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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 October 2, 2004
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
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (603) 595-7000
------------------
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(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 [X] 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 5, 2004, there were 34,831,786 shares of the registrant's common
stock, $.01 par value per share, outstanding.
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PRESSTEK, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets as of October 2, 2004 (unaudited) and
January 3, 2004 ........................................... 3
Statements of Operations for the three and nine months
ended October 2, 2004 and September 27, 2003 (unaudited)... 4
Statements of Cash Flows for the nine months ended
October 2, 2004 and September 27, 2003 (unaudited) ........ 5
Notes to Financial Statements (unaudited) ................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ...............................................25
Item 4. Controls and Procedures ...................................25
PART II OTHER INFORMATION
Item 1. Legal Proceedings .........................................26
Item 6. Exhibits ..................................................26
Signatures ...................................................................27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRESSTEK, INC. OCTOBER 2, January 3,
BALANCE SHEETS 2004 2004
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
- ----------------------------------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,758 $ 28,196
Accounts receivable, net of allowance for losses of $2,985
and $1,892, in fiscal 2004 and 2003, respectively 21,249 14,922
Inventories 21,099 12,354
Other current assets 1,468 836
- ----------------------------------------------------------------------- ------------ ------------
Total current assets 60,574 56,308
- ----------------------------------------------------------------------- ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 46,991 45,732
OTHER ASSETS:
Goodwill 4,629 --
Patent application costs and license rights, net 2,866 3,419
Other intangibles, net 1,392 --
Other assets 5,907 1,069
- ----------------------------------------------------------------------- ------------ ------------
Total other assets 14,794 4,488
- ----------------------------------------------------------------------- ------------ ------------
TOTAL $ 122,359 $ 106,528
======================================================================= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,750 $ 2,143
Accounts payable 11,800 4,750
Accrued expenses 7,464 7,131
- ----------------------------------------------------------------------- ------------ ------------
Total current liabilities 23,014 14,024
- ----------------------------------------------------------------------- ------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 9,107 12,321
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 34,755,361 shares at
October 2, 2004; 34,202,175 shares at January 3, 2004 348 342
Additional paid-in capital 101,765 97,769
Comprehensive loss (47) (47)
Accumulated deficit (11,828) (17,881)
- ----------------------------------------------------------------------- ------------ ------------
Total stockholders' equity 90,238 80,183
- ----------------------------------------------------------------------- ------------ ------------
TOTAL $ 122,359 $ 106,528
======================================================================= ============ ============
See accompanying notes to financial statements
3
PRESSTEK, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED
- -------------------------------------------------------- --------------------------- ----------------------------
OCTOBER 2, September 27, OCTOBER 2, September 27,
2004 2003 2004 2003
- -------------------------------------------------------- ------------ ------------ ------------ ------------
REVENUE:
Product sales $ 29,639 $ 19,266 $ 75,337 $ 62,598
Royalties and fees from licensees 111 492 424 2,121
- -------------------------------------------------------- ------------ ------------ ------------ ------------
Total revenue 29,750 19,758 75,761 64,719
- -------------------------------------------------------- ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 19,747 12,105 47,832 37,947
Research and product development 1,265 1,667 4,586 5,491
Sales, marketing and customer support 3,423 2,857 10,308 8,771
General and administrative 2,534 2,100 7,046 7,065
Special charges and (credits) -- -- (296) 550
- -------------------------------------------------------- ------------ ------------ ------------ ------------
Total costs and expenses 26,969 18,729 69,476 59,824
- -------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,781 1,029 6,285 4,895
OTHER INCOME (EXPENSE), NET:
Interest income 80 82 271 233
Interest expense (107) (179) (320) (602)
Other income (expense), net (47) 76 (183) 97
- -------------------------------------------------------- ------------ ------------ ------------ ------------
Total other expense, net (74) (21) (232) (272)
- -------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,707 1,008 6,053 4,623
PROVISION FOR INCOME TAXES -- -- -- --
- -------------------------------------------------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 2,707 1,008 6,053 4,623
- -------------------------------------------------------- ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from discontinued operations -- 1,429 -- 1,429
- -------------------------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 2,707 $ 2,437 $ 6,053 $ 6,052
======================================================== ============ ============ ============ ============
EARNINGS PER SHARE - BASIC:
From continuing operations $ 0.08 $ 0.03 $ 0.18 $ 0.14
======================================================== ============ ============ ============ ============
From discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.04
======================================================== ============ ============ ============ ============
EARNINGS PER SHARE - BASIC $ 0.08 $ 0.07 $ 0.18 $ 0.18
======================================================== ============ ============ ============ ============
EARNINGS PER SHARE - DILUTED:
From continuing operations $ 0.08 $ 0.03 $ 0.17 $ 0.13
======================================================== ============ ============ ============ ============
From discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.04
======================================================== ============ ============ ============ ============
EARNINGS PER SHARE - DILUTED $ 0.08 $ 0.07 $ 0.17 $ 0.17
======================================================== ============ ============ ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - BASIC 34,688 34,177 34,464 34,158
======================================================== ============ ============ ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - DILUTED 35,336 34,625 35,285 34,329
======================================================== ============ ============ ============ ============
See accompanying notes to financial statements
4
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
OCTOBER 2, September 27,
FOR THE NINE MONTHS ENDED 2004 2003
- ------------------------------------------------------------------ ------------ ------------
CASH FLOWS - OPERATING ACTIVITIES:
Net Income $ 6,053 $ 6,052
Less income from discontinued operations -- (1,429)
Income from continuing operations 6,053 4,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Special charges and discontinued programs (296) 550
Depreciation and amortization 6,423 6,618
Provision for warranty and other costs 1,034 1,336
Provision for losses on accounts receivable 1,135 1,077
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable (4,707) (681)
Inventories (5,339) (181)
Other current assets (404) (667)
Accounts payable 3,148 941
Accrued expenses (1,283) (1,249)
Other (1,901) (192)
- ------------------------------------------------------------------ ------------ ------------
Net cash provided by operating activities 3,863 12,175
- ------------------------------------------------------------------ ------------ ------------
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,061) (1,005)
Cash paid for the purchase of Precision Lithograining
Corporation, net of cash acquired (13,310) --
Cash advanced under debtor-in-possession financing agreement (3,325) --
- ------------------------------------------------------------------ ------------ ------------
Net cash used in investing activities (17,696) (1,005)
- ------------------------------------------------------------------ ------------ ------------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 4,002 266
Repayment of term loan (1,607) (901)
Repayment of lease line of credit -- (1,441)
- ------------------------------------------------------------------ ------------ ------------
Net cash provided by (used in) financing activities 2,395 (2,076)
- ------------------------------------------------------------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,438) 9,094
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 28,196 17,563
- ------------------------------------------------------------------ ------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 16,758 $ 26,657
================================================================== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 320 $ 602
================================================================== ============ ============
Income taxes $ -- $ --
================================================================== ============ ============
See accompanying notes to financial statements
5
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 2, 2004
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------
NATURE OF BUSINESS - Presstek, Inc. ("Presstek", or "the Company") 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 Lasertel, Inc. subsidiary, ("Lasertel") is engaged
in the manufacture and development of high-powered laser diodes for the Company
and external customers. The Company's Precision Lithograining Corporation
subsidiary ("Precision") is primarily engaged in the manufacture and development
of conventional and digital printing plates.
The Company operates in three reportable segments, the Digital Imaging Products
segment, the Lasertel segment and the Precision segment. The Digital Imaging
Products segment is primarily engaged in the development, manufacture and sale
of patented 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 high-powered laser diodes for Presstek and other
customers. The Precision segment which was acquired on July 30, 2004, is
primarily engaged in the manufacture and development of conventional and digital
printing plates. See Note 2.
