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 July 4, 1998
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 number 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.)
8-9 Commercial Street, Hudson, New Hampshire 03051-3907
(Address of principal executive offices) (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 the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date: As of August 10, 1998 there
were 32,141,725 shares outstanding of the Registrant's Common Stock, $.01 par
value per share.
<PAGE>
PRESSTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of
July 4, 1998 (unaudited)
and January 3, 1998 3
Statements of Income for the
three and six month periods ended
July 4, 1998 and June 28, 1997
(unaudited) 4
Statements of Cash Flows for the six
month periods ended July 4, 1998
and June 28, 1997 (unaudited) 5
Notes to Financial Statements
(unaudited) 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II OTHER INFORMATION 23
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
Signatures 25
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PRESSTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
July 4, January 3,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,137,638 $ 5,201,071
Marketable securities -- 1,008,171
Accounts receivable, net of allowance
for doubtful accounts of $740,000 in
fiscal 1998 and $373,000 in fiscal 1997 24,380,018 26,400,561
Inventories 10,319,364 13,308,504
Costs and estimated earnings in excess
of billings on uncompleted contracts 892,051 1,095,579
Other current assets 1,002,817 430,909
------------- -------------
Total current assets 60,731,888 47,444,795
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 2,366,216 2,571,296
Buildings 16,073,581 15,424,056
Machinery and equipment 32,158,056 29,758,165
Furniture and fixtures 1,146,327 995,639
Leasehold improvements 2,572,118 2,572,118
Other 34,498 34,498
------------- -------------
Total 54,350,796 51,355,772
Less accumulated depreciation
and amortization (8,302,428) (6,392,430)
------------- -------------
Property, plant and equipment, net 46,048,368 44,963,342
------------- -------------
OTHER ASSETS:
Goodwill, net 5,657,589 5,819,999
Patent application costs and license rights, net 3,607,077 1,931,651
Software development costs, net 145,988 303,923
Other 212,006 9,071
------------- -------------
Total other assets 9,622,660 8,064,644
------------- -------------
TOTAL $ 116,402,916 $ 100,472,781
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -- $ 4,800,000
Current portion of mortgage term loan 491,046 --
Accounts payable 5,827,041 7,530,187
Accrued expenses 1,821,284 1,280,070
Accrued salaries and employee benefits 1,234,795 872,851
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,594,628 --
------------- -------------
Total current liabilities 16,968,794 14,483,108
------------- -------------
MORTGAGE TERM LOAN $ 6,197,050 $ --
------------- -------------
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
31,999,284 shares at July 4, 1998; 319,993 318,666
31,866,554 shares at January 3, 1998
Additional paid-in capital 67,424,242 63,156,909
Unrealized loss on marketable securities, net -- (1,222)
Retained earnings 25,492,837 22,515,320
------------- -------------
Stockholders' equity 93,237,072 85,989,673
------------- -------------
TOTAL $ 116,402,916 $ 100,472,781
============= =============
</TABLE>
See notes to financial statements
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<PAGE>
PRESSTEK, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Product Sales $ 19,733,487 $ 15,976,226 $ 39,391,147 $ 32,323,182
Royalties and fees from licensees 3,295,886 4,919,979 7,978,737 8,580,675
------------ ------------ ------------ ------------
Total revenues 23,029,373 20,896,205 47,369,884 40,903,857
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 13,658,598 9,941,655 27,831,688 20,548,769
Engineering and product development 4,178,776 2,543,676 7,420,708 4,811,011
Sales and marketing 1,631,336 1,090,758 2,793,758 1,852,596
General and administrative 2,693,716 1,717,671 4,924,127 2,965,094
------------ ------------ ------------ ------------
Total costs and expenses 22,162,426 15,293,760 42,970,281 30,177,470
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 866,947 5,602,445 4,399,603 10,726,387
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Dividend and interest, net 104,340 110,827 174,720 215,503
Other, net 85,140 (77,940) 393,194 (524,457)
------------ ------------ ------------ ------------
Total other income, net 189,480 32,887 567,914 (308,954)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,056,427 5,635,332 4,967,517 10,417,433
PROVISION FOR INCOME TAXES 420,000 2,425,000 1,990,000 4,305,000
------------ ------------ ------------ ------------
NET INCOME $ 636,427 $ 3,210,332 $ 2,977,517 $ 6,112,433
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ .02 $ .10 $ .09 $ .19
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ .02 $ .10 $ .09 $ .19
============ ============ ============ ============
COMMON SHARES OUTSTANDING 31,994,434 31,920,121 31,890,067 31,820,860
============ ============ ============ ============
COMMON SHARES ASSUMING DILUTION 32,630,946 33,162,960 32,792,458 33,006,658
============ ============ ============ ============
</TABLE>
See notes to financial statements
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<PAGE>
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
July 4, 1998 June 28, 1997
------------ ------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net income $ 2,977,517 $ 6,112,433
Adjustments to reconcile net income to net
cash provided by operating activities:
Tax benefit arising from stock option deductions 1,620,000 3,910,000
Depreciation 1,718,036 880,303
