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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 28, 2002
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_______________.
Commission File No. 0-17541
PRESSTEK, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 02-0415170
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Executive Drive, Hudson, New Hampshire 03051-4903
----------------------------------------------------
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (603) 595-7000
--------------
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 6, 2002, there were 34,125,481 shares of the registrant's common
stock, $.01 par value per share, outstanding.
================================================================================
PRESSTEK, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets as of September 28, 2002 (unaudited)
and December 29, 2001 ........................................ 3
Statements of Operations for the three and nine months ended
September 28, 2002 and September 29, 2001 (unaudited) ........ 4
Statements of Cash Flows for the nine months ended
September 28, 2002 and September 29, 2001 (unaudited) ........ 5
Notes to Financial Statements (unaudited) .................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................................ 18
Item 4. Controls and Procedures ...................................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 19
Item 6. Exhibits and Reports on Form 8-K ............................. 19
Signatures ............................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRESSTEK, INC.
SEPTEMBER 28 DECEMBER 29
BALANCE SHEETS 2002 2001
(In thousands, except share data) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,975 $ 2,492
Accounts receivable, net of allowance for losses
of $2,404 and $2,420 in fiscal 2002 and 2001, respectively 14,977 18,117
Inventories 13,845 17,818
Advances to suppliers -- 303
Other current assets 1,065 815
- --------------------------------------------------------------------------------------------------------
Total current assets 43,862 39,545
- --------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 54,020 61,235
- --------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Patent application costs and license rights, net 4,022 4,358
Other 117 1,706
- --------------------------------------------------------------------------------------------------------
Total other assets 4,139 6,064
- --------------------------------------------------------------------------------------------------------
TOTAL $ 102,021 $ 106,844
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ -- $ 967
Current portion of long-term debt 2,999 2,343
Accounts payable 3,404 2,067
Accrued expenses 10,080 5,920
Deferred revenues 1,768 1,507
- --------------------------------------------------------------------------------------------------------
Total current liabilities 18,251 12,804
- --------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT PORTION 14,441 14,055
- --------------------------------------------------------------------------------------------------------
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 34,125,481 shares at
September 28, 2002; 34,115,906 shares at December 29, 2001 341 341
Additional paid-in capital 97,403 97,342
Accumulated deficit (28,415) (17,698)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 69,329 79,985
- --------------------------------------------------------------------------------------------------------
TOTAL $ 102,021 $ 106,844
========================================================================================================
See notes to financial statements
3
PRESSTEK, INC.
STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
- ---------------------------------------------------------------------------------------------------------------------
SEPTEMBER 28 SEPTEMBER 29 SEPTEMBER 28 SEPTEMBER 29
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Product sales $ 19,693 $ 24,283 $ 56,715 $ 72,832
Royalties and fees from licensees 1,293 2,041 4,361 6,388
- -------------------------------------------------------------------------------------------------------------------
Total revenues 20,986 26,324 61,076 79,220
- -------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 13,293 18,551 41,964 49,984
Research and product development 1,982 2,778 7,319 9,143
Sales, marketing and customer support 2,277 3,653 7,819 10,228
General and administrative 2,600 3,806 8,079 10,697
Special charges -- -- 5,961 --
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 20,152 28,788 71,142 80,052
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 834 (2,464) (10,066) (832)
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE), NET:
Interest expense, net (224) (327) (679) (857)
Other, net 11 (25) 28 (49)
- -------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (213) (352) (651) (906)
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 621 (2,816) (10,717) (1,738)
PROVISION FOR INCOME TAXES -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 621 $ (2,816) $(10,717) $ (1,738)
===================================================================================================================
EARNINGS (LOSS) PER SHARE - BASIC $ 0.02 $ (0.08) $ (0.31) $ (0.05)
===================================================================================================================
EARNINGS (LOSS) PER SHARE - DILUTED $ 0.02 $ (0.08) $ (0.31) $ (0.05)
===================================================================================================================
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - BASIC 34,125 34,109 34,124 34,091
===================================================================================================================
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - DILUTED 34,127 34,109 34,124 34,091
===================================================================================================================
See notes to financial statements
4
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
SEPTEMBER 28 SEPTEMBER 29
FOR THE NINE MONTHS ENDED 2002 2001
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net loss $(10,717) $ (1,738)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Special charges and discontinued programs 10,696 --
Depreciation and amortization 7,208 6,623
Provision for warranty and other costs 645 3,053
Provision for losses on accounts receivable 670 900
Other, net 288 94
Changes in operating assets and liabilities:
Accounts receivable 2,477 (4,647)
Inventories 1,261 (6,718)
Advances to suppliers and other current assets 53 3,018
Accounts payable 1,337 (1,950)
Accrued expenses (1,509) 374
Deferred revenue 261 (1,106)
Other assets (326) 13
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 12,344 (2,084)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,200) (8,855)
Proceeds from sale of equipment 203 --
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (997) (8,855)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 61 614
Proceeds (repayments) under line of credit (967) 2,533
Repayments of mortgage term loan (792) (630)
Proceeds under lease line of credit 3,000 --
Repayments of lease line of credit (1,166) (878)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 136 1,639
- ------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,483 (9,300)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,492 11,972
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 13,975 $ 2,672
============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 763 $ 1,051
============================================================================================================
Income taxes $ -- $ 121
============================================================================================================
See notes to financial statements
5
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 28, 2002
1. BASIS OF PRESENTATION
---------------------
Presstek, Inc. (the "Company" or "Presstek") is a manufacturer, developer and
marketer of digital laser imaging and chemistry-free plate technologies for the
printing and graphic arts industries. Presstek's products and applications
incorporate its patented Direct Imaging (DI(R)) technologies and consumables for
computer-to-plate ("CTP") and direct-to-press applications.
The Company also operates Lasertel, Inc. ("Lasertel"), a subsidiary located in
Tucson, Arizona. Lasertel is primarily engaged in the manufacture and
development of the Company's high-powered laser diodes.