BASIS OF PRESENTATION - The financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. 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 this quarterly report should be read in
conjunction with the Company's audited financial statements and related notes
thereto for the fiscal year ended January 3, 2004. The year-end 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 October 2, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 1, 2005.
FISCAL YEAR - The Company operates and reports on a 52 or 53-week fiscal year
ending on the Saturday closest to December 31. Accordingly, the financial
statements include the thirteen-week periods ended October 2, 2004 ("the third
quarter of fiscal 2004") and September 27, 2003 ("the third quarter of fiscal
2003"), and the thirty-nine week periods ended October 2, 2004 ("the first nine
months of fiscal 2004"), and September 27, 2003 ("the first nine months of
fiscal 2003").
USE OF ESTIMATES - The Company prepares its financial statements in accordance
with US generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. The
Company evaluates its estimates, including those related to product returns,
inventories, income taxes, warranty obligations, and litigation on an on-going
basis. The Company 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 under different
assumptions or conditions.
6
REVENUE RECOGNITION - The Company recognizes revenue when persuasive evidence of
an agreement exists, delivery has occurred or services have been rendered, the
price to the customer is fixed or determinable, collection is reasonably
assured, and no future services are required.
The Company generates revenue through four main sources; equipment sales, laser
diode sales, consumable sales and license agreements with manufacturers who
incorporate the Company's technology into their products. The Company also
generates revenue through the sale of installation services, training, support
services and equipment maintenance contracts, although historically these items
have not been a significant source of revenue.
The Company records revenue for product sales net of estimated returns, which
are adjusted periodically, based upon historical rates of return. Equipment
revenue and any related royalties for products sold to original equipment
manufacturers is recognized at the time of shipment. Contracts with OEM's do not
include price protection or product return rights. Revenue for equipment sold to
distributors, whereby the distributor is responsible for installation, is
recognized at shipment. Revenue for equipment sold to distributors whereby the
Company is responsible for installation, for which the installation is not
deemed inconsequential, is recognized upon completion of installation and
customer acceptance. Contracts with distributors do not include price protection
or product return rights, however the Company may elect in certain circumstances
to accept returns for product. Revenue for installation services is recognized
after installation has occurred. Revenue related to service maintenance
agreements is recognized ratably over the duration of the particular contract.
Revenue for training and support services is recognized upon completion of the
training and services. Certain fees and other reimbursements are recognized as
revenue when the related services have been performed or the revenue otherwise
earned. Deferred revenue includes certain customer advances received as a result
of the Company's distribution agreements. This revenue is recognized as product
is shipped or services are performed. The Company may enter into multiple
element arrangements. When equipment, consumables, installation and maintenance
agreements are contained in a single arrangement, revenue is allocated to the
various elements based upon the fair market value of each element. Fair market
value is generally determined based upon the price charged when the element is
sold separately.
STOCK-BASED COMPENSATION - The Company accounts for stock options and other
equity instruments 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,
"Accounting for Stock-Based Compensation" ("SFAS 123"). 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 exercise price on the grant date. As the Company has only issued
fixed term stock option grants at or above the quoted market price on the date
of the grant, there is no compensation expense recognized in the accompanying
financial statements. The Company adopted the disclosure provisions of SFAS 123,
which 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-based compensation plans.
7
Accordingly, the Company's net income and net income per share for the three and
nine months ended October 2, 2004 and September 27, 2003, would have been
reduced to the pro forma amounts indicated in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------
OCTOBER 2, September 27, OCTOBER 2, September 27,
(IN THOUSANDS EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 2,707 $ 2,437 $ 6,053 $ 6,052
Less:
- ------------------------------------------------------------------------------------------------------------------
Total stock-based employee compensation expense (594) (596) (1,685) (1,929)
- ------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 2,113 $ 1,841 $ 4,368 $ 4,123
==================================================================================================================
Net income per common share, as reported:
Basic $ 0.08 $ 0.07 $ 0.18 $ 0.18
==================================================================================================================
Diluted $ 0.08 $ 0.07 $ 0.17 $ 0.17
==================================================================================================================
Pro forma net income per common share:
Basic $ 0.06 $ 0.05 $ 0.13 $ 0.12
==================================================================================================================
Diluted $ 0.06 $ 0.05 $ 0.12 $ 0.12
==================================================================================================================
The above pro forma net income and net income per share do not consider any
related tax benefit from stock option exercises.
The Company used the Black-Scholes option-pricing model to estimate the weighted
average fair value of $5.83 and $6.40 for each stock option issued in the third
quarter and first nine months of fiscal 2004, respectively, and $3.36 and $3.43
for each stock option issued in the third quarter and first nine months of
fiscal 2003, respectively, using the following weighted average assumptions for
both the third quarter and first nine months of fiscal 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 2, SEPTEMBER 27, OCTOBER 2, SEPTEMBER 27,
2004 2003 2004 2003
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Dividend yield None None None None
Expected volatility 69.79% 70.85% 69.79% 72.70%
Risk free interest rate 3.68% 3.55% 3.35% 3.28%
Expected option life 5.50 6.59 5.50 6.59
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2. ACQUISITIONS
On July 30, 2004, the Company acquired the stock of Precision Lithograining
Corporation and its affiliated company SDK Realty Corp., ("Precision") of South
Hadley, Massachusetts, an independent plate manufacturer, for approximately
$13.3 million in cash. Precision provides the Company with its Anthem and
Freedom printing plates, and is also a provider of other conventional and
digital printing plates for both web and sheet-fed printing applications.
8
The Company has not finalized the allocation of the purchase price as of October
2, 2004. The following table summarizes the preliminary estimated fair value
assigned to the assets acquired and liabilities assumed at the date of
acquisition:
((IN THOUSANDS) JULY 30, 2004
---------------------------------------------------------------
Accounts receivable 2,734
Inventory 3,236
Property, plant and equipment 6,065
Trade names 700
Customer relationships 600
Non-compete covenants 100
Goodwill 4,629
Accounts payable and accrued expenses (4,754)
----------------------------------------------------------------
Net cash paid $ 13,310
================================================================
The operating results of Precision are included in the Company's consolidated
statements of operations after the acquisition date. The assets and liabilities
acquired are included in the consolidated balance sheet as of October 2, 2004.
The following table presents selected unaudited financial information of the
Company as if Precision had been acquired at the beginning of fiscal 2003 and
2004:
THREE MONTHS ENDED NINE MONTHS ENDED
- -------------------------------------------------------------------------------------------
OCTOBER 2, September 27, OCTOBER 2, September 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------
Pro forma revenue $33,277 $25,444 $92,580 $81,777
Pro forma net income $ 2,707 $ 2,391 $ 6,053 $ 5,914
Pro forma earnings per share
Basic $ 0.08 $ 0.07 $ 0.18 $ 0.17
Diluted $ 0.08 $ 0.07 $ 0.17 $ 0.17
On July 13, 2004, the Company entered into an asset purchase agreement with
A.B.Dick Company ("A.B.Dick"), which was subject to Bankruptcy Court approval.
Under the agreement the Company agreed to acquire the business and assets of
A.B.Dick through a U.S. Bankruptcy Code Section 363 asset sale for approximately
$40 million. A.B.Dick manufactures and markets equipment and supplies for the
graphic arts and printing industries, and also provides continuing service and
support. A.B.Dick filed for Chapter 11 bankruptcy protection on July 13, 2004.
On November 3, 2004, the Bankruptcy Court approved the Company's bid to acquire
A.B.Dick, and on November 5, 2004 the Company completed the acquisition with
funding provided by the Company's new credit facilities. See note 6. The Company
also had an agreement with Key Corporate Capital, Inc., A.B.Dick's current
lender, to provide $7.0 million in debtor-in-possession financing to fund
A.B.Dick's post-petition operating expenses and to meet supplier and employee
commitments through the completion of the sale proceedings on November 5, 2004.
