (MC), Inc. ("Mitsubishi") under its
name. Both of these Platesetter lines use patented resonant galvanometer
technology which was licensed to the Company by Minnesota Mining and
Manufacturing Company ("3M") when the Company was organized in 1985. In 1993 the
Company began to focus exclusively on Computer-to-Plate products and phased out
its other products. This resulted in a reduction in revenue but a significant
improvement in profitability in 1994 and 1995.
The Company is incorporated in Minnesota and has its principal executive
office and manufacturing facility at 1270 Eagan Industrial Road, St. Paul,
Minnesota 55121. Its telephone number is (612) 456-1400.
3
THE OFFERING
COMMON STOCK OFFERED BY THE COMPANY.......... 1,200,000 shares
COMMON STOCK OFFERED BY THE SELLING
SHAREHOLDERS................................ 400,000 shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING.................................... 4,829,713 shares(1)
USE OF PROCEEDS.............................. Product development, sales and marketing and
working capital
PROPOSED NASDAQ NATIONAL MARKET SYMBOL....... PRTW
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(1) Does not include, as of March 30, 1996 (i) 135,567 shares issuable upon
exercise of stock options held by executive officers and employees of the
Company, (ii) 120,000 shares issuable upon exercise of the Representative's
Warrant, and (iii) 5,000 shares issuable upon exercise of warrants held by
Deluxe.
RISK FACTORS AND DILUTION
An investment in the Common Stock involves a high degree of risk. See "Risk
Factors." Purchasers will experience immediate and substantial dilution in net
tangible book value per share. See "Dilution."
SUMMARY FINANCIAL DATA
THREE MONTHS ENDED
-------------------------- YEAR ENDED DECEMBER 31,
MARCH 30, APRIL 1, -----------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ -------------
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 1,832,013 $ 1,807,623 $ 8,388,148 $ 6,626,925 $ 7,296,484
Gross margin............................ 721,967 806,752 3,384,192 2,524,524 1,951,965
Income (loss) from operations........... 304,555 330,105 1,554,183 622,184 (1,213,897)
Net income (loss)(1).................... 330,898 326,483 1,793,425 784,029 (1,204,707)
Net income (loss) per common and common
equivalent share(1).................... $.09 $.09 $.48 $.21 $(.33)
Weighted average common and common
equivalent shares outstanding(2)....... 3,705,403 3,705,627 3,705,627 3,685,580 3,635,226
AS OF MARCH 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(3)
------------ ---------------
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 2,795,856 $ 9,695,856
Working capital.................................................................. 4,491,641 11,391,641
Total assets..................................................................... 5,396,406 12,296,406
Shareholders' equity............................................................. 4,655,666 11,555,666
- ---------------------------
(1) Net income in 1994 includes an extraordinary item of $140,927, consisting of
a gain on extinguishment of debt. The income per common and common
equivalent share attributable to such extraordinary gain was $.04.
(2) See Note 1 to Financial Statements for an explanation of the determination
of weighted average common and common equivalent shares outstanding.
(3) As adjusted to reflect the sale of shares offered hereby, assuming a Price
to Public of $6.50 per share, and the application of the estimated net
proceeds therefrom of $6.9 million. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
4
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN EVALUATING THE COMPANY AND ITS BUSINESS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A
RESULT, IN PART, OF THE RISK FACTORS SET FORTH BELOW.
DEPENDENCE ON CERTAIN CUSTOMERS. The Company is heavily dependent on two
customers, Deluxe and Mitsubishi. Sales to these customers represented 41.7% and
17.5%, respectively, of 1995 revenues and 43.0% and 2.1%, respectively, of 1994
revenues. Deluxe is a provider of checks and related electronic-based financial
systems. As of March 30, 1996 Deluxe owned 51.3% of the Company's outstanding
Common Stock and two of its executive officers are members of the Company's
Board of Directors. Mitsubishi is a world wide supplier of equipment and
supplies to the printing industry and markets the Company's Model 3240
Platesetter under Mitsubishi's trade name. Loss of either of these customers or
a substantial reduction in their purchases would have a material adverse effect
on the Company. See "Business--Customers" and "Certain Transactions."
DEPENDENCE ON CERTAIN SUPPLIERS. The Company is dependent on several key
single-source suppliers, including the supplier of its planned Adobe
PostScript-Registered Trademark- raster image processor, the raster image
processing software used in its ZAPrip-Registered Trademark- product and the
plate materials which the Company sells for the Model 1440. All of the Company's
agreements with suppliers can be canceled by either party under certain
circumstances. Furthermore, there can be no assurance that technical or other
problems might not cause supply interruptions. Such interruptions could
seriously jeopardize the Company's ability to provide products that are critical
to the Company's business and operations. See "Business--Suppliers."
COMPETITION. The Company faces considerable competition in its business.
Most of 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 or are less expensive than those developed and marketed by the Company,
or that would render the Company's products and technology obsolete or
noncompetitive. There can be no assurance that competition might not adversely
affect the profitability or viability of the Company's supplies business. The
Company is highly dependent on its ability to develop new products with higher
performance and lower costs, and there can be no assurance these development
efforts will be successful. See "Business--Competition."
OPERATING RESULTS. The Company has experienced net income (loss) of
$330,898 for the three months ended March 30, 1996 and $1,793,425, $784,029,
($1,204,707), ($2,543,602) and $103,077 for the five years ended December 31,
1995, 1994, 1993, 1992 and 1991, respectively. Although the Company has reported
net income in the last two years and the first quarter of 1996, no assurance can
be given that the Company's operations will continue to be profitable. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements."
RAPID TECHNOLOGICAL AND MARKET CHANGES. Certain segments of the printing
industry are characterized by rapid technological change and the frequent
introduction of new products. The Company's future success will depend, in part,
on its ability to develop and introduce new products that take advantage of
technological advances and to respond promptly to new customer requirements.
There can be no assurance that a shift to large-format presses or higher-quality
color printing might not render the Company's products and technology obsolete.
Technology such as xerographic printers, digital presses or electronic
publishing could replace offset printing, rendering the Company's current
products and technology obsolete. There can be no assurance that the Company's
resonant galvanometer technology will remain competitive with other types of
laser scanners. See "Business--Competition."
5
PROTECTION OF PROPRIETARY TECHNOLOGY. Printware seeks to protect its
proprietary technology by seeking patents or entering into confidentiality
agreements with employees and suppliers, depending on the circumstances. There
can be no assurance that such measures will be effective or afford the Company
any meaningful competitive advantage. See "Business--Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL; LACK OF EMPLOYMENT AGREEMENTS. The Company's
success depends in large part on its ability to attract and retain highly
qualified management, technical and marketing personnel. The Company has no
employment agreements with any of its management or other personnel and, except
for $300,000 of key person coverage on Dr. Baker, has no key person insurance
covering any such individuals. Competition for such personnel is generally
intense and there can be no assurance that the Company will be able to attract
and retain the personnel necessary for the development and operation of its
business. The loss of the services of key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management."
CONCENTRATION OF OWNERSHIP. Following this Offering, Deluxe, the Company's
current principal shareholder, will continue to own approximately 32.9% of the
outstanding Common Stock. Two executive officers of Deluxe serve as directors of
the Company. Two of the Company's other directors, Donald Mager and Allen
Taylor, will also own after this Offering 8.1% and 7.1%, respectively, of the
outstanding Common Stock. Accordingly, Deluxe and Messrs. Mager and Taylor will
have the ability to control the election of the Company's Board of Directors and
most corporate actions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of the Company. See "Principal and
Selling Shareholders."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY. Prior to this
Offering, there has been no public market for the Common Stock and there can be
no assurance that an active trading market for the Common Stock will develop or
be sustained following this Offering. The initial public offering price will be
determined through negotiations between the Company and the Representative and
may bear no relationship to the price at which the Common Stock will trade
following this Offering. There can be no assurance that future market prices of
the Common Stock will not be lower than the initial offering price. In addition,
the stock market historically has experienced volatility which has affected the
market price of securities of many companies and which has sometimes been
unrelated to the operating performance of such companies. Announcements of new
products and services by the Company or its competitors, technological
innovations, developments with respect to patents or other proprietary rights,
changes in stock market analyst recommendations regarding the Company, other
technology companies or the Company's industry generally and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, may have a significant effect on the market price of the Common Stock.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of Common Stock
in the public market after this Offering could adversely affect the market price
of the Common Stock. Unless purchased by an affiliate of the Company, the
1,600,000 shares of Common Stock to be sold in this Offering will be freely
transferable without restriction. Upon conclusion of this Offering, in addition
to the shares being sold hereby, 748,876 shares of Common Stock will be eligible
for sale in the public market without registration. Certain of the Company's
existing shareholders, holding 2,383,425 shares of Common Stock, have agreed
that they will not, without the consent of the Representative, sell or otherwise
dispose of any equity securities of the Company for a period of six months
following the effective date of this Offering. However, sale of substantial
amounts of shares in the public market following that period could adversely
affect the market price of the Company's Common Stock. In addition, certain
shareholders holding 109,961 shares of Common Stock have the right, subject to
certain conditions, to participate in future Company registrations and to cause
the Company to register certain Common Stock owned by them. See "Shares Eligible
For Future Sale."
POSSIBLE ISSUANCES OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board
of Directors is authorized to issue up to 1,000,000 shares of Preferred Stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
Company's shareholders. The rights of the holders of the Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. Although there is no current
intention
6
to do so, the issuance of Preferred Stock could have the effect of delaying,
deferring or preventing a change in control of the Company, which could deprive
the Company's shareholders of opportunities to sell their shares of Common Stock
at a premium. Additionally, the Company could adopt in the future one or more
additional anti-takeover measures, such as a shareholder rights plan, without
first seeking shareholder approval, which measures could also make a change in
control of the Company more difficult. The Company is also subject to provisions
of the Minnesota Business Corporation Act that make certain business
combinations or potential acquisitions of the Company more difficult. See
"Description of Capital Stock."
DILUTION. Purchasers of shares of Common Stock in this Offering will incur
immediate and substantial dilution of $4.11 per share. Investors may also
experience additional dilution as a result of the exercise of outstanding stock
options and warrants. See "Dilution" and "Shares Eligible for Future Sale."
NO DIVIDENDS. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying such dividends for the foreseeable future.
See "Dividend Policy."
7
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,200,000 shares of Common Stock offered by the Company hereby, after deducting
the estimated underwriting discount and offering expenses, are estimated to be
approximately $6.9 million ($8.0 million if the Underwriters' over-allotment
option is exercised in full) at an assumed offering price of $6.50 per share.
The Company will not receive any of the proceeds from the sale of Common Stock
by the Selling Shareholders. The Company intends to apply these proceeds
approximately as follows:
Product development..................................... $3,200,000
Sales and marketing..................................... 1,800,000
Working capital......................................... 1,900,000
---------
Total................................................. $6,900,000
---------
---------
The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the success of product development
efforts, market conditions and customer preferences. Pending application of the
net proceeds described above, the Company intends to invest the net proceeds of
this Offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any future earnings for use in
developing its business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future.
CAPITALIZATION
The following table sets forth the Company's capitalization as of March 30,
1996, giving retroactive effect to the authorization of 1,000,000 shares of
Preferred Stock and as adjusted to give effect to the sale of the 1,200,000
shares of Common Stock being offered by the Company at an assumed offering price
of $6.50 per share and the application of the estimated net proceeds therefrom.
MARCH 30, 1996
------------------------------
ACTUAL(1) AS ADJUSTED
-------------- --------------
Long-term debt.................................................................... $ -- $ --
Shareholders' equity:
Preferred Stock, no specified par value; 1,000,000 shares authorized; no shares
issued and outstanding......................................................... -- --
Common Stock, no par value, 15,000,000 shares authorized, 3,629,713 shares
issued and outstanding, and 4,829,713 shares issued and outstanding, as
adjusted(2).................................................................... 15,522,238 22,422,238
Accumulated deficit............................................................. (10,866,572) (10,866,572)
-------------- --------------
Total shareholders' equity.................................................... 4,655,666 11,555,666
-------------- --------------
Total capitalization........................................................ $ 4,655,666 $ 11,555,666
-------------- --------------
-------------- --------------
- ---------------------------
(1) Derived from the Company's unaudited financial statements. See "Financial
Statements."
(2) Does not include, as of March 30, 1996 (i) 135,567 shares issuable upon
exercise of stock options held by executive officers and other employees of
the Company, (ii) 120,000 shares issuable upon exercise of the
Representative's Warrant, and (iii) 5,000 shares issuable upon exercise of
warrants held by Deluxe.
8
DILUTION
The net tangible book value of the Company as of March 30, 1996 was
$4,622,060 or $1.27 per share. Net tangible book value per share represents the
total amount of the Company's tangible assets reduced by the amount of its total
liabilities and divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the 1,200,000 shares of Common
Stock offered hereby (after deducting the underwriting discount and estimated
offering expenses payable by the Company) at an initial public offering price of
$6.50 per share, and without taking into account any other changes in net
tangible book value after March 30, 1996, the pro forma net tangible book value
of the Company at March 30, 1996 would have been $11,522,060 or $2.39 per share.
This represents an immediate increase in net tangible book value of $1.12 per
share to the Company's existing shareholders and an immediate dilution in net
tangible book value of $4.11 per share to new investors. The following table
illustrates this per share dilution:
Assumed public offering price per share..................... $ 6.50
Net tangible book value per share at March 30, 1996..... $ 1.27
Increase per share attributable to new investors........ 1.12
---------
Pro forma net tangible book value per share after this
Offering................................................... 2.39
---------
Dilution per share to new investors......................... $ 4.11
---------
---------
The following table summarizes as of March 30, 1996, the differences in the
total consideration paid and the average price per share paid by the existing
shareholders and the new investors with respect to the 1,200,000 shares of
Common Stock to be issued by the Company. The calculations in this table with
respect to shares of Common Stock to be purchased by new investors in the
Offering reflect an assumed Price to Public of $6.50 per share (before deducting
the underwriting discount and estimated offering expenses payable by the
Company):
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
Existing shareholders(1)............ 3,629,713 75.15% $ 15,522,238 66.56% $ 4.28
New investors(1).................... 1,200,000 24.85% 7,800,000 33.44% $ 6.50
---------- ----------- ------------- -----------
Total........................... 4,829,713 100.00% $ 23,322,238 100.00%
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
- ---------------------------
(1) Sales by the Selling Shareholders in this Offering will reduce the number of
shares held by existing shareholders to 3,229,713 shares, or 66.9% of the
total number of shares of Common Stock to be outstanding after the Offering,
and will increase the number of shares held by new investors to 1,600,000
shares, or 33.1% of the total number of shares of Common Stock to be
outstanding after the Offering.
The computations in the tables above exclude, as of March 30, 1996, an
aggregate of 140,567 shares issuable upon exercise of outstanding stock options
and warrants at a weighted average exercise price of $3.00 per share and up to
120,000 shares of Common Stock issuable upon exercise of the Representative's
Warrant. See "Description of Capital Stock" and "Underwriting."