The Company operates in two reportable segments, the Digital Imaging Products
segment and the Lasertel segment. The Digital Imaging Products segment is
primarily engaged in the development, manufacture and sale of proprietary
digital imaging systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily engaged in the
manufacture and development of Presstek's high-powered laser diodes.
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the financial statements include
the thirteen-week periods ended September 28, 2002 ("the third quarter of fiscal
2002") and September 29, 2001 ("the third quarter of fiscal 2001"), and the
thirty-nine week periods ended September 28, 2002 ("the first nine months of
fiscal 2002"), and September 29, 2001 ("the first nine months of fiscal 2001").
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The financial
information included in the quarterly report should be read in conjunction with
the Company's audited financial statements and related notes thereto for the
fiscal year ended December 29, 2001. The December 29, 2001 information has been
derived directly from the annual financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments were normal and recurring. Operating
results for the three and nine months ended September 28, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 28, 2002.
Certain accounts in the September 29, 2001 financial statements have been
reclassified for comparative purposes to conform to the presentation in the
September 28, 2002 financial statements.
2. INVENTORIES
-----------
Inventories consisted of the following at September 28, 2002 and December 29,
2001:
SEPTEMBER 28 DECEMBER 29
(In thousands) 2002 2001
------------------------------------------------------------------
Raw materials $ 2,647 $ 4,458
Work in process 6,108 4,530
Finished goods 5,090 8,830
------------------------------------------------------------------
Total inventories $ 13,845 $ 17,818
==================================================================
The September 28, 2002 inventories are stated net of write-downs recorded in
June 2002 of $2.7 million for inventory related to certain discontinued
programs.
6
3. PROPERTY, PLANT AND EQUIPMENT, NET
----------------------------------
Property, plant and equipment, net consisted of the following at September 28,
2002 and December 29, 2001:
SEPTEMBER 28 DECEMBER 29
(In thousands) 2002 2001
--------------------------------------------------------------------------
At cost:
Land and improvements $ 2,038 $ 2,038
Buildings and leasehold improvements 24,456 26,245
Production equipment and other 47,100 49,147
Office furniture and equipment 5,013 5,119
--------------------------------------------------------------------------
78,607 82,549
Less accumulated depreciation (24,587) (21,314)
--------------------------------------------------------------------------
Total property, plant and equipment, net $ 54,020 $ 61,235
==========================================================================
The September 28, 2002 property, plant and equipment is stated net of
write-downs recorded in June 2002 of $1.7 million for equipment and leasehold
improvements as a result of the consolidation of facilities.
4. ACCRUED EXPENSES
----------------
Accrued expenses consisted of the following at September 28, 2002 and December
29, 2001:
SEPTEMBER 28 DECEMBER 29
(In thousands) 2002 2001
--------------------------------------------------------------------------
Accrued payroll and benefits $ 2,235 $ 1,811
Accrued warranty 816 793
Accrued special charges and
discontinued programs 3,971 --
Net current liabilities of discontinued
operations 1,468 1,521
Other current liabilities 1,590 1,795
--------------------------------------------------------------------------
Total accrued expenses $ 10,080 $ 5,920
==========================================================================
5. LONG-TERM DEBT
--------------
Long-term debt consisted of the following at September 28, 2002 and December 29,
2001:
SEPTEMBER 28 DECEMBER 29
(In thousands) 2002 2001
--------------------------------------------------------------------------
Mortgage term loans $ 7,688 $ 8,480
Lease line of credit 9,752 7,918
-------------------------------------------------------------------------
17,440 16,398
Less current portion (2,999) (2,343)
--------------------------------------------------------------------------
Total long-term debt, net of current
portion $ 14,441 $ 14,055
==========================================================================
In addition to the mortgage term loans and the lease line of credit, the Company
has a revolving line of credit loan with Citizens Bank New Hampshire,
("Citizens") which expires in October 2003, under which the Company may borrow a
maximum of $16.0 million. The revolving line of credit is subject to a borrowing
base formula based on eligible accounts receivable and inventories, as defined
by the loan agreement, and reduced by the amount of all letters of credit
outstanding. The revolving line of credit loan is secured by substantially all
of the Company's assets, with interest payable at the LIBOR rate plus 1.50%
(3.31% at September 28, 2002). As of September 28, 2002, the Company had $10.5
million available under the revolving line of credit loan, reduced by $6.8
million outstanding under standby letters of credit.
On May 1, 2002, the Company borrowed an additional $3.0 million against its
lease line of credit facility with Keybank National Association. The borrowing
is secured by certain equipment valued at $5.0 million, with
7
interest payable at the LIBOR rate plus 4.25% (6.06% at September 28, 2002).
Principal and interest is due and payable in sixty equal monthly installments of
$58,126, beginning on June 1, 2002.
Under the terms of the mortgage term loans, the lease line of credit and the
revolving line of credit agreements, the Company is required to meet various
restrictive covenants on a quarterly and annual basis, including maximum funded
debt to EBITDA and minimum fixed charge coverage covenants. As of September 28,
2002, the Company was in compliance with all financial covenants.
6. INCOME TAXES
------------
The Company did not record a provision for income taxes in the first nine months
of fiscal 2002 and in the third quarter and first nine months of fiscal 2001, as
a result of tax losses incurred in those periods. The Company did not record a
provision for income taxes in the third quarter of fiscal 2002, as a result of
the utilization of net operating loss carryforwards incurred prior to the
deduction for stock compensation.
7. EARNINGS PER SHARE
------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed giving effect to all diluted potential common
shares that were outstanding during the period. Diluted potential common shares
consist of the incremental common shares issuable upon exercise of stock options
and warrants that have an exercise price that is less than the average market
price of the common shares for the period.