Amortization 492,157 561,606
Provision for warranty and other costs 476,173 565,000
Other, net 425,222 572,734
(Increase) decrease in:
Accounts receivable 2,039,154 1,189,718
Inventory 4,148,581 (3,044,622)
Costs and estimated earnings in excess of
billings on uncompleted contracts 203,528 (494,375)
Other current assets (571,558) 159,408
Increase (decrease) in:
Accounts payable and accrued expenses (2,436,076) 895,602
Accrued salaries and employee benefits 283,905 319,239
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,594,628 (1,355,130)
------------ ------------
Net cash provided by operating activities 18,971,267 10,271,916
------------ ------------
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,974,687) (17,006,032)
Proceeds from sale of land and equipment 441,174 1,200
Increase in other assets (269,366) (206,889)
Sales and maturities of marketable securities 1,000,000 3,493,516
------------ ------------
Net cash used for investing activities (1,802,879) (13,718,205)
------------ ------------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from sale of Common Stock 241,463 1,263,321
Proceeds under mortgage term loan 6,900,000 --
Repayments of mortgage term loan (211,904) --
Net proceeds from revolving line of credit -- 1,000,000
Net payments on revolving line of credit (4,800,000) --
Payment on Heath Custom Press, Inc.'s
revolving line of credit (600,352) --
------------ ------------
Net cash provided by financing activities 1,529,207 2,263,321
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,697,595 (1,182,968)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,201,071 3,530,866
Cash acquired from Heath Custom Press, Inc. 238,972 --
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 24,137,638 $ 2,347,898
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for income taxes $ 250,000 $ 90,406
============ ============
Cash paid during the period for interest $ 115,647 $ 98,115
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITY
Common Stock issued and patents and other net
assets acquired relating to the acquisition
of Heath Custom Press, Inc. $ 2,407,199 $ --
============ ============
</TABLE>
See notes to financial statements
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<PAGE>
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JULY 4, 1998
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Rule 10 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. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments were normal and recurring. 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 January 3, 1998. The January 3, 1998 information has been
derived directly from the annual financial statements. Operating results for the
three and six month periods ended July 4, 1998 are not necessarily indicative of
the results that may be expected for the year ended January 2, 1999.
Presstek, Inc. (the "Company") is engaged in the development, manufacture,
and sale of PEARL(R), its patented, proprietary, digital imaging system and
process-free, thermal ablation printing plate technology. PEARL's thermal laser
diode system is capable of imaging various types of the Company's printing
plates either off-press or on-press to produce high quality, full-color,
lithographic printed materials for the printing and graphic arts industries.
Revenues generated under the Company's agreements with Heidelberger
Druckmaschinen AG ("Heidelberg"), the world's largest printing press
manufacturer, and from Heidelberg distributors represented 57% and 77% of total
revenues for the six months ended July 4, 1998, and June 28, 1997, respectively.
Revenues from Heidelberg include sales of consumable products sold under
distribution agreements.
Delta V Technologies, Inc. ("Delta V"), formerly Catalina Coatings, Inc.,
is engaged in the development, manufacture, and sale of vacuum deposition
coating equipment, and licensing and sub-licensing of patent rights with respect
to a vapor deposition process to coat moving webs of material at high speeds.
During the first six months of 1997, a substantial part of Delta V's efforts
were devoted to developing and manufacturing the equipment the Company requires
to manufacture PEARL thermal plates. Delta V subsequently expanded its
commercial relationships with other companies and currently has a backlog for
its customized high-vacuum deposition systems.
On January 4, 1998, the Company acquired the stock of Heath Custom Press,
Inc. ("Heath"), of Seattle, Washington. Heath is engaged in the design and
manufacture of custom printing presses.
-6-
<PAGE>
Heath was purchased for 94,865 unregistered shares of the Company's Common
Stock. The purchase price of $2,407,000 has been allocated to assets acquired
and liabilities assumed based on the fair market value at the date of
acquisition as follows: current assets, $2,198,000; patents, $1,781,000;
long-term assets, $186,000; other liabilities, $1,758,000. The acquisition was
accounted for as a purchase and, accordingly, the results of Heath's operations
have been included in the Company's financial statements for the second quarter
and first six months of 1998. The results of Heath's operations did not have a
material impact on the Company's results of operations.
Delta V and Heath operate as 90% and 100% owned subsidiaries of the
Company, respectively. Significant intercompany accounts and transactions have
been eliminated.
Certain accounts in the 1997 financial statements have been reclassified
for comparative purposes to conform with the presentation in the July 4, 1998,
financial statements.
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the three and six month periods of
1998 and 1997 ended on July 4, 1998 and June 28, 1997, respectively.
2. INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out method. At July 4, 1998, and January 3, 1998,
inventories consisted of the following:
1998 1997
---- ----
Raw materials $ 5,141,000 $ 7,698,000
Work in process 4,055,000 3,840,000
Finished goods 1,123,000 1,771,000
----------- -----------
Total $10,319,000 $13,309,000
=========== ===========
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<PAGE>
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share," which
requires companies to report basic earnings per share (EPS) and diluted EPS as a
replacement for primary and fully diluted EPS. Basic EPS is computed by dividing
net income by the weighted average number of shares of Common Stock outstanding.
Diluted EPS is computed by dividing net income by the weighted average number of
Common Stock and Common Stock equivalent shares outstanding. On May 30, 1997,
the Company's Board of Directors declared a two-for-one stock split, effected in
the form of a 100% stock dividend during the third quarter of fiscal 1997. The
split resulted in the issuance of 15,549,862 shares of Common Stock. All
references to average number of shares outstanding and prices per share have
been restated retroactively to reflect the split.
Summaries of the earnings per share calculations for the three and six
month periods ended July 4, 1998, and June 28, 1997, follow:
<TABLE>
<CAPTION>
Three Months
(In Thousands, Except Per Share)
1998 1997
-------------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings
Per Share
- --------------
Income available to
common stockholders $ 636 31,994 $.02 $3,210 31,920 $.10
==== ====
Effect of
Dilutive Securities
- -------------------
Effect of assumed
conversion of employee
stock options 637 1,243
------ ------
Diluted Earnings
Per Share
- ----------------
Income available to
common stockholders and
assumed conversions $ 636 32,631 $.02 $3,210 33,163 $.10
====== ====== ==== ====== ====== ====
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Six Months
(In Thousands, Except Per Share)
1998 1997
-------------------------------- --------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings
Per Share
- --------------
Income available to
common stockholders $2,978 31,890 $ .09 $6,112 31,821 $.19
======= ====
Effect of
Dilutive Securities
- -------------------
Effect of assumed
conversion of employee
stock options 902 1,186
--- -----
Diluted Earnings
Per Share
- ----------------
Income available to
common stockholders and
assumed conversions $2,978 32,792 $ .09 $6,112 33,007 $.19
====== ====== ==== ====== ====== ====
</TABLE>
Options to purchase 192,500 shares of Common Stock at exercise prices
ranging from $16.81 to $44.75 per share were outstanding during a portion of the
first six months of 1998, but were not included in the computation of diluted
earnings per share, because the exercise prices of the options were greater than
the average market price of the common shares. These options, which expire
between February 15, 2001, and May 18, 2004, were all outstanding at July 4,
1998.
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<PAGE>
4. INCOME TAXES
The components of the provision for income taxes for the three month
periods ended July 4, 1998, and June 28, 1997, based upon the estimated
effective income tax rate for the full fiscal year, were as follows:
1998 1997
----------------------- -----------------------
Second Six Second Six
Quarter Months Quarter Months
---------- ---------- ---------- ----------
Current tax expense - State $ -- $ 370,000 $ 90,000 $ 395,000
Charge in lieu of income
taxes:
Federal 340,000 1,540,000 1,975,000 3,550,000
State 80,000 80,000 360,000 360,000
---------- ---------- ---------- ----------
Total provision $ 420,000 $1,990,000 $2,425,000 $4,305,000
========== ========== ========== ==========
The charge in lieu of income taxes included in the six months ended July 4,
1998 relates principally to the realization of net operating loss carryforwards
resulting from stock compensation deductions for tax purposes. The charge in
lieu of income taxes included in the second quarter and six months ended June
28, 1997 relates principally to the tax benefit of stock option deductions
earned in that period. These deductions have been credited to stockholders
equity.
5. CREDIT FACILITIES
On February 6, 1998, the Company obtained a ten-year mortgage term loan in
the principal amount of $6,900,000 from Citizens Bank New Hampshire
("Citizens"). Borrowings are secured by land and buildings with a cost of
approximately $17,000,000. The loan bears a fixed rate of interest of 7.12% per
year during the first five years, and a variable rate of interest at the LIBOR
rate plus 2% (7.66% at July 4, 1998) for the remaining five years. Principal and
interest payments during the first five years of the loan will be made in 60
monthly installments of $80,500. During the remaining five years, principal and
interest payments will be made on a monthly basis in the amount of one-sixtieth
of the outstanding principal amount as of the first day of the second five year
period, plus accrued interest through the monthly payment date. All outstanding
principal and accrued and unpaid interest is due and payable on February 6,
2008. As of July 4, 1998, the Company had received all proceeds under the
mortgage term loan.
On July 29, 1997, the Company renewed its agreement with Citizens for a
revolving line of credit loan under which the Company may borrow a maximum of
$10,000,000 for working capital requirements and general corporate purposes.
Borrowings are secured by substantially all of the Company's assets and are
guaranteed by the Company's subsidiary, Delta V, and secured by its assets.
