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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 1999
OR
__ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
0-17541
(Commission File No.)
PRESSTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0415170
(State or other juris- (I.R.S. Employer
diction of incorporation or Identification No.)
organization)
9 Commercial Street, Hudson, New Hampshire 03051
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (603) 595-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March , 1999, was approximately
$209,000,000.
As of March 10, 1999, there were 32,307,563 shares of the registrant's common
stock outstanding.
Documents Incorporated by Reference:
Parts of the definitive Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on June 8, 1999 are incorporated by reference into Part
III of this Form 10-K.
PART I
Item 1. Business.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Certain statements contained in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve a number
of known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, the risks of uncertainty of patent protection, the risks of
uncertainty of strategic alliances, the risk of Year 2000 noncompliance, the
impact of third-party suppliers, manufacturing constraints or difficulties,
market acceptance of and demand for the Company's products and resulting
revenues, development of technology and manufacturing capabilities, impact of
competitive products and pricing, litigation and other risks detailed in the
Company's other filings with the Securities and Exchange Commission. The words
"looking forward," "believe," "demonstrate," "intend," "expect," "estimate,"
"anticipate," "likely" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made.
Set forth below is a glossary of certain terms used in this report:
A2 (4-up) a printing term referring to a standard paper size capable
of printing four 8.5" x 11" pages on a sheet of paper
A3 (2-up) a printing term referring to a standard paper size capable
of printing two 8.5" x 11" pages on a sheet of paper
Ablation a controlled detachment/vaporization caused by a thermal
event. This process is used during the imaging of the
Company's PEARL(R) consumables
Computer-to-plate a general term referring to the exposure of lithographic
(CTP), plate material from a digital database, off-press
(direct-to-plate)
Dampening solution traditional lithographic printing chemical bath used to coat
the non-image areas of a printing plate
Direct Imaging (DI) Digital Imaging systems that allow image
technologies carriers (film and plates) to be imaged from a
digital database, on- and off-press
Dots per inch (dpi) a measurement of the resolving power or the addressability
of an imaging device
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Effluents waste materials that flow from photographic processing
equipment, which are often toxic in nature
GTO-DI the first generation of direct imaging, waterless presses
available in two, four and five printing station
configurations, a joint effort between Heidelberg and
Presstek
Halftone a printing reproduction process which converts the image
into dots of various sizes and equal spacing between centers
Heidelberg Heidelberger Druckmaschinen AG, the world's largest printing
press manufacturer, headquartered in Heidelberg, Germany
Hydrophobic/ used in printing to describe whether a material will reject
Hydrophilic water (hydrophobic) or will be water receptive (hydrophilic)
Infrared lying outside of the visible spectrum at its red-end longer
wavelengths; used in the Company's thermal imaging process
Large format a printing term referring to printing layouts that
include four or more pages on a single sheet of paper
Lithographic printing from a single plane surface under the principle
that image area carries ink and the nonimage area does not,
and that ink and water do not mix
Off-press making a printing plate from either an analog or digital
source independently of the press on which it will be used
Oleophilic/ used in printing to describe whether a material will be ink
Oleophobic receptive (oleophilic) or reject ink (oleophobic)
On-demand a manufacturing philosophy when applied to printing provides
faster service, shorter run lengths and less inventory
On-press the use of Presstek's direct imaging technologies to make a
plate directly from a digital file on the press
PEARL(R) the name associated with Presstek's current laser imaging
technologies and related products and consumables
3
PEARL Imaging the Presstek components required to convert a conventional
systems printing press into a direct imaging press, including laser
diode arrays, computers, electronics
PEARLsetter(TM) the Company's product line of computer-to-plate, off-press
PEARLhdp(TM) plate making and digital proofing equipment
Photosensitive silver halide emulsions exposed by a reaction to light
requiring a subsequent chemical development and
stabilization process
Plate making the process of applying a printable image to a printing
plate
Prepress graphic arts operations and methodologies that occur prior
to the printing process; typically these include
photography, scanning, image assembly, exposure of image
carriers (film and/or plate), proofing
Proofer/proof a machine that creates an image that is a duplicate of what
will be printed, or the duplicated image itself.
Quickmaster 46-4; the second generation of direct imaging, waterless presses,
Quickmaster DI highly automated with roll-fed PEARL plate material, a joint
development effort between Heidelberg and Presstek
Semiconductor laser a high-powered, infrared imaging technology employed in the
diode PEARL imaging system
Short-run a graphic arts classification used to denote an emerging
markets/printing trend for lower print quantities
Spark Discharge Technology the Company's first direct imaging
technology in which a proprietary printing plate was imaged
by means of discharging an electrical spark
Thermally-based a method of digitally exposing a material via the heat
generated from a laser beam
Vapor deposition a technology to accurately, uniformly coat substrates in a
process controlled environment
Waterless a lithographic printing method that uses dry offset printing
plates and inks thus it does not require a dampening system
"YAG" laser one of the more commonly used laser sources for
direct-to-plate imaging systems
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General
Presstek, Inc. (the "Company" or "Presstek"), incorporated in Delaware, was
founded in September of 1987 as a development company to find a new way to
produce color offset printing. This new printing method would take full
advantage of computer based, electronic prepress processes which were rapidly
becoming available and expedite the design, image manipulation, page assembly
and related aspects used to produce high quality color pages in a totally
digital manner. At that time, digitally created pages could not be easily
converted to finished, four or more color offset printed pages. The process used
involved costly and time consuming methods including the use of specialized
photosensitive film recording systems and related plate exposure devices along
with the need to chemically process these photosensitive analog films and
plates. These photographically based methods generated waste effluents that were
difficult to dispose of in an environmentally sound manner. The Company's
objective was to eliminate these non-digital processes and develop a new system
that would allow digitally formatted file data to be used to image a plate
directly on the printing press. This would reduce cost, eliminate the time it
normally takes to make films and plates, and improve the quality of the finished
printed offset page.
The Company's development work ultimately led to the commercialization of
its proprietary PEARL based direct imaging technology. This new direct imaging
technology, which now uses high powered semiconductor laser diodes and thermal
ablation printing plate materials, is currently being used in a variety of both
on-press and off-press applications. The Company believes that PEARL represents
a technological breakthrough for the worldwide printing and publishing industry,
since PEARL can be used for both on-press and off-press applications. This
capability provides a number of new applications for the Company's direct
imaging systems and its proprietary consumable thermal-based printing plates.
The Company's past investments in its proprietary PEARL direct imaging
technologies have resulted in more than 94 patents issued and 130 applications
pending throughout the world. The Company believes these patents together with
its eleven years of experience in developing digital imaging systems, place the
Company in a significant position in the markets it has chosen to serve. To
further strengthen its patent portfolio, on January 5, 1998, the Company
acquired the stock of Heath Custom Press, Inc. ("Heath") of Seattle, Washington.
In October 1998 the Company sold certain assets of Heath Custom Press but
retained all rights to the Heath patents. See "Patents and Proprietary Rights."
Strategy, Background, and Important Relationships
The Company's business strategy is based in part on alliances and
relationships with major companies in the graphic arts industry and other
markets. This strategy includes licensing the Company's intellectual property;
specialized product development based on the Company's proprietary technologies;
and the manufacture of imaging subsystems for inclusion in other manufacturers'
products. The manufacture of the Company's own end user and private label
products, as well as the manufacture of the Company's proprietary thermal plate
materials for use in the Company's and other manufacturers' imaging hardware and
printing presses, is also an important aspect of the business strategy.
5
This strategy led to the development of an important and long-term
relationship with Heidelberger Druckmaschinen AG ("Heidelberg"), the world's
largest manufacturer of printing presses and printing equipment, based in
Germany. This relationship was formalized with the signing of a Master Agreement
and a Technology License Agreement in January 1991. The Master Agreement and
Technology License Agreement are sometimes collectively referred to hereafter as
the "Heidelberg Agreements."
The Heidelberg Agreements
The Heidelberg Agreements and amendments govern the Company's relationship
with Heidelberg and relate to the integration of the PEARL Direct Imaging
technology into various presses manufactured by Heidelberg. The manufacture of
components, at specified rates, for such presses and the commercialization of
such presses are also covered.
The Heidelberg Agreements currently expire in December 2011 subject to
certain early termination and extension provisions. Under these agreements,
Heidelberg agreed to pay royalties to the Company based on the net sales prices
of various specified types of Heidelberg presses on which the Company's PEARL
Direct Imaging technology would be used. Pursuant to the Heidelberg Agreements,
Heidelberg has been provided with certain exclusive rights for use of the PEARL
Direct Imaging technology for the Quickmaster DI format size. The Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used on the Quickmaster DI.
In March 1998, the Company and Heidelberg concluded negotiations relating
to production levels and schedules for fiscal 1998, which resulted in the
Company materially reducing production levels of direct imaging systems used in
the Quickmaster DI press for fiscal 1998. The Company has not yet received
orders from Heidelberg for fiscal 1999 in connection with its direct imaging
systems used on the Quickmaster DI. Management believes that orders for these
direct imaging systems will resume at some time in the second half of fiscal
1999. There can be no assurance, however, that any orders will be received.
Other Business Relationships
In addition to its on-going association with Heidelberg, the Company has
also developed and announced business relationships with:
Adamovske Strojirny a.s. ("Adast"), a Czech Republic company, which uses
the Company's direct imaging technology on a larger format (19" x 26")
multicolor offset press.
Scitex Corporation Limited ("Scitex"), a leading supplier of electronic
pre-press products and systems which, along with KBA-Planeta AG, a major
supplier of medium and large format sheet-fed offset printing presses,
established a joint venture to develop, produce and market a new digital offset
press. This new press, called the 74 Karat uses the
6
Company's direct imaging and related intellectual property (under license from
Presstek), and Presstek's patented thermal ablation printing plates.
Nilpeter A/S of Denmark has begun marketing an offset label press that
utilizes the Company's direct imaging technology and printing plates.
Alcoa Packaging Equipment, a division of the Aluminum Company of America,
which has publicly shown a new method of printing halftone images on beverage
cans that is based on Presstek's direct imaging technology and thermal ablation
printing plates.
Imation Corp., which together with Presstek have jointly developed a new
method for the production of true half-tone "dot for dot" color press proofs
using the Company's computer-to-plate imaging system, the PEARLhdp, specially
modified for this application.
Fuji Photo Film Ltd., one of the world's leading suppliers to the graphic
communications industry, which together with the Company announced in 1997 the
signing of a long-range Development and Sales Agreement which will involve the
use of the Company's proprietary intellectual property and know how.
The Company's Delta V Technologies, Inc. subsidiary has also announced its
intention to form a strategic relationship with Battelle Memorial Institute, a
worldwide non-profit research and development organization, for the development
and marketing of polymer multi-layer (PML) and liquid multi-layer (LML)
technologies.
The Company has formed and is pursuing other business relationships that it
believes should result in broader use of the Company's direct imaging and plate
technologies in existing as well as new applications. There can be no assurance,
however, that the Company, any Company product or any products incorporating the
Company's technology will be able to compete successfully in the market.
The Company has also established a worldwide distribution network through
which it markets, sells and supports its PEARLsetter branded computer-to-plate
and PEARL thermal ablation printing plate products. This network currently
encompasses 36 dealers located worldwide and includes the largest graphic arts
dealer in the United States, the Pitman Company, which sells its products
through multiple branch locations. In addition, Fuji Photo of Canada is the
Company's exclusive dealer for its products in Canada.
The Company's PEARL Direct Imaging System and Its Manufacture
The Company's PEARL Direct Imaging system is composed of a series of solid
state semiconductor laser diodes held in a fixed array that can range in size,
depending on the application, from as few as 8 diodes to as many as 32 or more
diodes. Each diode is responsible for imaging a specific area of the printing
plate.
7
Each diode is under computer control and can be turned off and on at high
speeds, usually measured in microseconds. When the diode is turned on it creates
a miniature, precise, micron measured beam of high powered, infrared laser
light. The beam is focused on a specific area on the surface of the thermal
printing plate and causes this area of the plate to instantaneously heat up
causing an ablation effect and creating a microscopic hole. This hole on the
surface of the printing plate is ink receptive. The area surrounding the hole
that has not been exposed to the laser beam is not, thus an image can be created
by controlling the placement of each laser beam. This laser-based imaging
concept is used on both the Company's computer-to-press and computer-to-plate
systems.
The Company is also developing its next generation laser imaging system.
With this new technology, multiple beams of high-powered infrared laser light
are created from the same laser diode. This concept is expected to allow the
Company to expand the number of diodes mounted on a fixed array, resulting in
faster imaging speeds at a lower cost than current technology.
These imaging systems are manufactured by the Company in its imaging
systems manufacturing facility located at 9 Commercial Street in Hudson, New
Hampshire. The Company uses a number of outside vendors who supply many of the
imaging system's sub-system assemblies. These assemblies and components are
manufactured and assembled by the Company into completed systems - either
computer-to-press direct imaging systems such as the Quickmaster DI systems, or
PEARLsetter computer-to-plate imaging systems. Both of these systems use
semiconductor laser diode devices built to the Company's specifications and
currently supplied by one source pursuant to open purchase orders. The Company
believes however, that there will be several sources available to manufacture
the laser diodes to its specifications, if required in the future.
The Company's PEARL Thermal Ablation Printing Plate and Its Manufacture.
The Company continues to develop its proprietary thermally-based consumable
plate products that are imaged by both its own direct imaging systems as well as
high-energy laser based, direct-to-plate and direct-to-press systems offered by
companies such as Scitex, Creo and others.
The Company's PEARL thermal ablation printing plates are available in both
waterless PEARLdry(TM) or for dampening system equipped press plate
configurations, PEARLgold. Both of these plates are based on the Company's
proprietary ablation imaging technology. This means that they respond to heat
and not to light. The Presstek plate is able to convert the laser light into
heat because of a special metalized layer that is sensitive to the wave length
of the laser light source. The Company's plate materials have a wide infrared
spectral sensitivity range (800 to 1200 nanometers) and can be used with a
variety of both "YAG" and diode based laser imaging systems.
The Company's newest plate technology, PEARLgold, is a first generation
"wet", or dampening system equipped press, lithographic offset printing plate
specifically targeted to the
8
short-run, color market. It requires no post imaging cleaning or chemical
processing. PEARLgold is an ablation based printing plate using a metalized
infrared absorbing material with an additional metalized layer placed over the
infrared absorber. This additional metal layer is a hydrophilic material and ink
will not adhere to it (ink, which is oil based, and water do not mix) but ink
will adhere to those areas of the plate that have been ablated away by the laser
beam thus forming a printable image. The Company believes a wet offset plate
product has broad market potential due to the large number of wet offset
printing presses installed on a worldwide basis. The market opportunity for the
first generation PEARLgold plate is limited to short-run (25,000 impressions or
less) applications and may require modifications of press conditions to
accommodate the characteristics of this unique, no-process plate technology. The
Company is continuing to develop this plate and believes that future generations
of PEARLgold will be suitable for use in markets requiring longer run lengths.
Shortly after its introduction in 1997, the Company's PEARLgold plate technology
received both the 1997 Graphic Arts Technical Foundation (GATF) Intertech
Technology Award and Publish Magazine's Impact Award. Although the Company
believes it can compete successfully in this newly developing market there can
be no assurances that it can do so.
The PEARLdry plate uses a specially formulated silicone material that is
coated over the metalized infrared absorbing layer. The silicone layer is
oleophobic and when the imaging laser causes the ablation process to occur, the
resulting hole created by the laser in the silicone becomes ink receptive.
