Stock at .22/.27 on OTC BB:
March 25, 1999
PUBLISHERS EQUIPMENT CORP (PECN)
Annual Report (SEC form 10KSB)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Position and Liquidity
King Press was supported in 1998 by (i) a secured $2,000,000 revolving line of credit that expires July 15, 1999; (ii) a
secured $2,500,000 term loan that matures July 15, 2001; and (iii) a $1,000,000 advisory line of credit. The loan agreement
pertaining to the revolving line of credit includes restrictions on indebtedness, liens, the disposal of assets and requires that
certain financial ratios be maintained; and provides security through a cross collateralization of all King Press Corporation
assets. The advisory line of credit is conditional and includes restrictions on its use.
At December 31, 1998, King Press had $888,000 outstanding under the revolving line of credit, no borrowings outstanding
under the advisory line and a balance of $2,437,000 owed under the term loan, $162,000 of which is current. King Press
Corporation was in compliance with all provisions of the loan agreement at December 31, 1998, and expects to renew the
revolving line of credit at its July 15, 1999 maturity.
The Company has a $1,000,000 Convertible Subordinated Note due December 31, 1999. The maturity date of this note has
been extended in the past, and the Company expects to negotiate a further extension of the maturity date.
The Company's backlog at December 31, 1998, totaled $6,900,000, compared to $6,600,000 at December 31, 1997. These
backlog amounts include a $3.3 million equipment order for a customer in Saudi Arabia that was placed on hold by the
Company in the fourth quarter of 1997 when the customer requested a restructured contract payment schedule. The
restructuring of the payment schedule has been accomplished, but the customer has not made a scheduled payment required to
restart the contract. The Company expects to restart the contract in 1999, but there is no assurance that this will occur.
Results of Operations
Revenues. Revenues of $15,180,000 for 1998 compare to $13,557,000 for 1997, an increase of approximately 12 percent.
This improvement came on the strength of domestic revenues, which increased approximately 21 percent in 1998 compared to
1997. The fundamentals for the health of domestic printing equipment markets were positive in 1998. Advertising expenditures,
which represent the major source of income for the industry's customer base, increased during the year and newsprint cost,
which represents the single largest component of a newspaper's production expense, remained stable.
Trade publications report that domestic print advertising expenditures in total grew an estimated 6.1 percent in 1998. Classified
advertising, the largest category, is estimated to have increased by 6.5 percent over 1997, with retail and national growing
approximately 4.9 percent and 9.5 percent respectively. These increases in advertising expenditures follow similar results in
1997 and reflect the strength of the U.S. economy.
These increases in print advertising expenditures were achieved in spite of a gradual decline in newspaper readership in recent
years. This decline is attributed to the availability of alternative news sources, primarily television. To reverse this decline and
increase the effectiveness of advertising, newspapers have increased local news coverage and included targeted supplements,
inserts and circulars. In recent years the business mix of major newspapers has included an increasing content of these focused
printed materials, which are delivered to targeted market areas. These short press-run products are produced more cost
effectively, with less waste, on single-width press equipment as sold by the Company. The Company has delivered equipment
for this purpose to a leading U.S. newspaper group, and expects similar orders in the future.
Domestic newsprint cost has been volatile in recent years, reaching a high of over $700 a metric ton in 1995, declining to close
to $500 a metric ton in early 1997 and remaining at an average of approximately $600 a metric ton in 1998. At year end 1998,
the cost of newsprint declined to approximately $570 a metric ton. Newsprint cost can account for as much as 20 percent of
newspapers' costs, and the cost reduction since 1995 has been very beneficial to newspaper operating results, but price
stability is also important for business planning purposes.
Included in domestic revenues in 1998 is the sale of the Company's new Print King IV printing equipment to an existing King
Press customer. The new equipment delivered features 4-high vertically stackable printing units, and provides a cost effective
means to add high quality color capability to an existing equipment installation. There has been increasing demand for such
vertical printing towers because their compact design arrangement provides significant capacity additions, and color capability,
with relatively small space requirements.