At October 2, 2004 the Company had advanced $3.3 million to A.B.Dick under the
debtor-in-possession financing agreement. The outstanding amounts under this
financing facility were repaid at the closing of the acquisition from proceeds
from the purchase price. In connection with the acquisition the Company has
incurred approximately $1.2 million in costs for legal and advisory services.
These costs are currently included in other assets, and will be included in the
purchase price of the acquisition.
9
3. INVENTORIES
Inventories consisted of the following at October 2, 2004 and January 3, 2004:
(IN THOUSANDS) OCTOBER 2, 2004 January 3, 2004
- --------------------------------------------------------------------------------
Raw materials $ 6,684 $ 2,782
Work in process 4,911 2,939
Finished goods 9,504 6,633
- --------------------------------------------------------------------------------
Total inventories $ 21,099 $ 12,354
================================================================================
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following at October 2, 2004
and January 3, 2004:
(IN THOUSANDS) OCTOBER 2, 2004 January 3, 2004
- --------------------------------------------------------------------------------
At cost:
Land and improvements $ 2,241 $ 2,038
Buildings and leasehold improvements 27,550 24,518
Production equipment and other 50,347 46,931
Office furniture and equipment 4,965 4,831
- --------------------------------------------------------------------------------
85,103 78,318
Less accumulated depreciation (38,112) (32,586)
- --------------------------------------------------------------------------------
Total property, plant and equipment, net $ 46,991 $ 45,732
================================================================================
All property and equipment is pledged as security for long-term debt.
See Note 6.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at October 2, 2004 and January 3,
2004:
(IN THOUSANDS) OCTOBER 2, 2004 January 3, 2004
- --------------------------------------------------------------------------------
Accrued payroll and benefits $ 2,180 $ 2,154
Accrued warranty 1,018 935
Accrued special charges 355 1,055
Accrued royalties 1,187 1,057
Other current liabilities 2,724 1,930
- --------------------------------------------------------------------------------
Total accrued expenses $ 7,464 $ 7,131
================================================================================
6. LONG-TERM DEBT
Long-term debt consisted of the following at October 2, 2004 and January 3,
2004:
(IN THOUSANDS) OCTOBER 2, 2004 January 3, 2004
- --------------------------------------------------------------------------------
Mortgage term loans $ 12,857 $ 14,464
Less current portion (3,750) (2,143)
- --------------------------------------------------------------------------------
Total long-term debt, net of
current portion $ 9,107 $ 12,321
================================================================================
On November 5, 2004, in connection with the acquisition of A.B.Dick, the Company
replaced its current credit facilities with up to $80.0 million in Senior
Secured Credit Facilities (the "Facilities") from three lenders. The terms of
the Facilities include a $35.0 million five year secured Term Loan and a $45.0
million five year secured Revolving Line of Credit (the "Revolver"). Principal
payments on the Term
10
Loan will be made in consecutive quarterly installments beginning on March 31,
2005 with an initial installment in the amount of $250,000, and continuing
quarterly installments in the amount of $1,750,000, with a final installment of
all remaining principal and unpaid interest on November 4, 2009. The Facilities
will be used to partially finance the acquisition of A.B.Dick, and for working
capital requirements, capital expenditures, acquisitions, and general corporate
purposes. Borrowings under the facilities bear interest at either (i) the London
Interbank Offered Rate ("LIBOR") plus applicable margins or (ii) the Prime Rate,
as defined in the agreement, plus applicable margins. The applicable margins
range from 1.25% to 4.0% for LIBOR, or 0% to 1.75% for Prime, based on certain
financial performance.
7. INCOME TAXES
The Company did not record a provision for federal or state income taxes for the
third quarter and first nine months of fiscal 2004, as a result of the
utilization of federal net operating loss carryforwards, and the utilization of
state tax credits. These deferred tax assets were previously fully reserved. The
Company did not record a provision for federal or state income taxes for the
third quarter and first nine months of fiscal 2003 as a result of the
utilization of federal and state net operating loss carryforwards.
Although the Company recorded profits in the third quarter and first nine months
of fiscal 2004 and 2003, a full valuation allowance has been applied on the net
deferred tax assets, as a result of the significant losses incurred in prior
years. The Company will continue to assess the expected future results and
review its deferred tax position in each interim and fiscal period.
8. EARNINGS PER SHARE
The following represents the calculation of basic and diluted earnings per share
for the three and nine months ended October 2, 2004 and September 27, 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
- -----------------------------------------------------------------------------------------------
OCTOBER 2, September 27, OCTOBER 2, September 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Income from continuing operations $ 2,707 $ 1,008 $ 6,053 $ 4,623
Income from discontinued operations -- 1,429 -- 1,429
- -----------------------------------------------------------------------------------------------
Net income $ 2,707 $ 2,437 $ 6,053 $ 6,052
===============================================================================================
Weighted average common shares
outstanding - Basic 34,688 34,177 34,464 34,158
Weighted average common stock
equivalents 648 448 821 171
- -----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - Diluted 35,336 34,625 35,285 34,329
===============================================================================================
Earnings per share - Basic:
From continuing operations $ 0.08 $ 0.03 $ 0.18 $ 0.14
From discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.04
- -----------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.08 $ 0.07 $ 0.18 $ 0.18
===============================================================================================
Earnings per share - Diluted:
From continuing operations $ 0.08 $ 0.03 $ 0.17 $ 0.13
From discontinued operations $ 0.00 $ 0.04 $ 0.00 $ 0.04
- -----------------------------------------------------------------------------------------------
Earnings per share - Diluted $ 0.08 $ 0.07 $ 0.17 $ 0.17
===============================================================================================
Options and warrants to purchase 1,033,926 and 901,873 shares of common stock at
exercise prices ranging from $9.20 to $22.75 per share were outstanding during a
portion of the third quarter and first nine
11
months of fiscal 2004, respectively, 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 shares of common stock.
Options and warrants to purchase 1,590,427 and 2,412,275 shares of common stock
at exercise prices ranging from $6.10 to $22.75 per share were outstanding
during a portion of the third quarter and first nine months of fiscal 2003,
respectively, 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 shares of common stock.
9. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income 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 fiscal 2004 and fiscal 2003,
respectively, comprehensive income was comprised solely of net income.
10. SEGMENT INFORMATION
The following table presents a summary of the Company's operations by segment
for the three and nine months ended October 2, 2004 and September 27, 2003:
DIGITAL
IMAGING INTER-
(IN THOUSANDS) PRODUCTS LASERTEL PRECISION SEGMENT TOTAL
-----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 2, 2004
-----------------------------------------------------------------------------------------------------
REVENUE $ 25,852 $ 2,292 $ 3,834 $ (2,228) $ 29,750
INCOME (LOSS) FROM OPERATIONS 3,150 (599) 230 -- 2,781
TOTAL ASSETS 89,627 13,818 18,914 -- 122,359
Three months ended September 27, 2003
-----------------------------------------------------------------------------------------------------
Revenue $ 19,348 $ 1,608 $ -- $ (1,198) $ 19,758
Income (loss) from operations 1,738 (709) -- -- 1,029
Total assets 91,229 14,649 -- -- 105,878
NINE MONTHS ENDED OCTOBER 2, 2004
-----------------------------------------------------------------------------------------------------
REVENUE $ 70,750 $ 5,431 $ 3,834 $ (4,254) $ 75,761
INCOME (LOSS) FROM OPERATIONS 8,724 (2,669) 230 -- 6,285
TOTAL ASSETS 89,627 13,818 18,914 -- 122,359
Nine months ended September 27, 2003
-----------------------------------------------------------------------------------------------------
Revenue $ 63,706 $ 5,066 $ -- $ (4,053) $ 64,719
Income (loss) from operations 7,673 (2,778) -- -- 4,895
Total assets 91,229 14,649 -- -- 105,878
11. DISCONTINUED PROGRAMS AND SPECIAL CHARGES
In fiscal 2002, as a result of various repositioning programs, the Company
recorded a charge of $3.7 million to cost of products sold and $6.0 million in
special charges. These charges included inventory, equipment and other asset
write-downs, severance and fringe benefit costs, executive and other contractual
obligations.