The following represents the calculation of basic and diluted earnings (loss)
per share for the three and nine months ended September 28, 2002 and September
29, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28 SEPTEMBER 29 SEPTEMBER 28 SEPTEMBER 29
(In thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 621 $ (2,816) $ (10,717) $ (1,738)
===============================================================================================================
Weighted average common shares
Outstanding - Basic 34,125 34,109 34,124 34,091
Effect of assumed conversion
of stock options 2 -- -- --
- ---------------------------------------------------------------------------------------------------------------
Weighted average common shares
Outstanding - Diluted 34,127 34,109 34,124 34,091
===============================================================================================================
Earnings (loss) per share - Basic $ 0.02 $ (0.08) $ (0.31) $ (0.05)
===============================================================================================================
Earnings (loss) per share - Diluted $ 0.02 $ (0.08) $ (0.31) $ (0.05)
===============================================================================================================
Options and warrants to purchase 3,993,045 shares of common stock at exercise
prices ranging from $3.35 to $26.94 per share were outstanding during a portion
of the third quarter of fiscal 2002, but were not included in the computation of
diluted earnings per share as the exercise prices of the options and warrants
were greater than the average market price of the common shares. These options
and warrants, which expire from December 31, 2002 through August 12, 2012, were
all outstanding at September 28, 2002.
All options and warrants outstanding during the nine months ended September 28,
2002, and the third quarter and first nine months of fiscal 2001 were not
included in the computation of diluted earnings per share as their effect would
be anti-dilutive.
8. COMPREHENSIVE INCOME (LOSS)
---------------------------
Comprehensive income (loss) is comprised of net income (loss) and all changes in
stockholder's equity except those due to investments by owners and distributions
to owners. For the third quarter and first nine months of both fiscal 2002 and
fiscal 2001 there were no differences between net income (loss) and
comprehensive income (loss).
8
9. SEGMENT INFORMATION
-------------------
The Company operates in two reportable segments, the Digital Imaging Products
segment and the Lasertel segment. 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 CTP and
direct-to-press applications. The Lasertel segment is primarily engaged in the
manufacture and development of the Company's high-powered laser diodes.
The accounting policies of the reportable segments are consistent with those of
the Company. Sales between the segments are recorded at prices that 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 three and nine months
ended September 28, 2002 and September 29, 2001 is as follows:
DIGITAL
IMAGING INTER-
(In thousands) PRODUCTS LASERTEL SEGMENT TOTAL
---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 28, 2002
Revenues $ 20,961 $ 1,321 $ (1,296) $ 20,986
Income (loss) from operations 2,781 (1,947) 834
Total assets 85,486 16,535 102,021
Depreciation and amortization 1,640 661 2,301
Capital expenditures 554 46 600
THREE MONTHS ENDED SEPTEMBER 29, 2001
Revenues $ 26,299 $ 1,325 $ 1,300 $ 26,324
Loss from operations (162) (2,302) (2,464)
Total assets 95,048 21,122 116,170
Depreciation and amortization 1,797 503 2,300
Capital expenditures 272 1,264 1,536
NINE MONTHS ENDED SEPTEMBER 28, 2002
Revenues $ 61,050 $ 1,555 $ (1,529) $ 61,076
Loss from operations ( 3,872) (6,194) (10,066)
Total assets 85,486 16,535 102,021
Depreciation and amortization 5,250 1,958 7,208
Capital expenditures 940 260 1,200
NINE MONTHS ENDED SEPTEMBER 29, 2001
Revenues $ 79,192 $ 2,540 $ (2,512) $ 79,220
Income (loss) from operations 7,115 (7,947) (832)
Total assets 95,048 21,122 116,170
Depreciation and amortization 5,504 1,119 6,623
Capital expenditures 2,186 6,669 8,855
9
10. DISCONTINUED PROGRAMS AND SPECIAL CHARGES
-----------------------------------------
In the second quarter of fiscal 2002, the Company initiated a process to
evaluate the Company's resources and strategically re-focus the Company. During
this process, the Company evaluated all aspects of the business, and concluded
to reposition and rescale its resources. As part of this exercise, the Company
initiated various repositioning actions during the second quarter of fiscal
2002. These actions included the following: (i) creation of market-focused
Direct Imaging ("DI") and Computer-to-Plate ("CTP") product lines; (ii) creation
of a new senior management organization; (iii) discontinuance of certain
programs; and (iv) the consolidation of the Company's Hampshire Drive research
and development facility into the main Executive Drive facility in Hudson, NH.
As a result of these actions, the Company recorded a charge of $4.7 million to
cost of sales in the second quarter of fiscal 2002, which includes $2.7 million
for inventory write-downs and $2.0 million for other charges related to
discontinued programs. In addition, the Company recorded special charges of $6.0
million in the second quarter of fiscal 2002. The special charges include $1.0
million related to severance and fringe benefit costs associated with the
reduction of approximately 50 employees, primarily in manufacturing and research
and development, $2.0 million related to the write-down of equipment and lease
termination costs as a result of the Hampshire Drive consolidation, $1.8 million
related primarily to other asset write-downs and costs associated with the
repositioning, and $1.2 million related to executive contractual obligations, as
a result of a separation agreement with Robert W. Hallman, former President and
Chief Executive Officer of the Company. Pursuant to the separation agreement,
effective April 30, 2002, the Company agreed to pay Mr. Hallman a separation
payment equal to three times his current then annual salary, payable bi-weekly
over 36 months, until May 2005.
The repositioning activity and workforce reduction, which was initiated in June
2002, was substantially complete at the end of the second quarter of fiscal
2002. The consolidation of the Hampshire Drive facility was completed in the
third quarter of fiscal 2002. As of September 28, 2002, the Company's accrued
expenses related to the special charges and discontinued programs were as
follows:
SEPTEMBER 28
(In thousands) 2002
--------------------------------------------------------------------------
Discontinued programs $ 1,980
Executive contractual obligations 1,027
Severance and fringe benefits 395
Lease termination costs 304
Other miscellaneous costs 265
--------------------------------------------------------------------------
Total accrued special charges and discontinued programs $ 3,971
==========================================================================
The Company paid $947,000 through September 28, 2002, as a result of the
forgoing repositioning actions, and anticipates the remaining payments related
to the discontinued programs and special charges will be completed by May 2005.
11. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Restructuring Costs" ("SFAS 146"). SFAS 146 applies to
costs associated with an exit activity (including restructuring) or with a
disposal of long-lived assets. Those activities can include eliminating or
reducing product lines, terminating employees and contracts, and relocating
plant facilities or personnel. Under SFAS 146, a company will record a liability
for a cost associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. SFAS 146 will require a company to
disclose information about its exit and disposal activities, the related costs,
and changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated and in
any subsequent period until the activity is completed. SFAS 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
with earlier adoption encouraged. Under SFAS 146, a company may not restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously recorded under Emerging
Issues Task Force Issue 94-3. The Company does not anticipate that the adoption
of SFAS 146 will have a material effect on its results of operations or
financial position.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain statements contained in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including statements regarding the Company's expectations for its
financial and operating performance in 2002 and beyond, the adequacy of internal
cash for the Company's operations, the ability of the Company to manage its
working capital and inventory levels, availability of component materials,
management's plans and goals with regard to the Company's shipping and
production capabilities, the expected effects and benefits of the reorganization
and repositioning of the Company's business and the discontinuance of certain
programs, including any cost savings related thereto, management's plans and
goals for the Company's Lasertel subsidiary, the expected capital requirements
of Lasertel, the strength of the Company's various strategic partnerships both
on manufacturing and distribution, among others. 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 that could
cause or contribute to such differences include continued support from the
Company's banks, the Company's ability to receive waivers from its banks for any
debt covenant violations, the Company's dependency on its strategic partners
(both on manufacturing and distribution), shortages of critical or sole-source
component supplies, the availability and quality of Lasertel's laser diodes,
manufacturing constraints or difficulties, (as well as manufacturing
difficulties experienced by our sub-manufacturing partners and their capacity
constraints), the impact of general market factors in the print industry
generally and the economy as a whole, market acceptance of and demand for the
Company's products and resulting revenues and other risks detailed in the
Company's reports on file with the Securities Exchange Commission, including its
Annual Report on Form 10-K for the fiscal year ended December 29, 2001, as well
as those discussed elsewhere in this report. The words "looking forward,"
"looking ahead," "believe(s)," "should," "plan," "expect(s)," "project(s),"
"anticipate(s)," "may," "likely," "potential," "opportunity" 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 statements were made and readers are advised to consider such
forward-looking statements in light of the risks discussed above. Presstek
undertakes no obligation to update any forward-looking statements contained in
this Quarterly Report on Form 10-Q.
BACKGROUND
Presstek, Inc. (the "Company" or "Presstek"), incorporated in Delaware in 1987,
is a manufacturer, developer and marketer of digital laser imaging and
chemistry-free plate technologies for the printing and graphic arts industries.
Presstek's products and applications incorporate its patented Direct Imaging
("DI(R)") technologies and consumables for computer-to-plate ("CTP") and
direct-to-press applications. The Company's patented DI thermal laser diode
product family enables its customers to produce high quality, full-color
lithographic printed materials more quickly and cost effectively than
conventional methods. Using digital information and high-powered semiconductor
laser diodes to create images in its proprietary printing plate materials,
Presstek's patented DI technologies are marketed to leading press manufacturers
and used in the Company's Dimension series of CTP systems. Presstek's Dimension
systems incorporate its proprietary ProFire(TM) laser imaging technology and use
its complementary chemistry-free thermal printing plate, Anthem(TM). Presstek's
DI technology eliminates photographic darkrooms, film, and chemical processing,
which results in reduced turnaround time and lowers the cost of production for
commercial printers.
The Company is also engaged in the development of additional DI products that
incorporate its patented, proprietary, digital imaging system and process-free
thermal ablation printing plate technologies for CTP and direct-to-press
applications.
The Company operates in two reportable segments, the Digital Imaging Products
segment and the Lasertel segment. The Digital Imaging Products segment is
primarily engaged in the development, manufacture and sales of proprietary
digital imaging systems and printing plate technologies for CTP and
direct-to-press applications. The Lasertel segment is primarily engaged in the
manufacture and development of Presstek's high-powered laser diodes.
11
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the financial statements include
the thirteen week periods ended September 28, 2002 ("the third quarter of fiscal
2002") and September 29, 2001 ("the third quarter of fiscal 2001"), and the
thirty-nine week periods ended September 28, 2002 ("the first nine months of
fiscal 2002"), and September 29, 2001 ("the first nine months of fiscal 2001").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL
Presstek's management's discussion and analysis of its financial condition and
results of operations are based upon Presstek's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, Presstek
evaluates its estimates, including those related to product returns, bad debts,
inventories, income taxes, warranty obligations, and litigation. Presstek bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.
Presstek believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
REVENUE RECOGNITION
Presstek records revenue for product sales and related royalties at the time of
shipment or installation, net of estimated returns, which are adjusted
periodically based upon historical rates of return. Certain fees and other
reimbursements are recognized as revenue when the related services have been
performed or the revenues otherwise earned.
BAD DEBT
Presstek maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of Presstek's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
PRODUCT WARRANTIES
Presstek provides for the estimated cost of product warranties at the time
revenue is recognized. While Presstek engages in product quality programs and
processes, Presstek's warranty obligation is affected by product failure rates,
material usage and service costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service costs differ from
Presstek's estimates, a revision to the estimated warranty liability would be
required.
INVENTORY
Presstek's write-downs for excess and obsolete inventory are primarily based
upon forecasted demand for its products. If actual demand is less favorable than
what has been projected by management, additional inventory write-downs may be
required. The Company recorded a write-down of $2.7 million for inventory
related to certain discontinued programs in the second quarter of fiscal 2002.