9
SELECTED FINANCIAL DATA
The following selected financial data as of December 31 and for each of the
five years in the period ended December 31, 1995 has been derived from the
financial statements of the Company which have been audited by Deloitte & Touche
LLP, independent auditors, whose report on the financial statements as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 appears elsewhere in this Prospectus. The financial data as of
March 30, 1996 and for the three month periods ended March 30, 1996 and April 1,
1995 has been derived from the Company's unaudited financial statements. The
unaudited financial statements reflect, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position as of these dates and
results of operations for such periods. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Financial Statements."
THREE MONTHS ENDED
---------------------- YEAR ENDED DECEMBER 31,
MARCH 30, APRIL 1, -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues............................ $1,832,013 $1,807,623 $8,388,148 $6,626,925 $ 7,296,484 $10,659,994 $14,285,310
Cost of revenues.................... 1,110,046 1,000,871 5,003,956 4,102,401 5,344,519 8,234,092 8,907,147
---------- ---------- ---------- ---------- ----------- ----------- -----------
Gross margin........................ 721,967 806,752 3,384,192 2,524,524 1,951,965 2,425,902 5,378,163
Research and development expenses... 178,941 205,778 757,131 956,807 1,314,355 1,913,431 1,829,219
Selling, general and administrative
expenses........................... 238,471 270,869 1,072,878 945,533 1,851,507 3,022,684 3,394,216
---------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) from operations....... 304,555 330,105 1,554,183 622,184 (1,213,897) (2,510,213) 154,728
Other income (expense), net......... 32,843 8,378 261,742 22,918 10,299 (31,214) (47,651)
---------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary income........... 337,398 338,483 1,815,925 645,102 (1,203,598) (2,541,427) 107,077
Income taxes........................ 6,500 12,000 22,500 2,000 1,109 2,175 4,000
---------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) before extraordinary
item............................... 330,898 326,483 1,793,425 643,102 (1,204,707) (2,543,602) 103,077
Extraordinary income(1)............. -- -- -- 140,927 -- -- --
---------- ---------- ---------- ---------- ----------- ----------- -----------
Net income (loss)................... $ 330,898 $ 326,483 $1,793,425 $ 784,029 $(1,204,707) $(2,543,602) $ 103,077
---------- ---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ---------- ----------- ----------- -----------
Net income (loss) per common and
common equivalent share(2):
Income (loss) before extraordinary
item............................. $ .09 $ .09 $ .48 $ .17 $ (.33) $ (.84) $ .03
---------- ---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ---------- ----------- ----------- -----------
Net income (loss)(1).............. $ .09 $ .09 $ .48 $ .21 $ (.33) $ (.84) $ .03
---------- ---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ---------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding(2)... 3,705,403 3,705,627 3,705,627 3,685,580 3,635,226 3,025,699 3,000,390
---------- ---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ---------- ----------- ----------- -----------
DECEMBER 31,
MARCH 30, APRIL 1, ----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents.............. $2,795,856 $ 626,267 $2,568,852 $ 860,668 $1,288,821 $ 561,655 $ 98,551
Current assets......................... 5,232,381 3,464,348 5,087,328 3,255,959 4,371,149 4,826,294 5,620,695
Working capital........................ 4,491,641 2,643,532 4,151,595 2,292,562 1,441,554 2,544,209 2,173,719
Total assets........................... 5,396,406 3,669,342 5,252,401 3,476,928 4,633,747 5,180,631 6,097,071
Shareholders' equity................... 4,655,666 2,848,526 4,316,668 2,513,531 1,704,152 2,898,546 2,650,095
- ---------------------------
(1) During 1994 the Company recognized an extraordinary gain of $140,927
resulting from the extinguishment of debt. The income per common and common
equivalent share attributable to such extraordinary gain was $.04.
(2) See Note 1 to Financial Statements as to method of calculation.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Printware designs, builds and markets Computer-to-Plate systems which
provide faster, less expensive production of offset printing plates. The
Company's products, called Platesetters, make printing plates directly from
computer data, primarily for high-volume printing. In 1988 the Company began
selling its first Platesetter, the Model 1440 electrostatic Platesetter. The
Company also sold laser printers and film imagers. In 1993 Printware focused
exclusively on Computer-to-Plate and phased out other product lines, resulting
in a reduction in revenues but an improvement in profitability. The improvement
in profitability came from elimination of low-margin product lines, such as
laser printers, and elimination of engineering and sales expenses associated
with non-Platesetter products. Prototype shipments of a new photographic
Platesetter, the Model 3240, began in late 1993. First deliveries of the
production version were made in 1995.
Revenues are generated from the sale of Printware's Model 1440 and Model
3240 Platesetters, as well as from the sale of consumable supplies for the Model
1440. Sales of photographic Platesetters have increased rapidly since production
began in 1994. The Company anticipates that future sales of photographic
Platesetters will grow faster than sales of electrostatic Platesetters. There
can be no assurance, however, that this growth will continue.
Sales of supplies used in Model 1440 Platesetters comprised approximately
55% of the Company's 1995 revenues. In addition to equipment and supplies, the
Company separately charges for installation, training, service and spare parts.
Company technicians provide telephone support as well as on-site service.
Printware also trains its customers' technicians for self-sufficiency and
maintains a significant spare-parts inventory to support its installed base.
Revenues related to installation, training and support are recognized when the
services are performed. Printware has contracts with many of its Model 1440
customers to provide preventive and emergency maintenance. Such maintenance
contracts generally have a one-year term. Telephone and on-site support are
billed per incident for customers without support contracts. Printware provides
a 90-day warranty on its products, which may be extended to up to one year based
on additional customer supplies purchases.
Research and development efforts are focused on enhancing and improving
existing products and supplies and developing new Platesetter versions.
Management estimates that 87% of product (non-service) revenues in 1995 were
from products introduced within the prior three years. Future research and
development expenses are expected to increase as a result of the Company's
strategy to broaden its Platesetter line. There can be no assurance, however, of
attaining revenues from this effort.
Printware believes its selling expenses are relatively low compared to other
companies in similar industries. Printware's two largest customers, Deluxe and
Mitsubishi, are house accounts and no commissions are paid on those sales. Most
of Printware's selling expenses are related to the direct selling effort
associated with the Model 1440 Platesetter product line. These efforts are
currently aimed at high-volume printers in printing niches such as check
printing, social printing, technical/legal publishing, and newspapers, which the
Company has found can best utilize the product. The Company reaches these niches
with targeted marketing approaches such as trade shows, direct mailings and
sales calls. Consistent with this targeted approach, there is currently very
little advertising for the Model 1440. Sales and marketing expenses are expected
to increase considerably as the Company attempts to broaden its distribution
network.
Except for historical information, the matters discussed in this Prospectus
are forward looking statements which involve risks and uncertainties, including
but not limited to economic, competitive, and technological factors affecting
the Company's operations, markets, products, services, prices and other factors,
which may cause actual results to differ materially from the results discussed
in the forward looking statements.
11
RESULTS OF OPERATIONS
The following table summarizes the percentage of revenues for various items
in the Company's Statements of Operations for the periods indicated:
THREE MONTHS ENDED
-------------------------- YEAR ENDED DECEMBER 31,
MARCH 30, APRIL 1, ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ----------- ----------- ----------- ----------- ----------- -----------
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 60.6 55.4 59.7 61.9 73.2 77.2 62.4
------ ----------- ----------- ----------- ----------- ----------- -----------
Gross margin........................ 39.4 44.6 40.3 38.1 26.8 22.8 37.6
Research and development expenses... 9.8 11.4 9.0 14.4 18.0 17.9 12.8
Selling, general and administrative
expenses........................... 13.0 15.0 12.8 14.3 25.4 28.4 23.8
------ ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations....... 16.6 18.2 18.5 9.4 (16.6) (23.5) 1.0
Other income (expense), net......... 1.8 0.5 3.1 0.3 0.1 (0.3) (0.3)
------ ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item............. 18.4 18.7 21.6 9.7 (16.5) (23.8) 0.7
Income taxes........................ 0.3 0.6 0.2 0.0 0.0 0.0 0.0
Extraordinary income................ -- -- -- 2.1 -- -- --
------ ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................... 18.1% 18.1% 21.4% 11.8% (16.5)% (23.8)% 0.7%
------ ----------- ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDED MARCH 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 1, 1995
REVENUES. First-quarter revenues in 1996 were $1.83 million, an increase of
1% over first-quarter 1995 revenues of $1.81 million. This was the sixth
consecutive quarter in which revenues increased from the corresponding quarter
in the previous year. Revenues were up despite a decrease in supplies sales.
Supplies revenues declined to $900,000 in the first quarter of 1996 from $1.06
million in the first quarter of 1995. This was due in part to several customers
who determined that they had excess supplies inventory and cut back their
purchases in the first quarter of 1996. Model 3240 revenues for the 1996 period
increased 53% compared to 1995, primarily due to an increase in unit sales.
Management expects the Model 3240 to continue to provide an increasing portion
of Printware's revenues in the long term. Model 1440 revenues also increased in
the first quarter of 1996. There were laser printer sales and unusually strong
raster image processor sales in the first quarter of 1995 which did not recur in
1996.
GROSS MARGIN. The Company's gross margin was $722,000 in the first quarter
of 1996 compared to $807,000 in the comparable 1995 period. Gross margin as a
percentage of revenues declined from 45% in the first quarter of 1995 to 39% in
the first quarter of 1996. The lower margin in 1996 was due primarily to a
change in the product mix towards the lower-margin Model 3240 Platesetter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $179,000 in the first quarter of 1996 from $206,000 in the first
quarter of 1995. Although research and development labor expenses were up 10% in
1996, expenses associated with the Model 3240 declined as the product design was
completed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $238,000 in the first quarter of 1996 from
$271,000 in the first quarter of 1995. Selling expenses decreased by
approximately $10,000 in the first quarter from 1995 to 1996, due primarily to
eliminating the remaining laser-printer salesperson subsequent to the first
quarter of 1995. Legal expenses were unusually high in the 1995 period because
of expenses associated with a dispute with A.B. Dick Company.
12
INTEREST, OTHER INCOME AND INCOME TAXES. Interest, other income and income
taxes were $26,000 in the 1996 period compared to $4,000 in 1995. The change was
primarily caused by an increase in net interest income to $33,000 from $8,000
due to higher cash balances (cash and short-term cash investments were $2.80
million at March 30, 1996, compared to $626,000 at April 1, 1995). Tax expense
decreased to $7,000 in 1996 from $12,000 in 1995. Tax expense is relatively
small because the Company has net operating loss carryforwards which are
available to offset against taxable income. The Company is subject to
alternative minimum taxes, however.
NET INCOME. Net income for the first quarter of 1996 was $331,000, or $.09
per common and common equivalent share, up from $326,000 or $.09 per share in
1995, as lower margins were more than offset by lower expenses and higher
interest income.
1995 COMPARED TO 1994
REVENUES. Revenues were up 27% to $8.39 million in 1995 from $6.63 million
in 1994, primarily due to a sharp increase in unit sales of the Model 3240
Platesetter line. Model 3240 revenues increased 192% compared to 1994 as the
Model 3240 gained customer acceptance. Model 3240 revenues accounted for
approximately 20% of the Company's revenue in 1995, up from 9% in 1994. Supplies
revenues were up 7%. Laser printer revenues were down considerably in 1995 as
the Company continued to phase out that product line to focus on
Computer-to-Plate products.
GROSS MARGIN. The Company's gross margin increased 34% to $3.38 million in
1995 from $2.52 million in 1994, primarily as a result of increased revenues and
prices. Gross margin as a percentage of revenues improved slightly to 40% in
1995 from 38% in 1994. The basic Model 1440 list price was increased by
approximately 15% in 1995, and margins on Model 1440 supplies and service
increased slightly. The Model 1440 and supplies gross margin increases were
partially offset by a change in product mix towards the lower-margin Model 3240.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $757,000 in 1995 from $957,000 in 1994. Expenses associated with
the Model 3240 declined as the product design was completed. In 1995 the Company
also relied more on raster image processor software from third parties and
de-emphasized continuing development of its own raster image processor software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 13% to $1.07 million in 1995 from $946,000 in
1994. Selling expenses decreased to $380,000 in 1995 from $447,000 in 1994 as
the Company continued to focus on efficiently serving the target markets for the
Model 1440 Platesetter. In late 1994 the Company reduced selling expenses by
combining domestic, international and OEM sales functions. General and
administrative expenses remained at approximately 8% of revenues, increasing to
$693,000 in 1995 from $499,000 in 1994. In 1995 the Company made investments to
upgrade its computers, Internet link, information system databases and voice
mail. Employee profit-sharing also began in 1995.
INTEREST, OTHER INCOME AND INCOME TAXES. The Company had $69,000 of net
interest income in 1995, compared to $23,000 in 1994. The increase coincided
with the Company's cash position increasing significantly due to cash flow from
operations (cash and short-term cash investments increased to $2.57 million at
the end of 1995 from $861,000 at the end of 1994). Other income in 1995 was due
to a $334,000 arbitration award for A. B. Dick Company's 1994 order
cancellation. Out-of-pocket arbitration expenses of $142,000 were incurred,
resulting in a net gain of $192,000.
NET INCOME. The Company had net income of $1.79 million or $.48 per common
and common equivalent share in 1995. 1995 net income was 21% of revenue,
compared to 12% in 1994. The improvement in profitability came from significant
revenue growth in 1995 and lower operating expenses (operating expenses were 22%
of revenues in 1995 versus 29% in 1994).
For federal income tax purposes, the Company had net operating loss
carryforwards of approximately $10.5 million as of December 31, 1995. If not
used, these carryforwards will begin to expire in 2001. Under
13
current tax law certain 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. Management does not believe that the Offering will
result in a change in ownership which will trigger that limitation.
1994 COMPARED TO 1993
REVENUES. Revenues declined to $6.63 million in 1994 from $7.30 million in
1993. This decline was caused by reduced sales of laser printers and film
imagers due to the Company's shift to Computer-to-Plate products. The decline
was partially offset by sales of the Model 3240 Platesetter, which increased
275% from 1993 to account for approximately 9% of 1994 revenues.
GROSS MARGIN. Despite lower revenues, gross margin increased 30% to $2.52
million in 1994, from $1.95 million in 1993. Gross margin as a percentage of
revenues was 38% in 1994 versus 27% in 1993. The higher margin in 1994 was due
to lower costs, a deliberate move away from lower-margin laser printer and film
imager products and higher prices. Printware was able to raise the average
selling price of a basic Model 1440 Platesetter by 15% in 1994. Higher prices
were possible because models introduced in that year, such as the Model 1440
ZNX, had new features such as larger plate-size capability and digital machine
settings.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 27%
to $957,000 in 1994 from $1.31 million in 1993. This was primarily due to
completing substantial portions of the Model 3240 product development in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by nearly 50% to $946,000 from $1.85 million.