In fiscal 2003 the Company expanded its repositioning actions to reduce costs,
which had been initiated in the third quarter of fiscal 2002. As a result, the
Company recorded a charge of $550,000, primarily related
12
to severance and fringe benefit costs associated with the reduction of
approximately forty-three employees.
In the first quarter of fiscal 2004, the Company reversed $296,000 in excess
special charges related to severance and fringe benefits accrued in fiscal 2003
and 2002, as a result of lower fringe benefit costs.
The following tables summarize the activity related to the discontinued programs
and special charges and accrued balances for the nine months ended October 2,
2004:
ADJUSTED
PROVISIONS UTILIZATION
BALANCE AT THROUGH THROUGH BALANCE AT
(IN THOUSANDS) JANUARY 3, 2004 OCTOBER 2, 2004 OCTOBER 2, 2004 OCTOBER 2, 2004
- ----------------------------------------------------------------------------------------------------------
Executive contractual obligations $ 699 $ (24) $ (388) $ 287
Severance and fringe benefits 356 (272) (16) 68
- ----------------------------------------------------------------------------------------------------------
Total accrued special charges
and discontinued programs $ 1,055 $ (296) $ (404) $ 355
==========================================================================================================
The cumulative cash paid by the Company at October 2, 2004 as a result of the
forgoing repositioning actions totaled $4.8 million. The Company anticipates the
remaining payments related to the discontinued programs and special charges will
be completed by May 2005.
13
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 Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our expectations
for our financial and operating performance in 2004 and beyond; the adequacy of
internal cash and working capital for our operations; the strength of our
various strategic partnerships (both on manufacturing and distribution); our
expectations regarding our new OEM relationships with Heidelberger
Druckmaschinen, AG, ("Heidelberg") our ability to secure other strategic
alliances and relationships; our expectations regarding Presstek's strategy for
growth; our expectations and plans regarding market penetration, including the
strength and scope of our distribution channels and our expectations regarding
sales of DI presses in Europe; the expected effects and benefits of the A.B.Dick
Company ("A.B.Dick") and Precision Lithograining Corporation ("Precision")
acquisitions on Presstek's business and results of operations; the anticipated
growth of the combined operations of Presstek, A.B.Dick and Precision;
Presstek's ability to effectively manage its expanded operations; the ability of
Presstek to obtain and maintain normal terms with A.B.Dick's vendors and
dealers; the potential adverse impact of the Chapter 11 proceedings on
A.B.Dick's liquidity and/or results of operations; our expectations regarding
the sale of our products and use of our technology including pricing; our
expectations regarding the manufacture and performance of existing, planned and
recently introduced products; the effects, market acceptance, or pricing of
competitive products, including the impact of a competitive plate product
introduced by a strategic partner or other competitor in the marketplace; the
placement of orders for direct imaging kits; our expectations regarding the
effects and benefits of the Company's streamlining of operations and reductions
in force; the market success of, and benefits achieved by the use of new
products; and the expected effect of adopting recently issued accounting
standards, among others. Such forward-looking statements involve a number of
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements 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, but are not limited to, our dependency on our strategic
partners (both for manufacturing and distribution); the ability of the Company
to achieve the intended benefits of the acquisitions of the A.B.Dick and
Precision; negative reactions to the A.B.Dick acquisition from stockholders,
customers and partners; the ability to successfully integrate the two companies;
the ability of Presstek to maintain its financing, including complying with
certain financial covenants; uncertainty surrounding patent protection;
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 subsidiaries or
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 our products and resulting revenues;
the introduction and market acceptance of competitive products; risk and impact
of litigation; and other risks detailed in the Company's reports on file with
the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the fiscal year ended January 3, 2004 filed on March 18, 2004, 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 set forth below. Presstek
undertakes no obligation to update any forward-looking statements contained in
this Quarterly Report on Form 10-Q.
14
OVERVIEW
Presstek Inc. ("Presstek" or the "Company") is a developer, manufacturer, 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 direct-to-press and computer-to-plate ("CTP") applications. Presstek's DI
technology enables "direct to press" or on-press imaging, whereby the printing
plates are imaged on the press directly from digital files, bypassing numerous
prepress procedures and chemical processes in preparing jobs for presswork. Our
imaging technology also enables computer-to-plate or off-press imaging whereby
operators of conventional printing presses image plates directly from digital
files to a CTP device. The printer then uses these imaged plates on a
traditional printing press, but without the chemical processes required for
conventional plates.
Our patented DI thermal laser diode product family enables customers to produce
high quality, full-color lithographic printed materials more quickly and cost
effectively than with conventional methods. Presstek's patented DI, CTP and
plate products eliminate photographic darkrooms, film, and toxic chemical
processing, which results in reduced printing cycle time and lowers the
effective cost of production for commercial printers. Presstek solutions make it
easier for printers to meet increasing customer demand for shorter print runs,
faster turnaround times and improved cost competitiveness, with an
environmentally friendly process that avoids the chemicals associated with plate
development.
Our DI technologies are marketed to leading press manufacturers to be
incorporated into their direct imaging presses, and are used in our Dimension(R)
series of CTP systems. Our patented ProFire(R) laser imaging system, and our
recently introduced ProFire Excel imaging system, represent the next generation
technology which can be adapted to many DI presses and CTP devices. Presstek's
Dimension CTP systems incorporate the ProFire(R) system and use our
chemistry-free printing plates, Applause(R) and Anthem(R).
Lasertel, Inc. ("Lasertel"), a subsidiary of Presstek, is primarily engaged in
the manufacture and development of high-powered laser diodes. Lasertel's
products include semiconductor lasers and active components for the graphics and
defense industries. Lasertel offers high-powered laser diodes in both standard
and customized configurations, including chip on sub-mount, un-mounted bars, and
fiber-coupled devices, to support various applications.
On July 30, 2004, we acquired the stock of Precision, an independent plate
manufacturer and its affiliated company SDK Realty Corp., of South Hadley,
Massachusetts, for approximately $13.3 million in cash. Precision manufactures
our Anthem and Freedom digital printing plates, and is also a provider of other
conventional and digital printing plates for both web and sheet-fed printing
applications to other external customers.
We operate in three reportable segments, the Digital Imaging Products segment,
the Lasertel segment, and the Precision segment. The Digital Imaging Products
segment is primarily engaged in the development, manufacture and sale of
patented digital imaging systems and printing plate technologies for
direct-to-press, or on-press, applications and CTP, or off-press, applications.
The Lasertel segment is primarily engaged in the development and manufacture of
high-powered laser diodes for use by Presstek and for sale to external
customers. The Precision segment is primarily engaged in the manufacture and
sale of conventional and digital printing plates for both web and sheet-fed
printing applications.