Presstek's PEARLdry plates are used on the Quickmaster DI, the GTO-DI, the Adast
705C DI, the Scitex & KBA 74 Karat, the Alcoa can decorating imaging system and
the Kammann CD Imaging system. Other direct-to-plate systems also are able to
image the Company's PEARLdry plate that can then be used on a conventional
waterless press.
The Company owns 97% of the outstanding common stock of Catalina Coatings,
Inc., now renamed Delta V Technologies, Inc. ("Delta V). Based in Tucson,
Arizona, Delta V develops processes, materials and equipment for vacuum coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications including graphic arts, capacitors, electronics,
optics, architectural and decorative glass, flat panel displays and packaging.
Delta V has developed and manufactured customized vacuum deposition
equipment the Company requires to manufacture its PEARL thermal ablation
printing plate at a lower cost than using currently available conventional
coating technology. In 1997 the Company completed construction of a new 100,000
square foot manufacturing facility located on a site in Hudson, New Hampshire,
six miles from the Company's existing offices. This building now houses the
Company's new thin film vacuum coating system and other manufacturing equipment
that the Company requires to produce the Company's thermal plate consumable
products. In late 1998 the Company also moved its plate converting and finishing
equipment from a leased facility to its new consumable manufacturing facility
thus consolidating all of its plate manufacturing and finishing equipment into
this new location. The Company, determined to more vertically integrate the
manufacture of PEARL thermal printing plates, has also approved expenditures of
$7,500,000 for additional plate manufacturing equipment that is
9
expected to reduce the cost of plate manufacture and enhance the Company's
development capabilities.
Through the third quarter of 1998, the Company's PEARLdry plates were
manufactured by Rexam Custom Coaters ("Rexam") based in North Carolina under an
existing manufacturing agreement. In late 1998 the Company decided to bring more
of the PEARLdry manufacturing process in house and is now implementing this
decision. Rexam will continue to provide custom coating requirements to the
Company for the foreseeable future, however the Company expects to provide most
of its PEARLdry manufacturing requirements internally by the middle of 2000. As
the Company more vertically integrates the manufacture of PEARL thermal printing
plates, it may still need to enter into manufacturing agreements with third
parties.
The PEARLsetter Product Line
The PEARLsetter is a computer-to-plate imaging device that can image both
the Company's wet and dry thermal offset plates in both an A3 (2-up) and A2
(4-up) format size. The product can produce completely imaged printing plates,
ready to be mounted on a printing press, within 4 to 8 minutes depending on the
resolution (number of dots per inch) chosen by the user. If the PEARLsetter is
imaging PEARLgold plates, these plates can be mounted immediately on the press
with no further cleaning or processing. In the case of PEARLdry plates, the user
must first wipe the ablated debris from the imaging process off the surface of
the plate.
In addition to making printing plates, a specially modified PEARLsetter
product referred to as the PEARLhdp (halftone dot proofer), which uses proofing
materials supplied by Imation Corp., is also being sold by the Company. This
halftone proofing system offers the user the ability to make proofs that
replicate the dot structure used for imaging plates. Both Imation and the
Company believe this is an important market opportunity and are working jointly
to successfully market this product.
The Company has entered into distribution agreements with 22 graphic arts
dealers to sell, support and service its products in various countries around
the world. The Company has also entered into OEM arrangements or reseller
relationships with respect to the PEARLsetter product line and/or its PEARL
based consumable products with companies such as Sakurai Machinery Company and
Fuji Photo Film Co. Ltd. These agreements permit the OEM resellers to sell the
PEARL based products under their own label.
The Company continues to develop and commercialize its PEARL based
computer-to-plate and Imation proofing systems. However, there can be no
assurance that the Company will be able to successfully complete or
commercialize these or other products, or enter into any additional arrangements
which will result in the further commercialization of its PEARLsetter based
product line.
Market acceptance for any products incorporating the Company's various
technologies and proprietary know-how will require substantial marketing efforts
and the expenditure of
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significant sums, either by the Company, and/or its strategic and OEM partners.
There can be no assurance that any existing or new products will achieve market
acceptance or be commercially viable.
Patents and Proprietary Rights
As of March 5, 1999, the Company and its subsidiaries hold eighty-one (81)
U.S. patents, (including three (3) design patents), of which the Company has
elected to maintain sixty-three (63) in force. The Company has also been issued
thirty-four (34) foreign patents, and has received notice of allowance for an
additional eight (8) patents consisting of two (2) U.S. and six (6) foreign. The
Company has applied for and is pursuing its applications for twenty-two (22)
additional U.S. patents and one hundred eight (108) foreign patents. The Company
anticipates that it will apply for additional patents and for copyrights, as
deemed appropriate. There can be no assurance as to the issuance of any such
patents or the breadth or degree of protection which the Company's patents or
copyrights may afford the Company. There is rapid technological development in
the computer and image reproduction industries, resulting in extensive patent
filings and a rapid rate of issuance of new patents. Although the Company
believes that its technology has been independently developed, and that the
products it markets and proposes to market will not infringe on the patents, or
violate other proprietary rights of others, it is possible that such
infringement of existing or future patents or violation of proprietary rights
may occur. In such event the Company may be required to modify its design or
obtain a license. No assurance can be given that the Company will be able to do
so in a timely manner, upon acceptable terms and conditions, or at all. The
failure to do any of the foregoing could have a material adverse effect on the
Company. Furthermore, there can be no assurance that the Company will have the
financial or other resources necessary to successfully defend a patent
infringement or proprietary rights violation action. Moreover, the Company may
be unable, for financial or other reasons, to enforce its rights under any of
its patents.
The Company intends to rely on proprietary know-how and to employ various
methods to protect its source code, concepts, ideas and documentation of its
proprietary software, which methods may include copyrights. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop such know-how or obtain access to the
Company's know-how or software codes, concepts, ideas and documentation.
Furthermore, although the Company has and expects to have confidentiality
agreements with its employees and appropriate vendors, there can be no assurance
that such arrangements will adequately protect the Company's trade secrets.
Competition
The Company believes that its imaging, thermal plate and other intellectual
property, its proprietary technologies, its new thermal plate manufacturing
facilities, along with its strategic alliances and its worldwide distribution
network provide the Company with a competitive advantage. However, the Company
is also aware of a number of other companies that address markets in which
Presstek products are used, and therefore could be viewed as competitive
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to the Company's proprietary direct imaging, thermal plate technologies and
related capabilities.
In the area of direct imaging and the short-run, on-demand market,
potential competitive companies use electrophotographic technology, sometimes
referred to as xerography, as the basis of their product lines. These companies
include, among others, Canon Inc., Indigo N.V., Xeikon N.V., and Xerox
Corporation. Agfa Gevaert N.V, IBM, and Scitex are marketing product versions
manufactured by these companies. These electrophotographic imaging systems use
either wet or dry toners to create one to four color images on paper and
typically offer resolutions of between 400 and 800 dots per inch.
The Company is aware that most of the major entities in the graphic arts
industry have developed and/or are developing and marketing off-press
computer-to-plate imaging systems. To date, these devices, for the most part,
utilize printing plates that require a post imaging photochemical developing
step and/or other post processing steps such as heat treating. Potential
competitors in this area include, among others, Agfa Gevaert N.V., Creo Products
Inc., Dainippon Screen Mfg, Ltd., Heidelberger Druckmaschinen AG, Krause GmbH,
Scitex Corporation Ltd., and other smaller or lessor known companies. The
Company's PEARLsetter computer-to-plate off-press plate imaging system is, in
the Company's opinion, a further technological advancement because it eliminates
the need for post chemical processing. The Company believes however, that some
of the graphic arts companies mentioned above are likely to be working on
similar plate concepts that would eliminate the need for post image chemical
processing.
The Company also anticipates competition from printing plate, manufacturing
companies that manufacture, or have the potential to manufacture, digital
thermal plates. Such companies include Agfa Gevaert N.V., Kodak Polychrome
Graphics LLC, Fuji Photo Film Co., Ltd., and others.
Products incorporating the Company's technologies can also be expected to
face competition from conventional methods of printing and creating printing
plates. While these methods are considered by the Company to be more costly,
less efficient and are not as environmentally conscious as those being
implemented by the Company, they do offer their users the ability to continue to
employ their existing means of print and plate production. Companies offering
these more traditional means and methods are also refining these technologies to
make them more acceptable to the market.
Most of the companies marketing competitive products or with the potential
to do so are well established, have substantially greater financial and other
resources than the Company, and have established records in the development,
sale and service of products. There can be no assurance that the Company, any
Company product or any products incorporating the Company's technology will be
able to compete successfully in the future.
The Company has determined that it operates in two reportable segments. The
Digital Imaging Products segment is principally engaged in the development,
manufacture and sale
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of PEARL, its patented, proprietary digital imaging system and process-free
thermal ablation printing plate technologies. Delta V is principally engaged in
the development, manufacture and sale of vacuum deposition coating equipment.
Delta V develops processes, materials and equipment for vacuum coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications including graphic arts, capacitors, electronics,
optics, architectural and decorative glass, flat panel displays and packaging.
See Note 8 of Notes to the Financial Statements.
Backlog
As of March 11, 1999, the Company and its subsidiaries had a backlog of
products under contract aggregating approximately $21,649,000 compared to a
backlog of $39,316,000 as of March 8, 1998. Substantially all backlog of
products as of March 11, 1999 is expected to be shipped in 1999.
Employees
As of March 11, 1999, the Company and its subsidiaries had two hundred
sixty (260) employees. One hundred fourteen (114) are engaged primarily in
engineering, service and marketing; one hundred seven (107) are engaged
primarily in manufacturing, manufacturing engineering and quality control; and
thirty nine (39) are engaged primarily in corporate management, administration
and finance. The Company considers its relationship with its employees to be
good.
Item 2. Properties.
The Company's Direct Imaging Products operations are located in three
facilities in Hudson, New Hampshire:
The Company leases approximately 36,000 square feet to accommodate its
direct imaging systems manufacturing, and corporate and administrative
facilities at 9 Commercial Street. The lease specifies a base monthly rent of
$14,354, adjusted annually, plus a pro rata share of real estate taxes,
utilities, and certain other expenses. The lease expires on September 30, 2000,
subject to an option to renew for an additional three years and the Company's
right of first refusal to purchase the property.
The Company also leases approximately 50,000 square feet at 18 Hampshire
Drive. This facility houses the consumables and equipment research and
development groups. The lease of these premises, which expires in May 1999,
subject to two one-year renewal options, provides for rent at the rate of
$15,417 per month, adjusted annually, plus a pro rata share of real estate
taxes, utilities, and certain other expenses.
The Company also completed construction of the first phase of its future
facilities at 55 Executive Drive in December 1997. This first phase includes a
100,000 square foot manufacturing operation that houses certain manufacturing
equipment the Company requires
13
to produce its thermal plate consumable products. The Company believes that its
existing facilities will be adequate for its current operations and near-term
capacity increases.
Delta V is located in a new 70,000 square foot manufacturing facility in
Tucson, Arizona. This new building houses all of Delta V's operations and
includes space for future expansion.
On February 6, 1998, the Company obtained a ten-year mortgage term loan in
the principal amount of $6,900,000, which is secured by the land and building in
Tucson, Arizona, and a certain parcel of land and building in Hudson, New
Hampshire with an aggregate cost of $17,000,000.
Item 3. Legal Proceedings.
As previously disclosed, seven federal class action lawsuits were filed
against the Company and others, all of which have been consolidated before the
United States District Court, District of New Hampshire, under the common
caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly
filed and served a Second Consolidated Amended Class Action Complaint naming the
Company, certain of its present or former officers and directors ("the Berke
Officer and Director Defendants"), and other parties as defendants. The
plaintiffs allege, among other things, that the Company and/or the Berke Officer
and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities
Exchange Act of 1934, (the "Exchange Act") and Rule 10b-5 ("Rule 10b-5")
promulgated thereunder, and violated New Hampshire law; and that the Berke
Officer and Director Defendants violated Section 20(a) ("Sect. 20(a)") and
Section 20A of the Exchange Act. The Complaint alleges, among other things, that
the Company and/or the Berke Officer and Director Defendants issued false and
misleading reports, failed to disclose material facts including a misstatement
of earnings in the Company's financial statements for the first quarter ended
March 30, 1996, misstated or failed to fully disclose the Company's supply
contracts with, payments received from, sales made by, backlog of orders
received from, and delays in production by the Company's principal customer, the
alleged circulation of, and alleged failure to correct certain research reports
concerning the Company that contained alleged misrepresentations regarding
allegedly inflated financial projections and the alleged failure to properly
disclose the scope of an investigation by the Securities and Exchange Commission
("SEC"). Certain of the Berke Officer and Director Defendants are alleged to
have sold the Company's common stock at artificially inflated prices while in
possession of material non-public information concerning the Company. The
plaintiffs seek unspecified compensatory and punitive damages, attorney and
expert fees and other costs and expenses incurred by the plaintiffs in
connection with the action.
On March 30, 1999 the United States District Court for the District of New
Hampshire issued orders dismissing several of the claims brought against the
Company and others in the Berke lawsuit.
As previously disclosed, on July 16, 1996, Richard Strauss commenced a
derivative suit on behalf of the Company in the Court of Chancery of the State
of Delaware, New Castle County, against certain officers and directors of the
Company ("the Strauss Officer and Director Defendants"). The plaintiff alleges
that the Strauss Officer and Director Defendants breached their fiduciary duties
to the Company and its public stockholders and wasted corporate assets, by
making allegedly false and misleading statements of fact or concealing material
facts concerning the viability of the Company's "key" patent and its proprietary
interest in its PEARL technology, causing the Company to fail to properly
disclose the scope of an investigation by
14
the SEC, and causing the Company to misstate its financial results for the first
quarter of 1996. The plaintiff also alleges that certain of the Strauss Officer
and Director Defendants sold securities of the Company at inflated prices while
they were in possession of material non-public information concerning the
Company. The plaintiff alleges that the actions of the Officer and Director
Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other lawsuits being commenced against the Company which will require the
Company to expend resources to defend. The plaintiff seeks to recover, on behalf
of the Company, unspecified damages allegedly sustained by the Company as a
result of the defendants' alleged breaches of fiduciary duty, disgorgement of
any profits derived from their sale of the Company's common stock, as well as
other relief. This action had been stayed pending the outcome of the Berke
action.
As previously disclosed, on March 14, 1997, James P. Cassidy commenced a
derivative suit on behalf of the Company in the United States District Court for
the District of New Hampshire against, among others, certain of the Company's
officers and directors (the "Cassidy Officer and Director Defendants"). The
plaintiff alleges that the Cassidy Officer and Director Defendants breached
their fiduciary duty to the Company and its public stockholders and wasted
corporate assets by making false and misleading statements of fact or concealing
material facts concerning the scope and viability of the Company's "key" patents
and its proprietary interest in its PEARL technology, and causing the Company to
issue false and misleading reports or failure to disclose material facts
including a misstatement of earnings in the Company's financial statements for
the year ended December 30, 1995, and for the first quarter ended March 30,
1996. The plaintiff also alleges that certain of the Cassidy Officer and
Director Defendants sold securities of the Company at inflated prices while they
were in possession of material non-public information concerning the Company.
