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 3, 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 November 6, 1998,
there were 32,275,551 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
October 3, 1998 (unaudited)
and January 3, 1998 3
Statements of Income for the three and nine month periods
ended October 3, 1998 and September 27, 1997
(unaudited) 4
Statements of Cash Flows for the nine month periods ended
October 3, 1998 and September 27, 1997
(unaudited) 5
Notes to Financial Statements
(unaudited) 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II OTHER INFORMATION 20
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
Signatures 21
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PRESSTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,282,439 $ 5,201,071
Marketable securities 16,029,482 1,008,171
Accounts receivable, net of allowance for doubtful accounts
of $665,000 in fiscal 1998; and $373,000 in fiscal 1997 19,319,339 26,400,561
Inventories 12,473,762 13,308,504
Costs and estimated earnings in excess
of billings on uncompleted contracts 788,086 1,095,579
Other current assets 677,584 430,909
------------- -------------
Total current assets 60,570,692 47,444,795
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 2,367,313 2,571,296
Buildings 16,293,753 15,424,056
Machinery and equipment 32,901,344 29,758,165
Furniture and fixtures 1,196,496 995,639
Leasehold improvements 2,572,118 2,572,118
Other 48,723 34,498
------------- -------------
Total 55,379,747 51,355,772
Less accumulated depreciation and amortization (9,354,983) (6,392,430)
------------- -------------
Property plant and equipment, net 46,024,764 44,963,342
------------- -------------
OTHER ASSETS:
Goodwill, net 5,576,384 5,819,999
Patent application costs and license rights, net 3,601,283 1,931,651
Software development costs, net 118,428 303,923
Other 210,759 9,071
------------- -------------
Total other assets 9,506,854 8,064,644
------------- -------------
TOTAL $ 116,102,310 $ 100,472,781
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -- $ 4,800,000
Current portion of mortgage term loan 491,046 --
Accounts payable 7,526,940 7,530,187
Accrued expenses 2,166,695 1,280,070
Accrued salaries and employee benefits 1,600,455 872,851
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,854,637 --
------------- -------------
Total current liabilities 15,639,773 14,483,108
------------- -------------
MORTGAGE TERM LOAN 6,075,672 --
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value; authorized 75,000,000 shares;
issued and outstanding 32,175,151 shares at October 3, 1998;
31,866,554 shares at January 3, 1998 321,752 318,666
Additional paid-in capital 68,446,259 63,156,909
Unrealized loss on marketable securities, net -- (1,222)
Retained earnings 25,618,854 22,515,320
------------- -------------
Stockholders' equity 94,386,865 85,989,673
------------- -------------
TOTAL $ 116,102,310 $ 100,472,781
============= =============
</TABLE>
See notes to financial statements
3
<PAGE>
PRESSTEK, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
Oct. 3, 1998 Sep. 27, 1997 Oct. 3, 1998 Sep. 27, 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 17,627,636 $ 19,520,814 $ 57,018,783 $ 51,843,996
Royalties and fees from licensees 2,789,221 4,772,910 10,767,958 13,353,585
------------ ------------ ------------ ------------
Total revenues 20,416,857 24,293,724 67,786,741 65,197,581
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 12,521,063 12,191,210 40,352,751 32,739,979
Engineering and product development 3,963,534 2,895,163 11,384,242 7,706,174
Sales and marketing 1,656,403 1,311,244 4,450,161 3,163,840
General and administrative 2,271,757 1,612,402 7,195,884 4,577,496
------------ ------------ ------------ ------------
Total costs and expenses 20,412,757 18,010,019 63,383,038 48,187,489
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 4,100 6,283,705 4,403,703 17,010,092
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Dividend and interest, net 238,308 93,059 413,028 308,562
Other, net (16,391) 32,656 376,803 (491,801)
------------ ------------ ------------ ------------
Total other income (expense), net 221,917 125,715 789,831 (183,239)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 226,017 6,409,420 5,193,534 16,826,853
PROVISION FOR INCOME TAXES 100,000 2,345,000 2,090,000 6,650,000
------------ ------------ ------------ ------------
NET INCOME $ 126,017 $ 4,064,420 $ 3,103,534 $ 10,176,853
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.00 $ 0.12 $ 0.10 $ 0.32