As part of Printware's new mission to focus exclusively on Computer-to-Plate
products, direct-selling efforts were targeted at specific printing niches. As
part of that strategy, in late 1993 the Company reduced its sales force and
closed its field sales offices, centralizing its sales force in the Company's
St. Paul headquarters. These steps resulted in much lower selling expenses in
1994 than in the previous year. Selling expenses decreased 57% to $447,000 in
1994 from $1.05 million in 1993 (to 7% of revenues in 1994 from 14% in 1993).
General and administrative expenses decreased to $499,000 (8% of revenues) in
1994 from $801,000 (11% of revenues) in 1993. General and administrative
expenses were high in 1993 due to reserves recorded for legal disputes related
to events which occurred in prior years. These disputes were resolved in 1994.
INTEREST, OTHER INCOME AND INCOME TAXES. The Company had $23,000 in net
interest income in 1994, compared to $10,000 in 1993, as the Company was able to
repay its short-term debt in 1993 with cash flow from operations. Other income
in 1994 came from a $141,000 extraordinary gain from settlement of a debt
agreement with Minnesota Technology, Inc. ("MTI"). The Company issued 5,500
shares of Common Stock to MTI.
NET INCOME. The Company had net income of $784,000 (12% of revenues) in
1994, compared to a $1.20 million loss (17% of revenues) in 1993. The
improvement in profitability for 1994 came from lower operating expenses (29% of
revenues in 1994 versus 43% in 1993) and a higher gross margin (38% in 1994
versus 27% in 1993). Net income was $.21 per common and common equivalent share
in 1994, compared to a loss of $.33 per share in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Prior to becoming profitable in 1994, the Company financed its operations
through private placements of Common Stock, customer prepayments for merchandise
and short-term borrowings. Beginning in 1994, the Company was able to fulfill
prepayment obligations and meet its working capital and capital expenditure
requirements from cash flow from operations. During 1995, 1994 and 1993, the
Company generated (used) cash of $1.72 million, ($377,000), and $70,000,
respectively, from operating activities. During the first quarter of 1996, the
Company's operating activities generated cash flow of $241,000. Cash and
short-term cash investments were $2.80 million at March 30, 1996, compared to
$2.57 million at December 31, 1995 and $626,000 at April 1, 1995. The Company's
current ratio (current assets to current liabilities) improved to 7.1 at March
30, 1996, compared to 5.4 at December 31, 1995 and 4.2 at April 1, 1995.
Inventories were $1.62 million at March 30, 1996, compared to $1.73 million at
December 31, 1995 and $2.12 million at April 1, 1995, due to a continuing effort
to increase inventory turnover.
14
The Company's liquidity was such that management elected not to renew the
Company's $1 million bank line of credit, which expired September 1, 1995. The
Company purchased property and equipment of $15,000, $50,000 and $73,000 in
1995, 1994 and 1993, respectively. The Company purchased property and equipment
of $15,000 during the first quarter of 1996. The Company anticipates capital
expenditures of approximately $100,000 in the remainder of 1996. The Company has
no material non-cancelable commitments for the purchase of products or services
other than inventory purchases in the normal course of business. The Company
believes that existing cash balances and cash generated from operations will be
sufficient to finance its existing operations for the foreseeable future.
BACKLOG
The Company's backlog of customer orders was approximately $3.0 million as
of both March 30, 1996 and April 1, 1995. All backlog orders are expected to be
filled within one year. Backlog consists primarily of the portion of supplies on
long-term contracts expected to be shipped within one year and Platesetter
orders. The Platesetter backlog as of March 30, 1996 is expected to be filled by
September 30, 1996, although the Company expects additional orders to be placed
by that time.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). SFAS 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) application of
the fair value recognition provision of SFAS 123 to such arrangements. SFAS 123
is required to be adopted for reporting purposes by the Company in 1996.
Companies are permitted, however, to continue to apply APB opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
investment awarded. The Company will continue to apply APB opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
15
BUSINESS
GENERAL
Printware designs, builds and markets "Computer-to-Plate" systems which are
used by the offset printing industry to create printing plates directly from
computer data. These systems replace the traditional process (see figure below)
of typesetting, paste-up, camera work and film processing to produce a printing
plate:
TRADITIONAL PLATEMAKING PROCESS
[CHART]
Chart: Drawing depicting Traditional Platemaking Process of typesetting,
paste-up, camera work and film processing to produce a printing plate.
Computer-to-Plate technology provides one-step platemaking (including text,
graphics and photographic halftones) directly from computer data, much as a
laser printer makes printed pages directly from computer data (see figure
below):
COMPUTER-TO-PLATE PROCESS
[CHART]
Chart: Drawing depicting Computer-to-Plate Process in which a plate is made
directly from computer data.
The key benefits of Computer-to-Plate technology are:
- Lower costs from savings in supplies and labor
- Faster turnaround times
- Fewer pieces of equipment
- Fewer environmental limitations on by-product disposal
16
Some of the Company's customers have found that Computer-to-Plate technology
can reduce their costs for some printing operations by up to 50%. The check
printing, social printing and envelope printing segments of the printing
industry have been early adopters of Computer-to-Plate technology, largely
because of higher volumes and early computerization.
The heart of Printware's Platesetters is a high-resolution laser marker
system, the key technology obtained from 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. In 1990
Printware's Model 1440 Platesetter received the InterTech Technology Award for
Innovative Excellence from the Graphic Arts Technical Foundation. This award is
reserved for products judged to have the potential for a major impact in the
industry. There can be no assurance that the Company's resonant galvanometer
technology will remain competitive with other types of laser scanners. The
Company is exploring the feasibility of incorporating laser scanners based on
other technologies into its products.
Printware was organized in 1985 and began deliveries in 1987 of its first
product, a high resolution laser printer. In 1988 Printware began selling its
first Platesetter, the Model 1440 electrostatic Platesetter. Printware
subsequently expanded its product line with new Platesetter models, new laser
printers and filmsetters. In 1993, however, Printware began to focus exclusively
on Computer-to-Plate products and phased out its other product lines. This
resulted in reduced revenues in 1993 and 1994, but a significant improvement in
profitability. During this period Printware completed development of and began
to deliver a new photographic process (silver-halide) Platesetter, called the
Model 3240, to serve a broader range of users. The Model 3240 is marketed for
the Company by Mitsubishi under Mitsubishi's brand name.
INDUSTRY OVERVIEW
According to Printing Industries of America ("PIA"), a trade association,
there were approximately 52,400 printing firms in the United States in 1995. The
Company believes that most of the printing presses installed at these firms are
small format (18" wide or less), one and two color presses, which is the market
segment of the printing industry that the Company serves.
Printers in the United States are rapidly computerizing. Vantage Strategic
Marketing, a market research firm, estimates that 29% of print jobs now
originate electronically and that this will grow to 53% by the year 2000.
Although only a small percentage of printers now use Computer-to-Plate
technology, this is expected to grow rapidly. A 1995 poll by PIA of 6,000
printers in the United States and Canada indicated that approximately 6% were
using Computer-to-Plate technology. According to PIA, this percentage is
expected to grow to 33% by 1997. State Street Consultants, a consulting firm
which focuses on the graphic arts industry, surveyed 232 in-plant, commercial
and newspaper printers and found in 1995 that:
- 82% expect Computer-to-Plate technology to be widely accepted by the year
2000
- 80% expect to buy a Computer-to-Plate system eventually
- nearly 70% of newspapers expect to shift to Computer-to-Plate technology
Mills-Davis, a consulting firm, in a study commissioned by the Association
for Suppliers of Printing and Publishing Technologies ("NPES"), predicted that
because of competitive pressure on printers to increase efficiency and reduce
costs, "Direct-to-Plate will be a boom industry by 1997 and for the years that
follow." According to the NPES QUARTERLY ECONOMIC FORECAST for the fourth
quarter of 1995, much of the growth in imaging/prepress equipment shipments in
the next two years will stem from the purchase of computer-related equipment,
with only a minor portion attributed to gains in traditional prepress equipment.
A 1995 study by Professor Frank Romano of the Rochester Institute of Technology
estimates that Platesetter equipment sales will exceed $2 billion for the
six-year period between 1995 and the year 2000.
17
CUSTOMERS
The Company has sold over 300 Platesetters to date, which it believes is
more than any other single competitor. Printware's customers include a number of
leading printers, such as Deluxe, Pitney Bowes, Thomson Publishing, Liberty
Check Printers and Northrop-Grumman. Most of the Company's large customers have
one or two year contracts for service and supplies. Sales to Deluxe accounted
for $3.50 million and $2.85 million of revenue in 1995 and 1994, respectively,
which constituted 41.7% and 43.0% of 1995 and 1994 revenue, respectively. Sales
to Mitsubishi, principally of the Model 3240 which it markets for the Company
under Mitsubishi's brand name, accounted for $1.46 million and $140,000 of
revenue in 1995 and 1994, respectively, which constituted 17.5% and 2.1% of 1995
and 1994 revenue, respectively. The loss of Deluxe or Mitsubishi as a customer,
or a substantial reduction in their purchases, would have a material adverse
effect on the Company. The Company provides a majority of the Platesetter
supplies used by Deluxe under a multi-year contract that expires at the end of
1997. See "Certain Transactions."
BUSINESS STRATEGY
Printware's strategic plan is to continue to focus on Computer-to-Plate
products and pursue these specific strategies:
COVER A BROAD RANGE OF MAINSTREAM PRINTING. In the past several years the
Company has focused on providing a broad Computer-to-Plate product line for
"mainstream" printing, which management believes currently accounts for most
printing. The Company has no plans to pursue "high-end" Platesetter business
geared toward magazine-quality color printing (above 2,400 dots per inch
resolution) or large presses over 18" wide.
CUSTOMER DRIVEN INNOVATION. The Company's product strategy is primarily
driven by customer requirements, rather than technology. The Company believes
that this strategy will allow it to bring products and services to the
marketplace with the best chance of success. The Company endeavors to have all
areas of the Company maintain a close relationship with current and prospective
customers.
INCREMENTAL INNOVATION FROM CORE PRODUCTS. Printware's philosophy is to
develop new products from modules and technologies that are already available,
either within Printware or from third parties. The Company believes that this
philosophy will allow the Company to broaden its product line without excessive
research and development expenses or inordinate technical risks.
MAINTAIN EXCEPTIONAL QUALITY. The Company believes that its customers
demand near-perfect quality, and that quality demands will increase in the
future. The Company maintains a detailed problem reporting system and devotes
considerable engineering resources to improving designs and promptly eliminating
problems. The Company has improved and broadened its incoming inspection and
vendor quality efforts. Especially in the area of supplies, the Company has
tightened its specifications in response to customer requirements and instituted
more rigorous testing programs. Management believes that these efforts have
resulted in significant quality improvements in recent years.
PRODUCTS
The Company makes two lines of Platesetters, the Model 3240 Platesetter line
for digital photographic (silver-halide) plates and the Model 1440 family of
digital electrostatic Platesetters. The Company also sells service and
proprietary supplies (primarily digital plate material for the Model 1440
product line).
MODEL 3240 PLATESETTER. This versatile product uses commodity silver-halide
plate material for a wide range of printing applications. The product is sold by
Mitsubishi under its brand name internationally and through several leading
domestic graphic arts dealers, giving it broad market coverage. The Model 3240
is approximately 3' wide by 4' high by 4' long, and consists 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. It has a liquid-crystal operator panel to enter
machine settings and for checking machine status. The Model 3240 has input and
output cassettes for rolls of plate material. Imaged plates exit the machine
into a tray already dried, cut to size and press-ready.
18
MODEL 1440 PLATESETTER. This product line has three models: one for
economical paper-based plates; another for durable metal plates; and a third for
either paper or metal. The Model 1440 serves niche markets such as check
printing, social printing and envelope printing. It is sold by the Company's own
sales force, which has expertise in the specialized applications served by the
Model 1440. The Model 1440 is approximately 3' wide by 1 1/2' high by 2 1/2'
deep, and has liquid crystal operator panels to enter machine settings and for
checking machine status. The units have an area to load a roll of plate material
stock, or in the case of the metal plate version, a plate sheet feeder. Imaged
plates exit the machine into a tray or into optional post-processing modules.
The Company sells in-line plate handling modules for fully automated systems.
Optional equipment includes plate converters for paper plates, plate decoaters
for metal plates and plate sheet feeders for metal plates.
The Model 3240 resolution is 3,240 thousand dots per square inch (1,800 dots
per inch), which is suitable for high quality color and photographs. The Model
1440 resolution is 1,440 thousand dots per square inch (1,200 dpi), which is
suitable for text, graphics and medium-quality photographs. The imaging speed of
the Model 3240 is up to 36 inches per minute, and for the Model 1440 is 40
inches per minute. Based on independent surveys conducted by THE SEYBOLD REPORT
ON PUBLISHING SYSTEMS ("THE SEYBOLD REPORT"), a trade journal, in 1995 and
PrintCom Consulting Group in 1996, the Company believes that its products are
among the fastest Platesetters available.
End-user pricing is $85,000 to $100,000 for Model 3240 Platesetters and
$75,000 to $150,000 for Model 1440 Platesetters, depending on the specific model
and configuration. The Company also provides consulting services, software,
support and training for the Model 1440. The Company has been able to raise the
list prices of Model 1440 units by more than 50% since 1993 because of the
unique value it provides in certain applications.
RASTER IMAGE PROCESSORS (RIPS). Printware sells RIPs to connect
Platesetters to the customer's computer network and convert computer data to the
digital images which appear on the printing plate. The Company's RIPs are fully
compatible with the industry-standard PostScript language and most popular
networks. The Company has two RIP models, the economical ZipRip and the
high-speed ZAPrip.
SUPPLIES. Printware specifies, tests and markets supplies for Model 1440
Platesetters. These supplies consist mostly of digital laser sensitive plate
material used in the Platesetter. The Company also sells a paper-based plate
material for cost-sensitive applications and an aluminum-based plate material
for longer-run printing. Approximately 90% of the Company's supplies revenue is
from plate materials, but other supplies sold by the Company include developer
(toner), conversion solution, press fountain solution, dispersant, decoating
solution and plate gum.
The Company believes that its metal printing plates have unique
environmental advantages over other metal printing plates. Tests conducted by an
engineering consulting firm concluded that by-products from processing the
Company's plates can be disposed of without special treatment. Printware's paper
and metal printing plates are both recyclable and contain no heavy metals such
as silver. The Company knows of no other digital plates that can be recycled as
easily as its plates. The Company believes that the environmental advantages of
its plates will become increasingly important to printers.