The plaintiff also alleges that the actions of the Cassidy Officer and Director
Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other lawsuits being commenced against the Company which will require the
Company to expend resources to defend, and also constituted gross negligence and
breaches of their contractual obligations to the Company. The plaintiff seeks to
recover on behalf of the Company unspecified damages allegedly sustained by the
Company as a result of the Defendants' actions as alleged, disgorgement of any
profits from the sale of the Company's common stock, as well as other relief
against the defendants. By agreement of the parties, this action has been stayed
\pending the outcome of certain motions made by the parties in the Berke action.
As previously disclosed, on June 16, 1997, Seena Stevens Silverman
commenced a purported class action in the United States District Court for the
District of New Hampshire against the Company and certain of its present and/or
former officers and directors (the "Silverman Officer and Director Defendants"),
and other parties. The plaintiff purports to bring this action on behalf of a
class of persons who sold put options in the common stock of the Company between
November 7, 1995 and June 20, 1996. The complaint alleges, among other things,
that the Company and/or the Silverman Officer and Director Defendants violated
Sect. 10(b) and Rule 10b-5, and violated New Hampshire law; and that the
Silverman Officer and Director Defendants violated Sect. 20(a). The plaintiff
alleges that the defendants defrauded the putative class members by manipulating
the price and supply of the Company's common
15
stock, issuing false and misleading statements regarding the nature of the
Company's proprietary PEARL technology, failing to disclose the true depth and
target of an investigation by the SEC, and making misleading statements
regarding the Company's claims to its PEARL technology and its contract with the
Company's principal customer. The plaintiff also alleges that certain of the
Silverman Officer and Director Defendants sold securities of the Company at
inflated prices while they were in possession of material non-public information
concerning the Company. The plaintiff seeks to recover unspecified compensatory
and punitive damages on behalf of the putative class, as well other relief.
The Company intends to vigorously defend the foregoing investor class
actions. However, the outcome of any litigation is subject to uncertainty and a
successful claim against the Company in any of such actions could have a
material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock has traded in the over-the-counter market on the
NASDAQ National Market System under the symbol PRST since July 18, 1990, and,
prior thereto, from May 11, 1990, to July 17, 1990, traded on the NASDAQ System.
Prior thereto, from the Company's initial public offering until May 11, 1990,
the principal redemption date of the Warrants, the Company's Units, common stock
and Warrants were traded on the NASDAQ System. The following table sets forth,
for the periods indicated, the high and low sales prices of the Company's common
stock as reported by NASDAQ and retroactively adjusted for the Company's
two-for-one stock split effected in the form of a 100% stock dividend paid in
July 1997.
Fiscal Year Ended High Low
January 2, 1999 ---- ---
- -----------------
First Quarter $ 30 1/4 $ 15
Second Quarter 18 5/8 10 15/16
Third Quarter 13 13/16 7 1/4
Fourth Quarter 10 5 1/4
Fiscal Year Ended
January 3, 1998
- -----------------
First Quarter $ 38 1 /4 $ 19 3/4
Second Quarter 47 1/2 22
Third Quarter 54 33 3/4
Fourth Quarter 41 1/2 24
On March 10, 1999 there were 1,503 holders of record of the Company's
common stock.
Dividend Policy
To date, the Company has not paid any cash dividends on its common stock.
The payment of cash dividends, if any in the future is within the discretion of
the Company's Board of Directors and will depend upon the Company's earnings,
its capital requirements and financial condition and other relevant factors. The
Board of Directors does not intend to declare any cash dividends in the
foreseeable future, but instead intends to retain all earnings, if any, for use
in the Company's business operations.
17
Issuance of Unregistered Securities
During the quarter ending January 2, 1999, the Company issued to certain
employees, options to purchase 14,500 shares of its common stock pursuant to the
Company's 1997 Interim Stock Option Plan. These options were granted at prices
ranging from $7.19 to $9.00 per share with expiration dates ranging between
October 12, and November 30, 2004. In April 1998, the Company repriced previous
grants issued under its 1997 Interim Stock Option Plan and Non-Employee Director
Stock Option Plan. A total of 140,250 and 50,000 options were repriced to $13.75
and $14.75, respectively. These options were previously granted between January
2, 1996 and March 30, 1998, with exercise prices ranging from $22.38 to $48.50
per share. The foregoing options were issued pursuant to the exemption from
registration provided by Section 2(3) and/or Section 4(2) of the Securities Act
of 1933 (the "Act").
18
Item 6. Selected Financial Data.
The following selected financial data of the Company has been derived from the
financial statements of the Company appearing elsewhere herein (except for the
statement of operations data for the years ended December 30, 1995 and December
31, 1994 and the balance sheet data at December 28, 1996, December 30, 1995, and
December 31, 1994, which is not included in such financial statements). All
references to common shares and earnings per share data have been restated
retroactively to reflect the fiscal 1997 and fiscal 1995 two-for-one and the
1994 five-for-four stock splits, effected in the form of stock dividends. The
fiscal 1998 data includes the accounts of Heath Custom Press, Inc. and Delta V
Technologies, Inc. (formerly Catalina Coatings, Inc.) which were acquired as
subsidiaries of the Company during fiscal 1998 and 1996, respectively. The
fiscal 1997 and fiscal 1996 data include the accounts of Delta V Technologies,
Inc. See Note 2 of Notes to Financial Statements.
Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended JAN 2, JAN 3, DEC 28, DEC 30, DEC 31,
1999 1998 1996 1995 1994
(In thousands, except per share data)
Revenues: $ 84,386 $ 91,561 $ 48,627 $ 27,611 $ 16,518
Costs and Expenses:
Costs of products sold 54,774 45,678 21,826 14,924 6,944
Engineering and product development 16,488 11,246 8,894 6,155 5,123
Sales and marketing 5,867 4,522 2,587 1,727 1,226
General and administrative 10,834 6,507 4,740 2,050 1,604
--------- --------- --------- --------- ---------
Total costs and expenses 87,963 67,953 38,047 24,856 14,897
--------- --------- --------- --------- ---------
Other Income (Expense):
Dividend and interest, net 633 379 786 327 408
Other, net 263 (155) (245) (2) 0
--------- --------- --------- --------- ---------
Other income, net 896 224 541 325 408
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes (2,681) 23,832 11,121 3,080 2,029
Provision for Income Taxes -- 9,460 4,000 220 187
Net Income (Loss) $ (2,681) $ 14,372 $ 7,121 $ 2,860 $ 1,842
========= ========= ========= ========= =========
Basic Earnings (Loss) Per Share $ (0.08) $ 0.46 $ 0.24 $ 0.10 $ 0.07
========= ========= ========= ========= =========
Diluted Earnings (Loss) Per Share $ (0.08) $ 0.44 $ 0.21 $ 0.09 $ 0.06
========= ========= ========= ========= =========
Common Shares Outstanding 31,986 31,300 29,858 29,124 28,053
========= ========= ========= ========= =========
Common Shares Outstanding Assuming Dilution 31,986 32,695 33,163 31,710 29,731
========= ========= ========= ========= =========
Balance Sheet Data
- ------------------------------------------------------------------------------------------------------------------------------------
As of JAN 2, JAN 3, DEC 28, DEC 30, DEC 31,
1999 1998 1996 1995 1994
(In thousands)
Working Capital $ 37,080 $ 32,962 $ 29,179 $ 16,837 $ 7,676
Total Assets 107,874 100,473 68,823 26,669 18,324
Short-Term Debt 522 4,800 -- -- --
Long-Term Debt 5,922 -- -- -- --
Stockholders' Equity 87,453 85,990 57,443 22,726 16,473
Cash Dividends -- -- -- -- --
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Background
Presstek, Inc. (The "Company" or "Presstek"), incorporated in Delaware, was
founded in September 1987 as a development company. It was established to find a
new way to produce color offset printing. Heidelberger Druckmaschinen AG
("Heidelberg"), the world's largest printing press manufacturer, and the Company
established a relationship that was formalized in 1991 and resulted in the
introduction of the first jointly developed product, the spark discharge based
GTO-DI. In 1993, after investing substantial effort and resources, the Company
completed the development of its high resolution, semiconductor based laser
diode imaging and thermal plate technology referred to as PEARL. PEARL's thermal
laser diode system enables its customers to image various types of Presstek
printing plates either off-press or on-press which may then be used to produce
high-quality, full color lithographic printed materials for the printing and
graphic arts industries. These printed materials typically can be produced at a
lower cost than traditional competitive methods. The PEARL-based GTO-DI was
introduced in late 1993, and in May of 1995, Heidelberg introduced the
Quickmaster DI 46-4, which replaced the GTO-DI product line. The Quickmaster DI
represents the second generation of Presstek's proprietary PEARL-based direct
imaging technology. It also employs the Company's patented automatic plate
changing cylinder, which eliminates the need to manually change plates between
jobs, as well as a number of other productivity improvement features. The
Company began shipment of its PEARL-based Quickmaster direct imaging systems to
Heidelberg in the second quarter of 1995. The Company estimates that as of the
end of 1998, there are more than 950 PEARL-equipped GTO-DI and Quickmaster DI
presses installed utilizing the Company's proprietary consumable printing
plates.
The Company is also engaged in the development of additional PEARL-based
products that incorporate its patented, proprietary, digital imaging system and
process free thermal ablation printing plate technologies for both
computer-to-plate and computer-to-press applications. During the first quarter
of fiscal 1996, the Company began shipments of its PEARL platesetter, referred
to as the PEARLsetter. The PEARLsetter is a computer-to-plate imaging system
that images both the Company's wet and dry offset plates. Also, in December
1996, the Company began shipments of its direct imaging system for a larger
format Omni-Adast (19" x 26") multicolor press. In the second half of fiscal
1998 the Company began shipments of its PEARLhdp laser imaging system. The
PEARLhdp, jointly developed with Imation Corp., is a digital halftone, proofing
device. It can produce true halftone "dot for dot" color press proofs using the
Company's computer-to-plate imaging system specially modified for this unique
application.
The Company also has announced agreements with a number of other companies
including Scitex Corporation LTD., Nilpeter A/S, Werner Kammann Maschinenfabrik
GmbH, Alcoa Packaging Equipment, Sakurai Graphic Systems Corp., and Fuji Photo
Film Co., Ltd. These agreements typically are for the use of the Company's
direct imaging systems, technology licenses, and/or thermal plate materials.
They include a variety of "direct-to" offset
20
printing applications ranging from high quality label production and printing on
aluminum cans to the production of normal four-color printing.
On February 15, 1996, the Company acquired 90% of the outstanding common
stock of Catalina Coatings, Inc., now known as Delta V Technologies, Inc.
("Delta V"), an Arizona corporation. Delta V is engaged in the development,
manufacture and sale of vacuum deposition coating equipment and the licensing
and sublicensing of patent rights with respect to a vapor deposition process to
coat moving webs of material at high speeds. The aggregate consideration paid by
the Company was $8,400,000, of which $8,200,000 represented the purchase price
of the purchased shares and $200,000 represented consideration for the
non-competition and confidentiality covenants of the selling shareholders.
Simultaneous with the closing of the acquisition, the Company entered into
a Put and Call Option Agreement (the "Option Agreement"). The Option Agreement
provides the Company with the right, at any time after February 15, 2000, to
acquire the remaining 10% of the outstanding common stock of Delta V for an
aggregate consideration of $2,000,000. The Option Agreement also provides the
selling shareholders of Delta V, and another individual with the right, at any
time after August 15, 2000, to cause the Company to purchase the remaining
shares for aggregate consideration of $1,000,000. The Option Agreement will
terminate if Delta V consummates an initial public offering of its securities
prior to February 15, 2000.
On December 28, 1998, the Company acquired an additional 7% of the
outstanding common stock of Delta V for consideration of $500,000 pursuant to
the Option Agreement.
The acquisition of Delta V was accounted for as a purchase and,
accordingly, the results of Delta V's operations have been included in the
Company's fiscal 1998, 1997 and 1996 financial statements. Significant
intercompany accounts and transactions have been eliminated.
In January 1998, the Company acquired the stock of Heath Custom Press, Inc.
("Heath"), of Seattle, Washington. Heath was engaged in the design and
manufacture of custom printing presses. Heath was purchased for 94,865
unregistered shares of the Company's common stock. The acquisition was accounted
for as a purchase and, accordingly, the results of Heath's operations have been
included in the Company's financial statements for the year ended January 2,
1999. The results of Heath's operations would not have had a material impact on
the Company's results of operations for fiscal 1997 or 1996.
In October 1998, the Company sold certain assets of Heath for $1,000,000,
which approximated book value. The Company retained all rights to the Heath
patent.
The Company operates and reports on a 52/53, week fiscal year, ending on
the Saturday closest to December 31. Accordingly, the 1998 fiscal year ended on
January 2, 1999 ("fiscal 1998"), the 1997 fiscal year ended on January 3, 1998
("fiscal 1997"), and the fiscal year 1996 ended on December 28, 1996 ("fiscal
1996"). The 1998 and 1996 fiscal years each reflect 52 weeks, while the 1997
fiscal year reflects 53 weeks.
21
The Company has determined that it operates in two reportable segments. The
Digital Imaging Products segment is principally engaged in the development,
manufacture and sale of PEARL, its patented, proprietary digital imaging system
and process-free thermal ablation printing plate technologies. Delta V is
principally engaged in the development, manufacture and sale of vacuum
deposition coating equipment. Delta V develops processes, materials and
equipment for vacuum coating applications. Its equipment and process innovations
are used in a broad range of industries and applications including graphic arts,
capacitors, electronics, optics, architectural and decorative glass, flat panel
displays and packaging.
Results of Operations
Fiscal 1998 versus Fiscal 1997
Revenues
Revenues for fiscal year 1998 of $84,386,000, consisting of product sales,
royalties, fees and other reimbursements, decreased $7,175,000 or 8% as compared
to revenues of $91,561,000 for fiscal 1997.
Revenues for Digital Imaging Products totaled $74,165,000 for fiscal 1998
as compared to $89,792,000 for fiscal 1997:
Net product sales for fiscal 1998 of $60,833,000 decreased $10,445,000 or
15% as compared to net product sales of $71,278,000 in fiscal 1997, primarily as
a result of a reduction in sales volume of direct imaging systems to Heidelberg
for use in the Quickmaster DI. These reductions were partially offset by the
increased sales volume of custom printing presses as a result of the acquisition
of Heath in 1998, as well as increased sales volume of the Company's proprietary
thermal printing plates. The revenues generated from the sale of the Company's
PEARLdry and other consumable products were $28,268,000 for the fiscal year
1998, an increase of $10,843,000 or 62% over fiscal 1997 due to increased sales
volume.
Royalties and fees from licensees for fiscal 1998 of $13,332,000 decreased
$5,181,000 or 28% as compared to royalties and fees of $18,513,000 for fiscal
1997. Royalties decreased $9,492,000 or 56% comparing fiscal 1998 to fiscal
1997, as a result of the reduction in sales volume of direct imaging systems to
Heidelberg for use in the Quickmaster DI. Engineering fees increased $4,311,000
or 302% in fiscal 1998 primarily as a result of engineering and other fees
received from Fuji Photo Film Co., Ltd. Included in fiscal 1997 were certain
fees related to the Company's agreement to license its on-press imaging patents
to Scitex Corporation Ltd.
Revenues for Delta V totaled $10,221,000 for fiscal 1998 as compared to
$1,769,000 for fiscal 1997. The increase of $8,452,000 relates primarily to the
increase in sales volume of vacuum deposition coating equipment to external
customers. During fiscal 1997, a substantial part of Delta V's efforts were
devoted to developing and manufacturing equipment required for the Digital
Imaging Products manufacture of PEARL thermal plates.