Under the terms of the revolving credit agreement,
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<PAGE>
the Company is required to meet certain financial covenants on a quarterly and
annual basis. Interest on the line of credit is payable at the LIBOR rate plus
1.75% (7.41% at July 4, 1998). The loan agreement terminates on July 31, 1999,
at which date, the entire principal and accrued interest is due and payable. As
of July 4, 1998, the Company had $10,000,000 available under the line of credit.
6. OTHER INFORMATION
Since June 28, 1996, several class action lawsuits have been filed against
the Company and certain other defendants, including, but not limited to, certain
of the Company's officers and directors. These actions have been consolidated in
the United States District Court, District of New Hampshire, and a single
consolidated amended complaint ("The Consolidated Amended Complaint") has been
filed by lead counsel for the plaintiffs. In addition, two actions have been
filed derivatively, on behalf of the Company, one in the Chancery Court of the
State of Delaware and the other in the United States District Court, District of
New Hampshire.
The lawsuits each contain a variety of allegations including, among other
things, that the defendants violated Section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder,
violations of Section 20(a) of the Exchange Act, common law fraud and deceit,
negligent misrepresentation and waste of corporate assets. The allegations
include claims that the Company issued false and misleading financial
statements, and failed to properly disclose (a) adverse information concerning
the Company's patents; (b) the nature and extent of the investigation by the
Securities and Exchange Commission with respect to activities by certain unnamed
persons and entities in connection with the securities of the Company (c) the
backlog of orders from, supply contracts with, and orders received by its
principal customer. The Company's officer and director defendants are alleged to
have sold the Company's Common Stock while in possession of material non-public
information. The plaintiffs generally are seeking to recover unspecified damages
and reimbursement of their costs and expenses incurred in connection with the
action. Moreover, the plaintiff in the derivative action in Delaware is also
seeking a return to the Company of all salaries and the value of other
remuneration paid to the defendants by the Company during the time they were in
breach of their fiduciary duties and an accounting of and/or constructive trust
on the proceeds of defendants trading activities in the Common Stock.
The Company intends to vigorously defend all actions. However, the outcome
of any litigation is subject to uncertainty, and a successful claim against the
Company, in any of the foregoing actions, could have a material adverse effect
on the financial position and results of operations of the Company. At the
present time, the Company cannot reasonably estimate the ultimate liability, if
any, which may result from these lawsuits.
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<PAGE>
Accordingly, no provision for any liability that may result has been recorded in
the accompanying financial statements.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," which requires that all components of
comprehensive income and total comprehensive income be reported on one of the
following: a statement of income and comprehensive income, a statement of
comprehensive income, or a statement of stockholder's equity. Comprehensive
income is comprised of net income and all changes to stockholder's equity,
except those due to investments by owners (changes in paid in capital) and
distributions to owners (dividends). For interim reporting purposes, SFAS 130
requires disclosure of total comprehensive income. There was no material impact
during the six months ended July 4, 1998 and June 28, 1997 as a result of the
adoption of SFAS 130, since there was no significant difference between net
income and comprehensive income in either period.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Financial Reporting for Segments of a Business Enterprise and Related
Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," and establishes standards for the way public
enterprises report information about operating segments in financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. This standard is
effective for the Company's financial statements to be issued for the fiscal
year ending January 2, 1999. This standard requires comparative information to
be restated. Results of operations and financial position will be unaffected by
the implementation of this new standard. Management has not yet completed its
evaluation of the impact of this new standard on future financial statement
disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS 132 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. This standard does not currently apply to the Company.
The American Institute of Certified Public Accountants has issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This SOP defines start-up activities as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customers,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 requires that these start-up costs be expensed as incurred.
This SOP is effective for
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<PAGE>
financial statements for fiscal years beginning after December 15, 1998,
although earlier application is encouraged. Management does not believe that
adoption of SOP 98-5 will materially impact the results of operations, financial
position, and future financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"), which requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
presently enter into any transactions involving derivative financial instruments
and, accordingly, does not anticipate the new standard will have any effect on
its financial statements. Should the Company enter into any transactions
involving derivatives in the future, it will comply with the requirements of
SFAS No. 133.
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<PAGE>
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. Such forward-looking statements involve a number of known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
risks of uncertainty of patent protection, the impact of supply and
manufacturing constraints or difficulties, possible technological obsolescence,
increased competition, litigation and other risks detailed in the Company's
other filings with the Securities and Exchange Commission. The words "believe",
"expect", "anticipate", "intend", "forecast", and "plan" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made.