We generate revenue through four main sources: the sale of our equipment,
including DI presses, CTP devices, and imaging kits incorporated by leading
press manufacturers into direct imaging presses for the graphic arts industry;
the sale of high-powered laser diodes for the industrial and defense industries;
the sale of our proprietary consumables; and license agreements with
manufacturers that incorporate our technology into their products. Our business
strategy is centered on maximizing the sale of consumable products, and
therefore our business efforts focus on the sale of "consumable burning engines"
such as our DI presses and CTP devices. We rely on partnerships with press
manufacturers such as Ryobi
15
Limited ("Ryobi"), Heidelberg and Koeing & Bauer, AG ("KBA") to manufacture
presses that use our proprietary consumables. We also rely on distribution
partners, such as Kodak Polychrome Graphics ("KPG") to sell and distribute press
and CTP systems and the related proprietary consumable products.
Historically we have been reliant on Heidelberg for a material share of our
revenue. In fiscal 2002, we initiated a process to evaluate our resources and
strategically re-focus the business. During this re-alignment, we concluded that
we needed to reposition and rescale our resources, and implemented cost savings
programs in fiscal 2002 and 2003 to return to profitability. We expanded our
strategic relationships with other press manufacturers and distributors such as
Ryobi, KBA, and KPG to develop and distribute presses that incorporate our
imaging technology and use our proprietary consumables, so as to lessen our
reliance on any one partner. We are working with other CTP manufacturers to
qualify our consumables on their systems. We believe this shift in strategy
fundamentally enhances Presstek's ability to expand and control its business. In
the first nine months of 2004, we've continued the growth of our new technology
business, which consists of all business other than the Quickmaster DI platform
products, and are focused on expanding our digital product and service
offerings.
We have recently pursued strategic acquisitions that are designed, in part, to
improve the manufacturing and distribution capabilities of the Company, and to
enhance the Company's over-all position within the graphic arts industry.
Generally, our strategy is to identify candidates for acquisition that will meet
these goals as well as be accretive within the first twelve months following the
acquisition, and for which we have the capacity to effectively manage.
Recently, we announced two such acquisitions: Precision, of South Hadley,
Massachusetts and A.B. Dick, of Niles, Illinois.
The acquisition of Precision was accounted for as a purchase, and accordingly
the operating results of Precision are included in our consolidated statements
of operations after the acquisition date of July 30, 2004. The assets and
liabilities acquired are included in the consolidated balance sheet as of
October 2, 2004.
On July 13, 2004, we entered into an asset purchase agreement with A.B.Dick,
which was subject to Bankruptcy Court approval. Under the agreement we agreed to
acquire the business and assets of A.B.Dick through a U.S. Bankruptcy Code
Section 363 asset sale for approximately $40 million. A.B.Dick manufactures and
markets equipment and supplies for the graphic arts and printing industries, and
provides continuing service and support. A.B.Dick filed for Chapter 11
bankruptcy protection on July 13, 2004. On November 3, 2004 the Bankruptcy Court
approved the company's bid to acquire A.B.Dick, and on November 5, 2004 the
Company completed the acquisition with funding provided by our new credit
facilities. See note 6. In connection with the acquisition, we have incurred
approximately $1.2 million in costs for legal and advisory services. These costs
are currently included in other assets, and will be included in the purchase
price of the acquisition.
RESULTS OF OPERATIONS
REVENUE
Revenue for the third quarter and first nine months of fiscal 2004 of $29.8
million and $75.8 million, respectively, consisted of product sales, customer
support revenue, royalties and license fees. Revenue for the third quarter and
first nine months of fiscal 2004 increased $10.0 million or 51% and $11.0
million or 17%, respectively, as compared to $19.8 million and $64.7 million for
the third quarter and first nine months of fiscal 2003. Revenue for the third
quarter and first nine months of fiscal 2004 included $3.1 million from
Precision in consumable sales since the acquisition date of July 30, 2004.
Product sales for the Digital Imaging Products segment, which includes the sale
of equipment and spare parts, consumables and customer support services, were
$25.7 million for the third quarter of fiscal 2004, an increase of $6.9 million
or 37% as compared to $18.9 million for the comparable period in fiscal 2003.
16
This increase was due primarily to volume increases in equipment sales of $5.1
million and volume increases in consumable sales of $1.8 million.
Equipment sales were $11.3 million for the third quarter of fiscal 2004, an
increase of $5.1 million, or 82% as compared to $6.2 million for the third
quarter of fiscal 2003. This increase was primarily due to volume increases of
approximately $3.6 million in DI press sales and volume increases of $1.9
million in sales of our CTP Dimensions and spare parts, partially offset by
price decreases of approximately $400,000.
Consumable sales were $14.0 million for the third quarter of fiscal 2004, an
increase of $1.8 million, or 15%, as compared to $12.2 million for the third
quarter of fiscal 2003, primarily as a result of an increase in Anthem and
Applause sales of approximately $1.0 million and DI consumables of $833,000,
related to the increase in the installed base of new technology equipment using
our proprietary consumables.
Product sales for the Digital Imaging Products segment were $70.3 million for
the first nine months of fiscal 2004, an increase of $8.7 million or 14% as
compared to $61.6 million for the comparable period in fiscal 2003. This was due
primarily to volume increases in equipment sales of approximately $7.2 million
and an increase of $1.8 million in consumable sales, offset by a decrease of
$252,000 in customer support services.
Equipment sales were $28.0 million for the first nine months of fiscal 2004, an
increase of $7.2 million, or 35% as compared to $20.8 million for the comparable
period in fiscal 2003. This increase relates primarily to volume increases of
approximately $4.0 million in sales of DI press products and volume increases of
$6.1 million offset by price decreases of $900,000 in sales of CTP Dimensions
and spare parts, offset in part by volume decreases of approximately $1.2
million in sales of direct imaging systems for use in the Quickmaster DI, and
volume decreases of approximately $400,000 in sales of direct imaging systems
for use in the Ryobi 3404 DI.
Consumable sales were $41.1 million for the first nine months of fiscal 2004, an
increase of $1.8 million or 4%, as compared to $39.4 million for the comparable
period in fiscal 2003 primarily as a result of an increase in Anthem and
Applause sales of approximately $2.8 million and new technology DI consumables
of $3.4 million, related to the increase in the installed base of new technology
equipment using our proprietary consumables. Offsetting the increase in new
technology consumable sales was a volume decrease of $4.4 million in sales of
consumables used on the Quickmaster DI press platform.
Consumable and equipment sales under our agreements with Heidelberg and its
distributors of $2.7 million and $9.0 million for the third quarter and first
nine months of fiscal 2004, respectively, decreased $723,000 or 21% and $5.9
million or 39%, respectively, as compared to $3.5 million and $14.9 million in
the comparable periods in fiscal 2003.
Royalties and fees from licensees for the third quarter of fiscal 2004 were
$111,000, a decrease of $381,000 or 77%, as compared to $492,000 for the
comparable period in fiscal 2003. This decrease relates primarily to a reduction
in fees generated from our distribution agreement with Xerox. Royalties and fees
from licensees for the first nine months of fiscal 2004 were $424,000, a
decrease of $1.7 million or 80%, as compared to $2.1 million for the comparable
period in fiscal 2003. This decrease relates primarily to a reduction in fees
generated from our distribution agreement with Xerox, as well as a decrease in
royalties as a result of decreased shipments to Heidelberg of direct imaging
kits used in the Quickmaster DI. Heidelberg has indicated that as a result of
the global economic slowdown, it has an inventory of direct imaging kits on hand
to support its production requirements. We currently have no orders for direct
imaging kits from Heidelberg and cannot anticipate when orders will resume.
Revenue from Heidelberg represented 9% and 12% of total revenue for the third
quarter and first nine months of fiscal 2004 respectively, as compared to 18%
and 23% of total revenue for the comparable periods in fiscal 2003,
respectively. As a result of our expanded strategic partnerships and
distribution channels, our sales to Heidelberg comprise a less significant share
of total sales for the third quarter and first nine months of fiscal 2004.