22
Revenues generated under the Company's agreements with Heidelberg and its
distributors were $42,123,000 in fiscal 1998, a decrease of $31,624,000 or 43%
from fiscal 1997 revenues of $73,747,000. Revenues from Heidelberg represented
50% and 81% of total revenues for the fiscal years 1998 and 1997, respectively.
Heidelberg has indicated to the Company that the substantial backlog that
existed for its Quickmaster DI, which uses the Company's direct imaging
technology, has now been reduced to normal levels. The Company has not yet
received orders from Heidelberg for fiscal 1999 in connection with its direct
imaging systems used on the Quickmaster DI. Management believes that orders for
these direct imaging systems will resume at some time in the second half of
fiscal 1999. There can be no assurance, however, that any orders will be
received.
The Company believes that net revenues will be lower in fiscal 1999 as
compared to fiscal 1998. This is due to a reduction in the requirements for the
direct imaging systems used on the QM-DI and to a lesser extent the reduction in
sales of custom printing presses due to the sale of certain assets of Heath. The
anticipated increase in sales volume related to the Company's proprietary
consumables sold for the QM-DI and other equipment, as well as the anticipated
increase in sales volume of the PEARLhdp imaging systems is expected to
partially mitigate the effect of the decrease in revenues. There can be no
assurance, however, that the Company will achieve these offsetting revenue
increases.
Cost of Products Sold
Cost of products sold consists of the costs of material, labor and overhead
as well as future warranty costs associated with product sales. Cost of products
sold for fiscal 1998 were $54,774,000, an increase of $9,096,000 or 20% as
compared to fiscal 1997. The gross margin decrease to 23% from 37% in fiscal
1997 is primarily related to the Digital Imaging Products operations. The gross
margin decrease is a result of reduced manufacturing volume of the direct
imaging systems sold to Heidelberg for use in the QM-DI, as well as increased
fixed costs associated with the Hudson, New Hampshire manufacturing operations.
Also included in fiscal 1998 was an allowance of $1,300,000 provided to a major
supplier as a result of a change in requirements and an allowance of $1,600,000
for inventory obsolescence as a result of the planned introduction of the
Company's next generation laser technology.
The Company anticipates that the gross margin on product sales will
continue at reduced levels through the first six months of fiscal 1999, due to
the reduction in sales of direct imaging systems to Heidelberg. The Company does
anticipate gross margin improvement in the second half of fiscal 1999 as it
continues to improve manufacturing processes, and seeks alternate distribution
methods for its proprietary consumable products. There can be no assurance
however, that these process improvements or alternate distribution methods will
result in improved gross margins for fiscal 1999.
23
Engineering and Product Development
Engineering and product development expenses consist primarily of payroll
and related expenses for personnel, parts and supplies, and contracted services
required to conduct the Company's equipment and consumable product development
efforts.
Engineering and product development expenses were $16,488,000 or 20% of net
revenues for fiscal 1998 as compared to $11,246,000 or 12% of fiscal 1997 net
revenues. The increase resulted principally from increased expenditures for
parts and supplies related to the Company's continued development of products
incorporating its PEARL technology. Included in these development efforts were
significant expenditures for the Company's PEARLgold and other consumable
products as well as expenditures for its next-generation laser diode technology
and other product development efforts. These increased expenditures were also a
result of increased engineering programs related to the development contract
with Fuji Photo Film Co., Ltd.
The Company expects these increased development expenditures to continue as
it prepares for the introduction of its next-generation laser imaging
technology, expands its PEARLgold family of proprietary consumable printing
plates, and pursues the development of additional products for the DRUPA 2000
international printing-media trade show. There can be no assurance however, that
these expenses will not be greater than anticipated.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for personnel, advertising and promotional expenses, and travel costs.
Sales and marketing expenses were $5,867,000 or 7% of net revenues for fiscal
1998 compared to $4,522,000 or 5% of fiscal 1997 net revenues. The increase
resulted primarily from increased expenditures for professional services and
other related costs associated with the Company's attendance at trade shows and
the continued expansion of its worldwide sales, distribution and technical
support network.
It is expected that these expenditures for fiscal 1999 will increase as the
Company continues to expand its direct sales force and distribution channels for
its products. There can be no assurance, however, that these expenditures will
not be greater than currently anticipated.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for personnel, and contracted professional services. General
and administrative expenses for fiscal 1998 were $10,834,000, or 13% of net
revenues compared to $6,507,000 or 7% of fiscal 1997 net revenues. The increase
of $4,327,000 related primarily to increased expenditures for additional
personnel required to conduct the finance, information systems, and
administrative functions of the Company. In addition, the Company recorded a
charge for
24
uncollectible accounts in the amount of $321,000 relating to Delta V and
$2,200,000 for certain disputed and uncollectible accounts related to its
Digital Imaging Products operations.
The Company anticipates that general and administrative costs for fiscal
1999 will be reduced from current levels, however there can be no assurance that
these expenses will not be greater than anticipated.
Other Income and Expense
Other income was $896,000 or 1% of net revenues for fiscal 1998 compared to
$224,000 or .2% of net revenues for fiscal 1997. The increase of $672,000 can be
attributed to increased interest income earned as a result of higher average
balances of funds available for investment, the gain from the sale of a parcel
of land in Hudson, New Hampshire, as well as the absence of foreign exchange
losses incurred on certain receivables from Heidelberg in fiscal 1997.
Provision for Income Taxes
For fiscal 1998, the Company did not record a provision for income taxes as
a result of the $2,681,000 net loss reported for the period. The provision for
income taxes for fiscal 1997 represents the tax benefit arising from stock
option deductions and the realization of net operating loss carryforwards
resulting from compensation deductions for tax purposes. The tax benefit related
to such stock option deductions has been credited to additional paid in capital.
Net Income (Loss)
As a result of the foregoing, the Company had net losses of $2,681,000 for
fiscal 1998 as compared to net income of $14,372,000 for fiscal 1997.
Fiscal 1997 versus Fiscal 1996
Revenues
Revenues for fiscal year 1997 of $91,561,000, consisting of product sales,
royalties, fees and other reimbursements, increased $42,934,000, or 88% compared
to fiscal 1996 revenues as a result of the following:
Product sales for fiscal 1997 increased $39,289,000, or 117%, over fiscal
1996, primarily as a result of volume increases in sales by the Company of
direct imaging systems used in the Quickmaster DI, as well as volume increases
in sales of the Company's consumable printing plates.
Royalties and fees from licensees increased $3,645,000 in fiscal 1997 over
fiscal 1996, primarily as a result of royalty increases of $10,907,000, offset
by a decrease of $7,262,000 in engineering and other fees primarily received
from Heidelberg. Included in fiscal 1997 were
25
certain fees related to the Company's agreement to license its on-press imaging
patents to Scitex Corporation Ltd.
Other fees from licensees for fiscal 1997 and 1996 are based primarily on
amounts annually agreed upon between the Company and Heidelberg. No significant
fees were received from Heidelberg in fiscal 1997.
Revenues generated under the Company's agreements with Heidelberg and its
distributors represented 81% and 73% of total revenues for the fiscal years 1997
and 1996, respectively.
Cost of Products Sold
Cost of products sold for fiscal 1997 of $45,678,000 increased $23,852,000
over fiscal 1996. The increase in such costs related primarily to volume
increases in product sales. The improvement in the gross margin on product sales
to 37% for fiscal 1997 from 35% in fiscal 1996 resulted primarily from a change
in product mix and certain volume related manufacturing efficiencies.
Engineering and Product Development
Engineering and product development expenses for fiscal 1997 totaled
$11,246,000 compared to $8,894,000 for fiscal 1996. The increase of $2,352,000
or 26% for fiscal 1997 resulted principally from increased expenditure for
parts, supplies, labor, and contracted services related to the Company's PEARL
technology, including the Company's PEARLgold plates, as well as other product
development efforts.
Sales and Marketing
Sales and Marketing expenses for fiscal 1997 totaled $4,522,000 compared to
$2,587,000 for fiscal year 1996. The increase of $1,935,000, or 75%, related
principally to increased expenditures for additional personnel and related
costs, as well as various promotional activities.
General and Administrative
General and administrative expenses for fiscal 1997 totaled $6,507,000,
compared to $4,740,000 for fiscal 1996, an increase of $1,767,000, or 37%. The
increase related primarily to increased expenditures for additional personnel
and other related costs.
Other Income and Expense
Dividend and interest income earned on the Company's cash and investments
decreased $407,000 for fiscal 1997 compared to the same period in fiscal 1996,
principally as a result of decreased funds invested in securities.
26
Income Taxes
The charge in lieu of income taxes included in the fiscal 1997 provision
for income taxes represents the tax benefit arising from stock option deductions
in that year and the realization of net operating loss carryforwards resulting
from compensation deductions for tax purposes. The charge in lieu of income
taxes included in the fiscal 1996 provision for income taxes represents the tax
benefit arising from stock option deductions in that year. The tax benefits
related to such stock option deductions have been credited to stockholders'
equity.
Net Income
As a result of the foregoing, the Company had net income of $14,372,000 for
fiscal 1997, compared to net income of $7,121,000 for fiscal 1996. The
operations of Delta V did not have a material effect on net income for the
fiscal years ended January 3, 1998 and December 28, 1996.
Liquidity and Capital Resources
At January 2, 1999, the Company had cash, cash equivalents, and short-term
marketable securities of $19,281,000 and working capital of $37,080,000 as
compared to cash, cash equivalents and marketable securities of $6,209,000 and
working capital of $32,962,000 at January 3, 1998.
Cash generated from operating activities was $15,725,000 for the fiscal
year ended January 2, 1999. The cash flow resulted primarily from reductions in
accounts receivable and inventories of $5,347,000, non-cash items of
depreciation and amortization of $5,069,000 and provisions for uncollectible
accounts of $5,006,000, offset by the loss from operations of $2,681,000. Cash
flow from operations was also affected by the increase in billings in excess of
costs and estimated earnings on uncompleted contracts of $3,030,000. This
increase was primarily a result of advance payments on equipment under
construction at the Company's Delta V subsidiary, and the Company's development
program with Fuji Photo Film Co., Ltd. The Company expects to expend this cash
over the next twelve months as it completes its obligations under the related
contracts.
Net cash used for investing activities was $20,771,000 for the fiscal year
ended January 2, 1999 and consisted primarily of additions to property, plant
and equipment used in the Company's business of $5,835,000, the purchase of
marketable securities of $16,036,000, offset by the maturity of marketable
securities of $1,000,000.
Net cash provided by financing activities during the fiscal year ended
January 2, 1999 totaled $2,780,000 and consisted primarily of the proceeds from
a mortgage term loan of $6,900,000 and proceeds from the issuance of common
stock of $1,736,000. These proceeds were offset by payments of $5,400,000 on the
Company's revolving lines of credit.
In December 1998, the Company renewed its agreement with Citizens Bank New
Hampshire ("Citizens") for a revolving line of credit loan under which the
Company may borrow
27
a maximum of $10,000,000 for working capital requirements and general corporate
purposes. Borrowings are secured by substantially all of the Company's assets
and are guaranteed by the Company's subsidiary, Delta V and secured by its
assets. Interest on the line of credit is payable at the LIBOR rate plus 1.50%
(7.12% at January 2, 1999). The loan agreement terminates on July 31, 2000, at
which date, the entire principal and accrued interest is due and payable. As of
January 2, 1999, the Company had $10,000,000 available under the line of credit
loan agreement.
On February 6, 1998, the Company obtained a ten-year mortgage term loan in
the principal amount of $6,900,000 from Citizens. Borrowings are secured with
land and buildings with a cost of approximately $17,000,000. The loan bears a
fixed rate of interest of 7.12% per year during the first five years, and a
variable rate of interest at the LIBOR rate plus 2% (7.62% at January 2, 1999)
for the remaining five years. Principal and interest payments during the first
five years of the loan will be made in 60 monthly installments of $80,500.
During the remaining five years, principal and interest payments shall be made
on a monthly basis in the amount of one-sixtieth of the outstanding principal
amount as of the first day of each month of the second five year period, plus
accrued interest through the monthly payment date. All outstanding principal and
accrued and unpaid interest is due and payable on February 6, 2008.
At January 2, 1999, the Company was in violation of a certain financial
covenant, which was waived by the bank through April 3, 1999. Citizens has
agreed to modify the financial covenants currently contained in the loan
agreement, through the term of the revolving line of credit loan agreement.
The Company has approved expenditures of $7,500,000 for additional plate
manufacturing equipment that is expected to reduce the cost of plate manufacture
and enhance the Company's development capabilities. The Company has not yet
determined whether to purchase the equipment with existing funds, or to seek
additional financing.
The Company believes that existing funds, cash flows from operations, and
cash available under its revolving line of credit and mortgage loan should be
sufficient to satisfy working capital requirements and capital expenditures for
the next twelve months.
Effect of Inflation
Inflation has not had, and is not expected to have, a material impact upon
the Company's operations.
Net Operating Loss Carryforwards
As of January 2, 1999, the Company had net operating loss carryforwards
totaling approximately $38,000,000 resulting primarily from compensation
deductions, for tax purposes, relative to stock option plans. To the extent net
operating losses resulting from stock option plan compensation deductions become
realizable, the benefit will be credited directly to additional paid in capital.
The amount of the net operating loss carryforwards that may be
28
utilized in any future period may be subject to certain limitations, based upon
changes in the ownership of the Company's common stock.
Recently Issued Accounting Standards
The American Institute of Certified Public Accountants has issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This SOP defines start-up activities as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customers,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 requires that these start-up costs be expensed as incurred.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, although earlier application is encouraged. Management does
not believe that adoption of SOP 98-5 will materially impact the results of
operations, financial position, and future financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. The Company does not presently
enter into any transactions involving derivative financial instruments and,
accordingly, does not anticipate the new standard will have any effect on its
financial statements for the foreseeable future.
YEAR 2000
The Year 2000 ("Y2K") problem arose because many existing computer systems
use only the last two digits to identify the year instead of using all four
digits. These computer systems cannot recognize the difference in a year that
begins with "20" from a year that begins with "19". If not corrected, many of
these computer systems could fail or create erroneous results.
The Company has established a program to determine the impact of the Y2K
issue on the software and hardware utilized in the Company's internal operations
and included in its products manufactured for sale to customers. This assessment
includes applications and systems software, information technology ("IT")
infrastructure, manufacturing and process control technology, products and
services, and third party suppliers and customers. Representatives from each
functional area of the Company meet weekly to monitor program status and address
issues relating to the program's progress.
The major project phases include; inventorying affected technology and
assessing the impact of the Y2K issue on items determined to be material to the
Company; modifying or replacing items determined not to be Y2K compliant;
testing and certifying material items; and developing contingency plans.
29
The inventory and assessment phase of the project has been completed.
Certain non-compliant systems were replaced in January 1998 as the Company
installed Y2K compliant business systems software. All other components of
software and hardware for the Company are in various phases. The Company expects
to have its IT systems and server infrastructure and manufacturing and process
control technology Y2K compliant by August 1999. The Company also expects that
currently supported products available for sale to customers will be tested for
compliance by the end of September 1999. The product commercialization process
is being modified to produce compliant products in the future.
The Company relies on third-party suppliers for many systems, products and
services including its security system, building equipment and
telecommunications. Failure of such third party systems and equipment to operate
properly could adversely effect the Company. The Company is in the process of
evaluating the compliance status of critical third party suppliers.