Printware's current generation of paper plate material, called Platinum
grade, was introduced in 1995. This plate material uses a zinc-oxide coating and
a triple plastic-coated paper base stock. The Company believes that this
plasticized stock provides more stability and consistency than other paper
plates. The plates can be used for run lengths of up to 5,000 impressions,
handling work which would otherwise require more expensive metal or
silver-halide plates. Platinum plate material comes in 425-foot rolls in various
widths up to 16 inches. The plates are cut to exact length by the Platesetter.
The Company believes that paper-based printing plates used in Printware
Platesetters are the lowest cost digital plates available.
MARKETING
Printware has separate marketing strategies for its two different
Platesetter lines. The Model 3240 Platesetter is sold by Mitsubishi, Printware's
marketing partner, who sells the Model 3240 to customers
19
directly or through graphic arts dealers. The Company has retained the right to
market the Model 3240 directly or through other marketing partners. The Model
1440 line is sold directly by Printware's own sales force, which has expertise
in the specialized applications served by the Model 1440.
Through its original equipment manufacturer ("OEM") partnership with
Mitsubishi, the Company is enjoying much broader product exposure. A significant
advertising campaign, which Mitsubishi began in several industry trade magazines
in late 1994, is raising product awareness for the Model 3240. In 1995 the Model
3240 was introduced at tradeshows in the U. S., Canada, Europe and Japan by
Mitsubishi. Pitman Co., the largest graphic arts dealer in the country, and
other dealers are exhibiting and promoting the product.
The Company believes that its OEM strategy for the Model 3240 allows
Mitsubishi to add value, such as brand awareness, promotion, distribution and
service. Mitsubishi also couples the sale of the Model 3240 to the sale of its
plate material supplies. The Company believes that Mitsubishi is the world's
leading supplier of photographic plate material. The Company has been satisfied
with the results of the Mitsubishi partnership, but there can be no assurance
that the relationship will continue or that the business level will continue to
grow. Currently the supplies marketed by Mitsubishi for the Model 3240 do not
materially affect the Company's sales of supplies for the Model 1440.
The Company's goal is to significantly expand distribution of its products
in order to reach a broader customer base. Management envisions this expansion
taking place gradually as the Computer-to-Plate market grows. The Company plans
to use a portion of the net proceeds of this Offering to expand its distribution
by hiring additional sales and marketing personnel, expanding advertising and
attending trade shows.
RESEARCH AND DEVELOPMENT
Printware has research and development programs underway or planned to
develop higher performance RIPs, faster Platesetters and lower-cost
Platesetters. The Company believes that these programs are necessary to maintain
its competitive advantage and that the technology to accomplish these programs
is already developed. The Company plans to continue to make use of outside
suppliers as part of these development efforts. No assurance can be given that
any of these programs will be successful in producing revenue for the Company.
HIGHER-PERFORMANCE RIPS. The Company is developing a next-generation raster
image processor using the current industry standard Adobe Level 2 PostScript
software interface. Products using this interface are intended to be available
in 1996, and will allow Printware equipment to integrate more easily with a
wider range of computer and network systems. The Company believes that offering
the widely-accepted Adobe software interface will improve the market acceptance
of the Company's products. In addition, Printware plans to improve the speed of
its RIPs with higher-speed microprocessors and other higher speed components.
FASTER PLATESETTERS. Based on independent surveys conducted by THE SEYBOLD
REPORT in 1995 and PrintCom Consulting Group in 1996, the Company believes that
its Platesetters are among the fastest in the industry, with a top speed of 40
inches per minute. The Company plans to maintain and extend its speed advantage
by developing a next generation of even faster Platesetters. Through changes in
the laser marker system, the Company believes it can increase the speed of its
Platesetters by up to 50%. If this can be accomplished, the Company believes it
will provide an important competitive advantage by helping the Company meet the
printing industry's ever-increasing productivity demands.
LOWER-COST PLATESETTERS. Printware plans to develop a Platesetter with an
end-user price in the $50,000 range, compared to $75,000 for Printware's current
lowest-priced model. Costs will be reduced by scaling down the maximum plate
width to approximately 13" and by eliminating certain features. The 13" width
would allow printing of up to two 8 1/2" by 11" pages simultaneously, and would
be compatible with a large number of small-format printing presses (sometimes
called duplicator presses). Management believes that such a product would allow
customers with lower plate volumes to justify a Platesetter purchase, thus
making it viable for smaller printing operations in segments such as business
forms and technical/legal publishing.
20
Printware had completed the development of such a product for a former OEM
partner (A. B. Dick Company) in 1994. A. B. Dick canceled its orders for the
product, but the Company believes parts of that design can be used in the new
product. A current customer has expressed strong interest in such a product,
although pricing and other supply terms have not been agreed to, and there is no
assurance that an acceptable supply agreement can be reached with the customer.
In addition to new products, the Company is committed to the continual
improvement of its existing products. Based on the results of rigorous quality
audits, the Company believes that Model 3240 product quality has improved
steadily since its introduction. The product meets the strenuous quality demands
of the world market and a number of Model 3240 units have been exported to
Japan. In 1996 the Company introduced an enhanced external design of the Model
3240, which is stronger and has a more rounded look.
In the long term (three to five years), the Company plans to develop more
highly automated digital printing systems built around Computer-to-Plate
technology. There can be no assurance that such a development effort will be
successful. The Company believes that there is and will continue to be
significant competition in this area.
COMPETITION
The growth in the Computer-to-Plate business has attracted considerable
competition. The Company's competitors and potential competitors are established
companies that have significantly greater financial, technical and marketing
resources than the Company. There can be no assurance that the Company's
competitors will not succeed in developing and marketing products which perform
better and are less expensive than the Company's products, or that will render
the Company's products and technology obsolete or noncompetitive in other ways.
The Company divides its competition into four categories: other platesetters;
film imagers; enhanced xerographic/laser printers; and supplies competitors.
OTHER PLATESETTERS. The Company believes, based on surveys reported in THE
SEYBOLD REPORT and by the PrintCom Consulting Group and others, that there are
at least 50 Platesetter models currently being marketed by more than 20
companies. THE SEYBOLD REPORT recently identified the four leaders as Printware,
Gerber Scientific, Creo Products and the Optronics division of Intergraph.
Another company, Presstek, a leader in digital presses, has recently introduced
Platesetters. THE SEYBOLD REPORT noted that: "...Printware has manufactured more
[Platesetters] than anyone else, giving it an enviable position in the market."
The Company believes that it has a head start over Platesetter competition,
although there can be no assurance the Company will be able to maintain that
advantage.
All major competitors mentioned above use metal plates, and most of their
Platesetters are relatively expensive ($250,000 to $500,000), as they are geared
towards the relatively small market for high-end color printing. Creo Products
serves large printers, such as magazine publishers. Gerber Scientific
specializes in metal Platesetters, and Optronics focuses on craft-oriented
printing.
Printware's products are focused at mainstream, smaller presses and
mid-range quality, which management believes currently accounts for most
printing. The Company believes that this type of printing will continue for the
foreseeable future, although there can be no assurance that a shift to large
format presses or higher-quality color printing might not render the Company's
products obsolete. From independent industry surveys, the Company believes its
Platesetters are unmatched in cost-effectiveness and speed. Gerber Scientific
and Presstek have announced lower cost models, but the Company believes they are
still more expensive to buy and to operate than Printware's products. All four
major competitors use metal plates, which are much more expensive than the
Printware's economical paper plates. Presstek has introduced a nonmetallic
version of its plate, but the plate is still much more costly than Printware's
paper-based plates. Printware's latest Platesetter for paper-based plates, the
Model 1440 ZNX, costs $75,000, which the Company believes is less than most
competitive Platesetters. The Company also believes that Printware Platesetters
have the lowest variable platemaking cost of any digital method.
In addition to the metal Platesetter competition summarized above, the
Company also faces significant competition from other photographic Platesetters
which use non-metallic printing plates. This competition could particularly
affect the Model 3240 photographic Platesetter. Management believes the most
significant
21
of these competitors include A. B. Dick Company, Eskofot International and
PrePress Systems. The Company believes that its advantages over those products
include higher speed, less plate waste and the reputation of the Mitsubishi
brand name.
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.,
Linotype-Hell 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 fully daylight-safe (no darkrooms) and chemical processing steps are
contained, providing so-called "dry-to-dry" operation. The Company's
Platesetters are faster than most film imagers and, unlike film imagers, have
virtually no plate waste.
XEROGRAPHIC/LASER PRINTERS. Enhanced xerographic/laser printers can replace
offset printing in certain applications, but are currently limited to
lower-quality applications such as overseas check printing and low-quality
business forms. These devices also have a higher variable cost per impression
than Computer-to-Plate technology. Companies in this area include Check
Technology Corporation, Delphax Systems and Xerox Corporation. Management
believes that competitors in this area are making efforts to improve the quality
and reduce the cost of their systems, and there can be no assurance that systems
marketed by the Company will sustain their advantage.
SUPPLIES COMPETITION. Printware has competitors that sell paper plate
supplies for Model 1440 Platesetters. The Company is not aware of competition
for metal plates used in the Model 1440. The most significant competitive paper
plate material is made by a Japanese paper mill and sold through a U. S.
distributor. There have also been several less significant competitors in this
market from time to time. Printware has addressed the competitive threat with
lower prices where appropriate and a program 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 strength and
dimensional stability, but not inferior in other respects. The Company also
believes that many of its customers would prefer to purchase their supplies from
Printware as the manufacturer of the equipment. The Company expects supplies
revenues to grow at a modest rate, but there can be no assurance that the
Company will be able to maintain its product advantage or that competition might
not adversely affect the profitability or viability of its supplies business.
PROPRIETARY RIGHTS
PATENTS AND TRADE SECRETS. Printware's policy is to attempt to protect its
technology by seeking patents, maintaining certain trade secrets and continuing
technological innovation. As of March 30, 1996, the Company had rights to 17
patents, consisting of 11 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 1995, 1994 and 1993 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 the Company's trade secrets.
PRODUCT SUPPLY AGREEMENTS. In 1995 Printware obtained the non-exclusive
right to use Adobe Systems' software interface for all of its Platesetters.
Adobe originated the printing industry standard PostScript language and is
viewed as controlling its future evolution. The Company also has non-exclusive
rights to raster image processing software used in the ZAPrip, to fonts used in
the ZipRip and to the plate processor module used in the Model 3240. 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.
22
SUPPLIERS
The Company has a number of single source suppliers for materials that are
critical to production of its products. These include the suppliers of the
Company's Model 1440 paper plate material, Model 1440 metal plate material,
Model 1440 liquid toner and certain key components used in Model 1440
Platesetters, Model 3240 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.
MANUFACTURING AND FACILITIES
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, 1998. Management believes that this
facility will be adequate for Printware's needs at least until the expiration of
the lease. The lease also has an option to extend for three additional years at
then-existing market rates. Monthly rent expense is currently $7,029, plus a pro
rata share of real estate taxes and common area maintenance.
EMPLOYEES
As of March 30, 1996, Printware had 48 employees, including 44 full-time
employees and 4 part-time or contract employees. Of the 44 full-time employees,
17 were in manufacturing, 5 were in marketing, sales and customer service, 14
were in research and development and 8 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. Accordingly,
Printware began an employee profit-sharing plan in 1995. The program provides
payments to each non-officer employee of up to 3% of salary, depending on the
Company's performance against quarterly profit goals. No Printware employees are
covered by collective bargaining agreements and the Company considers its
relationship with its employees to be good.
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.
23
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
March 30, 1996 are as follows:
NAME AGE POSITION WITH COMPANY
- ----------------------------- --- ----------------------------------------------------------
Allen L. Taylor, Ph.D.(1)(2) 60 Co-chairman of the Board, Director
Donald V. Mager(2) 60 Co-chairman of the Board, Director
Daniel A. Baker, Ph.D 38 President, Chief Executive Officer and Director
Thomas W. Petschauer 56 Executive Vice President and Chief Financial Officer
Joseph F. Dayton 49 Senior Vice President
Brian D. Shiffman(1)(2) 56 Director, Secretary
Jerry K. Twogood(2) 55 Director
Charles M. Osborne(1) 42 Director
- ---------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee
ALLEN L. TAYLOR, PH.D. has served as Co-chairman of the Board since February
1993 and prior to that time as Chairman of the Board beginning in May 1985. Dr.
Taylor is a co-founder of the Company but has never been an employee of the
Company. He has been an employee of 3M (a publicly-held diversified
manufacturer) for over 30 years and was instrumental in obtaining for the
Company in 1985 a license from 3M for the key galvanometer technology.
DONALD V. MAGER has served as Co-chairman of the Board since February 1993
and prior to that time was President, Chief Executive Officer and a director of
the Company since May 1985. Mr. Mager is a co-founder of the Company. Since
February 1993 Mr. Mager has been a part-time employee acting in a consulting
capacity and is no longer active in the day-to-day management of the Company.
Mr. Mager's employment by the Company will terminate on June 1, 1996.
Previously, he was employed by Sperry Corporation (a publicly-held manufacturer
of computer systems) and its predecessors for 30 years, most recently as
Director of New Product Ventures.
DANIEL A. BAKER, PH.D. has served as the Company's President and a member of
its Board of Directors since February 1993 and as Chief Executive Officer since
January 1995. Dr. Baker joined the Company in May 1990 as Vice President of
Engineering and was later appointed Vice President of Sales, Marketing and
Product Development. He has 20 years of experience in high-tech industry, and
personally holds 15 patents. His previous experience includes executive
positions at Minntech Corporation (a publicly-held manufacturer of medical and
industrial devices) and Percom Data Corporation (a privately-held manufacturer
of computer peripherals).
THOMAS W. PETSCHAUER has served as a Vice President of the Company since
June 1985 and was named Executive Vice President and Chief Financial Officer in
January 1995. Mr. Petschauer is a co-founder of the Company. He has over 30
years of technical, managerial and business experience in the computer and
peripheral field. Prior to joining Printware, he was Venture Executive at Sperry
Corporation, where he was employed for over 20 years.
JOSEPH F. DAYTON has served as a Vice President of the Company since October
1986 and was named Senior Vice President of Manufacturing and Customer Service
in January 1995. Prior to October 1986 he was employed by E. F. Johnson Company
(a publicly-held manufacturer of cellular radio systems), where he held
increasingly responsible executive positions in program management, quality and
manufacturing functions.
24
BRIAN D. SHIFFMAN has served on the Board of Directors since the Company's
incorporation in May 1985. Mr. Shiffman has been Business Development Manager at
Minnesota Project Innovation, Inc. since 1991. Previously, Mr. Shiffman was Vice
President at the Minnesota Cooperation Office, as a loaned executive from
Control Data Corporation, and was instrumental to the formation of the Company.
Mr. Shiffman was employed at Control Data Corporation (a publicly-held computer
systems business) for over 20 years.
JERRY K. TWOGOOD has served on the Board of Directors since January 1987.