Background
Presstek, Inc. (The "Company" or "Presstek"), incorporated in Delaware, was
founded in September 1987 as a development company. It was established to find a
new way to produce color offset printing. Heidelberger Druckmaschinen AG
("Heidelberg"), the world's largest printing press manufacturer, and the Company
established a relationship that was formalized in 1991 and resulted in the
introduction of the first jointly developed product, the spark discharge based
GTO-DI. In 1993, after investing substantial effort and resources, the Company
completed the development of its high resolution, semiconductor based laser
diode imaging and thermal plate technology referred to as PEARL. The Company's
PEARL technology is capable of imaging various types of Presstek printing plates
either off-press or on-press which may then be used to produce high-quality,
full color lithographic printed materials. These printed materials typically can
be produced at a lower cost than traditional competitive methods. The
PEARL-based GTO-DI was introduced in late 1993, and in May 1995, Heidelberg
introduced the Quickmaster DI 46-4 ("QM-DI"), which replaced the GTO-DI product
line. The QM-DI represents the second generation of Presstek's PEARL-based
direct imaging technology. It also employs the Company's automatic plate
changing cylinder which eliminates the need to manually change plates between
jobs, as well as a number of other productivity improvement features. The
Company began shipment of its PEARL-based Quickmaster Direct Imaging systems to
Heidelberg in the second quarter of 1995. The Company estimates that as of July
4, 1998, there were approximately 900 PEARL-equipped Heidelberg presses
installed utilizing the Company's proprietary consumable printing plates.
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<PAGE>
The Company is also engaged in the development of additional PEARL-based
products that incorporate the use of its proprietary technologies and
consumables, including both computer-to-plate and computer-to-press
applications. Some of these additional activities have resulted in an agreement
with the Adast Adamov Company, a manufacturer of sheet fed offset presses. This
agreement has resulted in the availability of the Company's PEARL Direct Imaging
technology on a larger format Omni-Adast (19" x 26") multicolor press, shipments
of which began in December 1996. Also, during the first quarter of 1996, the
Company began shipments of its PEARL platesetter, now referred to as the
PEARLsetter. The PEARLsetter is a computer-to-plate imaging system that images
both the Company's wet and dry offset plates. Another agreement entered into
with Nilpeter A/S of Denmark has resulted in the utilization of the PEARL
technology on a high-speed rotary label printing press called the OFFSET 3300.
Presstek supplies a special PEARL-based digital imaging system which images
Presstek's thermal plates directly on the press plate cylinder. In 1998, the
Company began shipment of its PEARLhdp(TM) laser imaging system. The PEARLhdp,
jointly developed with Imation Corp., is a digital halftone proofing device. It
can produce true halftone "dot for dot" color press proofs using the Company's
computer-to-plate imaging system specially modified for this unique application.
On January 4, 1998, the Company acquired the stock of Heath Custom Press,
Inc. ("Heath"), of Seattle, Washington. Heath is engaged in the design and
manufacture of custom printing presses. Heath was purchased for 94,865
unregistered shares of the Company's Common Stock. The purchase price of
$2,407,000 has been allocated to assets acquired and liabilities assumed based
on the fair market value at the date of acquisition as follows: current assets,
$2,198,000; patents, $1,781,000; long term assets, $186,000; other liabilities,
$1,758,000. The acquisition was accounted for as a purchase and, accordingly,
the results of Heath's operations are included in the Company's financial
statements for the second quarter and first six months ended July 4, 1998. The
results of Heath's operations would not have had a material impact on the
Company's results of operations for 1997.
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the second quarter and first six
months of 1998 and 1997 ended on July 4, 1998 and June 28, 1997, respectively.
Results of Operations
Revenues
Revenues for the quarters ended July 4, 1998 and June 28, 1997 of
$23,029,000 and $20,896,000, respectively, consisted of product sales,
royalties, fees and other reimbursements. Revenues for the second quarter of
1998 increased $2,133,000 or 10% compared to the second quarter of 1997. For the
first six months of 1998 and 1997, revenues totaled $47,370,000 and $40,904,000,
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<PAGE>
respectively. Revenues for the first six months of 1998 increased $6,466,000 or
16% compared to the first six months of 1997.
Product sales increased $3,757,000 and $7,068,000, respectively, comparing
the three and six month periods in 1998 with the same periods in 1997. These
increases were primarily a result of volume increases in the Company's
PEARLsetter and PEARLhdp computer-to-plate imaging systems, as well as volume
increases in sales of vacuum deposition coating equipment and custom printing
press products, and proprietary consumable products. The revenues generated from
the sale of the Company's PEARLdry and other consumable products were $7,809,000
and $13,884,000 for the second quarter and six months ended July 4, 1998. This
increase of $3,858,000 and $6,370,000 over the comparable periods in 1997, was
the most significant increase in the Company's product revenues. These increases
were partially offset by a reduction in sales of the Company's Direct Imaging
systems to Heidelberg for use on the QM-DI.