The total costs associated with becoming Y2K compliant are not expected to
be material to the Company's financial position or operations. Costs incurred
through January 2, 1999 have been incurred as part of normal IT operating costs.
Management believes it has an effective program in place to resolve Y2K
issues without significant costs or disruption of operations. However, it is not
possible to anticipate all future outcomes, especially when third parties are
involved. There could be circumstances that could adversely effect the Company's
results of operations, liquidity and financial condition. The Company is
developing a contingency plan to minimize the effect of non-compliance on
business operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
30
Item 8. Financial Statements and Supplementary Data.
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
(In thousands, except per share data)
JAN 2 OCT 3 JUL 4 APR 4
QUARTERS ENDED 1999 1998 1998 1998
---- ---- ---- ----
Total revenues $ 16,599 $ 20,417 $ 23,029 $ 24,341
Total costs & expenses 24,580 20,413 22,162 20,808
Net income (loss) (5,784) 126 636 2,341
Basic earnings (loss) per share $ (0.18) $ 0.00 $ 0.02 $ 0.07
Diluted earnings (loss) per share $ (0.18) $ 0.00 $ 0.02 $ 0.07
Common shares outstanding 32,259 32,112 31,994 31,881
Common shares outstanding
assuming dilution 32,259 32,393 32,631 32,763
JAN 3 SEP 27 JUN 28 MAR 29
QUARTERS ENDED 1998 1997 1997 1997
---- ---- ---- ----
Total revenues $ 26,363 $ 24,294 $ 20,896 $ 20,008
Total costs & expenses 19,766 18,010 15,294 14,884
Net income 4,196 4,064 3,210 2,902
Basic earnings per share $ 0.13 $ 0.12 $ 0.10 $ 0.09
Diluted earnings per share $ 0.13 $ 0.12 $ 0.10 $ 0.09
Common shares outstanding 31,810 32,661 31,920 30,804
Common shares outstanding
assuming dilution 32,918 33,472 33,163 32,992
31
PART III
Item 9. Directors and Executive Officers of the Registrant.
The information required by this item will be set forth under the caption
"Election of Directors" and "Executive Officers" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on June 8, 1999 to be filed with the
Securities and Exchange Commission, (the "Proxy Statement"), and is incorporated
herein by reference.
Item 10. Executive Compensation.
The information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
Item 11. Security Ownership of Certain
Beneficial Owners and Management.
The information required by this item will be set forth under the caption
"Voting Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement, and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by this item will be set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, and is
incorporated herein by reference.
32
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Page
----
Report of Independent Certified Public
Accountants F-2
Balance Sheets as of January 2, 1999, and
January 3, 1998 F-3
Statements of Operations for the fiscal years
ended January 2, 1999, January 3, 1998,
and December 28, 1996 F-4
Statements of Changes in Stockholders'
Equity for the fiscal years ended
January 2, 1999, January 3, 1998, and
December 28, 1996 F-5
Statements of Cash Flows for the fiscal
years ended January 2, 1999, January 3, 1998,
and December 28, 1996 F-6
Notes to Financial Statements F-7
(a)(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
and Reserves. FS-1
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
- ------ -----------
2(a) Stock Purchase Agreement dated and effective as of January 1, 1996, among
the Company and David G. Shaw, Marc G. Langlois and David G. Shaw and
Lynn R. Shaw,
33
as Trustees of the David and Lynn Shaw Charitable Remainder Unitrust,
dated February 12, 1996, and John E. Madocks and Catalina. **
2(b) Put and Call Option Agreement by and among the Company, David G. Shaw,
Marc G. Langlois and John E. Madocks. **
2(c) Confidentiality and Non-Competition Agreement by and among the Company,
David G. Shaw and Catalina. **
2(d) Confidentiality and Non-Competition Agreement by and among the Company,
Marc G. Langlois and Catalina. **
2(e) Confidentiality and Non-Competition Agreement by and among the Company,
John E. Madocks and Catalina. **
2(f) Special Option Agreement, among the Company, Catalina, David G. Shaw,
Marc G. Langlois and John E. Madocks. **
3(a) Amended and Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended June 29, 1996.
3(b) By-laws of the Company.***
10(a) 1988 Stock Option Plan, incorporated by reference to Exhibit 10(c) of
Registration Statement 33-27112, effective March 28, 1989.
10(b) 1988 Restricted Stock Purchase Plan, incorporated by reference to Exhibit
10(d) of Registration Statement 33-27112, effective March 28, 1989.
10(c) Confidentiality Agreement between the Company and Heidelberger
Druckmaschinen A.G., effective December 7, 1989 as amended, incorporated
by reference to Exhibit 10(i) of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989.
10(d) Master Agreement effective January 1, 1991, by and between Heidelberger
Druckmaschinen Aktiengesellschaft and the Company, incorporated by
reference to the Company's Form 8-K, dated January 1, 1991.
34
10(e) Technology License effective January 1, 1991, by and between Heidelberger
Druckmaschinen Aktiengesellschaft and the Company, incorporated by
reference to the Company's Form 8-K, dated January 1, 1991.
10(f) Memorandum of Performance No. 3 dated April 27, 1993, to the Master
Agreement, Technology License, and Supply Agreement between the Company
and Heidelberger Druckmaschinen Aktiengesellschaft, incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1993.
10(g) Modification to Memorandum of Performance No. 3 dated April 27, 1993, to
the Master Agreement, Technology License, and Supply Agreement between
the Company and Heidelberger Druckmaschinen Aktiengesellschaft.+
10(h) Memorandum of Understanding No. 4 dated November 9, 1995, to the Master
Agreement and Technology License and Supply Agreement between the Company
and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)
10(i) Lease relating to real property located at 9 Commercial St., Hudson, NH.
+++
10(j) Lease relating to real property located at 18-20 Hampshire Dr., Hudson,
New Hampshire. +++
10(k) Employment Agreement dated March 30, 1999 between the Company and Richard
Williams.
10(l) 1991 Stock Option Plan. *
10(m) 1994 Stock Option Plan. +
10(n) Non-Employee Director Stock Option Plan.
10(o) 1997 Interim Stock Option Plan. ++
10(p) Memorandum of Understanding No. 5 dated March 7, 1997 between the Company
and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)
10(q) Amendment to Loan Agreement between the Company and Citizens Bank, New
Hampshire.
10(r) Revolving Line of Credit Promissory Note in favor of Citizens Bank, New
Hampshire.
10(s) 1998 Stock Incentive Plan ++++
10(t) Employment Agreement by and between the Company and Robert W. Hallman.
+++++
35
11 Calculations of earnings per share
21 Subsidiaries of the Company.
23(a) Consent of BDO Seidman LLP.
27 Financial Data Schedule (for SEC use only)
(a) Exhibits
(b) No Form 8-K's were filed during the quarter ended January 2, 1999.
(c) See Item 13(a)(3) above.
(d) See Item 13(a)(2) above.
- ----------
* Previously filed as an exhibit to the Company's Annual report on Form
10-K for the fiscal year ended December 31, 1991 and incorporated by
reference thereto.
** Previously filed as an exhibit to the Company's Form 8-K for the event
dated February 15, 1996 and incorporated by reference thereto.
*** Previously filed as an exhibit with the Company's Form 10-K for the
fiscal year ended December 30, 1995 and incorporated by reference
thereto.
(I) The SEC has granted the Company's request of confidential treatment with
respect to a portion of this exhibit.
+ Previously filed as an exhibit to the Company's Annual report on Form
10-K for the fiscal year ended December 31, 1994 and incorporated by
reference thereto.
++ Incorporated by reference to the exhibit filed with the Company's
Quarterly report on Form 10-Q for the quarter ended September 27, 1997.
+++ Previously filed as an exhibit filed with the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996 and incorporated by
reference thereto.
++++ Incorporated by reference to the exhibit to the Company's April 23, 1998
Proxy Statement.
+++++ Previously filed as an exhibit filed with the Company's Quarterly report
on Form 10-Q for the Quarter ended October 3, 1998 and incorporated by
reference thereto.
36
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Balance Sheets as of January 2, 1999 and
January 3, 1998 F-3
Statements of Operations for the fiscal years ended
January 2, 1999, January 3, 1998, and
December 28, 1996 F-4
Statements of Changes in Stockholders' Equity
for the fiscal years ended January 2, 1999,
January 3, 1998, and December 28, 1996 F-5
Statements of Cash Flows for the fiscal years ended
January 2, 1999, January 3, 1998, and
December 28, 1996 F-6
Notes to Financial Statements F-7
Financial Statement Schedule:
Schedule II - Valuation and qualifying accounts
and reserves FS-1
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Presstek, Inc.
Hudson, New Hampshire
We have audited the accompanying balance sheets of Presstek, Inc. as of January
2, 1999 and January 3, 1998, and the related statements of operations, changes
in stockholders' equity, and cash flows for the fiscal years ended January 2,
1999, January 3, 1998 and December 28, 1996. We have also audited the financial
statement schedule listed in the accompanying index. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Presstek, Inc. at January 2, 1999
and January 3, 1998, and the results of its operations and its cash flows for
the fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996,
in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
New York, New York
February 19, 1999, except for Note 14, as to which the date is March 31, 1999.
F-2
PRESSTEK, INC.
BALANCE SHEETS
January 2, January 3,
1999 1998
(In thousands, except per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,174 $ 5,201
Marketable securities 16,107 1,008
Accounts receivable, net of allowance for losses
of $2,536 in fiscal 1998; and $941 in fiscal 1997 20,638 26,401
Inventories 9,857 13,308
Costs and estimated earnings in excess
of billings on uncompleted contracts 823 1,096
Other current assets 980 431
--------- ---------
Total current assets 51,579 47,445
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 2,412 2,571
Buildings 16,776 15,424
Machinery and equipment 33,354 29,758
Furniture and fixtures 1,238 996
Leasehold improvements 2,392 2,572
Other 71 34
--------- ---------
Total 56,243 51,355
Less accumulated depreciation and amortization (9,850) (6,392)
--------- ---------
Property, plant and equipment, net 46,393 44,963
--------- ---------
OTHER ASSETS:
Goodwill, net 5,996 5,820
Patent application costs and license rights, net 3,625 1,932
Software development costs, net 91 304
Other 190 9
--------- ---------
Total other assets 9,902 8,065
--------- ---------
TOTAL $ 107,874 $ 100,473
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -- $ 4,800
Current portion of mortgage term loan 522 --
Accounts payable 8,104 7,530
Accrued expenses 1,782 1,280
Accrued salaries and employee benefits 1,061 873
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,030 --
--------- ---------
Total current liabilities 14,499 14,483
--------- ---------
MORTGAGE TERM LOAN 5,922 --
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value; authorized 75,000,000 shares;
issued and outstanding 32,276,263 shares at January 2, 1999;
31,866,554 shares at January 3, 1998 323 319
Additional paid-in capital 67,296 63,157
Accumulated other comprehensive loss -- (1)
Retained earnings 19,834 22,515
--------- ---------
Stockholders' equity 87,453 85,990
--------- ---------
TOTAL $ 107,874 $ 100,473
========= =========
See notes to financial statements
F-3
PRESSTEK, INC.
STATEMENTS OF OPERATIONS
For the Fiscal Years Ended
January 2, January 3, December 28,
1999 1998 1996
-------- -------- --------
(In thousands, except per share data)
REVENUES:
Product sales $ 70,962 $ 72,858 $ 33,569
Royalties and fees from licensees 13,424 18,703 15,058
-------- -------- --------
Total revenues 84,386 91,561 48,627
-------- -------- --------
COSTS AND EXPENSES:
Cost of products sold 54,774 45,678 21,826
Engineering and product delopment 16,488 11,246 8,894
Sales and marketing 5,867 4,522 2,587
General and administrative 10,834 6,507 4,740
-------- -------- --------
Total costs and expenses 87,963 67,953 38,047
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (3,577) 23,608 10,580
-------- -------- --------
OTHER INCOME (EXPENSE):
Dividend and interest, net 633 379 786
Other, net 263 (155) (245)
-------- -------- --------
Total other income (expense), net 896 224 541
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (2,681) 23,832 11,121
PROVISION FOR INCOME TAXES -- 9,460 4,000
-------- -------- --------
NET INCOME (LOSS) $ (2,681) $ 14,372 $ 7,121
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.46 $ 0.24
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.44 $ 0.21
======== ======== ========
COMMON SHARES OUTSTANDING 31,986 31,300 29,858
======== ======== ========
COMMON SHARES OUTSTANDING ASSUMING DILUTION 31,986 32,695 33,163
======== ======== ========
See notes to financial statements
F-4
Presstek, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Fiscal Years Ended
January 2, 1999, January 3, 1998, and December 28, 1996
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income (Loss) Equity
------ ------ ------- -------- ------------- ------
(In thousands, except per share data)
BALANCE AT DECEMBER 30, 1995 14,765 $ 148 $ 21,560 $ 1,022 ($ 3) $ 22,727
Comprehensive income
Net income for the fiscal year 7,121 7,121
Other comprehensive income (loss)
Unrealized loss on marketable securities (40) (40)
--------
Comprehensive income for the fiscal year 7,081
--------
Issuance of common stock relative to the
exercise of incentive and non-qualified stock
options at $2.15 - $26.375 per share 344 3 3,580 3,583
Issuance of common stock relative to the
private placements at $73.00 per share 283 3 20,206 20,209
Costs relative to the private placements (34) (34)
Tax benefit arising from stock option deductions -- -- 3,876 -- -- 3,876
------ -------- -------- -------- -------- --------
BALANCE AT DECEMBER 28, 1996 15,392 $ 154 $ 49,188 $ 8,143 ($ 43) $ 57,442
Comprehensive income
Net income for the fiscal year 14,372 14,372
Other comprehensive income (loss)
Unrealized gain on marketable securities 42 42
--------
Comprehensive income for the fiscal year 14,414
--------
Issuance of common stock relative to the
exercise of incentive and non-qualified stock
options at $2.85 - $35.00 per share 924 10 4,855 4,865
Two-for-one stock split effected in the form
of a 100% stock dividend 15,551 155 (155) --
Tax benefit arising from stock option deductions -- -- 9,269 -- -- 9,269
------ -------- -------- -------- -------- --------
BALANCE AT JANUARY 3, 1998 31,867 $ 319 $ 63,157 $ 22,515 ($ 1) $ 85,990
Comprehensive loss
Net loss for the fiscal year (2,681) (2,681)
Other comprehensive income (loss)
Unrealized gain on marketable securities 1 1
--------
Comprehensive loss for the fiscal year (2,680)
--------
Issuance of unregistered shares of
common stock relative to the acquisition of
Heath Custom Press, Inc.