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.00 $ 0.12 $ 0.09 $ 0.31
============ ============ ============ ============
COMMON SHARES OUTSTANDING 32,111,505 32,661,589 31,932,264 31,752,282
============ ============ ============ ============
COMMON SHARES OUTSTANDING ASSUMING DILUTION 32,392,578 33,472,324 32,698,543 33,012,136
============ ============ ============ ============
</TABLE>
See notes to financial statements
4
<PAGE>
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
October 3, 1998 September 27, 1997
--------------- ------------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net income $ 3,103,534 $ 10,176,853
Adjustments to reconcile net income to net
cash provided by operating activities:
Tax benefit arising from stock option deductions 1,640,000 6,245,000
Depreciation 2,770,588 1,364,425
Amortization 735,842 728,590
Provision for warranty and other costs 2,284,004 1,453,174
Other, net (254,161) 310,412
(Increase) decrease in: --
Accounts receivable 9,071,965 (7,483,193)
Inventory 1,994,183 (2,792,079)
Costs and estimated earnings in excess of
billings on uncompleted contracts 307,493 307,942
Other current assets (246,675) 389,359
Increase (decrease) in: --
Accounts payable and accrued expenses (3,544,530) 511,968
Accrued salaries and employee benefits 649,565 94,662
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,854,637 (1,355,130)
------------ ------------
Net cash provided by operating activities 22,366,445 9,951,983
------------ ------------
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,003,648) (23,260,297)
Proceeds from sale of land and equipment 441,174 1,200
Increase in other assets (397,524) (314,501)
Sales and maturities of marketable securities 1,000,000 3,493,516
Purchases of marketable securities (15,975,655) --
------------ ------------
Net cash (used for) investing activities (18,935,653) (20,080,082)
------------ ------------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from sale of common stock 1,245,238 4,091,725
Proceeds under mortgage term loan 6,900,000 --
Repayments of mortgage term loan (333,282) --
Net proceeds from revolving line of credit -- 5,200,000
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 2,411,604 9,291,725
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,842,396 (836,374)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 5,201,071 3,530,866
Cash acquired from Heath Custom Press 238,972 --
------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 11,282,439 $ 2,694,492
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 225,082 $ 99,553
============ ============
Income taxes $ 250,000 $ 90,406
============ ============
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
5
<PAGE>
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 3, 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 nine month periods ended October 3, 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 51% and 79% of total
revenues for the nine months ended October 3, 1998, and September 27, 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 sublicensing 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. Delta V operates as a 90% owned
subsidiary of the Company. Significant intercompany accounts and transactions
have been eliminated.
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
6
<PAGE>
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 third quarter
and nine months of 1998. The results of Heath's operations would not have had a
material impact on the Company's results of operations.
On October 26, 1998, the Company sold certain net assets of Heath to
Base-Line Incorporated of Auburn, Washington for $1,000,000, which approximated
book value. Heath operated as a 100% owned subsidiary of the Company.
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the three and nine month periods
of 1998 and 1997 ended on October 3, 1998 and September 27, 1997, respectively.
Certain accounts in the 1997 financial statements have been reclassified for
comparative purposes to conform with the presentation in the October 3, 1998
financial statements.
2. MARKETABLE SECURITIES
Marketable securities are classified as available for sale and are stated
at fair market value. All unrealized gains and losses, if any, are recorded as a
separate component of stockholders' equity. At October 3, 1998 marketable
securities consisted of debt securities and commercial paper. At September 27,
1997 marketable securities consisted of United States Treasury Notes.
3. INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out method. At October 3, 1998 and January 3, 1998,
inventories consisted of the following:
1998 1997
----------- -----------
Raw materials $ 5,823,000 $ 7,698,000
Work in process 3,738,000 3,840,000
Finished goods 2,913,000 1,771,000
----------- -----------
TOTAL $12,474,000 $13,309,000
=========== ===========
4. 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
new 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.
7
<PAGE>
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 nine
months periods ended October 3, 1998 and September 27, 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 $ 126 32,112 $ 0.00 $ 4,064 32,662 $ 0.12
====== ======
Effect of Diluted Securities
Effect of assumed conversion
of employee stock options 281 810
---- -------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 126 32,393 $ 0.00 $ 4,064 33,472 $ 0.12
====== ====== ====== ======= ======= ======
<CAPTION>
Nine 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 $ 3,104 31,932 $ 0.10 $ 10,177 31,752 $ 0.32
====== ======
Effect of Diluted Securities
Effect of assumed conversion
of employee stock options 767 1,260
------- -------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 3,104 32,699 $ 0.09 $ 10,177 33,012 $ 0.31
======= ======= ====== ======== ======= ======
</TABLE>
8
<PAGE>
5. INCOME TAXES
The components of the provision for income taxes for the three month
periods ended October 3, 1998 and September 27, 1997, based upon the estimated
effective income tax rate for the full fiscal year, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Third Nine Third Nine
Quarter Months Quarter Months
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current tax expense - State $ -- $ 450,000 $ 10,000 $ 405,000
Charge in lieu of income taxes:
Federal 100,000 1,560,000 1,900,000 5,450,000
State -- 80,000 435,000 795,000
---------- ---------- ---------- ----------
Total provision $ 100,000 $2,090,000 $2,345,000 $6,650,000
========== ========== ========== ==========
</TABLE>
The charge in lieu of income taxes included in the nine months ended
October 3, 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 third quarter and nine months
ended September 27, 1997 relates principally to the tax benefit of stock option
deductions earned in that period. These deductions have been credited to
stockholders' equity.
6. 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% 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.
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, 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% (7.16% at October 3,
1998). The loan agreement terminates on July 31, 1999, at which date, the entire
principal and accrued interest is due and payable. The Company currently has
$10,000,000 available under the line of credit.
9
<PAGE>
7. 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 and (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 officer and director 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 such 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. Accordingly, no provision for any
liability that may result has been recorded in the accompanying financial
statements.
8. 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 stockholders' equity. Comprehensive
income is comprised of net income and all changes to stockholders' equity,
except those due to
10
<PAGE>
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 nine months
ended October 3, 1998 and September 27, 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 reporting
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 Accounts 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.
11
<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 that 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 is also engaged in the development of additional PEARL-based
products that incorporate the use of its proprietary technologies and
consumables,
12
<PAGE>
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 that 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 third quarter and nine months ended October 3, 1998. The
results of Heath's operations would not have had a material impact on the
Company's results of operations.
On October 26, 1998, the Company sold certain net assets of Heath to
Base-Line Incorporated of Auburn, Washington for $1,000,000, which approximated
book value. Heath operated as a 100% owned subsidiary of the Company.
The Company operates and reports on a 52/53 week fiscal year ending on the
Saturday closest to December 31. Accordingly, the third quarter and nine months
of 1998 and 1997 ended on October 3, 1998 and September 27, 1997, respectively.
Results of Operations
Revenues
Total revenues for the quarters ended October 3, 1998 and September 27,
1997 of $20,417,000 and $24,294,000, respectively, consisted of product sales,
royalties, fees and other reimbursements. Total revenues for the third quarter
of 1998 decreased $3,877,000 or 16% compared to the third quarter of 1997. Total
revenues for the nine months ended October 3, 1998 were $67,787,000, as compared
to $65,198,000 for the comparable period in 1997, an increase of $2,589,000 or
4%.