Royalties and fees from licensees decreased $1,624,000 and $602,000,
respectively, in the second quarter and first six months of 1998 compared to the
same periods in 1997. Royalty decreases for the three and six month periods
ended July 4, 1998 of $1,576,000 and $1,807,000, respectively, resulted
primarily from the reduction in sales of Direct Imaging systems used on the
QM-DI. Fees from licensees increased $1,205,000 for the six months ended July 4,
1998 as compared to the same period in 1997 as a result of engineering and other
fees received primarily from Fuji Photo Film Co., Ltd. Included in the second
quarter of 1997 were certain fees related to the Company's agreement to license
its on-press imaging patents to Scitex Corporation.
Revenues generated under the Company's agreements with Heidelberg and from
Heidelberg distributors represented 57% and 77% of total revenues for the six
month periods ended July 4, 1998 and June 28, 1997, respectively.
While the Company believes that the reduction in sales of the Direct
Imaging systems for use on the QM-DI will continue through the remainder of
1998, the anticipated increase in volume related to the Company's proprietary
consumables sold for the QM-DI and other equipment, as well as the anticipated
increase in volume related to the PEARLsetter and PEARLhdp imaging systems, is
expected to help mitigate the effect of the decrease in sales of Direct Imaging
systems used on the QM-DI. There can be no assurance, however, that the Company
will achieve additional revenue increases.
Cost of Products Sold
Costs of products sold for the second quarter and first six months of 1998
totaled $13,659,000 and $27,832,000 compared to $9,942,000 and $20,549,000 for
the same periods in 1997. These costs consist of the material, labor and
overhead associated with product sales, as well as future warranty costs. The
reduction in
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<PAGE>
the gross margin on product sales to 31% for the second quarter of 1998 as
compared to 38% for the comparable period in 1997 resulted primarily from the
reduction in sales of the Company's Direct Imaging systems to Heidelberg for the
QM-DI, as well as increased sales of lower margin vacuum deposition coating
equipment and specialty custom presses. The reduction in the gross margin on
product sales to 29% for the first six months of 1998 from 36% in the comparable
period in 1997 resulted primarily from the reduction in sales of the Company's
Direct Imaging systems to Heidelberg for the QM-DI, increased sales of lower
margin specialty custom presses, as well as increased costs associated with the
Hudson, New Hampshire manufacturing operations.
The Company anticipates that the gross margin on product sales will
continue at the current reduced levels through the remainder of 1998, due to the
anticipated reduction of sales of Direct Imaging systems to Heidelberg through
the second half of 1998. However, there can be no assurance that the Company's
gross margin on product sales will continue at current levels.
Engineering and Product Development Expenses
Engineering and product development expenses, which consist primarily of
personnel, parts, supplies, and contracted services required to conduct the
Company's equipment and consumable product development efforts, totaled
$4,179,000 and $7,421,000 for the second quarter and first six months of 1998
compared to $2,544,000 and $4,811,000 for the same periods in 1997. The
increases of $1,635,000 (64%) for the second quarter and $2,610,000 (54%) for
the first six months of 1998 resulted principally from increased expenditures
for parts, supplies, and contracted services related to the Company's continued
development of products incorporating its PEARL technology. Included in these
development efforts are significant expenditures for the Company's PEARLgold(TM)
and other consumable products, as well as expenditures for the next generation
laser diode technology and other product development efforts.
The Company expects these increased development expenditures to continue
through the end of 1998, however, there can be no assurance that these expenses
will not be greater than anticipated. Sales and Marketing Expenses
Sales and Marketing Expenses
Sales and marketing expenses which consist primarily of personnel,
advertising, and promotional expenses totaled $1,631,000 and $2,794,000 for the
second quarter and first six months of 1998, compared to $1,091,000 and
$1,853,000 for the same periods in 1997. The increases for the second quarter
and first six months of 1998 of $540,000 (49%) and $941,000 (51%), respectively,
related principally to increased expenditures for additional personnel,
professional services, and other related costs associated with the Company's
efforts to expand its worldwide sales, distribution and technical support
network.
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<PAGE>
It is expected that expenditures for the remaining six months of 1998 will
increase as the Company seeks to expand its distribution channels and increase
its promotional activities by its attendance at two major trade shows during the
second half of 1998. There can be no assurance, however, that these expenses
will not be greater than anticipated.
General and Administrative Expenses
General and administrative expenses, which consist primarily of personnel
and contracted professional services, totaled $2,694,000 and $4,924,000 for the
second quarter and first six months of 1998, compared to $1,718,000 and
$2,965,000 for the same periods in 1997. The increases of $976,000 (57%) and
$1,959,000 (66%), respectively, related principally to increased expenditures
for additional personnel required to conduct the finance, information systems,
and administrative functions of the Company. In addition, the Company recorded a
one-time charge for an uncollectible account in the amount of $364,000 in the
second quarter of 1998, related to its Delta V subsidiary.
The Company anticipates that general and administrative costs for the
remainder of 1998 will be reduced to levels incurred in the first quarter of
1998, however, there can be no assurance that these expenses will not be greater
than anticipated.