at $25.38 per share 94 1 2,406 2,407
Issuance of common stock relative to the
exercise of incentive and non-qualified stock
options at $2.85 - $10.94 per share 315 3 1,733 -- -- 1,736
------ -------- -------- -------- -------- --------
BALANCE AT JANUARY 2, 1999 32,276 $ 323 $ 67,296 $ 19,834 ($ 0) $ 87,453
====== ======== ======== ======== ======== ========
See notes to financials statements
F-5
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
January 2, January 3, December 28,
1999 1998 1996
-------- -------- --------
(In thousands)
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss) $ (2,681) $ 14,372 $ 7,121
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Tax benefit arising from stock option deductions -- 9,269 3,876
Depreciation 4,070 2,214 1,254
Amortization 999 909 785
Provision for warranty and other costs 766 1,164 616
Provision for losses on accounts receivable 5,006 1,074 113
Other, net (35) (71) 107
(Increase) decrease in:
Accounts receivable 1,238 (10,169) (9,470)
Inventories 4,109 (2,669) (5,036)
Costs and estimated earnings in excess of
billings on uncompleted contracts 273 530 (606)
Other current assets (549) 424 (475)
Increase (decrease) in:
Accounts payable and accrued expenses (611) (1,538) 5,109
Accrued salaries and employee benefits 110 187 169
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,030 (1,355) 668
-------- -------- --------
Net cash provided by operating activities 15,725 14,341 4,231
-------- -------- --------
CASH FLOWS - INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired -- -- (7,456)
Purchases of property, plant and equipment (5,835) (27,918) (16,390)
Proceeds from sale of land and equipment 442 538 66
Proceeds from sale of certain net assets
of Heath Custom Press, Inc. 732 -- --
Increase in other assets (1,074) (449) (851)
Sales and maturities of marketable securities 1,000 5,493 3,500
Purchases of marketable securities (16,036) -- (6,956)
-------- -------- --------
Net cash (used for) investing activities (20,771) (22,336) (28,087)
-------- -------- --------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from sale of common stock 1,736 4,865 23,759
Proceeds under mortgage term loan 6,900 -- --
Repayments of mortgage term loan (456) -- --
Net proceeds from revolving line of credit -- 4,800 --
Net payments on revolving line of credit (4,800) -- --
Payment on Heath Custom Press, Inc.'s
revolving line of credit (600) -- --
-------- -------- --------
Net cash provided by financing activities 2,780 9,665 23,759
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,266) 1,670 (97)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 5,201 3,531 3,628
Cash acquired from Heath Custom Press, Inc. 239 -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 3,174 $ 5,201 $ 3,531
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 225 $ 171 $ --
======== ======== ========
Income taxes $ 250 $ 90 $ 45
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITY:
Common stock issued and net assets acquired relating
to the acquisition of Heath Custom Press, Inc. $ 2,407 $ -- $ --
======== ======== ========
See notes to financial statements
F-6
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Presstek, Inc. ("Presstek", or "the Company") is
principally engaged in the development, manufacture, and sale of PEARL(R), its
patented, proprietary, digital imaging system and process-free thermal ablation
printing plate technologies. Presstek's products and applications incorporate
PEARL technologies and utilize PEARL consumables for computer-to-plate and
direct-to-press applications. PEARL's thermal laser diode system enables its
customers to produce high quality, full color lithographic printed materials for
the printing and graphic arts industries. The Company is also engaged in the
development, manufacture, and sale of vacuum deposition coating equipment at its
Delta V Technologies Inc. ("Delta V") subsidiary. Based in Tucson, Arizona,
Delta V develops processes, materials and equipment for vacuum coating
applications. Its equipment and process innovations are used in a broad range of
industries and applications including graphic arts, capacitors, electronics,
optics, architectural and decorative glass, flat panel displays and packaging.
See Note 2 of the financial statements.
In January 1998, the Company acquired 100% of the stock of Heath Custom
Press, Inc. ("Heath") of Seattle, Washington. On October 26, 1998 the Company
sold certain assets of Heath, which was engaged in the design and manufacture of
custom printing presses. See Note 2 of the financial statements.
The Company operates in two reportable business segments, the Direct
Imaging Products segment, and Delta V. See Note 8 of the financial statements.
Principles of Consolidation - The financial statements for the fiscal years
ended January 2, 1999, January 3, 1998, and December 28, 1996 include the
accounts of the Company and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated.
Fiscal Year - The Company operates and reports on a 52 / 53 week fiscal
year ending on the Saturday closest to December 31. Accordingly, fiscal 1998
ended January 2, 1999, fiscal 1997 ended January 3, 1998, and fiscal 1996 ended
December 28, 1996. The 1998 and 1996 fiscal years each reflects 52 weeks, while
the 1997 fiscal year reflects 53 weeks.
Use of Estimates - The Company prepares its financial statements in
conformity with generally accepted accounting principles. This 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 these
estimates. Many of the Company's estimates and assumptions used in the financial
statements relate to the Company's products, which are subject to rapid
technological change.
F-7
It is reasonably possible that changes may occur in the near term that would
affect management's estimates with respect to the carrying values of
inventories, property plant and equipment, goodwill, patents, and software
development costs.
Revenue Recognition - The Company records revenues on product sales and
related royalties at the time of shipment. Certain fees and other reimbursements
are recognized as revenue when the related services have been performed or the
revenues otherwise earned.
Revenues from fixed-price and modified fixed-price production and
development contracts are recognized on the percentage-of-completion method,
measured by the percentage of costs incurred to date compared to the estimated
total of direct costs for each contract. As contracts can extend over one or
more accounting periods, revisions in costs and earnings estimated during the
course of the work are reflected during the accounting period in which the facts
that required such revisions become known.
Product Warranties - The Company warrants its products against defects in
material and workmanship for a period of one year. Anticipated future warranty
costs are accrued by a charge to expense as products are shipped and the related
revenue recognized. At January 2, 1999 and January 3, 1998, accrued expenses
included accrued warranty costs of $1,067,000 and $933,000.
Inventories - Inventories are valued at the lower of cost or market, with
cost determined using the first-in, first-out method. At January 2, 1999 and
January 3, 1998, inventories consisted of the following:
1998 1997
---- ----
(In thousands)
Raw materials $ 7,289 $ 7,698
Work in process 690 3,840
Finished goods 1,878 1,770
------- -------
Total $ 9,857 $13,308
======= =======
Property, Plant and Equipment - Property, plant and equipment are stated at
cost and are depreciated using a straight-line method for both financial
reporting and for tax purposes over their estimated useful lives (ranging from 3
to 30 years). Leasehold improvements are amortized over the life of the lease
for financial reporting purposes and a required longer period for tax purposes.
Goodwill - The excess of cost over the fair value of net assets acquired,
which relates to the Company's acquisition of Delta V (Note 2), is being
amortized over a twenty year period using the straight line method. At January
2, 1999 goodwill of $6,969,000 is stated net of total accumulated amortization
of $973,000. Amortization expense was $325,000 for the fiscal year ended January
2, 1999 and $324,000
F-8
for each of the fiscal years ended January 3, 1998, and December 28, 1996.
Patent Application Costs and License Rights - Patent application costs
represent the expense of preparing and filing applications to patent the
Company's proprietary technologies, in addition to certain patent and license
rights obtained in the acquisitions of Delta V and Heath. Such costs are
amortized over a period ranging from five to seven years, beginning on the date
the patents or rights are issued or acquired. Amortization expense for the
fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996, was
$466,000, $190,000, and $212,000, respectively.
Software Development Costs - Software development costs for products and
certain product enhancements are capitalized subsequent to the establishment of
their technological feasibility (as defined in Statement of Financial Accounting
Standards No. 86) based upon the existence of working models of the products
which are ready for initial customer testing. Costs incurred prior to such
technological feasibility or subsequent to a product's general release to
customers are expensed as incurred. During fiscal 1998 and 1997, the Company did
not incur material costs subject to capitalization. Through fiscal 1996, the
Company incurred and capitalized $895,000 of costs subject to capitalization.
Amortization of these costs commenced in fiscal 1995 when the related product
was released to customers. Amortization expense reported for the fiscal years
1998, 1997, and 1996 was $110,000, $376,000, and $250,000, respectively.
Amortization expense is based upon the ratio that current gross revenues bear to
total estimated gross revenues, which was an amount greater than amortization on
a straight-line method over the estimated economic life of the product from
three to five years. Based upon current sales estimates software costs, are
expected to be fully amortized in less than one year.
Non-Competition and Confidentiality Covenants - The consideration paid by
the Company to the selling shareholders of Delta V with respect to
non-competition and confidentiality is being amortized over a four year period
using the straight line method. Amortization expense was $49,000 for each of the
fiscal years ended January 2, 1999, January 3, 1998, and December 28, 1996.
Research and Development Costs - Research and development costs are
expensed as incurred for financial reporting purposes. Such costs aggregated
$16,488,000, $11,246,000, and $8,894,000, for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively.
Fair Value of Financial Instruments - The carrying values of cash
equivalents, marketable securities available for sale, accounts receivable,
accounts payable and notes payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of the Company's bank
borrowings under its revolving credit agreement approximates fair value because
the interest rates are based on floating rates identified by reference to market
rates. The fair value of the Company's other long-term debt is estimated
F-9
based on quoted market prices. At January 2, 1999, the fair value of the
Company's long term debt approximated carrying value.
Cash Equivalents, and Marketable Securities - For purposes of reporting
cash flows, the Company considers all savings deposits, certificates of deposit,
and money market funds and deposits purchased with a maturity of three months or
less to be cash equivalents. At January 2, 1999, and January 3, 1998, cash and
cash equivalents consisted of cash balances on deposit and money market funds.
Marketable securities are classified as available for sale and are stated at
fair market value. All unrealized gains and losses, if any, are recorded as a
separate component of stockholders' equity. At January 2, 1999 marketable
securities consisted of high-quality debt securities and commercial paper. At
January 3, 1998 marketable securities consisted of United States Treasury Notes.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, marketable securities and accounts receivable. The Company invests
in high-quality money market instruments, securities of the U.S government, and
high-quality corporate issues. Accounts receivable, are generally unsecured and
are derived from the Company's customers located around the world. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses. Concentration of credit risk with respect to accounts
receivable results from a significant portion of the Company's receivables
concentrated with two major customers. See Note 8 of the financial statements.
Reclassification - Certain prior fiscal years' accounts have been
reclassified for comparative purposes to conform to the presentation in the
current fiscal year.
Long Lived Assets - Long-lived assets, such as intangible assets and
property and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. No write downs, were necessary for the fiscal years
ended January 2, 1999, January 3, 1998, and December 28, 1996.
Stock-Based Compensation - The Company accounts for stock options granted
to employees under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as permitted by Statement
of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for
Stock-Based Compensation. APB 25 provides for compensation cost to be recognized
over the vesting period of the options based on the difference, if any, between
the fair market value of the Company's stock and the option price on the grant
date. SFAS 123 requires companies that follow APB 25 to provide pro forma
disclosure of the effect of applying the optional fair value method. See Note 7
of the financial statements.
F-10
Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted average numbers
of shares of common stock outstanding during the period. Diluted earnings (loss)
per share is computed giving effect to all diluted potential common shares that
were outstanding during the period. Dilutive potential common shares consist of
the incremental common shares issuable upon the exercise of stock options. For
fiscal 1998, potentially dilutive securities that related to shares issuable
upon the exercise of stock options granted by the Company were excluded, as
their effect was antidilutive. See Note 4 of the financial statements.
Comprehensive Income - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" in the
first quarter of fiscal 1998. SFAS No 130 sets standards for the reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is comprised of net income and all changes in stockholders'
equity except those due to investments by owners and distributions to owners,
which for the Company includes unrealized gains (losses) on marketable
securities. The Company has elected to disclose comprehensive income in its
Statement of Changes in Stockholders' Equity.
Effect of New Accounting Pronouncements - The American Institute of
Certified Public Accountants has issued Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"). This SOP defines start-up
activities as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customers, initiating a new process in
an existing facility, or commencing some new operation. SOP 98-5 requires that
these start-up costs be expensed as incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998,
although earlier application is encouraged. Management does not believe that
adoption of SOP 98-5 will materially impact the results of operations, financial
position, and future financial statement disclosures.
In June 1998 the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards No. 133; "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
presently enter into any transactions involving derivative financial instruments
and, accordingly, does not anticipate the new standard will have any effect on
its financial statements for the foreseeable future.
2. BUSINESS ACQUISITIONS
In January 1998, the Company acquired 100% of the stock of Heath Custom
Press, Inc. ("Heath"), of Seattle, Washington. Heath was engaged in the design
and manufacture of custom printing presses. Heath was purchased for 94,865
unregistered shares of the Company's common stock. The purchase price of
$2,407,000 has been allocated to assets acquired and liabilities assumed based
on the fair market value at the date of acquisition as
F-11
follows: current assets, $2,198,000; patents, $1,781,000; long-term assets,
$186,000; other liabilities, $1,758,000. The acquisition was accounted for as a
purchase and, accordingly, the results of Heath's operations have been included
in the Company's financial statements for the fiscal year 1998. The results of
Heath's operations would not have had a material impact on the Company's results
of operations for fiscal 1997 and 1996, and were not material in 1998.
In October 1998, the Company sold certain assets of Heath for $1,000,000,
which approximated book value. The Company retained all rights to the Heath
patent.
On February 15, 1996, the Company acquired 90% of the outstanding common
stock (the "Purchased Shares") of Catalina Coatings, Inc. which now operates as
Delta V, a subsidiary of the Company. The Purchased Shares were acquired from
the selling shareholders pursuant to a Stock Purchase Agreement (the "Stock
Purchase Agreement") dated and effective as of January 1, 1996. The aggregate
consideration paid by the Company pursuant to the Stock Purchase Agreement was
$8,400,000, of which $8,200,000 represented the purchase price of the Purchased
Shares and $200,000 represented consideration for the non-competition and
confidentiality covenants of the selling shareholders.
Simultaneous with the closing of the acquisition; the Company entered into
a Put and Call Option Agreement (the "Option Agreement"). The Option Agreement
provides the Company with the right, at any time after February 15, 2000, to
acquire the remaining 10% of the outstanding common stock of Delta V for an
aggregate consideration of $2,000,000. The Option Agreement also provides the
selling shareholders of Delta V, and another individual with the right, at any
time after August 15, 2000, to cause the Company to purchase the remaining
shares for aggregate consideration of $1,000,000. The Option Agreement will
terminate if Delta V consummates an initial public offering of its securities
prior to February 15, 2000. On December 28, 1998, the Company acquired an
additional 7% of the outstanding common stock of Delta V for consideration of
$500,000 pursuant to the Option Agreement. The additional purchase price was
recorded as goodwill.
The acquisition was accounted for as a purchase and, accordingly, the
results of Delta V's operations have been included in the Company's fiscal 1998,
1997, and 1996 financial statements.
3. MARKETABLE SECURITIES
Marketable Securities are classified as available for sale and consist of
treasury notes and of auction rate securities and commercial paper, and are
stated at fair value.
Marketable securities as of January 2, 1999, of $16,107,000, will mature at
various dates in fiscal 1999. No aggregate net unrealized holding losses were
recorded at January 2, 1999. At January 3, 1998, there was an aggregate net
unrealized holding loss of $1,000, which was included as a separate component of
stockholders' equity in the accompanying balance sheet.
F-12
For the fiscal years ended January 2, 1999, January 3, 1998, and December
28, 1996, the Company received proceeds from the sale or maturity of available
for sale securities of $1,000,000, $5,494,000, and $3,500,000, and recorded net
realized losses of $9,135 in 1997. There were no net realized losses recorded in
1998 or 1996. In computing such realized losses, cost was determined using the
specific cost method.
