BY Gail Kailing EDITOR'S NOTE: We asked Gail Nickel-Kailing to examine the recent S-1 filing by Printcafe and provide a summary of the document with select highlights. Gail Nickel-Kailing, is principal consultant at Business Strategies Etc., a boutique consulting firm providing counsel to commercial and digital printers and corporate marketing departments regarding the use and management of sales and marketing collateral and the document lifecycle. She can be reached at [email protected]. As we have noted on many occasions, Printcafe is one of the most watched companies by our members. As a Premium Access feature, our members are mostly executives within mid to large companies and understand the cautious nature of SEC filings. We remind you that SEC filings err to the side of extreme caution and care should be taken when reading direct quotes from this or any SEC document. Our goal is to make you aware of key issues going forward for one of the industry's most important suppliers - Printcafe.) Late 1999 and early 2000 saw a flurry of activity as a number of companies pursued public funding for Web-based software and service solutions geared toward the graphic arts industry. EagleDirect filed its S-1 in October 1999, Noosh in January 2000, and Impresse in February 2000. All three had been withdrawn by June 2000. Printcafe Software, Inc. formerly printCafe, burst onto the scene in early 2000 with several acquisition announcements forming a print management powerhouse. The company filed their first S-1 in March of 2000 and didn’t formally withdraw their IPO effort until a year later (June 2001) siting unfavorable market conditions. Printcafe has decided the timing is right for them to seek public funding again and, almost exactly two years after their first SEC Filing for an initial public offering (March 14, 2000), they filed a new S-1 on February 12, 2002. Following are highlights from the current S-1 and a few brief comparisons to the previous filing. Overview Printcafe describes their offering as "integrated software solutions designed specifically for the printing industry supply chain." The solution is intended to enable printers and print buyers to be more efficient at each stage of the print process by incorporating enterprise resource planning systems, purchasing systems, and collaborative supply chain planning and execution systems. In February 2000, Printcafe launched their Web-based products to complement their existing enterprise resource planning software and from February through April 2000, acquired five complementary businesses for an aggregate purchase price of $137.3 million. Substantially all of Printcafe’s revenues have come from software licenses and related maintenance to printers, including licenses and subscriptions of products, maintenance contracts, professional and other services. It wasn’t until the first quarter of 2001 that Printcafe began to recognize revenue from the sale of Web-based products to printers, and began to market Web-based solutions for print buyers. To date, there have not been significant revenues from the sales of subscriptions to the Web-based products for print buyers. Printcafe has clarified themselves over the last two years. The system was originally launched as a business-to-business electronic commerce solution for the printing industry designed to connect print buyers, printers and printing industry suppliers and to automate the printing process. The intent was to integrate a new Web-based print procurement platform with the Printcafe suite of print design, specification, manufacturing, distribution and supply chain management enterprise software applications. Risks A prospectus for an initial public offering includes innumerable comments addressing the risk of investment. Please keep in mind that most filings err to the side of extreme caution when describing the risks of inventing and business in general. These are not intended to discourage knowledgeable investing, but to contribute to it. For the year ending December 31, 2001, Printcafe incurred a net loss of $70.0 million (of which $61.3 million were one time charges not directly related to ongoing operating expenses) and they anticipate net losses for the foreseeable future. In fact, Printcafe cannot say when or if they will become profitable; not an unusual statement for a young company filing for a public offering. However, among the risks listed, Printcafe faces a unique one. Currently, Amos Michelson is both the chairman of Printcafe’s board of directors and the chief executive officer and a director of Creo. As a result, it is possible that Mr. Michelson’s duties to Creo and its stockholders may conflict with his duties as Chairman of the Board of Printcafe and to its stockholders. At the same time, it was stated that no plan or agreement is in place with Creo that would determine how to resolve potential conflicts of interest. Revenue While Printcafe has a history of revenues coming from the various companies acquired and merged into its current form, revenues for the last two years are the most applicable. (in thousands) 2000 2001 % chg Revenue $25, 334 $41,868 65.3% Cost of Revenue 10,658 11,596 8.8% Gross Profit 14,676 30,272 106.3% Operating Expenses $104,224 $95,013 -8.84% Income (loss) from operations (89,568) (64,741) 27.7% Other expense (6,150) (5,262) 14.4% Net income (loss) $(95,718) $(70,003) 26.7% For 2001, revenue from foreign customers approximated 11% of the total. Operating expense details: * Sales and marketing expenses were fairly consistent for both years: about $20.5 million in 2000 and $19.1 million in 2001, however, increasing revenues meant sales and marketing expenses dropped from 81% of revenue to 46% of revenue. * General and administrative (G&A) expenses showed a precipitous drop in both the expense amount and percent of revenue: from around $24.5 million and 97% of revenue in 2000 to $7.6 million and 18% of revenue in 2001. G&A consists of compensation for executive and administrative personnel, travel expenses, professional advisory fees, and general overhead expenses not allocated to cost of revenue, R&D, or sales and marketing. In 1999, G&A expenses increased from $2.7 million to $24.5 million in 2000, which was attributed to significant third-party professional consulting fees related to the integration of the acquired companies, and the addition of finance, human resources, executive, and other administrative personnel. * Research and development expenses were also fairly consistent at $11.3 million for 2000 and $12.2 million for 2001. Again, increasing revenues dropped the percentage from 45% in 2000 to 29% in 2001. * Depreciation, amortization and other non-cash and one time charges increased by 17% from $47.9 million in 2000 to $56.1 million in 2001. These expenses made up 46% and 59% respectively of total operating expenses in 2000 and 2001. Overall total operating expenses decreased 