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Product sales were $17,628,000 for the three months ended October 3, 1998,
as compared to $19,521,000 for the same period in 1997. This decrease of
$1,893,000, or 10%, was primarily a result of volume decreases in the sales of
the Company's Direct Imaging systems and spare parts to Heidelberg for use on
the QM-DI. This decrease was partially offset by an increase in sales of vacuum
deposition coating equipment, custom printing press products, and proprietary
consumable products.
Product sales for the nine months ended October 3, 1998 were $57,019,000,
as compared to $51,844,000 for the comparable period in 1997. This increase of
$5,175,000, or 10%, was the result of volume increases in sales of the Company's
PEARLsetter and PEARLhdp computer-to-plate imaging systems, as well as volume
increases in sales of vacuum deposition coating equipment, custom printing press
products, and proprietary consumable products. The revenues generated from the
sale of the Company's PEARLdry and other consumable products were $6,495,000 and
$20,379,000 for the third quarter and nine months ended October 3, 1998,
resulting in an increase of $1,881,000 and $8,251,000 over the comparable
periods in 1997. These increases were partially offset by a reduction in sales
of the Company's Direct Imaging systems and spare parts to Heidelberg for use on
the QM-DI.
Royalties and fees from licensees decreased $1,984,000 and $2,586,000,
respectively, in the three and nine month periods of 1998, compared to the
comparable periods in 1997. Royalty decreases for the three and nine month
periods ended October 3, 1998 of $3,366,000 and $5,173,000, respectively,
resulted primarily from the reduction in sales of Direct Imaging systems used on
the QM-DI. Fees from licensees increased $1,501,000 and $2,639,000 for the three
and nine months ended October 3, 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 nine months 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 51% and 79% of total revenues for the nine
month periods ended October 3, 1998 and September 27, 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 partially 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 these offsetting revenue increases.
Cost of Products Sold
Cost of products sold for the third quarter and nine months of 1998 totaled
$12,521,000 and $40,353,000 compared to $12,191,000 and $32,740,000 for the same
periods in 1997. These costs consist of the material, labor and overhead
associated
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<PAGE>
with product sales, as well as expected future warranty costs. The reduction in
the gross margin on product sales to 29% for the three and nine months ended
October 3, 1998 as compared to 38% and 37% for the comparable periods in 1997
resulted primarily from reduced manufacturing volume of the Company's Direct
Imaging systems to Heidelberg for the QM-DI, increased sales of lower margin
vacuum deposition coating equipment and 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. 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
$3,964,000 and $11,384,000 for the three and nine months ended October 3, 1998,
compared to $2,895,000 and $7,706,000 for the same periods in 1997. The
increases of $1,069,000 (37%) for the third quarter and $3,678,000 (48%) for the
nine months of 1998 resulted principally from increased expenditures for parts
and supplies related to the Company's continued development of products
incorporating its PEARL technology. Included in these development efforts 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 which consist primarily of personnel,
advertising, and promotional expenses totaled $1,656,000 and $4,450,000 for the
three and nine months ended October 3, 1998, compared to $1,311,000 and
$3,164,000 for the same periods in 1997. The increases for the third quarter and
nine months of 1998 of $345,000 (26%) and $1,286,000 (41%), respectively,
related principally to increased expenditures for professional services and
other related costs associated with the Company's attendance at tradeshows and
the continued expansion of its worldwide sales, distribution and technical
support network.
It is expected that expenditures for the remaining three months of 1998
will continue at current levels as the Company continues to expand its
distribution channels and ongoing promotional activities by its attendance at a
major trade show. There can be no assurance, however, that these expenses will
not be greater than anticipated.