Mr. Twogood has been the Executive Vice President of Deluxe (a publicly-held
provider of checks and related electronic-based payment systems) since 1987 and
since November 1995 has been its President of Manufacturing. He has also been a
member of the Board of Directors of Deluxe since 1987, where he has been
employed since 1959. Deluxe owned 51.3% of the Company's outstanding Common
Stock as of March 30, 1996 and is one of the Company's major customers.
CHARLES M. OSBORNE joined the Company's Board of Directors in January 1989.
Mr. Osborne has been Deluxe's Chief Financial Officer since 1984 and Senior Vice
President since 1989. He has been employed by Deluxe since 1981. Previously, Mr.
Osborne was at Deloitte & Touche LLP, public accountants. In 1996 Mr. Osborne
completed a term as President of the Financial Stationers Association. He also
serves on the board of directors of Graco Corporation (a publicly-held paint
sprayer business) and of Computer Petroleum Corporation (a publicly-held
provider of market research to the petroleum industry).
In addition to the above executive officers and directors, the Company has
certain other employees who the Company believes are important to its
operations. These key employees are: RODNEY S. CERAR, age 48, who has been with
the Company since March 1992 and has been Director of Platesetter Engineering
since February 1993 and was previously employed by ADC Telecommunications (a
publicly-held manufacturer of telecommunications equipment) from February 1990
to November 1991 as Manager of Manufacturing; ALEXANDER K. KOSS, age 37, who
joined the Company in July 1985 and has been Director of Product Development
since August 1994; TIMOTHY S. MURPHY, age 32, who has been employed by the
Company since October 1987 and has been Director of Marketing and Sales since
August 1994; and CORDELL E. LOMEN, age 50, who has been the Company's Controller
since October 1986.
The Company's Articles of Incorporation provide that the Board of Directors
may consist of up to 11 members. Currently the Board of Directors has 6 members.
Each director is elected to hold office until the next annual meeting of
shareholders.
The Company has not paid any fees to members of its Board of Directors, with
the exception of Mr. Shiffman, who receives $750 per quarter for serving as
Secretary. Under the Company's 1996 Stock Plan, each of the non-employee
directors (except for Messrs. Osborne and Twogood) was automatically granted a
non-qualified stock option for 1,000 shares of Common Stock (at an exercise
price of $3.00 per share) on April 25, 1996 when the Plan was approved by
shareholders and will be automatically granted an option for an additional 1,000
shares (at an exercise price equal to the then fair market value of the Common
Stock) upon each election or re-election as a member of the Board of Directors
(see "Stock Plans" below).
There are no family relationships among any of the Company's directors and
executive officers.
BOARD OF DIRECTORS COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee consists of Messrs. Osborne, Shiffman and Taylor.
This committee will review the Company's accounting, auditing and reporting
practices, make recommendations concerning the work of the Company's independent
auditors and review the adequacy of internal controls. The Compensation
Committee consists of Messrs. Taylor, Shiffman, Twogood and Mager. This
committee is responsible for establishing salaries, bonuses and other
compensation for the Company's executive officers, and for the administration of
the 1996 Stock Plan and the Employee Stock Purchase Plan. See "Stock Plans"
below.
25
EXECUTIVE COMPENSATION
The following table shows the compensation earned for services rendered in
all capacities to the Company by the President and Chief Executive Officer and
the two other most highly compensated executive officers of the Company whose
salary and bonuses exceeded $100,000 for the year ended December 31, 1995 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE FOR 1995
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
- ---------------------------------------- -------- ------- ------------ --------- ---------- ------------
Daniel A. Baker $110,000 $44,814 $ 0 $ 7,500(1) 11,203(2) $1,413(3)
President and CEO
Thomas W. Petschauer 95,000 38,703 0 0 9,675(2) 1,226(3)
Executive Vice President and CFO
Joseph F. Dayton 83,000 33,814 0 0 8,453(2) 956(3)
Senior Vice President
- ---------------------------
(1) Represents the value of a restricted stock award of 2,500 shares approved
by the Board of Directors.
(2) Consists of Incentive Stock Options awarded under the Company's 1995 Bonus
Plan for executive officers (see "Executive Bonus Plan").
(3) Consists of matching contributions made under the Company's 401(k) Plan
(see "401(k) Profit Sharing Plan").
None of the executive officers and directors of the Company are parties to
any employment or severance agreements, except for a Change in Control Severance
Agreement with Dr. Baker. This agreement provides that in the event of a change
in control of the Company followed by termination of Dr. Baker's employment
within one year thereafter, he will generally receive a lump sum severance
payment equivalent to two years of compensation.
The following table summarizes option grants in 1995 to each of the Named
Executive Officers:
OPTION GRANTS IN 1995
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK PRICE
---------------------------------------------------------------------------- APPRECIATION FOR
NUMBER OF SECURITIES PERCENTAGE OF TOTAL EXERCISE OR OPTION TERM
UNDERLYING OPTIONS OPTIONS GRANTED BASE PRICE EXPIRATION --------------------
GRANTED EMPLOYEES IN 1995 PER SHARE DATE 5%(1) 10%(1)
----------------------- --------------------- ------------- ------------- --------- ---------
Daniel A Baker(2).......... 8,000 34.4% $ 3.00 Jan. 13, 2005 $ 15,093 $ 38,250
Thomas W. Petschauer(2).... 7,000 30.0 3.00 Jan. 13, 2005 13,207 33,469
Joseph F. Dayton(2)........ 6,250 26.9 3.00 Jan. 13, 2005 11,792 29,883
- ---------------------------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying Common Stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates. As determined by the Company's
Board of Directors, the fair market value of the Common Stock on the date
of grant of the options described in the table was $3.00 per share.
(2) The options were granted under the 1986 Incentive Stock Option Plan and are
currently 100% vested.
26
The following table summarizes the value of options held at December 31,
1995 by the Named Executive Officers. There were no options exercised by the
Named Executive Officers during 1995.
YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
- ---------------------------------------------------- ----------- --------------- ----------- ---------------
Daniel A. Baker..................................... 18,750 11,203 $ 65,625 $ 39,211
Thomas W. Petschauer................................ 22,125 9,675 77,438 33,863
Joseph F. Dayton.................................... 25,700 8,453 89,950 29,586
- ---------------------------
(1) The amounts set forth represent the difference between the assumed Price to
Public of $6.50 per share and the exercise price of the options, multiplied
by the applicable number of shares underlying the options.
(2) The unexercisable options were granted in January 1996 for 1995
performance.
STOCK PLANS
1996 STOCK PLAN
The shareholders approved the Company's 1996 Stock Plan (the "Plan") on
April 25, 1996. The Plan is administered by the Compensation Committee of the
Board of Directors and expires on April 25, 2006. The Plan provides for the
grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to employees of the
Company and non-qualified stock options and restricted stock awards to
employees, consultants and directors of the Company. Options and awards of
restricted stock for up to 500,000 shares of Common Stock are authorized under
the Plan. The Compensation Committee has broad discretion to prescribe
conditions (such as the completion of a period of employment with the Company
following the grant of an option to an employee) to be satisfied before an
option becomes exercisable. The Plan also provides for the automatic grant of a
non-qualified stock option for 1,000 shares at 100% of the fair market value,
fully vested upon grant, exercisable for five years, to each non-employee
director upon adoption of the Plan and upon each election or re-election as a
member of the Board of Directors.
The Company's 1986 Incentive Stock Option Plan and the Company's original
Incentive Stock Option Plan have been utilized to grant all of the Company's
options through March 30, 1996. The original plan expired in June 1995. Although
the 1986 Incentive Stock Option Plan will not terminate until October 1996, the
Company decided not to grant any additional options under this plan after March
30, 1996.
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. The Stock Purchase Plan is administered by the
Compensation Committee of the Board of Directors. 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, with the first such offering planned to begin on April 1,
1997. Each offering under the Stock Purchase Plan will be for a period
determined by the Compensation Committee of 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. No shares have been issued under the Stock
Purchase Plan.
27
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 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. Under Section 401(k) of the Code, contributions by
employees or by the Company to the 401(k) Plan and income earned on plan
contributions are not taxable to employees until withdrawn from the 401(k) Plan.
Contributions by the Company, if any, will be deductible by the Company when
made.
EXECUTIVE BONUS PLAN
The Compensation Committee authorizes and approves an executive officer
bonus plan ("Bonus Plan") near the beginning of each year based on the Company's
financial plan for the year and based on its view of the overall compensation of
the executive officers. For 1996 the Bonus Plan provides for a formula-
determined cash payment of up to 52% of the base salary of each of the executive
officers based on the overall revenues and profit of the Company in 1996. The
Compensation Committee also reserves the right to make additions to the awarded
bonuses based on additional subjective measures of executive officer performance
and achievement. In addition, each executive officer will receive a grant of an
Incentive Stock Option for a number of shares of Common Stock determined by
dividing by four the number of dollars of Bonus Plan cash payment to each
officer. These Incentive Stock Options will be exercisable at the fair market
value of the Common Stock on the date of grant, will be 100% vested after one
year and will be exercisable for nine years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Each of the current non-employee directors is entitled to receive
compensation in the form of cash for their services as directors. At present,
and during the year ended December 31, 1995, no director or executive officer of
the Company and no member of the Compensation Committee is, or was during the
year ended December 31, 1995, a director or compensation committee member of any
other business entity which had a director that sits on the Company's Board of
Directors or Compensation Committee.
28
CERTAIN TRANSACTIONS
Deluxe owned 51.3% of the Company's outstanding Common Stock as of March 30,
1996 and two of its executive officers (Messrs. Osborne and Twogood) are members
of the Company's Board of Directors. From time to time over the last nine years,
the Company has had agreements with Deluxe to develop or deliver products,
supplies and services to Deluxe. Under some of these agreements the Company
received prepayments as a source of financing in exchange for providing
favorable pricing to Deluxe. The Company has recorded these prepayments as a
deferred revenue liability and no revenue was recognized until the Company
delivered the goods or services to Deluxe.
In February 1991 Deluxe ordered several units of a film imager version of
the Model 3240 and associated ZipRip raster image processors for a purchase
price and advance payment of $516,000. The Company offered favorable pricing to
Deluxe due to the Company's desire to receive financing from the advance payment
and the need for Deluxe to wait for completion of the development and subsequent
production of the units. A change to the product resulted in Deluxe paying an
additional $40,000 in November 1991. The Company delivered a portion of the
Model 3240 film imagers in 1993. In August 1994 Deluxe replaced its order with
another order for the Platesetter version of the Model 3240. The replacement
order was for a number of Model 3240 Platesetters, ZAPrips and a film imager
Model 3240, for an increase of $155,000 in the aggregate price. The Company
delivered the products for the replacement order in 1995.
In August 1993 the Company and Deluxe entered into a contract that called
for the Company to provide special equipment to Deluxe for $1.59 million.
Approximately $635,000 of the contract amount was paid as a down payment in
order to allow the Company to finance the procurement of components and
assemblies to ensure their availability for subsequent equipment production.
Deluxe later determined not to proceed with the transaction and paid the Company
an additional $45,000. As a result of the contract cancellation, the Company
wrote down the related inventory. The Company had no material gain or loss
resulting from the contract cancellation and settlement.
Effective in January 1995, the Company entered into a three year supply
contract with Deluxe to supply Deluxe with Model 1440 plate material. The
contract calls for Deluxe to purchase a fixed quantity of plate material each
year. In 1995 this contract produced revenues to the Company of between $2 and
$3 million. The Company believes this contract will produce similar revenues for
the Company in 1996 and 1997.
In February 1996, the Company entered into an $80,000 contract with Deluxe
under which the Company is performing software research and development work. In
April 1996 Deluxe placed a $102,000 purchase order for the Company to retrofit
certain Deluxe equipment to incorporate the results of this software research
and development work.
29
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 30, 1996 and as adjusted to
reflect the sale of the shares offered hereby by (i) each person known to the
Company to beneficially own more than five percent (5%) of Common Stock, (ii)
each director, (iii) each of the Named Executive Officers, (iv) all directors
and executive officers of the Company as a group and (v) each Selling
Shareholder. Except as otherwise indicated below, to the knowledge of the
Company, all shareholders have sole voting and investment power over the shares
beneficially owned, except to the extent authority is shared by spouses under
applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING SHARES TO OFFERING
----------------------- BE SOLD -----------------------
NAME NUMBER PERCENT IN OFFERING NUMBER PERCENT
- -------------------------------------------------- ---------- ----------- ----------- ---------- -----------
Deluxe Corporation(1) ............................ 1,862,290 51.31% 274,600 1,587,690 32.87%
P.O. Box 64235
St. Paul, MN 55164-0235
Donald V. Mager(2)(3) ............................ 454,862 12.53% 62,300 392,562 8.13%
c/o Printware, Inc.
1270 Eagan Industrial Rd.
St. Paul, MN 55121
Allen L. Taylor(3) ............................... 405,875 11.18% 62,300 343,575 7.11%
c/o Printware, Inc.
1270 Eagan Industrial Rd.
St. Paul, MN 55121
Thomas W. Petschauer(4)........................... 99,823 2.75% 0 99,823 2.07%
Daniel A. Baker(5)................................ 28,750 * 0 28,750 *
Joseph F. Dayton(6)............................... 25,800 * 0 25,800 *
Minnesota Technology, Inc......................... 5,500 * 800 4,700 *
Brian D. Shiffman................................. 500 * 0 500 *
Jerry K. Twogood(7)............................... 0 * 0 0 *
Charles M. Osborne(7)............................. 0 * 0 0 *
Directors and executive officers as a group (8
persons)(8)...................................... 2,877,900 79.29% 399,200 2,478,700 51.32%
- ---------------------------
* Less than 1%
(1) Includes 5,000 shares issuable upon the exercise of warrants exercisable
within 60 days of March 30, 1996. Deluxe is a major customer of the Company
and two of its officers are members of the Company's Board of Directors. See
"Business-- Customers" and "Management."
(2) Includes 18,700 shares issuable upon the exercise of options exercisable
within 60 days of March 30, 1996.
(3) Mr. Mager and Mr. Taylor are members of the Company's Board of Directors.
(4) Includes 22,125 shares issuable upon the exercise of options exercisable
within 60 days of March 30, 1996. The shares listed above for Mr. Petschauer
include 5,000 issued to his wife, as to which Mr. Petschauer disclaims
beneficial ownership.
(5) Includes 18,750 shares issuable upon the exercise of options exercisable
within 60 days of March 30, 1996.
(6) Includes 25,700 shares issuable upon the exercise of options exercisable
within 60 days of March 30, 1996.
(7) Mr. Twogood and Mr. Osborne are officers of Deluxe.
(8) Includes 85,275 shares issuable upon the exercise of options exercisable
within 60 days of March 30, 1996, the shares owned by Deluxe and 5,000
shares issuable to Deluxe upon the exercise of its warrants exercisable
within 60 days of March 30, 1996.
30
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock.
The following summary of the terms and provisions of the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Company's Articles of Incorporation and applicable law.