Revenues derived from sales to foreign customers decreased approximately 5 percent in 1998 compared to 1997, accounting
for approximately 30 percent of total revenues in 1998 compared to approximately 43 percent in 1997. The single largest
factor affecting foreign printing equipment sales in 1998 was the currency crisis in Southeast Asia. The Pacific Rim has been
one of the most rapidly emerging markets for printing equipment in the world, and the currency crisis brought activity in this area
to a virtual halt. The Company was able to partially mitigate the loss of this most important market in 1998 by its success in
supplying equipment expansions to existing customers in Europe and Russia. These sales included the Company's Media King
2000 equipment delivered to a customer in the Netherlands. Like the NEWSCOLOR IV, the Media King 2000 equipment
features 4-high vertically stackable printing units.
The outlook for domestic printing equipment markets in 1999 remains positive. The U.S. economy is expected to grow at a
sustainable rate with low inflation. Trade publications forecast an overall increase in print advertising expenditures of 4.5 to 5.0
percent, with classified up approximately 5.5 percent, and retail and national up approximately 4 percent and 6 percent
respectively. With this level of advertising expenditures, domestic printing equipment markets can be expected to be active
again in 1999.
Foreign printing equipment market conditions in 1999 will be shaped largely by the consequences of the currency crisis in
Southeast Asia. Recent developments in Brazil indicate that the difficulties are not over, and may be spreading. Until these
currency situations are resolved, the most attractive foreign markets for printing equipment sales will be largely inactive. The
Company is represented worldwide by an effective dealer network and expects foreign equipment sales to be a significant
component of its total revenues in 1999. These dealer arrangements are reviewed periodically to insure that their effectiveness
is maintained.
The normally intense competition for both domestic and foreign orders in 1999 will be heightened, as it was in 1998, by the
adverse market conditions in Asia. The situation there has shifted the attention of all equipment manufacturers to remaining
active markets, including the U.S., and greatly increased the competitive environment. The Company's full line of cost effective
printing equipment and established customer base should enable the Company to compete effectively in 1999, as it did in 1998,
but matching the Company's financial performance in 1999 will be more difficult if the currency problems in Brazil are
protracted, or spread into other South American countries.
From a longer term perspective, the level of advertising expenditures, principally classified, will be affected by the growth of
"online" commerce. Domestic newspapers are responding to this diversion of an important revenue source by investing in
websites that utilize their news gathering resources. It is reported that the number of newspapers with online outlets
increased from 30 in 1996 to 900 at present, with many including classified advertising. Foreign markets have been less
affected by online commerce, but developments here are thought to be only lagging the U.S. The Company does not expect the
growth of online commerce to have a material effect on its equipment sales in the near term, but is developing its long term
strategies with this eventuality in mind.
Gross Profit. Gross profit of $3,147,000, or 20.7 percent of revenues, for 1998 compares to $3,021,000, or 22.3 percent of
revenues, for 1997. The reduction in gross profit expressed as a percent of revenues in 1998 results primarily from lower profit
margins on contracts. The Company attributes this reduction in contract profit margin to competitive pricing conditions in both
domestic and foreign markets. The pursuit of equipment orders with market opportunities reduced by the Asian currency crisis
(See Revenues) has resulted in certain of the Company's larger competitors using deeply discounted pricing to secure orders.
The Company will not compete for an order on less than a break-even basis, and as a consequence has had to withdraw from
the competition for some orders. The cumulative effect of pricing below cost may account for the financial difficulties recently
reported by one of the Company's major competitors.
Selling, General and Administrative Expense. Selling, general and administrative expense of $2,618,000, or 17.2 percent of
revenues for 1998 compares to $2,503,000, or 18.5 percent of revenues, for 1997. The improvement in selling, general and
administrative expense expressed as a percent of revenues in 1998 is a result of the higher level of revenues in the current
period.
Other Income (Expense). Interest expense of $322,000 for 1998, derived primarily from borrowings under the King Press
Corporation revolving line of credit and term note (See Financial Position and Liquidity), compares to $333,000 for 1997,
derived primarily from borrowings under the King Press Corporation revolving line of credit. Net other income of $95,000 in
1998 compares to net other expense of $8,000 in 1997. Included in other income in 1998 is a customer deposit forfeited by a
canceled order.
Provision For Taxes. The Company utilized available net operating loss carryforwards to offset federal and state income tax
liabilities for 1998 and 1997. (See Note 7 of Notes to Consolidated Financial Statements).
Net Income. Net income of $304,000, or 2.0 percent of revenues, for 1998 compares to net income of $180,000, or 1.3
percent of revenues, for 1997.
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