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<PAGE>
General and Administrative Expenses
General and administrative expenses, which consist primarily of personnel
and contracted professional services, totaled $2,272,000 and $7,196,000 for the
three and nine months ended October 3, 1998, compared to $1,612,000 and
$4,577,000 for the same periods in 1997. The increases of $660,000 (41%) and
$2,619,000 (57%), 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 continue at current levels, 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 third quarter and nine 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 three and nine months ended October
3, 1998 represents principally charges in lieu of income taxes relating to the
realization of net operating loss carryforwards resulting from stock
compensation deductions for tax purposes. The provision for income taxes for the
three and nine months ended September 27, 1997 represents 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 $126,000 and
$3,104,000 for the third quarter and nine months of 1998, compared to net income
of $4,064,000 and $10,177,000 for the same periods in 1997.
Liquidity and Capital Resources
At October 3, 1998, the Company had cash, cash equivalents and short term
marketable securities of $27,312,000 and working capital of $44,931,000, as
compared to cash, cash equivalents and short term marketable securities of
$6,209,000 and working capital of $32,962,000 at January 3, 1998.
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<PAGE>
Cash generated from operating activities was $22,366,000 for the nine
months ended October 3, 1998. The cash flow resulted primarily from net income
from operations of $3,104,000, adjusted for non-cash items of depreciation and
amortization of $3,507,000, the tax benefit arising from stock option deductions
of $1,640,000, reductions in accounts receivable and inventories of $11,066,000,
offset by a reduction in accounts payable and accrued expenses of $3,545,000.
Cash flows from operations were significantly affected by the increase in
billing in excess of costs and estimated earnings on uncompleted contracts of
$3,855,000, 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 three months as it completes its
obligations under the related contracts.
Net cash used for investing activities of $18,936,000 for the nine months
ended October 3, 1998, resulted primarily from additions to property, plant and
equipment used in the Company's business of $4,004,000, the purchase of
marketable securities of $15,976,000, offset by the maturity of marketable
securities of $1,000,000.
Net cash provided by financing activities during the nine months ended
October 3, 1998, totaled $2,412,000, 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% 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.
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, 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% (7.16% at October 3,
1998). The loan agreement terminates on July 31, 1999, at which date, the entire
principal and accrued interest is due and payable. The Company currently has
$10,000,000 available under the line of credit.
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<PAGE>
During the next eighteen months, the Company anticipates investing
approximately $7,500,000 in additional plate manufacturing equipment that is
expected to reduce the cost of plate manufacture and enhance the Company's
development capabilities.
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 stockholders' 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 nine months ended October 3, 1998 and September 27, 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 reporting
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.
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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. This evaluation is expected to be
completed by the first quarter of 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 is still gathering
information and 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 noncompliance will have
on the Company's business operations.
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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 October 3, 1998, the Company granted to employees
six year options to purchase an aggregate of 39,000 shares of Common Stock under
its 1997 Interim Stock Option Plan at exercise prices ranging from $8.50 to
$11.31 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 1922.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Employment agreement by and between the Company and Robert
W. Hallman
27.1 Financial Data Schedule for the nine month period ended
October 3, 1998*
27.2 Restated Financial Data Schedule for the nine month period
ended September 27, 1997*
27.3 Restated Financial Data Schedule for the six month period
ended June 28, 1997*
27.4 Restated Financial Data Schedule for the three month period
ended March 29, 1997*
27.5 Restated Financial Data Schedule for the fiscal years ended
December 30, 1995 and December 28, 1996*
----------
* 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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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: November 17, 1998
PRESSTEK, INC.
-------------------------------------
(Registrant)
By: /s/Robert W. Hallman
------------------------------------
Robert W. Hallman
Chief Executive Officer
(Duly Authorized Officer)
By: /s/Neil Rossen
------------------------------------
Neil Rossen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
EMPLOYMENT AGREEMENT
AGREEMENT (the "Agreement") made by and between PRESSTEK, INC., a Delaware
corporation (the "Employer"), and Robert W. Hallman (the "Employee").