4. EARNINGS (LOSS) PER SHARE
On May 30, 1997, the Company's Board of Directors declared a two-for-one
stock split effected in the form of a 100% stock dividend during the third
quarter of fiscal 1997. The split resulted in the issuance of 15,549,862 shares
of common stock. All references to average number of shares outstanding and
prices per share have been restated retroactively to reflect the split. The
following represents the calculation of basic and diluted earnings (loss) per
share for the fiscal years ended:
January 3, January 2, December 28,
1999 1997 1996
---- ---- ----
(In thousands, except per share data)
Net income (loss) as reported $ (2,681) $14,372 $ 7,121
========= ======= =======
Weighted average shares outstanding
for basic earnings (loss) per share 31,986 31,300 29,858
Effect of assumed conversion
of stock options -- 1,395 3,305
--------- ------- -------
Weighted average shares outstanding
for diluted earnings (loss) per share 31,986 32,695 33,163
========= ======= =======
Basic earnings (loss) per share $ (0.08) $ 0.46 $ 0.24
========= ======= =======
Diluted earnings (loss) per share $ (0.08) $ 0.44 $ 0.21
========= ======= =======
All stock options outstanding are excluded from the fiscal 1998 calculation
of diluted loss per share, as their effect would be anti-dilutive. Options to
purchase 1,111,000 and 287,000 shares of common stock at exercise prices ranging
from $26.38 to $49.62 per share were outstanding during a portion of fiscal 1997
and fiscal 1996, respectively. These options were not included in the
computation of diluted earnings per share as the exercise prices of the options
were greater than the average market price of the common shares. These options,
which expire between January 2, 2001 and December 22, 2003, were all outstanding
at the end of fiscal 1997 and 1996, respectively.
5. INCOME TAXES
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The primary objectives of accounting
for income taxes are to (a) recognize the amount of tax payable for the current
fiscal year (b) recognize the amount of
F-13
deferred tax liability or asset for the future tax consequences of events that
have been reflected in the Company's financial statements or tax returns.
The components of the provision for income taxes for the fiscal years ended
January 2, 1999, January 3, 1998, and December 28, 1996, were as follows:
1998 1997 1996
---- ---- ----
(In thousands)
Current tax expense - State $ -- $ 191 $ 124
Charge in lieu of income taxes:
Federal -- 7,740 3,360
State -- 1,529 516
------- ------ ------
Total provision $ -- $9,460 $4,000
======= ====== ======
The Company did not record a provision for United States federal or state
income taxes or a charge in lieu of federal or state income taxes due to the net
operating loss in fiscal 1998. The charge in lieu of income taxes included in
the fiscal 1997 provision for income taxes represents the tax benefit arising
from stock option deductions in that year and the realization of net operating
loss carryforwards resulting from such deductions for tax purposes. The charge
in lieu of income taxes included in the fiscal 1996 provision for income taxes
represents the tax benefit arising from stock option deductions in that year.
The tax benefit related to such stock option deductions has been credited to
stockholder's equity.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Deferred tax assets and
liabilities consisted of the following at January 2, 1999, and January 3, 1998:
1998 1997
---- ----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 13,300 $ 9,500
Tax credits 2,200 2,050
Warranty provisions and other accruals 3,000 1,100
-------- --------
Gross deferred tax assets 18,500 12,650
-------- --------
Deferred tax liabilities:
Amortizable and depreciable assets 650 700
Accumulated depreciation and amortization 5,000 200
-------- --------
Gross deferred tax liabilities 5,650 900
-------- --------
12,850 11,750
Less valuation allowance (12,800) (11,700)
-------- --------
Deferred tax asset - net $ 50 $ 50
======== ========
The $50,000 deferred tax asset was included in other current assets at
January 2, 1999 and January 3, 1998. The valuation allowance increased
$1,100,000 and $3,700,000 in fiscal 1998 and 1997, respectively.
F-14
The difference between income taxes at the United States federal income tax
rate and the effective income tax rate was as follows for the fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1996:
1998 1997 1996
---- ---- ----
Computed at federal statutory rate (34)% 35% 34%
Increase (decrease) resulting from:
Expenses producing no current tax benefit 70% 3% 1%
State tax, net of federal benefit -- 4% 4%
Valuation allowance 29% -- --
Deductions for tax purposes in excess of
expenses for financial statement purposes (65)% (2)% (3)%
--- --- ---
Effective rate, net 0% 40% 36%
=== === ===
As of January 2, 1999, the Company had net operating loss carryforwards
totaling approximately $38,000,000 resulting principally from compensation
deductions for tax purposes relative to stock option plans. To the extent net
operating losses resulting from stock option plan compensation deductions become
realizable, the benefit will be credited directly to additional paid in capital.
The amount of the net operating loss carryforwards that may be utilized to
offset future taxable income, when earned, may be subject to certain
limitations, based upon changes in the ownership of the Company's common stock.
The following is a breakdown of the net operating losses and their expiration
dates:
Amount of Remaining
Net Operating
Expiration date Loss Carryforwards
--------------- ------------------
2005 $ 2,240
2006 $ 5,020
2008 $ 50
2009 $ 500
2010 $ 8,750
2011 $ 14,850
2012 $ 4,400
2013 $ 2,300
In addition, the Company has available tax credit carryforwards (adjusted
to reflect provisions of the Tax Reform Act of 1986) of approximately $2,200,000
which are available to offset future income tax liabilities when incurred.
6. RELATED PARTIES
During fiscal 1998, 1997, and 1996, the Company recorded sales of equipment
and consumables to Pitman Company of $13,728,000, $7,579,000, and $3,379,000,
respectively. At January 2, 1999 and January 3, 1998, the Company had accounts
receivable from Pitman
F-15
of $3,796,000 and $1,460,000, respectively. John Dreyer, who has been a director
of the Company since February 1996, is Pitman's President and Chief Executive
Officer.
On February 28, 1998, the Company made a loan to Robert E. Verrando in the
amount of $200,000 at an interest rate of 8% per annum, with the principal and
accrued interest payable on demand. At January 2, 1999, $213,333 was due to the
Company. Mr. Verrando was the President and Chief Operating Officer of the
Company from February 1996 to January 1999 when he retired from these positions.
He was appointed Secretary of the Company in September 1998. He also remains a
director on the Company's Board of Directors, and a consultant to the Company.
The Company subleases certain of its office facilities as a tenant-at-will
from Mr. Robert Howard, the Company's Chairman Emeritus. Payments totaled
$38,000 for the fiscal year ended January 2, 1999 and $36,000 for each of the
fiscal years ended January 3, 1998 and December 28, 1996. The Company paid Mr.
Howard $133,000, $145,000, and $125,000 for consulting services provided to the
Company during fiscal 1998, 1997, and 1996, respectively. The Company had a
payable to Mr. Howard of $12,000 for consulting services at January 2, 1999.
During fiscal 1996, the Company made equipment purchases from Howtek, Inc.
("Howtek") totaling $54,000. Mr. Howard is Chairman of the Board of Howtek.
7. STOCKHOLDERS' EQUITY
References herein to shares, options, warrants and the prices per share
have been restated for all stock splits, effected in the form of stock
dividends.
Preferred Stock - The Company's certificate of incorporation empowers the
Board of Directors, without stockholder approval, to issue up to 1,000,000
shares of $.01 par value preferred stock, with dividend, liquidation,
conversion, and voting or other rights to be determined upon issuance by the
Board of Directors.
Restricted Stock Purchase Plan - On August 22, 1988 the Company adopted a
Restricted Stock Purchase Plan ("the Purchase Plan"). The Purchase Plan
originally authorizing the sale of up to 125,000 shares of common stock to its
employees at a price to be determined by the Board of Directors, but in no event
to be less than $.01 per share or greater than 110% of the then fair market
value. This plan expired August 21, 1998.
Stock Option Plans - As of January 3, 1999 the Company had four stock
option plans in effect. The 1991 Stock Option Plan (the "1991 Plan"), the 1994
Stock Option Plan (the "1994 Plan"), the 1997 Interim Stock Option Plan (the
"1997 Plan") and the 1998 Stock Incentive Plan (the "1998 Plan"). The 1988 Stock
Option Plan (the "1988 Plan") expired on August 21, 1998. No future grants will
be issued under this plan, however 20,368 shares remain outstanding and will
expire according to the specified expiration dates under the individual grants.
The 1991 Plan and the 1994 Plan provide for the award of options, to key
employees and other persons, to purchase up to 2,500,000 shares of the Company's
common stock.
F-16
Options granted under these plans may be either Incentive Stock Options ("ISOs")
or Nonqualified Options ("NQOs"). Generally, ISOs may only be granted to
employees of the Company, at an exercise price of not less than fair market
value of the stock at the date of grant. NQOs may be granted to any person, at
any exercise price not less than par value, within the discretion of the Board
of Directors or a committee appointed by the Board of Directors ("Committee").
The 1997 Plan provides for the award of options to key employees and other
persons, to purchase up to 250,000 shares of the Company's common stock. Only
NQOs may be granted under this Plan.
Under the 1997, 1994 and 1991 Plans, any options granted will generally
become exercisable in increments over a period not to exceed ten years from the
date of grant, to be determined by the Board of Directors or Committee. These
options generally will expire not more than ten years from the date of grant.
The 1998 Plan provides for the award (collectively "awards") of stock
options, restricted stock, deferred stock, and other stock based awards to
officers, directors, employees, and other key persons. A total of 3,000,000
shares of common stock, subject to anti-dilution adjustments have been reserved
for this plan. Options under the 1998 Plan become exercisable upon the earlier
of a date set by the Board of Directors or Committee at the time of grant or the
close of business on the day before the tenth anniversary of the stock options'
date of grant. Options become exercisable the day before the fifth anniversary
of the date of grant in the case of an ISO.
Director Stock Option Plan - The Company's Non-employee Director Stock
Option Plan (the "Director Plan") allows only non-employee directors of the
Company (other than Robert Howard or Dr. Lawrence Howard) to receive grants
under the Director Plan. The Director Plan provides that eligible directors
automatically receive a grant of options to purchase 5,000 shares of common
stock at fair market value upon first becoming a director and, thereafter, an
annual grant, in January of each year, of options to purchase 2,500 shares at
fair market value. Options granted under this plan become 100% exercisable after
one year and terminate five years from date of grant.
F-17
The following table summarizes information about stock options outstanding
at January 2, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Outstanding Weighted-Average Exercisable as
Range of as of Remaining Weighted-Average of Weighted-Average
Exercise Prices 1/2/99 Contractual Years Exercise Price 1/2/99 Exercise Price
--------------- ------ ----------------- -------------- ------ --------------
$3.55 - $ 7.78 813,171 1.4 $ 7.49 800,484 $ 7.49
$7.79 - $10.00 442,315 2.9 $ 9.41 242,440 $ 9.77
$10.01 - $13.50 143,850 2.6 $ 11.33 61,100 $ 11.46
$13.51 - $14.00 911,700 3.7 $ 13.75 318,800 $ 13.75
$14.01 - $44.75 190,000 3.4 $ 21.96 97,500 $ 29.37
--------- ---------
2,501,036 2.7 $ 11.43 1,520,324 $ 10.73
========= =========
Information concerning all stock option activity under the 1988, 1991,
1994, 1997, 1998 and the Director Plans for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996 is summarized as follows:
Weighted
Option Option Price Average Price
Shares Per Share Per Share
------ --------- ---------
Outstanding at
December 30, 1995 3,611,792 $ 2.15 - $31.00 $ 6.65
Granted 670,800 $25.50 - $49.62 $ 38.80
Exercised (688,260) $2.15 - $26.38 $ 5.21
Cancelled/Expired (1,000) $24.00 - $24.00 $ 24.00
----------
Outstanding at
December 28, 1996 3,593,332 $ 2.85 - $49.62 $ 12.92
Granted 604,600 $22.00 - $49.38 $ 29.70
Exercised (1,082,002) $2.85 - $35.00 $ 4.50
Cancelled/Expired (83,250) $7.90 - $44.75 $ 35.91
----------
Outstanding at
January 3, 1998 3,032,680 $2.85 - $49.62 $ 18.64
Granted 1,503,000 $7.19 - $25.00 $ 13.40
Exercised (314,844) $2.85 - $10.94 $ 5.51
Cancelled/Expired (1,719,800) $4.85 - $49.63 $ 26.96
----------
Outstanding at
January 2, 1999 2,501,036 $3.55 - $44.75 $ 11.43
==========
F-18
The incentive and nonqualified stock options summarized in the previous
table were granted under various vesting schedules ranging from immediate to
five years, with termination dates ranging from five to six years from dates of
grant and may be subject to earlier termination as provided in the Plans.
In April 1998, the Company repriced grants previously issued between April
10, 1995 and March 30, 1998 under its 1988, 1991, 1994, 1997 and Non-Employee
Director Stock Option Plans. A total of 1,127,000 options with exercise prices
ranging from $18.00 to $49.63 per share were repriced to $13.75 or $14.75 per
share. These options are reflected in the previous table as options granted and
cancelled for fiscal 1998.
The proceeds to the Company from stock options exercised during the fiscal
years ended January 2, 1999, January 3, 1998, and December 28, 1996 totaled
$1,736,000, $4,865,000, and $3,583,000, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", requires the Company to provide pro
forma disclosure of net income and earnings per share as if the optional fair
value method had been applied to determine compensation costs for the Company's
Stock Option plans. The Company has used the Black-Scholes option-pricing model
to estimate the fair value of each stock option issued in 1998, 1997, and 1996.
The following weighted average assumptions were used in 1998, 1997, and 1996,
respectively: a risk-free interest rate of 5.11%, 5.62% and 6.0%; an expected
option life of 4.09 years, 4.65 years, and 4.08 years; expected volatility of
72.92%, 65.84% and 68.31%, and no dividends paid.
Accordingly, the Company's net income (loss) and earnings per share would
have been reduced to the pro forma amounts indicated in the following table:
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
Net income (loss)
As reported $ (2,681) $ 14,372 $ 7,121
Pro forma $ (9,036) $ 8,772 $ 249
Basic earnings (loss)
per share
As reported $ (.08) $ .46 $ .24
Pro forma $ (.28) $ .28 $ .01
Diluted earnings (loss)
per share
As reported $ (.08) $ .44 $ .21
Pro forma $ (.28) $ .27 $ .01
F-19
The above pro forma's net income (loss) and net income (loss) per share do
not recognize the related tax benefits in fiscal years 1997 and 1996 of
$1,972,000 and $2,470,000, respectively, as these deferred tax assets would be
fully offset by a valuation allowance. There was no related tax benefit for
fiscal 1998.
Other - During February 1996, the Company completed private placements of
an aggregate of 282,846 shares of its common stock for gross proceeds of
$20,208,758 to a limited number of domestic individual and institutional
investors, net of costs of $33,500. A portion of the proceeds was used to
acquire Delta V.
8. Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for fiscal 1998 year-end reporting. The
statement requires disclosure of certain financial information related to
operating segments. The Company has determined that it operates in two
reportable segments, the Digital Imaging Products segment and Delta V. The
Digital Imaging Products segment is primarily engaged in the development,
manufacture and sales of its proprietary digital imaging systems and printing
plate technologies for computer-to-plate and direct-to-press applications. Delta
V develops processes, materials and equipment for vacuum coating applications.
Its equipment and process innovations are used in a broad range of industries
and applications including graphic arts, capacitors, electronics, optics,
architectural and decorative glass, flat panel displays and packaging.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Summary of Significant Accounting Policies." Sales between
the segments are recorded at prices which approximate pricing for sales
conducted at an arm's length basis. The segments are measured on operating
profits or losses before net interest income, minority interest and income
taxes.