9% from 2000 to 2001. Employees — Over the last two years, Printcafe has seen its head count drop by 116 or 23.8%, mostly in customer service and in general and administrative services and operations. The rapid merger of a number of companies resulted in redundant staff positions and necessary restructuring. As of December 31, 2001, there were 372 full-time employees: * 63 in sales and marketing, including a 44-person direct sales force * 122 in research and development * 138 in the customer service organization (39.2% fewer than nearly two years ago) * 49 in general and administrative services and operations (24.6% fewer) In September 2000, Printcafe reduced their workforce by 78 employees, and in May, 2001, a second restructuring eliminated 45 more employees As of March 10, 2000, the time of the first S-1 filing, there were 488 full-time employees: * 68 in sales and marketing, including a 40-person direct sales force * 128 in research and development * 227 in the customer service organization * 65 in general and administrative services and operations. Losses since inception Printcafe indicated that as of December 31, 2001, the company had an accumulated deficit of $192.5 million. Debts and liabilities In connection with the acquisitions completed from October 1999 through April 2000, Printcafe had incurred $68.0 million in debt. In December 2001, as part of a debt and equity financing, the company repaid $27.6 million of the debt and modified the terms of $12.0 million of the debt. As of January 31, 2002, the total debt outstanding was $38.2 million, including $23.7 million under a term loan from Iris Graphics Inc., an affiliate of Creo. The loan from Iris Graphics was used to pay other outstanding debt, and the obligations are secured by substantially all of Printcafe’s tangible and intangible assets. The credit agreement also contains restrictive covenants including limitations on product development expenditures, capital expenditures, and investments, and on the company’s ability to incur additional indebtedness as well as requirements that they satisfy certain financial covenants. If Printcafe fails to comply with the agreements of this credit agreement (other than satisfaction of the financial covenants), Iris Graphics could proceed against the collateral. Printcafe also has $8.0 million outstanding from the purchase of Hagen Systems in March 2000, which must be paid on the completion of the public offering. The company also has a $2.0 million demand line of credit with National City Bank, all of which was drawn as of December 31, 2001. There are other smaller debts listed in the filing. Relationships and alliances Printcafe has a number of relationships and alliances intended to promote the growth of the company’s revenues and market share. Creo The company has a strategic alliance agreement, sales channel agreement, and license agreement with Creo, a holder of considerable Printcafe stock. The companies agreed to undertake joint sales and marketing efforts not to compete with each other’s business, and not to solicit the employment of each other’s employees. The strategic alliance agreement does not specify a termination date. The sales agreement renews annually upon agreement of the terms of the renewal, and the license agreement terminates upon written notice from Creo electing to terminate the agreement, or the termination of the strategic alliance agreement, or the repayment of all amounts due to Iris Graphics under that loan agreement, or the transfer by Iris Graphics of all of its interest in the loan agreement. Creo provides a third-party channel for the sale of the Printcafe software solutions to printers in North America, and will provide sales representatives to focus on sales of the Printcafe Web-based self-service applications to printers in North America. Neither party is obligated to continue the sales channel agreement beyond 2002. A.T. Kearney Procurement Solutions A marketing alliance is in place with A.T. Kearney Procurement Solutions (ATKPS), a subsidiary of A.T. Kearney, where ATKPS offers Printcafe’s Web-based print procurement solutions to Fortune 500 companies and business-to-business consortiums in North America in connection with its print supply market solution. Others Accenture and SMARTworks also market Printcafe products to their customers.   Summary: A key risk Printcafe has identified is the potential downturn in the demand for information technology products among current and potential customers that may result in decreased revenues or a lower growth rate. The market for IT technology and software applications has been soft in the recent past and, at the same time, commercial print revenues have flattened. However, the recently published WhatTheyThink.com/CAP Ventures Printer Confidence Index indicates more than 20% of printers anticipate their demand will either increase or continue to increase in the near future and approximately 25% of the surveyed printers are planning to buy print management software within the next six months. The term "print management software" includes a number of types of applications, most of which are offered by Printcafe. For the economy overall, a recovery is likely. Most analysts speaking at NPES’ Print Outlook in December, predict the national economy to begin a recovery in the first half of 2002, setting the stage for more robust growth late in the year and in 2003. Recovery in the print industry is certainly important for Printcafe to increase revenue and market share. Equally important is the overall economic climate that will shape the mood of investors when the IPO occurs. More About Gail Nickel-Kailing: Prior to launching her consulting practice, Ms. Nickel-Kailing was a Director at CAP Ventures, an internationally known firm specializing in market research and strategic consulting for the Print-on-Demand industry. Before moving to CAP Ventures, Gail was Director of Strategic Marketing at ImageX, where she was responsible for identification of new product and industry opportunities, market and competitive intelligence, industry and market projections, and pricing strategy. Nickel-Kailing was Vice President of Corporate Planning, prior to joining ImageX, where she defined, organized and executed the corporate long-term strategic planning process for Firstlogic (formerly known as Postalsoft) an international developer and marketer of Internet-enabled data quality and postal automation software and services. Gail's tenure at Firstlogic also included positions as Vice President of Marketing for the Postalsoft division, Product Planning Manager, and Target Market Analyst. Nickel-Kailing has also provided services as an independent mailing and shipping systems analyst and consultant. She has five years of experience as a U.S. Postal Service Account Representative, and has owned and operated a successful retail business. She can be reached at [email protected].