WHEREAS, Employee is to be employed as Chief Executive Officer of the
Employer; and
WHEREAS, the Employee wishes to commence his employment with the Employer
and the Employer wishes to commence its employment of Employee; and
NOW, THEREFORE, in consideration of the premises and of the promises
hereafter contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, it is AGREED as follows:
1. Employment. The Employee is employed as Chief Executive Officer of the
Employer and shall serve as a member of the Board of Directors of the Employer
from the date of employment through the Term of this Agreement. The Employee
shall render executive, policy, operations and other management services to the
Employer of the type customarily performed by persons situated in similar
executive and management capacities. The Employee shall perform such other
related duties as the Board of Directors of the Employer may from time to time
reasonably direct.
2. Compensation. The Employer agrees to pay the Employee during the Term of
this Agreement a base salary as follows: Through September 30, 1999, a salary at
an annual rate equal to $275,000.00 U.S. Dollars with the salary to be reviewed
annually thereafter during the Term of this Agreement by the Board of Directors
of the Employer. In the annual salary review, the Board of Directors may
compensate the Employee for increases in the market value of the Employee's
duties and responsibilities hereunder and may provide for performance or merit
increases. The base salary of the Employee shall not be decreased at any time
during the Term of this Agreement from the amount then in effect, unless the
Employee otherwise agrees in writing. The salary shall be payable to the
Employee not less frequently than monthly.
In addition, the Company will provide Employee at time of employment with a
full relocation package which will include all actual costs incurred to
facilitate Employee's move to the New Hampshire area. This relocation package
will be grossed-up for taxes. Presstek will also reimburse any repayment to
Employee's current employer for previous real estate losses and reimburse the
difference between purchase price and selling price on Employee's current
property not to exceed $265,000.00. These reimbursements may be recovered by the
Company in the event that Employee resigns within two (2) years unless the
resignation is for Good Reason (as described in Section 9(a) hereof) in
connection with or within two (2) years after a Change in Control (as defined in
Section 9(b) hereof).
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<PAGE>
Participation in discretionary bonuses, retirement and other employee benefit
plans and fringe benefits shall not reduce the salary payable to the Employee
under this Section 2.
3. Discretionary Bonuses. During the Term of this Agreement, the Employee
shall be entitled to participate in an equitable manner with all other eligible
executive employees of the Employer in any incentive compensation and bonus
programs authorized and declared by the Board of Directors of Employer for
executive employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Employee's right to participate in such incentive
compensation or bonus programs when and as declared.
4. Participation in Stock Option, Retirement and Employee Benefit Plans;
Fringe Benefits. The Employee shall be entitled to receive the stock option
package outlined in the Employer's offer letter dated July 29, 1998 which
accompanies and is incorporated by reference in this Agreement. In addition to
such stock option package, and subject to the eligibility requirements that may
be applicable, the Employee shall be entitled to participate in any plan or
arrangement of the Employer relating to stock options, stock purchases, pension,
thrift, or profit sharing benefits, or other benefits under qualified or
non-qualified deferred compensation plans, group life insurance, medical
coverage, education or any other employee benefits that the Employer may adopt
or make available for the benefit of Employee or of executive employees
generally.
The Employee shall also be entitled during the Term of this Agreement to
any fringe benefits which may be or become available, during the Term of this
Agreement, to executive employees of the Employer, and to the payment or
reimbursement of reasonable expenses for attending annual and periodic meetings
of trade associations, and any other benefits which are commensurate with the
duties and responsibilities to be performed by the Employee under this
Agreement.
5. Employment Term. "Term," as used in this Agreement, shall refer to the
Term of this Agreement as defined in this paragraph. The Term of the employment
under this Agreement is for a period ending September 30, 1999, unless sooner
terminated in accordance with the provisions hereof. The Term of employment
under this Agreement shall, on each September 30 hereafter, be automatically
extended for an additional calendar year unless Employer or Employee gives
written notice to the other, by no later than the preceding June 30, that he or
it does not concur in such extension. If neither party gives notice of
non-concurrence in such extension, the Term will automatically extend for one
(1) additional year.