A summary of the Company's operations by segment for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996 are as follows:
Digital
Imaging Products Delta V Total
---------------- ------- -----
Year ended January 2, 1999 (In thousands)
--------------------------
Revenues $ 74,165 $ 10,221 $ 84,386
Inter-segment sales -- 857 857
Income (loss) from operations (2,319) (1,258) (3,577)
Total assets 93,744 14,130 107,874
Depreciation and amortization 4,050 1,019 5,069
Capital expenditures 5,775 59 5,834
Year ended January 3, 1998
--------------------------
Revenues 89,792 1,769 91,561
Inter-segment sales -- 7,513 7,513
Income (loss) from operations 25,818 (2,210) 23,608
Total assets 85,634 14,839 100,473
Depreciation and amortization 2,259 864 3,123
Capital expenditures 23,894 4,024 27,918
F-20
Year ended December 28,1996
---------------------------
Revenues 46,677 1,950 48,627
Inter-segment sales -- 1,874 1,874
Income (loss) from operations 11,051 (471) 10,580
Total assets 56,623 12,200 68,823
Depreciation and amortization 1,506 532 2,038
Capital expenditures 13,306 3,084 16,390
For geographic reporting, revenues are attributed to the geographic locations
based on the location of the Company's customer.
1998 1997 1996
---- ------ -------
(in thousands)
Geographic Revenues:
United States $33,372 $11,448 $ 9,490
Germany 40,824 70,726 34,207
All other 10,190 9,387 4,930
------- ------- -------
$84,386 $91,561 $48,627
======= ======= =======
Revenues generated under the Company's agreements with Heidelberg and its
distributors totaled $42,123,000, $73,747,000, and $35,696,000 for fiscal 1998,
1997, and 1996, respectively. (See Note 10.) Accounts receivable from Heidelberg
totaled $10,860,000 and $19,419,000, respectively, at January 2, 1999, and
January 3, 1998. Revenues generated under the Company's agreements with the
Pitman Company totaled $13,728,000 in fiscal 1998. At January 2, 1999 the
Company had accounts receivable from Pitman of $3,796,000. No other customers
represented more than ten percent of the Company's revenues in fiscal 1998,
1997, and 1996.
9. COMMITMENTS AND CONTINGENCIES
The Company leases a number of its facilities under noncancellable
operating leases, many of which contain renewal options. The agreements
generally require minimum monthly rents, adjusted annually, plus a pro rata
share of real estate taxes and certain other expenses. Total rental expenses as
a result of these agreements were $513,000, $542,000, and $518,000 for fiscal
1998, 1997, and 1996, respectively. As of January 2, 1999, future minimum lease
payments under these agreements were as follows:
1999 $243,000
2000 129,000
--------
Total $372,000
========
The Company has employment agreements with two key executive officers. The
agreements provide for minimum salary levels that are subject to periodic review
by the Company's Board of Directors. The employment agreements also contain
certain change in control provisions, as defined, which entitle each executive
to receive up to three times his five-year average annual compensation.
F-21
The Company's maximum contingent liability under such agreements as of
January 2, 1999 would be $1,313,000.
10. HEIDELBERG AGREEMENTS
In January 1991, the Company entered into a Master Agreement and a
Technology License Agreement (collectively referred to as the "Heidelberg
Agreements") with Heidelberg.
The Heidelberg Agreements and amendments govern the Company's relationship
with Heidelberg and relate to the integration of the PEARL Direct Imaging
technology into various presses manufactured by Heidelberg. The manufacture of
components, at specified rates, for such presses and the commercialization of
such presses are also covered.
The Heidelberg Agreements currently expire in December 2011 subject to
certain early termination and extension provisions. Under these agreements,
Heidelberg agreed to pay royalties to the Company based on the net sales prices
of various specified types of Heidelberg presses on which the Company's PEARL
Direct Imaging technology would be used. Pursuant to the Heidelberg Agreements,
Heidelberg has been provided with certain exclusive rights for use of the PEARL
Direct Imaging technology for the Quickmaster DI format size. The Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used on the Quickmaster DI.
In March 1998, the Company and Heidelberg concluded negotiations relating
to production levels and schedules for fiscal 1998, which resulted in the
Company materially reducing production levels of direct imaging systems used in
the Quickmaster DI press for fiscal 1998. The Company has not yet received
orders from Heidelberg for fiscal 1999 in connection with its direct imaging
systems used on the Quickmaster DI.
11. OTHER INFORMATION
As previously disclosed, seven federal class action lawsuits were filed
against the Company and others, all of which have been consolidated before the
United States District Court, District of New Hampshire, under the common
caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly
filed and served a Second Consolidated Amended Class Action Complaint naming the
Company, certain of its present or former officers and directors ("the Berke
Officer and Director Defendants"), and other parties as defendants. The
plaintiffs allege, among other things, that the Company and/or the Berke Officer
and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities
Exchange Act of 1934, (the "Exchange Act") and Rule 10b-5 ("Rule 10b-5")
promulgated thereunder, and violated New Hampshire law; and that the Berke
Officer and Director Defendants violated Section 20(a) ("Sect. 20(a)") and
Section 20A of the Exchange Act. The Complaint alleges, among other things, that
the Company and/or the Berke Officer and Director Defendants issued false and
misleading reports: failed to disclose material facts, including a misstatement
of earnings in the Company's financial statements for the first quarter ended
March 30, 1996: misstated or failed to fully disclose the Company's supply
F-22
contracts with, payments received from sales made by backlog of orders received
from, and delays in production by the Company's principal customer, the alleged
circulation of, and alleged failure to correct certain analyst reports
concerning the Company that contained alleged misrepresentations regarding
allegedly inflated financial projections and the alleged failure to properly
disclose the scope of an investigation by the Securities and Exchange Commission
("SEC"). Certain of the Berke Officer and Director Defendants are alleged to
have sold the Company's common stock at artificially inflated prices while in
possession of material non-public information concerning the Company. The
plaintiffs seek unspecified compensatory and punitive damages, attorney and
expert fees and other costs and expenses incurred by the plaintiffs in
connection with the action.
As previously disclosed, on July 16, 1996, Richard Strauss commenced a
derivative suit on behalf of the Company in the Court of Chancery of the State
of Delaware, New Castle County, against certain officers and directors of the
Company ("the Strauss Officer and Director Defendants"). The plaintiff alleges
that the Strauss Officer and Director Defendants breached their fiduciary duties
to the Company and its public stockholders and wasted corporate assets, by
making allegedly false and misleading statements of fact or concealing material
facts concerning the viability of the Company's "key" patent and its proprietary
interest in its PEARL technology, causing the Company to fail to properly
disclose the scope of an investigation by the SEC, and causing the Company to
misstate its financial results for the first quarter of 1996. The plaintiff also
alleges that certain of the Strauss Officer and Director Defendants sold
securities of the Company at inflated prices while they were in possession of
material non-public information concerning the Company. The plaintiff alleges
that the actions of the Strauss Officer and Director Defendants resulted in
breaches of Sect. 10(b) and Rule 10b-5, which resulted in other lawsuits, being
commenced against the Company which will require the Company to expend resources
to defend. The plaintiff seeks to recover, on behalf of the Company, unspecified
damages allegedly sustained by the Company as a result of the defendants'
alleged breaches of fiduciary duty, disgorgement of any profits derived from
their sale of the Company's common stock, as well as other relief. This action
had been stayed pending the outcome of the Berke action.
As previously disclosed, on March 14, 1997, James P. Cassidy commenced a
derivative suit on behalf of the Company in the United States District Court for
the District of New Hampshire against, among others, certain of the Company's
officers and directors (the "Cassidy Officer and Director Defendants"). The
plaintiff alleges that the Cassidy Officer and Director Defendants breached
their fiduciary duty to the Company and its public shareholders and wasted
corporate assets by making false and misleading statements of fact or concealing
material facts concerning the scope and viability of the Company's "key" patents
and its proprietary interest in its PEARL technology, and causing the Company to
issue false and misleading reports or failure to disclose material facts
including a misstatement of earnings in the Company's financial statements for
the year ended December 30, 1995, and for the first quarter ended March 30,
1996. The plaintiff also alleges that certain of the Cassidy Officer and
Director Defendants sold securities of the Company at inflated prices while they
were in possession of material non-public information concerning the Company.
The plaintiff also alleges that the actions of the Cassidy Officer and Director
Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other lawsuits being commenced against the
F-23
Company which will require the Company to expend resources to defend, and also
constituted gross negligence and breaches of their contractual obligations to
the Company. The plaintiff seeks to recover on behalf of the Company unspecified
damages allegedly sustained by the Company as a result of the defendants'
actions as alleged, disgorgement of any profits from the sale of the Company's
common stock, as well as other relief against the defendants. By agreement of
the parties, this action has been stayed pending the outcome of certain motions
made by the parties in the Berke action.
As previously disclosed, on June 16, 1997, Seena Stevens Silverman
commenced a purported class action in the United States District Court for the
District of New Hampshire against the Company and certain of its present and/or
former officers and directors (the "Silverman Officer and Director Defendants"),
and other parties. The plaintiff purports to bring this action on behalf of a
class of persons who sold put options in the common stock of the Company between
November 7, 1995 and June 20, 1996. The complaint alleges, among other things,
that the Company and/or the Silverman Officer and Director Defendants violated
Sect. 10(b) and Rule 10b-5, and violated New Hampshire law; and that the
Silverman Officer and Director Defendants violated Sect. 20(a). The plaintiff
alleges that the defendants defrauded the putative class members by manipulating
the price and supply of the Company's common stock, issuing false and misleading
statements regarding the nature of the Company's proprietary PEARL technology,
failing to disclose the true depth and target of an investigation by the SEC,
and making misleading statements regarding the Company's claims to its PEARL
technology and its contract with the Company's principal customer. The plaintiff
also alleges that certain of the Silverman Officer and Director Defendants sold
securities of the Company at inflated prices while they were in possession of
material non-public information concerning the Company. The plaintiff seeks to
recover unspecified compensatory and punitive damages on behalf of the putative
class, as well other relief.
To date, the Company has not been required to file its answers to these
claimants. The Company expects that it will file its answer to the claims this
year.
The Company intends to vigorously defend the foregoing investor class
actions. However, the outcome of any litigation is subject to uncertainty and a
successful claim against the Company in any of such actions could have a
material adverse effect on the Company. (See note 14).
12. CREDIT FACILITIES
In December 1998, the Company renewed its agreement with Citizens Bank New
Hampshire ("Citizens") for a revolving line of credit loan under which the
Company may borrow a maximum of $10,000,000 for working capital requirements and
general corporate purposes. Borrowings are secured by substantially all of the
Company's assets and are guaranteed by the Company's subsidiary, Delta V and
secured by its assets. Interest on the line of credit is payable at the LIBOR
rate plus 1.50% (7.12% at January 2, 1999). The loan agreement terminates on
July 31, 2000, at which date, the entire principal and accrued interest is due
and payable. As of January 2, 1999 the Company had $10,000,000 available under
the line of credit loan agreement.
F-24
On February 6, 1998, the Company obtained a ten-year mortgage term loan in
the principal amount of $6,900,000 from Citizens. Borrowings are secured by land
and buildings with a cost of approximate $17,000,000. The loan bears a fixed
rate of interest of 7.12% per year during the first five years, and a variable
rate of interest at the LIBOR rate plus 2% (7.62% at January 2, 1999) for the
remaining five years. Principal and interest payments during the first five
years of the loan will be made in 60 monthly installments of $80,500. During the
remaining five years, principal and interest payments shall be made on a monthly
basis in the amount of one-sixtieth of the outstanding principal amount as of
the first day of the second five year period, plus accrued interest through the
monthly payment date. All outstanding principal and accrued and unpaid interest
is due and payable on February 6, 2008. As of January 2, 1999, aggregate debt
maturities were as follows: $522,000 in fiscal 1999; $590,000 in fiscal 2000;
$603,000 in fiscal 2001; $648,000 in fiscal 2002; $695,000 in fiscal 2003.
Under the terms of the revolving credit agreement and the mortgage term
loan, the Company is required to meet certain financial covenants on a quarterly
and annual basis. At January 2, 1999, the Company was in violation of a certain
financial covenant, which has been waived by the bank through April 3, 1999.
Citizens has agreed to modify the financial covenants currently contained in the
loan agreement, through the term of the revolving line of credit loan agreement.
13. FOURTH QUARTER ADJUSTMENTS
The Company recorded the following adjustments in the fourth quarter: an
allowance of $1,300,000 provided to a major supplier as a result of a change in
requirements; an allowance of $1,600,000 for inventory obsolescence as a result
of the planned introduction of the Company's next generation laser technology;
and $2,200,000 for certain disputed and uncollectible accounts related to its
Digital Imaging Products operations.
14. SUBSEQUENT EVENT
On March 30, 1999 the United States District Court for the District of New
Hampshire issued orders dismissing several of the claims brought against the
Company and others in the class action lawsuits referred to in Note 10 of the
financial statements.
The Company intends to vigorously defend the remaining claims in the class
action. However, the outcome of any litigation is subject to uncertainty and a
successful claim against the Company in any of such actions could have a
material adverse effect on the Company.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRESSTEK, INC.
Dated: April 1, 1999 By: /s/ Robert W. Hallman
-----------------------
Robert W. Hallman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf on the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard A. Williams Chairman of the Board April 2, 1999
- ---------------------------
Richard A. Williams
/s/ Robert W. Hallman Chief Executive Officer, April 2, 1999
- --------------------------- President, and Director
Robert W. Hallman (Principal Executive Officer)
/s/ Robert Howard Director April 2, 1999
- ---------------------------
Robert Howard
/s/ Dr. Lawrence Howard Director April 2, 1999
- ---------------------------
Dr. Lawrence Howard
/s/ Robert E. Verrando Director April 2, 1999
- ---------------------------
Robert E. Verrando
/s/ Harold N. Sparks Director April 2, 1999
- ---------------------------
Harold N. Sparks
/s/ Bert DePamphilis Director April 2, 1999
- ---------------------------
Bert DePamphilis
/s/ John W. Dreyer Director April 2, 1999
- ---------------------------
John W. Dreyer
/s/ John B. Evans Director April 2, 1999
- ---------------------------
John B. Evans
/s/ Neil Rossen Chief Financial Officer April 2, 1999
- --------------------------- (Principal Financial and
Neil Rossen Accounting Officer)
37
PRESSTEK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charges
Balance at Charged to Charged to Add Balance at
Fiscal Beginning of Costs and Other Account (Deduct) End of
Year Description Fiscal Year Expenses Describe Describe Fiscal Year
----- ----------- ----------- --------- -------------- -------- -----------
1996 Allowance for losses on
accounts receivable $ 80 $ 115 $ -- $ (11)(1) $ 184
====== ====== ======= ====== ======
Warranty reserve 601 216 -- (303)(2) 514
====== ====== ======= ====== ======
Equipment replacement
reserve 291 -- -- (291)(3) --
====== ====== ======= ====== ======
1997 Allowance for losses on
accounts receivable 184 1,074 -- (317)(1) 941
====== ====== ======= ====== ======
Warranty reserve 514 1,135 -- (716)(2) 933
====== ====== ======= ====== ======
Equipment replacement
reserve -- -- -- -- (3) --
====== ====== ======= ====== ======
1998 Allowance for losses on
accounts receivable 941 5,006 169(4) $(3,580)(1) $2,536
====== ====== ======= ====== ======
Warranty reserve 933 766 -- (632)(2) 1,067
====== ====== ======= ====== ======
Equipment replacement
reserve -- -- (3)
====== ====== ======= ====== ======
(1) Allowance for losses
(2) Warranty expenditures
(3) Equipment replacement
(4) Heath Custom Press, Inc. acquisition
FS-1