12
RESULTS OF OPERATIONS
REVENUES
Revenues for the third quarter and first nine months of fiscal 2002 of $21.0
million and $61.1 million, respectively, consisted of product sales, customer
support revenues, and royalties and license fees. Revenues for the third quarter
and first nine months of fiscal 2002 decreased $5.3 million or 20% and $18.1
million or 23% as compared to $26.3 million and $79.2 million for the third
quarter and first nine months of fiscal 2001, respectively. Revenues generated
for the third quarter and first nine months of fiscal 2002 and fiscal 2001
relate primarily to the Digital Imaging Products segment, as the external
revenues generated by the Lasertel segment were minimal. The Company's revenues
for the third quarter and first nine months of fiscal 2002 were negatively
impacted by the general down-turn in the capital equipment market and the
economy as a whole.
Product sales for the third quarter and first nine months of fiscal 2002 of
$19.7 million and $56.7 million respectively, decreased $4.6 million or 19% and
$16.1 million or 22%, respectively, as compared to $24.3 million and $72.8
million for the third quarter and first nine months of fiscal 2001. These
decreases in product sales were due primarily to volume and price decreases of
direct imaging kits sold to Heidelberg Druckmaschinen AG ("Heidelberg") for use
in the Quickmaster DI, volume decreases of direct imaging kits sold to Ryobi
Limited for use in the Ryobi 3404DI, and volume decreases of press shipments to
Xerox Corporation ("Xerox") for the DocuColor 400DI. For the first nine months
of fiscal 2002, the decrease in product sales was also due to volume decreases
of the Company's CTP Dimension platesetter products, and volume decreases of
press shipments to Xerox for the DocuColor 233. These decreases were partially
offset by volume increases of the Company's thermal consumable products. The
revenues generated from the sale of consumable products were $13.8 million and
$39.7 million for the third quarter and first nine months of fiscal 2002,
respectively, an increase of $2.9 million or 27% and $5.2 million or 15%, as
compared to $10.9 million and $34.5 million for the third quarter and first nine
months of fiscal 2001, respectively. These consumable product revenues include
sales under the Company's agreements with Heidelberg and its distributors of
$6.7 million and $17.1 million for the third quarter and first nine months of
fiscal 2002 respectively, and $4.7 million and $15.5 million for the comparable
periods in fiscal 2001, respectively.
Royalties and fees from licensees for the third quarter and first nine months of
fiscal 2002 of $1.3 million and $4.4 million respectively, decreased $700,000 or
35% and $2.0 million or 31%, as compared to royalties and fees from licensees of
$2.0 million and $6.4 million for the third quarter and first nine months of
fiscal 2001. Royalties decreased $850,000 or 58% and $2.7 million or 56% for the
third quarter and first nine months of fiscal 2002 respectively, compared to the
same periods of fiscal 2001, primarily as a result of decreased shipments to
Heidelberg of direct imaging systems used in the Quickmaster DI. These decreases
were partially offset by increases in customer support revenues of $101,000 or
60% and $643,000 or 179%, for the third quarter and first nine months of fiscal
2002, respectively, as compared to customer support revenues of $168,000 and
$359,000 for the same periods of fiscal 2001.
Revenues generated under the Company's agreements with Heidelberg and its
distributors were $8.3 million and $23.5 million for the third quarter and first
nine months of fiscal 2002, a decrease of $1.0 million or 11% and $9.5 million
or 29%, respectively, as compared to $9.3 million and $33.0 million for the
comparable periods in fiscal 2001. Revenues from Heidelberg represented 38% and
42% of total revenues for the first nine months of fiscal 2002 and fiscal 2001,
respectively.
In connection with the settlement of its outstanding arbitration proceedings
with Heidelberg in the third quarter of fiscal 2001, the Company agreed to
reduce the royalty payable by Heidelberg for imaging kits delivered in
connection with the Heidelberg Quickmaster 46 DI by approximately $9,000 per
kit. This reduced royalty rate became effective for imaging kits ordered and
delivered after May 1, 2002.
COST OF PRODUCTS SOLD
Cost of products sold consists of the costs of material, labor and overhead,
shipping and handling costs and warranty expenses. Cost of products sold for the
Digital Imaging Products segment were $11.8 million or 56% of revenue for the
third quarter of fiscal 2002, a decrease of $4.5 million or 28% as compared to
$16.3 million or 62% of revenue for the comparable period in fiscal 2001. Cost
of products sold for the Digital Imaging Products segment for the first
13
nine months of fiscal 2002 were $37.2 million or 61% of revenue, a decrease of
$6.7 million as compared to $43.9 million for the comparable period in fiscal
2001. Included in cost of products sold for the Digital Imaging Products segment
for the first nine months of fiscal 2002 is a charge of $4.0 million related to
the inventory write-downs and other charges associated with discontinued
programs.
Gross margin as a percentage of total revenues for the Digital Imaging Products
segment was 44% for the third of quarter fiscal 2002, as compared to 35% for the
comparable period in fiscal 2001. Gross margin as a percentage of total revenues
for the Digital Imaging Products segment was 39% for the first nine months of
fiscal 2002. Excluding the inventory write-downs and other charges for
discontinued programs, gross margin for the Digital Imaging Products segment
would have been 46% for the first nine months of fiscal 2002, as compared to 44%
for the first nine months of fiscal 2001. Excluding the inventory write-downs
and other charges for discontinued programs the gross margin increase for the
third quarter and first nine months of fiscal 2002 was primarily as a result of
yield improvements related to the manufacturing of the Company's consumable
products, a favorable product mix, and reduced warranty expenditures. Cost of
sales for the third quarter of fiscal 2002 included an increase of $250,000 in
warranty reserves over the average of the last three quarters, as a result of
expected costs related to improvements to the Dimension product. In the third
quarter of fiscal 2001, the Company recorded a warranty reserve of $2.1 million
as a result of increased warranty expenditures for customer service related to
product performance issues of the Dimension platesetter products.
Cost of product sold for the Lasertel segment included $1.5 million in
manufacturing costs for the third quarter of fiscal 2002, as compared to $2.2
million for the comparable period in fiscal 2001. This decrease is the result of
decreased salaries and benefits related to head count reductions in the first
quarter of fiscal 2002. Cost of products sold for the Lasertel segment for the
first nine months of fiscal 2002 of $4.8 million, included a charge of $688,000
related to inventory write-downs associated with discontinued programs.