6. Standards. The Employee shall perform his duties and responsibilities
under this Agreement in accordance with such reasonable standards as are
established from time to time by the Board of Directors of Employer. The
reasonableness of such standards shall be measured against standards for
executive performance generally prevailing in similar high technology companies.
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<PAGE>
7. Voluntary Absences: Vacations. The Employee shall be entitled to an
annual paid vacation during the Term of this Agreement of four (4) weeks per
year or such longer period as the Board of Directors may approve or such longer
periods to which the Employee may be entitled as an employee of the Employer.
The timing of paid vacations shall be scheduled in a reasonable manner by the
Employee.
8. Termination of Employment.
(a) (i) The Board of Directors of the Employer may terminate the
Employee's employment at any time, but any termination by the Board of
Directors other than termination for Cause shall not prejudice the
Employee's right to receive the compensation and other benefits under
this Agreement. In the event of a termination for Cause, the Employee
shall have no right to receive compensation or other benefits,
including payment of legal fees and expenses incurred, for any period
after termination for Cause except as otherwise required by law.
Regardless of the reason for the termination of Employee's employment,
other than termination for Cause, the Employer shall continue to be
subject to any independent obligation to Employee under any employee
benefit plan in which the Employee is then a participant, and to any
obligation for severance pay, if any, in accordance with the then
existing severance policies of the Employer, and to any obligation to
Employee to pay Deferred Compensation hereunder.
(ii) In the event that the Employee's employment ceases within three
(3) years after the commencement of such employment by reason of (a)
the Employer's termination of the Employee's employment during the
Term other than for Cause, or (b) the Employer's non-concurrence in
the automatic extension of the Term, the Employer shall be obligated
concurrently with the termination of such employment, in lieu and
replacement of the Employee's entitlement to any compensation and
other benefits under this Agreement pursuant to Section 8(a)(i), to
make a lump sum cash payment to the Employee as liquidated damages
consisting of the aggregate of an amount equal to the Employee's then
current salary for the remainder of the Term plus an additional amount
equal to three (3) times the Employee's then current annual salary. In
the event that the Employee's employment ceases at any time more than
three (3) years after the commencement of such employment by reason of
(a) the Employer's termination of the Employee's employment during the
Term other than for Cause, or (b) the Employer's non-concurrence in
the automatic extension of the Term, the Employer shall be obligated
concurrently with the termination of such employment, in lieu and
replacement of the Employee's entitlement to any compensation and
other benefits under this Agreement pursuant to Section 8(a)(i), to
make a lump sum cash payment to the Employee as liquidated
3
<PAGE>
damages consisting of the aggregate of an amount equal to the
Employee's then current salary for the remainder of the Term, plus an
additional amount equal to the Employee's then current annual salary
for one (1) full year. Notwithstanding the foregoing, if the
termination of employment occurs in connection with or within two (2)
years after a "Change in Control" as defined in Section 9(b) hereof,
the amount payable to the Employee shall be determined under Section
9(a) as limited by Section 9(c) hereof. Such payment to the Employee
shall be made on or before the Employee's last day of employment with
the Employer. The liquidated damages shall not be reduced by any
compensation which the Employee may receive for other employment with
another employer after termination of his employment with the
Employer. In addition, the Employee shall be entitled to have all
existing retirement or employee benefits of the type referred to in
Section 4 hereof continue for the remainder of the Term when the
Agreement is terminated, except as otherwise required by law or
provided in the related retirement or other employee benefit plans or
agreements.
(iii) References in this Agreement to "termination for Cause" shall
mean termination on account of acts or omissions of employee which
constitute Cause. Any determination with respect to a termination for
Cause shall require the approval of a two-thirds (2/3) vote of the
full Board of Directors of the Employer. "Cause" shall mean any of the
following:
(A) Conviction of a felony,
(B) Theft from the Employer,
(C) Breach of fiduciary duty involving personal profit,
(D) Sustained and continuous conduct by Employee which adversely
affects the reputation of the Employer,
(E) Continued failure of the Employee to substantially and
satisfactorily perform his duties or obligations under this
Agreement following twenty (20) days' notice by the Employer to
the Employee and a failure by the Employee to correct the
deficiency cited in such notice (other than any such failure
resulting from Employee's incapacity due to physical or mental
illness).