COMMON STOCK
On March 30, 1996, there were 3,629,713 shares of Common Stock outstanding
held by 209 shareholders of record. All shares of Common Stock have equal voting
rights and have one vote per share in all matters to be voted upon by
shareholders. Cumulative voting in the election of directors is not allowed. No
share of Common Stock is entitled to preference over any other share of Common
Stock, and each share of Common Stock is equal to any other share of Common
Stock in all respects. All of the outstanding shares of Common Stock are, and
the shares to be sold pursuant to this offering will be, fully paid and
nonassessable.
The shares of Common Stock have no preemptive or conversion rights, no
redemption or sinking fund provisions and are not liable for further call or
assessment. Subject to the rights of holders of the Preferred Stock, each share
of Common Stock is entitled to receive a return of paid-in capital and to
participate pro rata in any distribution of capital assets, whether voluntary or
involuntary, after creditors have been paid in full.
Subject to the rights of holders of the Preferred Stock, shareholders of
Common Stock are entitled to receive dividends when and as declared by the
Company's Board of Directors out of funds legally available thereof. Any such
dividends may be paid in cash, property or shares of Common Stock. The Company
has not paid any cash dividends since its inception and presently anticipates
that no dividends on its Common Stock will be declared in the foreseeable
future.
PREFERRED STOCK
There are no shares of Preferred Stock issued and outstanding. The Preferred
Stock is issuable by the Board of Directors from time to time in one or more
series without approval of the Company's shareholders. Each series will have a
distinctive designation or title as is fixed by the Board of Directors. Each
series of Preferred Stock will have such voting power (or no voting power),
preferences, rights, qualifications, limitations or restrictions as are adopted
by the Board of Directors prior to the issuance of the series, and would likely
have rights superior to the rights of Common Stock. The Company presently has no
plan to issue any Preferred Stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Bylaws and Minnesota law require the Company to indemnify any
director, officer, employee or agent of the Company who was or is a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, against certain liabilities and
expenses incurred in connection with the action, suit or proceeding, except
where such persons have not acted in good faith or did not reasonably believe
that the conduct was in the best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or other persons controlling the Company pursuant to the foregoing
provisions, the opinion of the Securities and Exchange Commission (the
"Commission") is that such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in
31
the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire the
Company which could deprive the Company's shareholders of opportunities to sell
their shares of Common stock at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act ("MBCA") provides
that, unless the acquisition of certain new percentages of voting control of the
Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other
person is approved by a majority of the disinterested shareholders of the
Company, the shares acquired above such new percentage level of voting control
will not be entitled to voting rights. The Company is required to hold a special
shareholders' meeting to vote on any such acquisition within 55 days after the
delivery to the Company by the acquiror of an information statement describing,
among other things, the acquiror and any plans of the acquiror to liquidate or
dissolve the Company and copies of definitive financing agreements for any
financing of the acquisition not to be provided by funds of the acquiror. If any
acquiror does not submit an information statement to the Company within ten days
after acquiring shares representing a new threshold percentage of voting control
of the Company, or if the disinterested shareholders vote not to approve such an
acquisition, the Company may redeem the shares so acquired by the acquiror at
their market value. Section 302A.671 generally does not apply to a cash offer to
purchase all shares of voting stock of the issuing corporation if such offer has
been approved by a majority vote of disinterested board members of the issuing
corporation.
Section 302A.673 of the MBCA restricts certain transactions between the
Company and a shareholder who becomes the beneficial holder of 10% or more of
the Company's outstanding voting stock (an "interested shareholder") unless a
majority of the disinterested directors of the Company have approved, prior to
the date on which the shareholder acquired a 10% interest, either the business
combination transaction suggested by such a shareholder or the acquisition of
shares that made such a shareholder a statutory interested shareholder. If such
prior approval is not obtained, the statute imposes a four-year prohibition from
the statutory interested shareholder's share acquisition date on mergers, sales
of substantial assets, loans, substantial issuances of stock and various other
transactions involving the Company and the statutory interested shareholder or
its affiliates.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
American Securities Transfer, Incorporated of Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock of the
Company. Sales of substantial amounts of Common Stock of the Company in the
public market after restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon the completion of this Offering, the Company will have 4,829,713 shares
of Common Stock outstanding, assuming no exercise of currently outstanding
options or warrants. Of these shares, the 1,600,000 shares sold in this Offering
will be freely tradeable without restriction under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 3,229,713 shares of Common stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration such as Rule 144, 144(k) or 701 under the Securities
Act. Holders of an aggregate of 2,383,425 shares of Common Stock and holders of
options and warrants to purchase an additional 119,606 shares, have entered into
lock-up agreements under which they have agreed not to offer, sell or otherwise
dispose, or directly or indirectly cause or permit the offer, sale or other
disposition, of any Common Stock of the Company owned of record or beneficially
and of which such shareholder has the power to control the disposition for a
period of six months after the date of this Prospectus, without the prior
written consent of the Underwriter. The Company has entered into a similar
agreement, except that the Company may grant options and issue stock under its
current stock option plans and pursuant to other currently outstanding options.
32
As of March 30, 1996, 135,567 shares were subject to outstanding options.
Following this Offering, the Company intends to file a Registration Statement on
Form S-8 covering shares issuable under the Company's Incentive Stock Option
Plan adopted in 1985, 1986 Incentive Stock Option Plan, 1996 Stock Plan and 1996
Employee Stock Purchase Plan, thus permitting the resale of such shares in the
public market without restrictions under the Securities Act after expiration of
the applicable lock-up agreements.
Upon the effective date of the Offering, 748,876 shares of Common Stock will
become eligible for sale in the public market pursuant to Rule 144(k). Beginning
90 days after the date of this Prospectus, 23,698 additional shares of Common
Stock (including 14,792 shares subject to outstanding vested options) will
become available for sale in the public market subject, in certain cases, to the
vesting requirements and volume and manner of sale limitations of Rule 144. Upon
expiration of the lock-up agreements, an additional 2,473,700 shares of Common
Stock (including 66,575 shares subject to outstanding vested options and 5,000
shares subject to outstanding vested warrants) will become eligible for
immediate public resale, subject in some cases to vesting provisions and volume
limitations pursuant to Rule 144. The remaining 4,700 shares will become
eligible for public resale at various times over a period of less than two years
following the completion of this Offering, subject in some cases to vesting
provisions and volume limitations.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 48,297 shares
immediately after this Offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this Offering are entitled to sell such shares 90 days after
the effective date of this Offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modification may have a material effect on the
time when shares of the Company's Common Stock become eligible for resale.
REGISTRATION RIGHTS
In connection with their acquisition of securities of the Company, two of
the Company's existing shareholders have agreements with the Company under which
the shareholders have the right to have their shares of Common Stock included in
future registration statements filed by the Company under the Securities Act.
33
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each
Underwriter named below has severally agreed to purchase, and the Company and
the Selling Stockholders have agreed to sell to such Underwriters, the number of
shares of Common Stock set forth opposite the name of such Underwriter below, at
the Price to Public set forth on the cover page of this Prospectus, less the
underwriting discount.
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------------ ------------------
R.J. Steichen & Company.............................................................
----------
Total............................................................................. 1,600,000
----------
----------
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of the Common Stock offered hereby if any are
purchased.
The Company and the Selling Shareholders have been advised by the
Representative that the Underwriters propose to offer the shares of Common Stock
to the public at the Price to Public set forth on the cover page of this
Prospectus and to certain selected dealers at such Price to Public less usual
and customary concessions not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.05 per
share to certain other securities dealers. Each of the concessions allowed will
be to members of the National Association of Securities Dealers, Inc. After the
initial public offering, the offering price and other selling terms may be
changed by the Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus, to
purchase up to an additional 180,000 shares of Common Stock from the Company,
and up to an additional 60,000 shares from the Selling Shareholders, at the
Price to Public less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
If purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 1,600,000 shares are being offered.
The Company and the Selling Shareholders have agreed to pay, on a pro rata
basis, to the Representative a nonaccountable expense allowance equal to 2.0% of
the aggregate offering price of the shares offered hereby, including the shares
sold by the Selling Shareholders, or $ ($ if the over-allotment
option is exercised in full), of which $10,000 has been paid. Such allowance is
included in the expenses of the Offering set forth on the cover page of this
Prospectus.
The Company has agreed to sell to the Representative upon the closing of
this Offering, for nominal consideration, the Representative's Warrant to
purchase 120,000 shares of Common Stock at an exercise price per share equal to
120% of the Price to Public. The Representative's Warrant contains anti-dilution
provisions providing for appropriate adjustments upon the occurrence of certain
events and contains a one-time demand and certain "piggyback" registration
rights with respect to the shares of Common Stock issuable upon the exercise of
the Representative's Warrant. The Representative's Warrant will have a "cashless
exercise" feature entitling the holder to convert the Representative's Warrant
into shares of Common Stock. This provision allows the holder of the
Representative's Warrant to apply the difference
34
between the exercise price of the Representative's Warrant and the higher fair
market value of the Common Stock underlying the Representative's Warrant to the
payment of the exercise price. The Representative's Warrant will be exercisable
commencing one year from the date of this Prospectus until five years after such
date. The Representative's Warrant is not transferable for a period of one year
after the effective date of the Offering, except for transfers by operation of
law, by will or pursuant to the laws of descent and distribution or to officers
of the Representative. Furthermore, the Representative's Warrant will not be
transferable absent an exemption from applicable state and federal securities
laws. Any profits realized upon the sale of the Representative's Warrant or the
Common Stock issuable upon exercise thereof may be deemed to constitute
additional underwriting compensation.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act. Such indemnification is limited or unavailable in certain
circumstances, including where legally unavailable.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
Shareholders of the Company holding in the aggregate 2,383,425 shares of
Common Stock and holders of options and warrants to purchase an additional
119,606 shares have agreed not to offer, sell or otherwise dispose, or directly
or indirectly cause or permit the offer, sale or other disposition, of any
Common Stock of the Company owned of record or beneficially and of which such
shareholder has the power to control the disposition for a period of six months
after the date of this Prospectus without the prior consent of the
Representative. See "Shares Eligible for Future Sale."
The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which any of them exercises discretionary authority.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representative. Among the factors considered in such negotiations will be
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representative believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. Certain legal
matters relating to the Offering will be passed upon for the Underwriters by
Winthrop & Weinstine, P.A., Minneapolis, Minnesota.
35
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to the Company and the Common Stock, reference is made to such
Registration Statement and exhibits. Statements made in this Prospectus as to
the contents of any contract, agreement or other documents referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved. The
Registration Statement and exhibits may be inspected without charge and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; Citicorp Center, 500 West Madison, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, New York, New York
10048. Copies of such material may be obtained at prescribed rates from the
Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549.
36
INDEX TO FINANCIAL STATEMENTS
PRINTWARE, INC.
PAGE
----
Independent Auditors' Report.......................................... F-2
Balance Sheets as of March 30, 1996 (unaudited) and December 31, 1995
and 1994............................................................. F-3
Statements of Operations for the three months ended March 30, 1996 and
April 1, 1995 (unaudited) and the years ended December 31, 1995, 1994
and 1993............................................................. F-4
Statements of Changes in Shareholders' Equity for the three months
ended March 30, 1996 (unaudited) and the years ended December 31,
1995, 1994 and 1993.................................................. F-5
Statements of Cash Flows for the three months ended March 30, 1996 and
April 1, 1995 (unaudited) and the years ended December 31, 1995, 1994
and 1993............................................................. F-6
Notes to Financial Statements for the three months ended March 30,
1996 and April 1, 1995 (unaudited) and the years ended December 31,
1995, 1994 and 1993.................................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To The Shareholders of Printware, Inc.:
We have audited the accompanying balance sheets of Printware, Inc. (the
Company) as of December 31, 1995 and 1994 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Printware, Inc. at December 31, 1995 and
1994 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 2, 1996
(April 25, 1996 as to the
first paragraph of Note 3)
F-2
PRINTWARE, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------
1995 1994
MARCH 30, ------------ ------------
1996
------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,795,856 $ 2,568,852 $ 860,668
Receivables (Note 2)...................................... 743,094 773,740 507,942
Inventories (Notes 1 and 2)............................... 1,624,238 1,727,342 1,843,698
Prepaid expenses.......................................... 69,193 17,394 43,651
------------ ------------ ------------
Total current assets.................................... 5,232,381 5,087,328 3,255,959
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization (Notes 1 and 2)............................... 130,419 130,677 183,415
INTANGIBLE ASSETS, net of accumulated amortization (Notes 1
and 2)..................................................... 33,606 34,396 37,554
------------ ------------ ------------
$ 5,396,406 $ 5,252,401 $ 3,476,928
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 390,602 $ 436,852 $ 445,059
Accrued expenses (Notes 1 and 2).......................... 308,650 469,108 342,988
Deferred revenues (Note 7)................................ 41,488 29,773 175,350
------------ ------------ ------------
Total current liabilities............................... 740,740 935,733 963,397
COMMITMENTS AND CONTINGENCIES (Notes 4, 5, 7 and 11)
SHAREHOLDERS' EQUITY (Note 3):
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 3,629,713 shares at March 30,
1996; 3,627,013 and 3,623,776 shares at December 31, 1995
and 1994, respectively................................... 15,522,238 15,514,138 15,504,426
Accumulated deficit....................................... (10,866,572) (11,197,470) (12,990,895)
------------ ------------ ------------
Total shareholders' equity.............................. 4,655,666 4,316,668 2,513,531
------------ ------------ ------------
$ 5,396,406 $ 5,252,401 $ 3,476,928
------------ ------------ ------------
------------ ------------ ------------
See notes to financial statements.
F-3
PRINTWARE, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
---------------------- YEAR ENDED DECEMBER 31,
MARCH 30, APRIL 1, -----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- -----------
(UNAUDITED)
REVENUES (Note 1, 7, 8 and 10).............................. $1,832,013 $1,807,623 $8,388,148 $6,626,925 $ 7,296,484
COST OF REVENUES............................................ 1,110,046 1,000,871 5,003,956 4,102,401 5,344,519
---------- ---------- ---------- ---------- -----------
Gross margin................................................ 721,967 806,752 3,384,192 2,524,524 1,951,965
PERIOD COSTS:
Research and development.................................. 178,941 205,778 757,131 956,807 1,314,355
Selling, general and administrative....................... 238,471 270,869 1,072,878 945,533 1,851,507
---------- ---------- ---------- ---------- -----------
Total................................................... 417,412 476,647 1,830,009 1,902,340 3,165,862
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS............................... 304,555 330,105 1,554,183 622,184 (1,213,897)
OTHER INCOME (EXPENSE):
Net gain on arbitration award (Note 11)................... -- -- 192,335 -- --
Interest expense.......................................... (235) (1,250) (3,333) (4,457) (8,143)
Interest and other income................................. 33,078 9,628 72,740 27,375 18,442
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.... 337,398 338,483 1,815,925 645,102 (1,203,598)
INCOME TAXES (Note 9)....................................... 6,500 12,000 22,500 2,000 1,109
---------- ---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 330,898 326,483 1,793,425 643,102 (1,204,707)
EXTRAORDINARY ITEM -- GAIN ON EXTINGUISHMENT OF DEBT (Note
3)......................................................... -- -- -- 140,927 --
---------- ---------- ---------- ---------- -----------
NET INCOME (LOSS)........................................... $ 330,898 $ 326,483 $1,793,425 $ 784,029 $(1,204,707)
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(Note 1):
Income (loss) before extraordinary item................... $ .09 $ .09 $ .48 $ .17 $ (.33)
Extraordinary item........................................ -- -- -- .04 --
---------- ---------- ---------- ---------- -----------
Net income (loss)......................................... $ .09 $ .09 $ .48 $ .21 $ (.33)
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 1)................................ 3,705,403 3,705,627 3,705,627 3,685,580 3,635,226
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
See notes to financial statements.