Excluding the inventory write-downs, manufacturing costs were $4.1 million for
the first nine months of 2002, a decrease of $2.0 million, as compared to $6.1
million for the first nine months of fiscal 2001. The decrease in manufacturing
costs was primarily as a result of reduced salaries and benefits related to head
count reductions in the first quarter of fiscal 2002.
RESEARCH AND PRODUCT DEVELOPMENT
Research 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. Research and product development expenses for the Digital Imaging
Products segment were $2.0 million or 10% of revenue for the third quarter of
fiscal 2002, a decrease of $800,000 as compared to $2.8 million or 11% of
revenue for the comparable period in fiscal 2001. Research and product
development expenses for the Digital Imaging Products segment for the first nine
months of fiscal 2002 were $7.2 million or 12% of revenue, a decrease of $1.9
million as compared to $9.1 million or 11% of revenue for the comparable period
in fiscal 2001. These decreases relate primarily to reduced salaries as a result
of head count reductions in the first six months of fiscal 2002, as well as
reduced professional and contracted services as part of the Company's cost
reduction programs put into place in the third quarter of fiscal 2001. The
Company's product development cycle centers around major industry trade shows,
such as Drupa, held every four of five years. As a result, the Company's
research and product development expenses vary in accordance with its product
development cycle.
Research and product development expenses for the Lasertel segment were $16,000
or less than 1% of revenues for the third quarter of fiscal 2002, and $89,000 or
less than 1% of revenues for the first nine months of fiscal 2002. These
expenses related primarily to salaries, benefits, and the costs of parts and
supplies to support Lasertel's research activities for both internal and
external customers. Research and product development expenses for the Lasertel
segment were not material in the third quarter and first nine months of fiscal
2001.
SALES, MARKETING AND CUSTOMER SUPPORT
Sales, marketing and customer support expenses consist primarily of payroll and
related expenses for personnel, advertising, trade shows, promotional expenses,
and travel costs related to the Company's sales, marketing and customer support
activities. Sales, marketing and customer support expenses for the Digital
Imaging Products segment were $2.3 million or 11% of revenue for the third
quarter of fiscal 2002, a decrease of $1.1 million as compared to $3.4 million
or 13% of revenue for the comparable period in fiscal 2001. Sales, marketing and
customer support expenses for the Digital Imaging Products segment for the first
nine months of fiscal 2002 were $7.6 million, or 12% of revenue, a decrease of
$2.0 million, as compared to $9.6 million or 12% of revenue for the comparable
period in fiscal 2001. This decrease relates primarily to reduced salaries,
benefits, and related travel costs as a result of head count reductions in the
first six months of fiscal 2002, as well as reduced professional and contracted
services.
14
Sales and marketing expenses for the Lasertel segment were $22,000 or less than
1% of revenues for the third quarter of fiscal 2002, a decrease of $215,000 as
compared to $237,000 or 1% of revenue for the comparable period in fiscal 2001.
Sales and marketing expenses for the Lasertel segment were $180,000 or less than
1% of revenues for the first nine months of fiscal 2002, a decrease of $484,000
as compared to $664,000 or 1% of revenue for the comparable period in fiscal
2001. These expenses relate primarily to salaries, benefits and advertising
expenses to support Lasertel`s marketing activities in the defense, medical and
graphics industries. These decreases relate primarily to reduced salaries and
benefits as a result of head count reductions in the first quarter of fiscal
2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of payroll and related
expenses for personnel, and contracted professional services necessary to
conduct the finance, information systems, human resources and administrative
activities of the Company. General and administrative expenses for the Digital
Imaging Products segment were $2.1 million or 10% of revenues for the third
quarter of fiscal 2002, a decrease of $1.1 million, as compared to $3.2 million
or 12% of revenues for the comparable period in fiscal 2001. General and
administrative expenses for the Digital Imaging Products segment for the first
nine months of fiscal 2002 were $7.0 million or 11% of revenue, a decrease of
$1.8 million, as compared to $8.8 million or 11% of revenue for the comparable
period in fiscal 2001. These decreases relate primarily to decreases in legal
fees as a result of the settlements of the Company's arbitration proceedings
with Heidelberg in July 2001.
General and administrative expenses for the Lasertel segment were $450,000 or 2%
of revenue for the third quarter of fiscal 2002, a decrease of $111,000 as
compared to $561,000 or 2% of revenue for the comparable period in fiscal 2001.
General and administrative expenses for the Lasertel segment were $1.1 million
or 2% of revenue for the first nine months of fiscal 2002, a decrease of
$800,000 as compared to $1.9 million or 2% of revenue for the comparable period
in fiscal 2001. These decreases relate primarily to reduced salaries and
benefits as a result of head count reductions in the first six months of fiscal
2002.
SPECIAL CHARGES
In the second quarter of fiscal 2002, the Company initiated a process to
evaluate the Company's resources and strategically re-focus the Company. During
this process, the Company evaluated all aspects of the business, and concluded
to reposition and rescale its resources. As part of this exercise, the Company
initiated various repositioning actions during the second quarter of fiscal
2002. These actions included the following: (i) creation of market-focused
Direct Imaging and Computer-to-Plate product lines; (ii) creation of a new
senior management organization; (iii) discontinuance of certain programs; and
(iv) the consolidation of the Company's Hampshire Drive research and development
facility into the main Executive Drive facility in Hudson, NH. As a result of
these actions, the Company recorded special charges of $6.0 million in the
second quarter of fiscal 2002. The special charges include $1.0 million related
to severance and fringe benefit costs associated with the reduction of
approximately 50 employees, primarily in manufacturing and research and
development, $2.0 million related to the write-down of equipment and lease
termination costs as a result of the Hampshire Drive consolidation, $1.8 million
related primarily to other asset write-downs and costs associated with the
repositioning, and $1.2 million related to executive contractual obligations, as
a result of a separation agreement (the "Hallman Agreement") with Robert W.