17
In July 2003, we entered into a global OEM consumable supply agreement with
Heidelberg which included a separate agreement with Heidelberg USA that provided
us with certain preferred supplier rights, which vary based on territory, time
period and sales volume. Under the terms of the OEM agreements, we manufacture
and supply Heidelberg branded consumable plate products for the Heidelberg
Quickmaster DI press. Shipments to Heidelberg of the branded consumable product
began in August 2003. In June 2004, Heidelberg USA notified us of their
intention to terminate the OEM consumable supply agreement, effective December
31, 2004. The action taken by Heidelberg USA will affect the minimum purchase
requirements for the branded product covered by these agreements, although
branded product may still be available to Heidelberg USA. Heidelberg USA also
has an alternative Presstek branded product for Heidelberg Quickmaster DI
customers available through other distribution channels. This action by
Heidelberg USA does not affect our agreement with Heidelberg.
Heidelberg is marketing a competitive plate product as an alternative to
Presstek's PEARLdry for the Quickmaster DI. We are also aware of a competitive
plate introduced as an alternative to our PEARLdry spooled product for all DI
presses, expected to be commercially available in the third quarter of 2004. The
introduction of these competitive plates could reduce the revenue generated by
Presstek under its agreements with Heidelberg, including the OEM consumables
supply agreements entered into in July 2003. It could also lead to downward
pricing pressure on our full line of spooled consumable products, which could
have a material adverse effect on our business, results of operations and
financial condition.
Product sales to external customers for the Lasertel segment, including the sale
of products for defense industry applications, were $775,000 and $1.9 million
for the third quarter and first nine months of fiscal 2004, respectively, an
increase of $365,000 and $875,000, as compared to $410,000 and $1.0 million for
the comparable periods in fiscal 2003, respectively.
Product sales to external customers for the Precision segment were $3.1 million
since the date of acquisition on July 30, 2004.
COST OF PRODUCTS SOLD
Cost of products sold consists of the cost of material, labor and overhead,
shipping and handling costs and warranty expenses.
Cost of products sold for the Digital Imaging Products segment was $16.3 million
for the third quarter of fiscal 2004, an increase of $4.8 million, as compared
to $11.5 million for the comparable period in fiscal 2003. Cost of products sold
was $42.1 million for the first nine months of fiscal 2004, an increase of $6.2
million, as compared to $35.9 million for the comparable period in fiscal 2003.
These increases relate primarily to the increase in product costs driven by
increased product sales.
Gross margin as a percentage of total revenue for the Digital Imaging Products
segment was 37% and 40%, respectively, for the third quarter and first nine
months of fiscal 2004, as compared to 41% and 44%, respectively, for the third
quarter and first nine months of fiscal 2003. The decrease in gross margin for
the third quarter and first nine months of fiscal 2004 was primarily the result
of product mix, as press margins are generally lower than historical average
margins, price reductions in our CTP Dimension equipment, and to a lesser
extent, the reduction in sales of direct imaging systems to Heidelberg for use
in the Quickmaster DI.
Cost of products sold for the Lasertel segment was $882,000 for the third
quarter of fiscal 2004, an increase of approximately $259,000, as compared to
$623,000 for the comparable period in fiscal 2003. Cost of products sold for the
Lasertel segment was $3.1 million for the first nine months of fiscal 2004, an
increase of approximately $1.1 million, as compared to $2.0 million for the
comparable period in fiscal 2003. This increase relates primarily to lower
absorption of labor and overhead costs as a result of inventory reductions in
the first quarter of fiscal 2004. The cost of products sold for the Lasertel
segment is comprised of the cost of material, direct labor and manufacturing
overhead associated with the production
18
of laser diodes for both Presstek and external customers. As the Lasertel
factory is operating at approximately 30% capacity, the unabsorbed manufacturing
overhead associated with the low production level of these diodes is higher.
Lasertel margins would be expected to improve if more production overhead is
absorbed by higher sales volume, either to Presstek or external customers.
Cost of products sold for the Precision segment was $2.6 million since the date
of acquisition on July 30, 2004. Gross margin as a percentage of total revenue
for the Precision segment was 18%, for the same period in fiscal 2004.
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 our equipment, consumables and high-powered laser diode
product development efforts.
Research and product development expenses for the Digital Imaging Products
segment were $1.0 million or 4% of revenue, for the third quarter of fiscal
2004, a decrease of $483,000, as compared to $1.5 million or 8% of revenue for
the comparable period in fiscal 2003. This decrease relates primarily to reduced
spending relative to parts and supplies for new product development for the CTP
Dimension platform.
Research and product development expenses for the Digital Imaging Products
segment were $4.1 million or 6% of revenue for the first nine months of fiscal
2004, a decrease of $741,000, as compared to $4.8 million or 8% of revenue for
the comparable period in fiscal 2003. This decrease relates primarily to reduced
expenses for salaries and benefits totaling approximately $636,000 as a result
of headcount reductions in the third quarter of 2003, as well as reduced
development costs of approximately $571,000 related to our Applause consumable
product. These decreases were offset in part by increased spending for parts and
supplies of $349,000 for development efforts related to the SureFire imaging
technology introduced in May 2004 at the Drupa trade show, as well as increased
other related expenses totaling approximately $117,000.
Research and product development expenses for the Lasertel segment were $142,000
for the third quarter of fiscal 2004, a decrease of $9,000, as compared to
$151,000 for the comparable period in fiscal 2003. This decrease consists
primarily of a decrease in spending for parts and supplies and professional
services related to Lasertel's research and product development activities.
Research and product development expenses for the Lasertel segment were $416,000
for the first nine months of fiscal 2004, a decrease of $254,000, as compared to
$670,000 for the comparable period in fiscal 2003. This decrease consists
primarily of a decrease in spending for parts and supplies and professional
services approximating $177,000 related to Lasertel's research and product
development activities, as well as a decrease of $72,000 in spending for
salaries and benefits related to headcount reductions in the third quarter of
fiscal 2003.
Research and product development expenses for the Precision segment were
approximately $90,000 since the acquisition date on July 30, 2004.
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 our sales, marketing and customer support
activities.
Sales, marketing and customer support expenses for the Digital Imaging Products
segment were $3.2 million or 12% of revenue, for the third quarter of fiscal
2004, an increase of $400,000, as compared to $2.8 million or 14% of revenue for
the comparable period in fiscal 2003. This increase relates primarily to
increased salaries and benefits of approximately $178,000 as a result of an
increase in headcount, as well
19
as increased spending for travel and related of $105,000 and professional
services of $111,000 in support of promotional activities directed at product
distribution.
Sales, marketing and customer support expenses for the Digital Imaging Products
segment were $9.8 million or 14% of revenue, for the first nine months of fiscal
2004, an increase of $1.3 million, as compared to $8.5 million or 13% of revenue
for the comparable period in fiscal 2003. This increase relates primarily to
increased spending for salaries and benefits of approximately $448,000 as a
result of an increase in headcount, an increase approximating $344,000 for trade
show related travel and expenses, as well as an increase of approximately
$487,000 in support of promotional activities directed at product distribution.
Sales and marketing expenses for the Lasertel segment were $133,000 and $366,000
for the third quarter and first nine months of fiscal 2004, respectively, an
increase of $59,000 and $119,000, as compared to $74,000 and $247,000 for the
comparable periods in fiscal 2003, respectively. These increases relate
primarily to increased travel and promotional expenses as a result of trade show
attendance.
Sales and marketing expenses for the Precision segment were $107,000 since the
acquisition date on July 30, 2004.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of payroll and related
expenses for personnel, and contracted professional services necessary to
conduct our finance, information systems, human resources and administrative
activities.