F-4
PRINTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 30, 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK TOTAL
------------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------- ------------- -------------- -------------
BALANCE AT DECEMBER 31, 1992.......................... 3,611,889 $ 15,468,763 $ (12,570,217) $ 2,898,546
Shares issued pursuant to exercise of stock options... 750 2,250 -- 2,250
Shares redeemed and retired at $3.00 per share........ (700) (2,100) -- (2,100)
Shares issued for services performed for the
Company.............................................. 3,387 10,163 -- 10,163
Net loss.............................................. -- -- (1,204,707) (1,204,707)
---------- ------------- -------------- -------------
BALANCE AT DECEMBER 31, 1993.......................... 3,615,326 15,479,076 (13,774,924) 1,704,152
Shares issued in connection with extinguishment of
debt................................................. 5,500 16,500 -- 16,500
Shares issued pursuant to exercise of stock options... 150 450 -- 450
Shares issued for services performed for the
Company.............................................. 2,800 8,400 -- 8,400
Net income............................................ -- -- 784,029 784,029
---------- ------------- -------------- -------------
BALANCE AT DECEMBER 31, 1994.......................... 3,623,776 15,504,426 (12,990,895) 2,513,531
Shares issued pursuant to exercise of stock options... 737 2,212 -- 2,212
Shares issued for services performed for the
Company.............................................. 2,500 7,500 -- 7,500
Net income............................................ -- -- 1,793,425 1,793,425
---------- ------------- -------------- -------------
BALANCE AT DECEMBER 31, 1995.......................... 3,627,013 15,514,138 (11,197,470) 4,316,668
Shares issued pursuant to exercise of stock options
(unaudited).......................................... 200 600 -- 600
Shares issued for services performed for the Company
(unaudited).......................................... 2,500 7,500 -- 7,500
Net income (unaudited)................................ -- -- 330,898 330,898
---------- ------------- -------------- -------------
BALANCE AT MARCH 30, 1996 (UNAUDITED)................. 3,629,713 $ 15,522,238 $ (10,866,572) $ 4,655,666
---------- ------------- -------------- -------------
---------- ------------- -------------- -------------
See notes to financial statements.
F-5
PRINTWARE, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
--------------------- YEARS ENDED DECEMBER 31,
MARCH 30, APRIL 1, ------------------------------------
1996 1995 1995 1994 1993
---------- --------- ---------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 330,898 $ 326,483 $1,793,425 $ 784,029 $(1,204,707)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 16,097 20,432 71,271 92,813 190,217
Common Stock issued for services.......................... 7,500 7,500 7,500 8,400 10,163
Extraordinary item........................................ -- -- -- (140,927) --
Changes in operating assets and liabilities:
Receivables............................................. 30,646 (166,160) (265,798) 66,497 696,437
Inventories............................................. 103,104 (273,018) 116,356 636,099 405,332
Prepaid expenses........................................ (51,799) (3,612) 26,257 (15,559) 80,542
Accounts payable........................................ (46,250) 106,558 (8,207) (479,317) 56,946
Accrued expenses........................................ (160,458) (96,089) 126,120 (227,093) 221,916
Deferred revenues....................................... 11,715 (153,050) (145,577) (1,102,361) (387,064)
---------- --------- ---------- ----------- -----------
Net cash provided by (used in) operating activities... 241,453 (230,956) 1,721,347 (377,419) 69,782
---------- --------- ---------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (15,049) (4,457) (15,375) (50,200) (72,771)
Increase in intangible assets............................. -- -- -- (984) (25,707)
---------- --------- ---------- ----------- -----------
Net cash used in investing activities................. (15,049) (4,457) (15,375) (51,184) (98,478)
---------- --------- ---------- ----------- -----------
FINANCING ACTIVITIES:
Advances on equipment and consumable sales................ -- -- -- -- 755,712
Proceeds from issuance of Common Stock.................... 600 1,012 2,212 450 2,250
Common Stock redeemed and retired......................... -- -- -- -- (2,100)
---------- --------- ---------- ----------- -----------
Net cash provided by financing activities............. 600 1,012 2,212 450 755,862
---------- --------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 227,004 (234,401) 1,708,184 (428,153) 727,166
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,568,852 860,668 860,668 1,288,821 561,655
---------- --------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $2,795,856 $ 626,267 $2,568,852 $ 860,668 $ 1,288,821
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for:
Interest................................................ $ 236 $ 1,250 $ 3,333 $ 4,457 $ 8,143
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Income taxes............................................ $ 6,500 $ 12,000 $ 15,488 $ 2,000 $ 1,109
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
OTHER NON CASH ITEM:
Issuance of Common Stock for extinguishment of debt (Note
3)....................................................... -- -- -- $ 16,500 --
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
See notes to financial statements.
F-6
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
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.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of March 30, 1996 and the statements of
operations and cash flows for the three months ended March 30, 1996 and April 1,
1995, the statement of shareholders' equity for the three months ended March 30,
1996 and the interim information as of and for the three months ended March 30,
1996 and April 1, 1995 appearing in the notes to financial statements 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.
REVENUE RECOGNITION
Revenue for equipment and supply sales is recognized at the time of shipment
to customers. Revenue from development projects and their related costs is
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 three months ended March 30, 1996 and April 1, 1995 and
the years ended December 31, 1995, 1994 and 1993.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock and dilutive Common Stock equivalents outstanding. 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 (Note 3). Common Stock equivalents result
from dilutive stock options and warrants. Common equivalent shares are not
included in the per share calculations when the effect of their inclusion would
be antidilutive, except that, in accordance with Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
12 months prior to the Company's proposed initial public offering have been
included in the calculation (using the treasury stock method based on an assumed
initial public offering price of $6.50 per share) as if they were outstanding
for all periods presented. The net income (loss) per common share will change if
the actual initial public offering price differs from the assumed initial public
offering price per share utilized in this calculation. Fully diluted earnings
(loss) per common share is substantially equivalent to primary earnings per
share and is therefore not separately presented.
CASH EQUIVALENTS
Cash equivalents consist primarily of investments in commercial paper and
certificate of deposits, which have original maturities of three months or less.
CREDIT RISK
The Company generally does not require collateral for its trade accounts
receivable. The Company manages credit risk by evaluating creditworthiness
regularly. 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.
F-7
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market. The Company has recorded inventory valuation
reserves of $562,000 at March 30, 1996 and $545,000 and $516,000 at December 31,
1995 and 1994, respectively.
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 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.
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. 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 the following lives:
YEARS
-----
Patents.......................................................... 17
License rights................................................... 2-5
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.
F-8
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 October, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123). SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions of SFAS 123 to such
arrangements. SFAS 123 is required to be adopted for reporting purposes by the
Company in 1996. Companies are permitted, however, to continue to apply APB
opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB opinion
No. 25 to its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
F-9
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
DECEMBER 31,
MARCH 30, ----------------------
1996 1995 1994
---------- ---------- ----------
RECEIVABLES:
Trade...................................... $ 765,565 $ 795,538 $ 528,463
Employees.................................. 2,442 3,115 1,017
Allowance for doubtful accounts............ (24,913) (24,913) (21,538)
---------- ---------- ----------
Total receivables........................ $ 743,094 $ 773,740 $ 507,942
---------- ---------- ----------
---------- ---------- ----------
INVENTORIES:
Raw materials.............................. $ 687,200 $ 782,189 $ 860,885
Work-in-process............................ 153,292 165,246 109,701
Finished goods............................. 783,746 779,907 873,112
---------- ---------- ----------
Total inventories........................ $1,624,238 $1,727,342 $1,843,698
---------- ---------- ----------
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Office equipment........................... $ 400,061 $ 395,650 $ 386,697
Software................................... 98,685 94,547 94,154
Machinery and equipment.................... 232,406 225,906 219,876
Leasehold improvements..................... 74,762 74,762 74,763
Tooling and spares......................... 334,001 334,001 334,001
Motor vehicles............................. 10,063 10,063 10,063
---------- ---------- ----------
Total property and equipment............. 1,149,978 1,134,919 1,119,554
Less accumulated depreciation and
amortization.............................. 1,019,559 1,004,252 936,139
---------- ---------- ----------
Net property and equipment............... $ 130,419 $ 130,677 $ 183,415
---------- ---------- ----------
---------- ---------- ----------
INTANGIBLE ASSETS:
License rights............................. $ 560,020 $ 560,020 $ 560,020
Patents.................................... 53,701 53,701 53,701
---------- ---------- ----------
Total intangible assets.................. 613,721 613,721 613,721
Less accumulated amortization.............. 580,115 579,325 576,167
---------- ---------- ----------
Net intangible assets.................... $ 33,606 $ 34,396 $ 37,554
---------- ---------- ----------
---------- ---------- ----------
ACCRUED EXPENSES:
Accrued payroll and related................ $ 50,560 $ 77,339 $ 75,932
Accrued vacation and benefits.............. 127,927 126,479 102,750
Accrued professional services.............. 77,844 204,175 97,175
Accrued warranty reserve................... 31,965 33,038 29,310
Accrued income taxes....................... -- 7,012 --
Accrued other.............................. 20,354 21,065 37,821
---------- ---------- ----------
Total accrued expenses................... $ 308,650 $ 469,108 $ 342,988
---------- ---------- ----------
---------- ---------- ----------
F-10
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
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. No shares of
Preferred Stock are issued and outstanding.
During the three months ended March 30, 1996 and the years ended December
31, 1995, 1994 and 1993, certain employees exercised their options and purchased
a total of 200, 737, 150 and 750 shares of Common Stock, respectively, at $3.00
per share.
The Company also issued 2,500, 2,500, 2,800 and 3,387 shares of Common Stock
valued at $7,500, $7,500, $8,400 and $10,163 in consideration for services
rendered during the three months ended March 30, 1996 and the years ended
December 31, 1995, 1994 and 1993, respectively.
During 1994, the Company extinguished debt of $157,427 through the issuance
of 5,500 shares of the Company's Common Stock valued at $16,500 which resulted
in an extraordinary gain of $140,927. The repurchase of the debt canceled the
Company's obligation under a research agreement with a governmental agency.
Common Stock values were based on management's estimates of the fair value
of the Company's Common Stock.
STOCK OPTIONS
On April 25, 1996 the Company's shareholders approved a new stock option
plan (the 1996 Stock Plan) which provides for the granting of options and
restricted stock to certain officers, employees, directors and consultants to
purchase up to 500,000 shares of Common Stock. On April 25, 1996, the Company
granted options to purchase 900 shares of the Company's Common Stock under this
plan to certain employees. The options become exercisable 33 1/3% per year for
three years. The exercise price is $3.00 per share. The options expire six years
after the date of grant. The 1996 Stock Plan also provides for the automatic
grant of an option for 1,000 shares of the Company's Common Stock, exercisable
for a period of five years, to each non-employee director, upon the adoption of
the 1996 Stock Plan and upon the election or re-election as a member of the
Board of Directors. Such Board of Directors options will be issued with an
exercise price equal to the fair market value of the Common Stock on the date
the option is granted. On April 25, 1996, options to purchase 2,000 shares of
Common Stock were granted under this plan with an exercise price of $3.00 per
share.
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 issued after August 1992 and before March 30, 1996 are
exercisable 33 1/3% per year for three years or 100% one year after grant. All
of these options expire either five, six or ten years from the date of grant.
F-11
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
3. SHAREHOLDERS' EQUITY (CONTINUED)
Stock option activity is summarized as follows:
AGGREGATE
NUMBER OF PRICE PER EXERCISE
EMPLOYEE STOCK OPTIONS SHARES SHARE PRICE
- --------------------------------------------- --------- ------------ ---------
Balance at December 31, 1992................. 116,028 $3.00 $ 348,084
Granted.................................... 3,175 3.00 9,525
Canceled................................... (23,293) 3.00 (69,879)
Exercised.................................. (750) 3.00 (2,250)
--------- ---------
Balance at December 31, 1993................. 95,160 3.00 285,480
Granted.................................... 1,912 3.00 5,736
Canceled................................... (14,516) 3.00 (43,548)
Exercised.................................. (150) 3.00 (450)
--------- ---------
Balance at December 31, 1994................. 82,406 3.00 247,218
Granted.................................... 23,087 3.00 69,261
Canceled................................... (1,784) 3.00 (5,352)
Exercised.................................. (737) 3.00 (2,211)
--------- ---------
Balance at December 31, 1995................. 102,972 3.00 308,916
Granted.................................... 33,382 3.00 100,146
Canceled................................... (587) 3.00 (1,761)
Exercised.................................. (200) 3.00 (600)
--------- ---------
Balance at March 30, 1996.................... 135,567 $3.00 $ 406,701
--------- ---------
--------- ---------
At March 30, 1996 and December 31, 1995, there were 100,067 and 79,548
options exercisable at $3.00 per share, respectively.
WARRANTS
Warrant activity is summarized as follows:
AGGREGATE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
--------- ------------- -----------
Balance at December 31, 1993................. 530,069 $3.00 - 12.00 $ 5,515,119
Canceled..................................... (525,069) 9.22 - 12.00 (5,500,119)
--------- -----------
Balance at December 31, 1994 and 1995 and
March 30, 1996.............................. 5,000 $3.00 $ 15,000
--------- -----------
--------- -----------
All outstanding warrants expire on August 28, 1997.
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 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 March 30, 1996.
Compensation expense related to these restricted stock issuances has been
recorded in the statements of operations.
F-12
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
3. SHAREHOLDERS' EQUITY (CONTINUED)
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,
with the first offering planned to begin on April 1, 1997. Each offering under
the Stock Purchase Plan will be for a period determined by the Compensation
Committee of 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.
No shares have been issued under the Stock Purchase Plan.