Hallman, former President and Chief Executive Officer of the Company. Pursuant
to the Hallman Agreement, effective April 30, 2002, the Company agreed to pay
Mr. Hallman a separation payment equal to three times his then current annual
salary, payable bi-weekly over 36 months, until May 2005. In consideration for
the payments and other benefits under the Hallman Agreement, Mr. Hallman agreed
for a period of five (5) years commencing April 30, 2002, not to engage in any
business activity on behalf of an entity which is a direct competitor of the
Company and not to recruit, solicit or offer employment to any employee of the
Company.
The repositioning activity and workforce reduction, which was initiated in June
2002, was substantially complete at the end of the second quarter of fiscal
2002. The consolidation of the Hampshire Drive facility was completed in the
third quarter of fiscal 2002. The Company paid $947,000 through September 28,
2002, as a result of the forgoing repositioning actions.
15
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of net interest expense and other
miscellaneous expense.
Interest expense, net was $224,000 for the third quarter of fiscal 2002, a
decrease of $103,000 as compared to $327,000 for the comparable period in fiscal
2001. Interest income was $55,000 for the third quarter of fiscal 2002, an
increase of $25,000 as compared to $30,000 for the comparable period in fiscal
2001, primarily as a result of increased cash balances. Interest income for the
first nine months of fiscal 2002 was $118,000, a decrease of $76,000 as compared
to $194,000 for the comparable period in fiscal 2001, primarily as a result of
lower interest rates on increased cash balances. Interest expense was $279,000
and $797,000, for the third quarter and first nine months of fiscal 2002,
respectively, a decrease of $78,000 and $303,000 as compared to $357,000 and
$1.1 million for the comparable periods in fiscal 2001, primarily as a result of
lower interest rates on borrowings.
PROVISION FOR INCOME TAXES
The Company did not record a provision for income taxes in the first nine months
of fiscal 2002 and in the third quarter and the first nine months of fiscal
2001, as a result of tax losses incurred in those periods. The Company did not
record a provision for income taxes in the third quarter of fiscal 2002, as a
result of the utilization of net operating loss carryforwards incurred prior to
the deduction for stock compensation.
NET INCOME (LOSS)
As a result of the foregoing, the Company had net income of $621,000 for the
third quarter of fiscal 2002 and a net loss of $10.7 million for the first nine
months of fiscal 2002, as compared to net losses of $2.8 million and $1.7
million for the third quarter and first nine months of fiscal 2001,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2002, the Company had cash and cash equivalents of $14.0
million and working capital of $25.6 million as compared to cash and cash
equivalents of $2.5 million and working capital of $26.7 million at December 29,
2001. The increase in cash and cash equivalents of $11.5 million for the first
nine months of fiscal 2002 was primarily attributable to strict working capital
management. Net cash provided by operating activities during the first nine
months of fiscal 2002 of $12.3 million was offset by cash used to purchase
equipment of approximately $1.2 million.
Net cash provided by operating activities was $12.3 million for the nine months
ended September 28, 2002, primarily as a result of special charges and
discontinued programs of $10.7 million, depreciation and amortization of $7.2
million and other non-cash items of $1.6 million, decreases in inventories and
accounts receivable of $1.3 million and $2.5 million, respectively, and
increases in accounts payable of $1.3 million, off set by net losses of $10.7
million and a decrease in accrued expenses of $1.5 million.
Net cash used in investing activities of $997,000 for the nine months ended
September 28, 2002 consisted primarily of additions to property, plant and
equipment used in the Company's business, net of proceeds from sales of
equipment used in the Company's business.
Net cash provided by financing activities for the nine months ended September
28, 2002 totaled $136,000 and consisted primarily of proceeds of $3.0 million
from borrowings under the Company's lease line of credit facility with Keybank
National Association, offset by payments on the mortgage term loans, the
revolving line of credit of $1.0 million and the lease line of credit facility
of $1.9 million.
The Company's long-term debt consists of two mortgage term loans from Citizens
Bank New Hampshire ("Citizens"), and a lease line of credit facility from
Keybank National Association ("Keybank").
On May 1, 2002, the Company borrowed an additional $3.0 million against its
lease line of credit facility with Keybank National Association. The borrowing
is secured by certain equipment valued at $5.0 million, with interest payable at
the LIBOR rate plus 4.25% (6.06% at September 28, 2002). Principal and interest
is due and payable in sixty equal monthly installments of $58,126, beginning on
June 1, 2002.
16
In addition to the mortgage term loans and the lease line of credit, the Company
has a revolving line of credit loan with Citizens which expires in October 2003,
under which the Company may borrow a maximum of $16.0 million. The revolving
line of credit is subject to a borrowing base formula based on eligible accounts
receivable and inventories, as defined by the Citizens loan agreement, and
reduced by the amount of all letters of credit outstanding. The revolving line
of credit loan is secured by substantially all of the Company's assets, with
interest payable at the LIBOR rate plus 1.50% (3.31% at September 28, 2002).
As of September 28, 2002, the Company had $10.5 million available under the
revolving line of credit loan, reduced by $6.8 million outstanding under standby
letters of credit.
Under the terms of the mortgage term loans, the lease line of credit and the
revolving line of credit agreements, the Company is required to meet various
restrictive covenants on a quarterly and annual basis, including maximum funded
debt to EBITDA and minimum fixed charge coverage covenants. At September 28,
2002, the Company was in compliance with all financial covenants.
The Company has future contractual payments primarily related to debt, royalty
obligations, and operating leases, from 2002 through 2010. The Company's future
commitments under its credit facilities total $17.4 million at September 28,
2002, of which $771,000 will be paid in the fourth quarter of fiscal 2002. The
future commitments under the Company's royalty agreement with Fuji Photo Film
Co., Ltd., total $12.2 million at September 28, 2002, of which $70,000 is
expected to be paid in the fourth quarter of fiscal 2002. The Company also has
future minimum rental commitments under various non-cancelable operating leases
of $199,000 at September 28, 2002. The related lease agreements expire on
various dates over the next three years. The Company expects to make payments of
$71,000 under its non-cancelable operating lease agreements for the remainder of
fiscal 2002.