General and administrative expenses for the Digital Imaging Products segment
were $2.2 million or 8% of revenue, for the third quarter of fiscal 2004, an
increase of $349,000, as compared to $1.8 million or 9% of revenue for the
comparable period in fiscal 2003. This increase relates primarily to an increase
of $130,000 for bad debts in line with higher revenues in the third quarter and
an increase in spending related to salaries and benefits totaling $62,000 as a
result of headcount increases, as well as increased spending of $54,000 and
$43,000 related to other taxes and professional services, respectively.
General and administrative expenses for the Digital Imaging Products segment
were $6.3 million or 9% of revenue for the first nine months of fiscal 2004, a
decrease of $8,000, as compared to $6.3 million or 10% of revenue for the
comparable period in fiscal 2003. This decrease relates primarily to a reduction
in bad debt provisions in line with estimated bad debt exposure of approximately
$314,000, as compared to the same period in fiscal 2003, as well as decreased
expenses related to salaries and benefits of $128,000 as a result of headcount
reductions. These decreases were offset in part by increased spending of
approximately, $111,000 and $187,000 related to other taxes and professional
services, respectively, as well as an increase of $152,000 in bank fees and
other costs.
In connection with the acquisition of A.B.Dick, the Company has incurred
approximately $1.2 million in costs for legal and advisory services. These costs
are currently included in other assets, and will be included in the purchase
price of A.B.Dick on November 5, 2004.
General and administrative expenses for the Lasertel segment were $216,000 and
$636,000, for the third quarter and first nine months of fiscal 2004,
respectively, a decrease of $55,000 and $151,000, as compared to $271,000 and
$787,000, for the comparable periods in fiscal 2003, respectively. These
decreases relate primarily to a decrease in salaries and benefits as a result of
lower head count.
20
General and administrative expenses for the Precision segment were $140,000
since the acquisition date on July 30, 2004.
DISCONTINUED PROGRAMS AND SPECIAL CHARGES
In fiscal 2002, as a result of various repositioning programs, the Company
recorded a charge of $3.7 million to cost of products sold and $6.0 million in
special charges. These charges included inventory, equipment and other asset
write-downs, severance and fringe benefit costs, executive and other contractual
obligations.
In fiscal 2003 the Company expanded its repositioning actions to reduce costs,
which had been initiated in the third quarter of fiscal 2002. As a result the
Company recorded a charge of $550,000, primarily related to severance and fringe
benefit costs associated with the reduction of approximately forty-three
employees.
In the first quarter of fiscal 2004, the Company reversed $296,000 in excess
special charges related to severance and fringe benefits accrued in fiscal 2003
and 2002.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income and expense,
and other miscellaneous income (expense).
Interest income was $80,000 for the third quarter of fiscal 2004, a decrease of
$2,000, as compared to $82,000 for the comparable period in fiscal 2003.
Interest expense was $107,000 for the third quarter of fiscal 2004, a decrease
of $72,000, as compared to $179,000 for the comparable period in fiscal 2003, as
a result of lower average debt balances and lower interest rates on borrowings.
Other expense, net was a loss of $47,000 for the third quarter of fiscal 2004,
an increased loss of $123,000, as compared to a gain of $76,000 for the
comparable period in fiscal 2003. This loss is mainly comprised of losses
incurred for foreign currency conversion on our accounts receivable balance.
Interest income was $271,000 for the first nine months of fiscal 2004, an
increase of $38,000, as compared to $233,000 for the comparable period in fiscal
2003. Interest expense was $320,000 for the first nine months of fiscal 2004, a
decrease of $282,000, as compared to $602,000 for the comparable period in
fiscal 2003, as a result of lower average debt balances and lower interest rates
on borrowings. Other expense, net was a loss of $183,000 for the first nine
months of fiscal 2004, an increased loss of $280,000, as compared to a gain of
$97,000 for the comparable period in fiscal 2003. This loss is mainly comprised
of losses incurred for foreign currency conversion on our accounts receivable
balance.
PROVISION FOR INCOME TAXES
We did not record a provision for federal or state income taxes for the third
quarter and first nine months of fiscal 2004, as a result of the utilization of
federal net operating loss carryforwards, and the utilization of state tax
credits. We did not record a provision for federal or state income taxes for the
third quarter and first nine months of fiscal 2003 as a result of the
utilization of federal and state net operating loss carryforwards.
Although we recorded profits in the third quarter and first nine months of
fiscal 2004 and 2003, we are applying a full valuation allowance on our net
deferred tax assets, as we have incurred significant losses in prior years. We
will continue to assess our expected future results and review our deferred tax
position in each interim and fiscal period.
21
INCOME FROM CONTINUING OPERATIONS
As a result of the foregoing, we had income from continuing operations of $2.7
million and $6.1 million for the third quarter and first nine months of fiscal
2004, as compared to income from continuing operations of $1.0 million and $4.6
million for the third quarter and first nine months of fiscal 2003.
INCOME FROM DISCONTINUED OPERATIONS
As a result of the dismissal of the lawsuit that PPG brought against our
subsidiary Delta V, whose operations were discontinued in fiscal 1999, we
reversed all previously recorded liabilities associated with this discontinued
operation in the third quarter of fiscal 2003, resulting in net income of $1.4
million from discontinued operations for the third quarter and first nine months
of fiscal 2003.
NET INCOME
As a result of the foregoing, we had net income of $2.7 million and $6.1 million
for the third quarter and first nine months of fiscal 2004, as compared to net
income of $2.4 million and $6.1 million for the third quarter and first nine
months of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operating and capital investment requirements primarily through
cash flows from operations and proceeds from borrowings. At October 2, 2004, we
had cash and cash equivalents of $16.8 million and working capital of $37.6
million as compared to cash and cash equivalents of $28.2 million and working
capital of $42.3 million at January 3, 2004. The decrease in cash of $11.4
million for the first nine months fiscal 2004 was primarily due to net cash used
in investing activities of $17.7 million, partially offset by net cash provided
by operating activities of $3.9 million, and financing activities of $2.4
million.
Net cash provided by operating activities was $3.9 million for the first nine
months of fiscal 2004, as compared $12.2 million for the first nine months of
fiscal 2003. The primary sources of cash from operating activities were net
income of $6.1 million, non-cash charges of depreciation, amortization and other
charges of $8.3 million, offset by cash used for increases in working capital of
$8.6 million and non-current assets of $1.9 million. Net cash provided by
operating activities decreased $8.3 million for the first nine months of fiscal
2004 as compared to the first nine months of 2003, primarily as a result of an
increase in working capital of $6.7 million. Cash flows from operations were
negatively impacted by an increase in accounts receivable of $4.7 million, an
increase in inventories of $5.3 million, and a decrease in accrued expenses of
$1.3 million for the nine months ended October 2, 2004, as compared to an
increase of $681,000, $181,000, and $1.2 million, respectively, for the
comparable period in 2003. The increase in trade receivables of $4.7 million
related to the revenue increase and the timing of sales in the third quarter of
fiscal 2004. The increase in inventories was primarily attributable to the
impact of transitioning to new products, as well as the decision to increase
aluminum inventories in anticipation of impending price increases expected in
2005. Accrued expenses decreased $1.3 million for the first nine months of
fiscal 2004 as compared to $1.2 million for the comparable period in 2003
primarily as a result of payments related to restructuring accruals. Partially
offsetting this negative impact was an increase in accounts payable of $3.1
million for the first nine months of fiscal 2004, primarily due to the timing of
purchases and payments to suppliers.