4. LEASES
During 1993, the Company moved into new leased office and manufacturing
space of 35,410 square feet under a noncancelable operating lease which expires
on July 31, 1998 and contains an option to renew for up to three additional
years. The Company is also responsible for all taxes, utilities, and
assessments. Rent expense for all leases was approximately $21,000 for each of
the three month periods ended March 30, 1996 and April 1, 1995, and $87,000,
$107,000 and $129,000 for the years ended December 31, in 1995, 1994 and 1993,
respectively.
At December 31, 1995, future minimum lease payments due, excluding taxes and
utilities, were as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
--------------- --------
1996....................................... $ 84,000
1997....................................... 84,000
1998....................................... 50,000
--------
$218,000
--------
--------
5. LICENSING AND ROYALTY AGREEMENTS
The Company has a licensing agreement with a minority shareholder whereby it
received all associated laser printer technology, including rights to patents,
know-how, software, firmware, documentation and access to their experts who were
involved in the development effort. The Company also received multiple
prototypes of two models. In return, the minority shareholder receives royalties
of up to 2% of net revenues from laser imager sales and received warrants to
purchase shares of Common Stock of the Company which were issued in 1987. The
warrants expired during 1994. Royalty expense relating to this agreement was
$600 and nil for the three months ended March 30, 1996 and April 1, 1995,
respectively, and $1,800, $9,014 and $11,640 for the years ended December 31, in
1995, 1994 and 1993, respectively.
The Company had a software development and license agreement with a third
party in which the Company was to fund certain software development costs, and
to pay royalties on products sold. The agreement expired during 1994. Royalty
expense relating to this agreement was insignificant during 1994 and 1993.
F-13
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
5. LICENSING AND ROYALTY AGREEMENTS (CONTINUED)
The Company has purchased license rights for up to 100,000 copies of 300
fonts (typefaces) for $395,000. In December 1989, the Company paid $100,000 to
extend the original agreement through December 31, 1993. These payments have
been included in intangible assets and were amortized over the four years ended
December 31, 1993. During 1994 and 1995, the Company extended this agreement
through December 31, 1997 at no additional cost.
6. BANK LINE OF CREDIT
During 1995, due to its cash position, the Company did not renew its line of
credit with a local bank. The agreement had provided for borrowings up to the
lesser of $1,000,000 or 75% of receivables outstanding less than 90 days from
invoice date.
7. DEFERRED REVENUES
During 1993, the Company entered into several agreements with customers for
the purchase of new products, supplies and research and development projects. As
part of these agreements, the Company received advance payments totaling
$755,712 during 1993. The Company had shipped equipment and supplies under these
agreements totaling $142,750, $385,450 and $387,064 during 1995, 1994 and 1993,
respectively. During 1994, a customer, who is a shareholder, canceled a contract
for equipment which led to the forfeiture of certain equipment advances totaling
$679,434. As a result of the contract cancellation, the Company devalued the
related inventory. There was no material gain or loss resulting from the
contract cancellation.
8. MAJOR CUSTOMERS AND EXPORT REVENUES
Revenues to one customer, excluding the related party total revenues (see
note 10), amounted to $539,000 (29.4% of total revenues) and $253,000 (14.0%)
for the three months ended March 30, 1996 and April 1, 1995 and $1,464,000
(17.5%), $140,000 (2.1%) and nil for the years ended December 31, 1995, 1994 and
1993, respectively. No other customer accounted for 10% or more of total
revenues for these periods.
The Company's export revenues did not exceed 10% of total revenues for the
three months ended March 30, 1996 and April 1, 1995 or the years ended December
31, 1995, 1994 and 1993.
9. 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 $10,500,000 as of December 31, 1995. If not used, these
carryforwards will begin to expire in 2001. 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 has recorded a valuation allowance to reduce recorded deferred tax
assets to the amount of deferred tax benefit expected to be realized.
F-14
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred taxes as of December 31, 1995 and 1994 are summarized as follows:
1995 1994
----------- -----------
Current deferred tax assets:
Inventory reserves......................... $ 192,000 $ 181,000
Accrued vacation........................... 35,000 30,000
Allowance for doubtful accounts............ 9,000 8,000
Other...................................... 18,000 24,000
Valuation allowance........................ (254,000) (243,000)
----------- -----------
Total.................................... $ -- $ --
----------- -----------
----------- -----------
Long-term deferred tax assets:
Tax net operating loss carryforwards....... 3,675,000 4,305,000
Tax credit carryforwards................... 32,000 --
Valuation allowance........................ (3,707,000) (4,305,000)
----------- -----------
Total.................................... $ -- $ --
----------- -----------
----------- -----------
A reconciliation of the expected federal income taxes, using the effective
statutory federal rate of 35%, with the provision for income taxes is as
follows:
1995 1994 1993
--------- --------- ---------
Expected federal expense (benefit)........... $ 635,000 $ 275,000 $(421,300)
State taxes, net of federal benefits......... 2,000 2,000 1,109
Net operating loss which cannot currently be
recognized.................................. -- -- 419,200
Change in valuation allowance................ (587,000) (275,000) --
Other........................................ (27,500) -- 2,100
--------- --------- ---------
$ 22,500 $ 2,000 $ 1,109
--------- --------- ---------
--------- --------- ---------
10. 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 as of and for the three months ended March 30, 1996 and April
1, 1995 and the years ended December 31, 1995, 1994 and 1993 are as follows:
DECEMBER 31,
MARCH 30, APRIL 1, ----------------------------------
1996 1995 1995 1994 1993
--------- -------- ---------- ---------- ----------
Total revenues............................... $706,000 $802,000 $3,498,000 $2,851,000 $2,948,000
Total purchases of production services....... 1,000 1,000 44,000 91,000 210,000
Accounts receivable.......................... 302,000 241,000 63,000 232,000 200,000
Accounts payable............................. 1,000 1,000 -- 8,000 28,000
11. COMMITMENTS AND CONTINGENCIES
During 1995, the Company received a favorable arbitration award from a
dispute with A. B. Dick Company, a former customer. The Company recognized a
gain of $192,000 after expenses of approximately $142,000 in this dispute. This
gain is included in the statements of operations under other income (expense).
F-15
PRINTWARE, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 30, 1996 AND APRIL 1, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in various other legal actions in the normal course
of business. Management is of the opinion that the outcome of such actions will
not have a significant effect on the Company's financial position or results of
operations.
401(K) PROFIT SHARING PLAN
The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") became
effective August 1, 1994. The 401(k) Plan is intended to qualify under Section
401(k) of the Internal Revenue Code. All employees employed by the Company in
the United States for at least 30 hours per week are eligible to participate in
the 401(k) Plan as of the next calendar quarter following one year after date of
hire by the Company. Each eligible employee may contribute to the 401(k) Plan,
through payroll deductions, up to 15% of his or her salary, subject to statutory
limitations. The 401(k) Plan permits, but does not require, additional
contributions to the 401(k) Plan by the Company of up to 2% of the compensation
paid by the Company to each employee in the previous calendar quarter. The
Company's contributions are made at the discretion of the Board of Directors,
within the limits of the 401(k) Plan. The Company has made a contribution of 1%
of the compensation of each participating employee each quarter since the
adoption of the 401(k) Plan. The Company's contributions to the 401(k) Plan were
$4,576 and $4,246 for the three months ended March 30, 1996 and April 1, 1995
and $13,352 and $4,769 for the years ended December 31, 1995 and 1994,
respectively. There were no contributions in 1993.
12. SUBSEQUENT EVENTS
The Company is planning an initial public offering of 1,200,000 shares of
Common Stock at an assumed initial public offering price of $6.50 per share. In
addition, current shareholders are planning to offer 400,000 shares of Common
Stock to the public at such time. The Company will grant to the Underwriters an
over-allotment option pursuant to which an additional 240,000 shares may be sold
(180,000 shares from the Company and 60,000 shares from existing shareholders)
on the same terms for the purpose of covering any over-allotment sales made in
the public offering. In connection with the proposed initial public offering,
the Representative of the Underwriters would be granted warrants to purchase up
to 120,000 shares of Common Stock at 120% of the price to public, exercisable
commencing one year after the date of the Offering for a period of four years.
F-16
[INSIDE BACK COVER GRAPHICS]
Photographs showing various Printware products:
Top right-hand photo: Model 1440 APF Platesetter
Text below photo: The Model 1440 APF Platesetter for bulk-fed metal
printing plates.
Middle right-hand photo: Model 1440 EZ Platesetter
Text next to photo: The Model 1440 EZ Platesetter produces paper and
metal printing plates.
Lower right-hand photo: Supplies for Model 1440 Platesetters
Text next to photo: Printware provides a full line of supplies for its
Model 1440 Platesetters.
Top left-hand photo: Model 1440 ZNX Platesetter
Text below photo: The Model 1440 ZNX Platesetter produces paper
printing plates directly from a computer.
Bottom left-hand photo: Raster Image Processor
Text below photo: Raster Image Processor (RIPs) connect Platesetters
to computer networks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE UNDERWRITERS OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 8
Dividend Policy........................................................... 8
Capitalization............................................................ 8
Dilution.................................................................. 9
Selected Financial Data................................................... 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 11
Business.................................................................. 16
Management................................................................ 24
Certain Transactions...................................................... 29
Principal and Selling Shareholders........................................ 30
Description of Capital Stock.............................................. 31
Shares Eligible for Future Sales.......................................... 32
Underwriting.............................................................. 34
Experts................................................................... 35
Legal Matters............................................................. 35
Additional Information.................................................... 36
Index to Financial Statements............................................. F-1
---------------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
------------------
[LOGO]
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following fees and expenses will be paid by the Company in connection
with issuance and distribution of the securities registered hereby and do not
include underwriting commissions and discounts. All of such expenses, except for
the SEC, NASD and Nasdaq fees are estimated.
SEC registration fee............................................... $ 4,441
NASD filing fee.................................................... 1,788
Nasdaq fee......................................................... 36,750
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue Sky fees and expenses......................................... *
Transfer agent and registrar fees.................................. *
Printing expenses.................................................. *
Miscellaneous...................................................... *
---------
Total.......................................................... $
---------
---------
- ---------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and Bylaws of Printware, Inc. provide for
indemnification of directors to the full extent permitted by the Minnesota
Business Corporation Act. Minnesota Statutes Section302A.521 provides that a
Minnesota business corporation shall indemnify any director, officer, employee
or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity (as defined
therein) of the person, against judgments, penalties, fines, settlements and
reasonable expenses incurred by the person in connection with the proceeding if
certain statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of Printware, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Printware, Inc.
pursuant to the foregoing provisions, Printware, Inc. has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Under Section 7(c) of the Underwriting Agreement filed as Exhibit 1.1
hereto, the Underwriters agree to indemnify, under certain conditions, the
Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The information in this Item gives retroactive effect to the one-for-four
reverse stock split of the Company which was effective April 25, 1996.
II-1
The Company has sold the following unregistered securities during the past
three years (since March 30, 1993):
DATE TYPE OF SALE NO. SHARES PRICE
- --------- -------------------- ------------- ---------
04/21/93 Trade for services 587 $ 3.00
09/01/93 Trade for services 300 3.00
11/26/93 ISO exercise 650 3.00
11/26/93 ISO exercise 50 3.00
12/27/93 ISO exercise 50 3.00
01/22/94 Trade for services 2,500 3.00
02/11/94 ISO exercise 50 3.00
03/14/94 ISO exercise 50 3.00
03/18/94 Trade for services 300 3.00
08/30/94 ISO exercise 25 3.00
10/28/94 ISO exercise 25 3.00
12/29/94 Trade for debt 5,500 3.00
01/20/95 ISO exercise 75 3.00
01/22/95 Trade for services 2,500 3.00
03/24/95 ISO exercise 262 3.00
09/29/95 ISO exercise 25 3.00
12/01/95 ISO exercise 375 3.00
01/22/96 Trade for services 2,500 3.00
02/28/96 ISO exercise 200 3.00
The Company believes that all transactions were exempt pursuant to Section
4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
1.1* Underwriting Agreement
1.2 Selected Dealers' Agreement
1.3 Agreement Among Underwriters
3.1 Articles of Incorporation, as amended
3.2 Bylaws of the Company
4.1* Form of Common Stock Certificate
5.1* Opinion of Lindquist & Vennum P.L.L.P.
10.1 Incentive Stock Option Plan of 1985
10.2 1986 Incentive Stock Option Plan
10.3 1996 Stock Plan
10.4 1996 Employee Stock Purchase Plan
10.5 Form of 1996 Bonus Compensation Plan for executive officers
10.6 Change in Control Severance Agreement dated April 25, 1996
10.7 Office/Warehouse Lease dated December 22, 1992 between the Company and
The Northwestern Mutual Life Insurance Company
10.8 Plate Material Agreement dated December 11, 1991 between the Company
and E.J. Gaisser, Inc.(1)
10.9 Supply Agreement dated May 2, 1991 between the Company and Polychrome
Corporation(1)
II-2
10.10 License Agreement dated May 17, 1985 among the Company, Minnesota
Mining and Manufacturing Company and Allen L. Taylor
10.11 Purchase Agreement dated January 1, 1995 between the Company and
Deluxe Corporation, as amended December 12, 1995(1)
11.1 Statement re computation of Per Share Earnings/Losses
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Lindquist & Vennum P.L.L.P., included in Exhibit 5.1
24.1 Power of Attorney, included in the Signature Page
- ---------------------------
* To be filed by amendment
(1) Certain information has been deleted from this exhibit and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment under Rule 406.
(b) Financial Statement Schedules
All schedules have been omitted because they are either not required,
are not applicable, or the required information is shown in the Financial
Statements and related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
had been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) It will provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Paul, State of
Minnesota, on the 13th day of May, 1996.
PRINTWARE, INC.
By: /s/ Daniel A. Baker
-----------------------------------------
Daniel A. Baker, Ph.D.,
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Each person whose signature appears below hereby constitutes and appoints
Daniel A. Baker and Thomas W. Petschauer, and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf, individually and in each capacity stated below, all amendments and
post-effective amendments to this Registration Statement on Form S-1 and to file
the same, with all exhibits thereto and any other documents in connection
therewith, with the Securities and Exchange Commission under the Securities Act
of 1933, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as each might or could do in person, hereby ratifying and confirming each act
that said attorneys-in-fact and agents may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------ ------------
/s/ Daniel A. Baker President, Chief
------------------------------------- Executive Officer and
Daniel A. Baker, Ph.D. Director
Executive Vice President
/s/ Thomas W. Petschauer and Chief Financial
------------------------------------- Officer (principal
Thomas W. Petschauer financial and
accounting officer)
/s/ Allen L. Taylor
------------------------------------- Director
Allen L. Taylor, Ph.D.
/s/ Donald V. Mager
------------------------------------- Director
Donald V. Mager
/s/ Brian D. Shiffman
------------------------------------- Director and Secretary
Brian D. Shiffman
/s/ Jerry K. Twogood
------------------------------------- Director
Jerry K. Twogood
/s/ Charles M. Osborne
------------------------------------- Director
Charles M. Osborne
II-4