Other Income and Expense
Other income increased for both the second quarter and first six months of
1998 compared to the same period in 1997, due to the absence of foreign exchange
losses in 1998 incurred on certain receivables from Heidelberg, and the gain in
the first quarter of 1998 from the sale of a parcel of land in Hudson, New
Hampshire.
Provision for Income Taxes
The provision for income taxes for the second quarter and six months ended
July 4, 1998 and June 28, 1997 represent principally charges in lieu of income
taxes relating to the tax benefit of stock option deductions earned during the
periods. The tax benefit of such stock option deductions has been credited to
stockholders' equity.
Net Income
As a result of the foregoing, the Company had net income of $636,000 and
$2,978,000 for the second quarter and first six months of 1998, compared to net
income of $3,210,000 and $6,112,000 for the same periods in 1997.
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<PAGE>
Liquidity and Capital Resources
At July 4, 1998, the Company had cash and cash equivalents of $24,138,000
and working capital of $43,763,000, as compared to cash and cash equivalents of
$6,209,000 and working capital of $32,962,000 at January 3, 1998.
Cash generated from operating activities was $18,971,000 for the six months
ended July 4, 1998. The cash flow resulted primarily from net income from
operations of $2,978,000, adjusted for non-cash items of depreciation and
amortization of $2,210,000, the tax benefit arising from stock option deductions
of $1,620,000, reductions in accounts receivable and inventories of $6,188,000,
offset by a reduction in accounts payable and accrued expenses of $2,436,000.
Cash flows from operations were significantly affected by the increase in
billing in excess of costs and estimated earnings on uncompleted contracts of
$7,595,000, primarily as a result of advance payments on the vacuum deposition
coating equipment under construction at the Company's Delta V subsidiary, and
the Company's development program with Fuji Photo Film Co., Ltd. The Company
expects to expend this cash over the next six months as it completes its
obligations under the related contracts.
Net cash used for investing activities of $1,803,000 for the six months
ended July 4, 1998, resulted primarily from additions to property, plant and
equipment used in the Company's business of $2,975,000, offset by the maturity
of marketable securities of $1,000,000.
Net cash provided by financing activities during the six months ended July
4, 1998, totaled $1,529,000, and consisted primarily of the proceeds from a
mortgage term loan of $6,900,000, offset by the payments of $5,400,000 on
revolving lines of credit.
On February 6, 1998, the Company obtained a ten-year mortgage term loan in
the principal amount of $6,900,000 from Citizens Bank New Hampshire
("Citizens"). Borrowings are secured by land and buildings with a cost of
approximately $17,000,000. The loan bears a fixed rate of interest of 7.12% per
year during the first five years, and a variable rate of interest at the LIBOR
rate plus 2% (7.66% at July 4, 1998) for the remaining five years. Principal and
interest payments during the first five years of the loan will be made in 60
monthly installments of $80,500. During the remaining five years, principal and
interest payments shall be made on a monthly basis in the amount of one-sixtieth
of the outstanding principal amount as of the first day of the second five year
period, plus accrued interest through the monthly payment date. All outstanding
principal and accrued and unpaid interest is due and payable on February 6,
2008. As of July 4, 1998, the Company had received all proceeds under the
mortgage term loan.
On July 29, 1997, the Company renewed its agreement with Citizens for a
revolving line of credit loan under which the Company may borrow a maximum of
$10,000,000 for working capital requirements and general corporate purposes.
Borrowings are
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<PAGE>
secured by substantially all of the Company's assets and are guaranteed by the
Company's subsidiary, Delta V, and secured by its assets. Under the terms of the
revolving credit agreement, the Company is required to meet certain financial
covenants on a quarterly and annual basis. Interest on the line of credit is
payable at the LIBOR rate plus 1.75% (7.41% at July 4, 1998). The loan agreement
terminates on July 31, 1999, at which date, the entire principal and accrued
interest is due and payable. As of July 4, 1998, the Company had $10,000,000
available under the line of credit.
The Company believes that existing funds, future anticipated cash flows
from operations, and cash available under its revolving line of credit should be
sufficient to satisfy working capital requirements and capital expenditures in
the foreseeable future.
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
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," which requires that all components of
comprehensive income and total comprehensive income be reported on one of the
following: a statement of income and comprehensive income, a statement of
comprehensive income, or a statement of stockholder's equity. Comprehensive
income is comprised of net income and all changes to stockholder's equity,
except those due to investments by owners (changes in paid in capital) and
distributions to owners (dividends). For interim reporting purposes, SFAS 130
requires disclosure of total comprehensive income. There was no material impact
during the first six months ended July 4, 1998 and June 28, 1997 as a result of
the adoption of SFAS 130, since there was no significant difference between net
income and comprehensive income in either period.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Financial Reporting for Segments of a Business Enterprise and Related
Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," and establishes standards for the way public
enterprises report information about operating segments in financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. This standard is
effective for the Company's financial statements to be issued for the fiscal
year ending January 2, 1999. This standard requires comparative information to
be restated. Results of operations and financial position will be unaffected by
the implementation of this new standard. Management has not yet completed its
evaluation of the impact of this new standard on future financial statement
disclosures.