Net cash used in investing activities was $17.7 million for the first nine
months of fiscal 2004 as compared to $1.0 million for the first nine months of
fiscal 2003, and consisted primarily of the acquisition cost of Precision, net
of cash acquired, of $13.3 million, $3.3 million used as a result of our
agreement with Key Corporate Capital, Inc, A.B.Dick's current lender, to provide
up to $7.0 million in debtor-in-possession financing to fund A.B.Dick's
post-petition operating expenses and to meet supplier and employee commitments
through the completion of A.B.Dick's sale proceedings, as well as additions to
property, plant and equipment used in the business of $1.1 million.
22
Net cash provided by financing activities was $2.4 million for the first nine
months of fiscal 2004, as compared to net cash used in financing activities of
$2.1 million in the first nine months of fiscal 2003, and consisted primarily of
cash received from the exercise of stock options in the amount of $4.0 million,
offset by payments on term loans of $1.6 million. Net cash provided by financing
activities increased $4.5 million for the first nine months of fiscal 2004 as
compared to the first nine months of 2003, primarily as a result of the increase
in cash received from the exercise of stock options of $3.7 million, and a
reduction in debt repayments of $735,000.
In October 2003, we replaced our existing credit facilities, entering into a
$50.0 million senior secured credit facility jointly with two lenders. This
credit facility includes a $35.0 million revolving line of credit (the
"Revolver") and a $15.0 million term loan (the "Term Loan"). These credit
facilities are secured by all our assets, and bear interest, at our election at
either, the Prime Rate or the London Interbank Offered Rate ("LIBOR") rate, plus
an applicable margin based on certain financial ratios, ranging from a minimum
of 0.25% to a maximum of 2.5%.
Under the terms of the Revolver and Term Loan, we are required to meet various
financial covenants on a quarterly and annual basis, including maximum funded
debt to EBITDA and minimum fixed charge coverage covenants. As of October 2,
2004, we were in compliance with all financial covenants.
On November 5, 2004, in connection with the acquisition of A.B.Dick, we replaced
our current credit facilities with $80.0 million in Senior Secured Credit
Facilities (the "Facilities") from three lenders. The terms of the Facilities
include a $35.0 million five year secured term loan (the "New Term Loan") and a
$45.0 million five year secured revolving line of credit (the "New Revolver"),
which have replaced the Term Loan and Revolver entered into in October 2003.
Principal payments on the New Term Loan will be made in consecutive quarterly
installments beginning on March 31, 2005 in the amount of $250,000, and
continuing quarterly in the amount of $1,750,000, with a final installment of
all remaining principal and unpaid interest on November 4, 2009. The Facilities
were used to partially finance the acquisition of A.B.Dick, and will be
available for working capital requirements, capital expenditures, acquisitions,
and general corporate purposes. Borrowings under the facilities bear interest at
either (i) the LIBOR rate plus applicable margins or (ii) the Prime Rate, as
defined in the agreement, plus applicable margins. The applicable margins range
from 1.25% to 4.0% for LIBOR, or 0% to 1.75% for Prime, based on certain
financial performance.
23
We have future contractual payment obligations through 2010 that primarily
relate to debt, financing and royalty obligations, executive contractual
obligations and operating leases. The following tables represent our future
commitments at October 2, 2004:
LESS THAN ONE TO THREE TO MORE THAN
(IN THOUSANDS) TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- --------------------------------------------------------------------------------
Credit facilities $ 12,857 $ 3,750 $ 9,107 $ -- $ --
Royalty obligation 10,587 1,200 9,387 -- --
Financing commitment 3,675 3,675 -- -- --
Executive contractual
obligations 3,077 542 2,535 -- --
Operating leases 169 31 138 -- --
- --------------------------------------------------------------------------------
Total contractual
obligations $ 30,365 $ 9,198 $ 21,167 $ -- $ --
================================================================================
Our anticipated capital expenditures for fiscal 2004 are approximately $3.0
million, and primarily relate to the purchase of capital equipment to be used in
the production of our DI and CTP equipment and consumable products.
Heidelberg is marketing a competitive plate product as an alternative to
Presstek's PEARLdry for the Quickmaster DI. We are also aware of a competitive
plate introduced as an alternative to our PEARLdry spooled product for all DI
presses, expected to be commercially available in the third quarter of 2004. The
introduction of these competitive plates could reduce the revenue generated by
Presstek under its agreements with Heidelberg including the OEM consumables
supply agreements entered into in July 2003. It could also lead to downward
pricing pressure on our full line of spooled consumable products, which could
have a material adverse effect on our business, results of operations and
financial condition.
We believe that existing funds, cash flows from operations, and cash available
under our New Revolver should be sufficient to satisfy working capital
requirements and capital expenditures through the next twelve months. There can
be no assurance, however, that we will not require additional financing, or that
such additional financing, if needed, will be available on acceptable terms.
EFFECT OF INFLATION
Inflation has not had, and is not expected to have, a material impact upon our
operations.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates primarily as a
result of our borrowing activities, and to a lesser extent, our investing
activities. Our long-term borrowings are in variable rate instruments, with
interest rates tied to either the prime rate or the LIBOR. A 100 basis point
change in these rates would have an impact of approximately $150,000 on our
annual interest expense, assuming consistent levels of floating rate debt with
those held as of the end of fiscal 2003. In the fourth quarter of fiscal 2003,
we entered into interest rate floors and caps to manage net exposure to interest
rate fluctuations related to our borrowings. As a result of our new credit
facilities on November 5, 2004, we expect to enter into contracts to manage our
exposure to market risk from changes in interest rates on our borrowings.
We have some exposure to foreign currency exchange rate risk as a limited number
of our sales and purchase transactions are denominated in the European euro and
the Japanese yen. In addition, some of our customers and strategic partners are
not located in the United States, and are themselves subject to fluctuations in
foreign exchange rates. If the home country currency of these customers and
strategic partners were to decrease in value relative to the United States
dollar, their ability to purchase and/or market our products could be adversely
affected and our products may become less competitive to them. This may have an
adverse impact on our business. Likewise, some of our suppliers are not located
in the United States and thus, such suppliers are subject to foreign exchange
rate risks in transactions with us. 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 our
business.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
As of October 2, 2004, we have, under the supervision and with the participation
of the Presstek's management, including its Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of Presstek's disclosure
controls and procedures pursuant to Rule 13a-15(b) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, Presstek's Chief Executive Officer and Chief Financial Officer
concluded that, as of the October 2, 2004 Presstek's disclosure controls and
procedures are effective in ensuring that material information relating to
Presstek (including its consolidated subsidiaries) required to be disclosed by
Presstek 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 Presstek's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no changes in Presstek's internal controls or in other factors that
could significantly affect Presstek's controls in the quarter ended October 2,
2004 that has materially affected, or is reasonably likely to affect our
internal control over financial reporting.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I - Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 2004 filed with the Commission on March 18, 2004 for a
description of certain legal proceedings involving the Company. Such information
is hereby incorporated by reference in response to this item, except that the
purported securities class action lawsuit filed on June 2, 2003 in the United
States District Court for the District of New Hampshire against the Company and
two of its former officers was dismissed by the court on October 4, 2004. The
plaintiffs in the case have appealed the court's dismissal on November 4, 2004.
Item 6. Exhibits
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-4(a) of the Exchange Act (furnished herewith).
31.2 Certification of Chief Financial Officer and Principal
Accounting Officer pursuant to Rule 13a-4(a) of the Exchange Act
(furnished herewith).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
26
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, 2004 /s/ Edward J. Marino
--------------------------------
By: Edward J. Marino
President and Chief Executive Officer
(Principal Executive and Duly Authorized Officer)
Date: November 12, 2004 /s/ Moosa E. Moosa
--------------------------------
By: Moosa E. Moosa
Vice President - Finance,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
27
EXHIBIT INDEX
No. Description
--- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-4(a) of
the Exchange Act (furnished herewith).
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer pursuant to Rule 13a- 4(a) of the Exchange Act (furnished
herewith).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).