Although the Company believes that existing funds, cash flows from operations,
and cash available under its revolving line of credit and lease line of credit
should be sufficient to satisfy working capital requirements, payout of
restructuring costs, and capital expenditures through the next twelve months,
there can be no assurance that the Company will not require additional
financing, or that such additional financing, if needed, will be available on
acceptable terms. Likewise there can be no assurance that the Company will be
able to manage its working capital successfully.
The Company's anticipated capital expenditures for the balance of fiscal 2002
are approximately $650,000, and primarily relate to the purchase of capital
equipment to be used in the production of the Company's DI and CTP equipment and
consumable products.
EFFECT OF INFLATION
Inflation has not had, and is not expected to have, a material impact upon the
Company's operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Restructuring Costs" ("SFAS 146"). SFAS 146 applies to
costs associated with an exit activity (including restructuring) or with a
disposal of long-lived assets. Those activities can include eliminating or
reducing product lines, terminating employees and contracts, and relocating
plant facilities or personnel. Under SFAS 146, a company will record a liability
for a cost associated with an exit or disposal activity when that liability is
incurred and can be measured at fair value. SFAS 146 will require a company to
disclose information about its exit and disposal activities, the related costs,
and changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated and in
any subsequent period until the activity is completed. SFAS 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002,
with earlier adoption encouraged. Under SFAS 146, a company may not restate its
previously issued financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously recorded under Emerging
Issues Task Force Issue 94-3. The Company does not anticipate that the adoption
of SFAS 146 will have a material effect on its results of operations or
financial position.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company is exposed to market risk from changes in interest rates primarily
as a result of its borrowing activities, and to a lesser extent, its investing
activities. The majority of the Company's long-term borrowings are in fixed rate
instruments, or variable rate instruments with fixed rate conversion provisions.
The Company does not enter into interest rate swap agreements or other
speculative or leveraged transactions. The Company currently has no material
exposure to interest rate fluctuations on its short-term investments.
The Company has limited exposure to foreign currency exchange rate risk, as
substantially all of its transactions are denominated in U.S. dollars. Some of
the Company's customers and strategic partners are not located in the United
States, however. As a result, these customers and strategic partners are
themselves subject to fluctuations in foreign exchange rates. If their home
country currency were to decrease in value relative to the United States dollar,
their ability to purchase and market the Company's products could be adversely
affected and the Company's products may become less competitive to them. This
may have an adverse impact on the Company's business. Likewise, some of the
Company's suppliers are not located in the United States and thus, such
suppliers are subject to foreign exchange rate risks in transactions with the
Company. Decreases in the value of their home country currency versus that of
the United States dollar could cause fluctuations in supply pricing which could
have an adverse effect on the Company's business.
ITEM 4. CONTROLS AND PROCEDURES.
------------------------
(a) Evaluation of Disclosure Controls and Procedures
As of a date (the "Evaluation Date") within ninety days prior to the filing date
of this Quarterly Report on Form 10-Q, the Company, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Based upon that evaluation, the Company's Chief
Executive Officer and the Company's Chief Financial Officer concluded that, as
of the Evaluation Date, the Company's disclosure controls and procedures are
effective in ensuring that material information relating to the Company
(including its consolidated subsidiaries) required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, including ensuring
that such material information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date the Company last evaluated its internal controls.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In August 1999 Creo Inc., ("Creo"), filed an action in the United States
District Court for the District of Delaware (the "District Court") against the
Company asserting that Creo has a "reasonable apprehension that it will be sued
by Presstek for infringement" of two of the Company's patents and seeking a
declaration that Creo's products "do not and will not infringe any valid and
enforceable claims" of the patents in question. In September 1999, the Company
filed a counterclaim against Creo for patent infringement. The Company claimed
that Creo infringed two direct imaging patents owned by the Company which had
recently been the subject of re-examination by the U.S. Patent and Trademark
Office. This action went to trial before the District Court without a jury
during the week of June 25, 2001. The District Court issued a decision on
September 11, 2001, in which it affirmed the validity and enforceability of the
Company's on-press imaging patents, but held that the current Creo DOP System
did not infringe the patents. Creo appealed the District Court's decision that
the patents are valid and enforceable, and the Company cross-appealed the
finding of non-infringement by the current Creo DOP System. On September 17,
2002, the United States Court of Appeals for the Federal Circuit affirmed the
District Court's decision that the Company's patents are valid and enforceable,
but that they are not infringed by the current Creo DOP System. The Company is
considering what further appeals may be appropriate.
See also Part I - Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2001 filed with the Commission on March 29, 2002
for a description of certain other legal proceedings pending against the
Company. All of such information is hereby incorporated by reference in response
to this item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Description of the Company's Non-Employee Director Compensation
Arrangements, approved by the Company's Board of Directors on July 17, 2002
(filed herewith).*
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
- --------------
* Denotes management employment contracts or compensatory plans.
(b) Reports on Form 8-K
None.
19
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: November 12, 2002 /s/ Edward J. Marino
-------------------------------
By: Edward J. Marino
President and
Chief Executive Officer
(Principal Executive and
Duly Authorized Officer)
Date: November 12, 2002 /s/ Moosa E. Moosa
-------------------------------
By: Moosa E. Moosa
Vice President of Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
CERTIFICATIONS
I, Edward J. Marino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Presstek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Edward J. Marino
-------------------------------------
Edward J. Marino
President and Chief Executive Officer
(Principal Executive Officer)
21
I, Moosa E. Moosa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Presstek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Moosa E. Moosa
-------------------------------------------
Moosa E. Moosa
Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
EXHIBIT INDEX
NO. DESCRIPTION
---- -----------
10.1 Description of the Company's Non-Employee Director Compensation
Arrangements, approved by the Company's Board of Directors on July
17, 2002 (filed herewith).*
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
- --------------
* Denotes management employment contracts or compensatory plans.
23