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<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS 132 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. This standard does not currently apply to the Company.
The American Institute of Certified Public Accountants has issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This SOP defines start-up activities as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customers,
initiating a new process in an existing facility, or commencing some new
operation. SOP 98-5 requires that these start-up costs be expensed as incurred.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, although earlier application is encouraged. Management does
not believe that adoption of SOP 98-5 will materially impact the results of
operations, financial position, and future financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133"), which requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
presently enter into any transactions involving derivative financial instruments
and, accordingly, does not anticipate the new standard will have any effect on
its financial statements. Should the Company enter into any transactions
involving derivatives in the future, it will comply with the requirements of
SFAS No. 133.
Year 2000
The Year 2000 problem arose because many existing computer systems use only
the last two digits to identify the year instead of using all four digits. These
computer systems cannot recognize the difference in a year that begins with "20"
from a year that begins with "19". If not corrected, many of these computer
systems could fail or create erroneous results.
In 1998, the Company implemented an operational and financial management
system that is Year 2000 compliant. All other software products in use, both
internally and in products manufactured for sale, are being evaluated to ensure
their ability to perform properly after 1999. The Company does not expect the
cost of compliance, as it applies to the Company's own systems and software, to
materially effect the results of future operations.
The Company is also developing a plan to determine the effect of Year 2000
compliance on its suppliers and customers. The Company has not yet determined
the exposure related to non-compliance by third parties. Although the Company
does not expect any significant costs or disruption in operations from its
customers' or suppliers' inability to achieve Year 2000 compliance, it cannot
predict the effect such non-compliance will have on the Company's business
operations.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of the Company's Form 10-K for the fiscal year ended January 3,
1998, for a description of certain legal proceedings pending against the Company
and certain of its officers and directors.
Item 2. Changes in Securities and Use of Proceeds
During the quarter ended July 4, 1998, the Company granted to officers and
employees six year options to purchase an aggregate of 248,000 shares of Common
Stock under its 1997 Interim Stock Option Plan and 1998 Stock Incentive Plan at
exercise prices ranging from $11.19 to $16.81 per share. The options were issued
in transactions exempt from registration pursuant to the provisions of Section 2
(3) and/or Section 4 (2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1998, the Company held an Annual Meeting of Stockholders at
which (i) the election of directors and (ii) adoption of the Company's 1998
Stock Incentive Plan, were voted on by common stockholders of the Company. The
results of the vote were as follows:
1. Election of Directors
---------------------
Mr. Robert Howard, Messrs. Richard A. Williams, and Robert E. Verrando, Dr.
Lawrence Howard and Messrs. Bert DePamphilis, John W. Dreyer, John B. Evans and
Harold N. Sparks were elected to serve as members of the Company's Board of
Directors for the ensuing year and until the election and qualification of their
successors.
The votes cast by stockholders with respect to the election of Directors
were as follows:
Number of
Names of Nominees Number of Votes For Votes Withheld
- ----------------- ------------------- --------------
Robert Howard 29,916,169 690,730
Richard A. Williams 30,039,919 566,980
Robert E. Verrando 29,982,874 624,025
Dr. Lawrence Howard 29,987,677 619,222
Bert DePamphilis 30,040,932 565,967
John W. Dreyer 29,776,063 560,836
John B. Evans 30,028,961 577,938
Harold N. Sparks 29,986,694 620,205
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<PAGE>
2. Adoption of 1998 Stock Incentive Plan
-------------------------------------
Votes Cast Votes Cast Votes Broker
For Against Abstaining Non-Votes
---------- ---------- ---------- ----------
27,908,684 2,255,657 442,558 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 Presstek, Inc. 1998 Stock Incentive Plan (incorporated by
reference to Exhibit A to the Company's April 23, 1998 proxy
statement)
(b) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed for the quarter for which this
report is filed.
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<PAGE>
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.
Dated: August 18, 1998
PRESSTEK, INC.
--------------
(Registrant)
By: /s/ Richard A. Williams
-----------------------
Richard A. Williams
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ Neil Rossen
-----------------------
Neil Rossen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from form
10-Q at July 4, 1998 and is qualified in its entirety by reference to such
financial information
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JUL-04-1998
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<SECURITIES> 0
<RECEIVABLES> 25,120,018
<ALLOWANCES> 740,000
<INVENTORY> 10,319,364
<CURRENT-ASSETS> 60,731,888
<PP&E> 54,350,796
<DEPRECIATION> 8,302,428
<TOTAL-ASSETS> 116,402,916
<CURRENT-LIABILITIES> 16,968,794
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0
0
<COMMON> 319,993
<OTHER-SE> 92,917,079
<TOTAL-LIABILITY-AND-EQUITY> 116,402,916
<SALES> 39,391,147
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