(b) The Employee shall have no right to terminate his employment under this
Agreement prior to the end of the Term of this Agreement, unless such
termination is either approved by the Board of Directors of the Employer or
is for Good Reason (as
4
<PAGE>
described in Section 9(a) hereof) in connection with or within two (2)
years after a Change in Control (as defined in Section 9(b) hereof). In the
event that the Employee violates this provision, or in the event that
Employee is terminated for Cause, Employee shall be entitled to no further
payments pursuant to this Agreement, and the Employer shall be entitled, in
addition to its other legal remedies, to request a court of competent
jurisdiction to enjoin the employment of the Employee with any significant
competitor of the Employer, within a 250 mile radius of the Employer or any
location at which the Employer operates at the time, for a period of two
(2) years or the remaining Term of this Agreement plus one (1) year,
whichever is less. Upon written consent, the Board may permit the Employee
to work for a significant competitor during such period. During such
period, even if the Employee is permitted to be employed by a significant
competitor, he shall not without the approval of the Board of Directors of
the Employer induce any officer of the Employer to accept employment from
such significant competitor, nor shall he use proprietary and confidential
information of the Employer for the benefit of such a significant
competitor.
9. Change in Control.
(a) (i) If during the Term of this Agreement there is a Change in Control
of the Employer, and Employee's employment with the Employer is
terminated involuntarily (other than for Cause), or voluntarily for
Good Reason (as defined below), in connection with or within two (2)
years after such Change in Control, then the Employee shall be
entitled to receive as a severance payment, for services previously
rendered to the Employer, a lump sum cash payment as provided in
Section 9(a)(ii) below.
(ii) Subject to Section 9(c) hereof, the amount of the lump sum cash
payment (the "Payment") shall equal three (3) times the Employee's
average annual compensation which was payable by the Employer and was
includible by the Employee in his gross income for federal income tax
purposes with respect to the five (5) most recent taxable years of the
Employee ending prior to such Change in Control of the Employer (or
such portion of such period during which the Employee was a full-time
employee of the Employer), less one dollar).
(iii) As used herein, the term "Good Reason" means, unless previously
consented to in writing by the Employee, the occurrence of any one of
the following:
(A) The assignment to the Employee of duties and responsibilities
that are not at least substantially equivalent to the Employee's
duties and
5
<PAGE>
responsibilities with the Employer immediately prior to such
Change in Control;
(B) the failure to continue the Employee in a position and title
that is at least substantially equivalent to the position held by
the Employee with the Employer immediately prior to such Change
in Control, except in connection with the termination of the
Employee's employment for Cause or as a result of death or
permanent disability;
(C) a reduction in or failure to pay currently total annual cash
compensation in an amount equal to or greater than the sum of (i)
the Employee's salary at the highest annual rate in effect during
the 12- month period immediately prior to such Change in Control,
and (ii) the bonus paid to similarly situated employees pursuant
to the acquiring Employer's executive bonus plan for the fiscal
year ending immediately prior to such Change in Control;
(D) the Employee's benefits under any employee benefit or welfare
plan of the acquiring Employer are less, or are reduced to less,
other than reductions mandated by a change in law, than the
benefits of similarly situated employees under any employee
benefit or welfare plan of the acquiring Employer in effect
immediately prior to such Change in Control;
(E) the Employee is reassigned to a place of business which is
more than 50 miles from Hudson, New Hampshire; or
(F) any breach by the Employer of this Agreement.
(iv) Payment under this Section 9(a) shall be in lieu of any amount
owed to the Employee as liquidated damages for termination without
Cause under Sections 8(a)(i) and (ii) hereof. However, payment under
this Section 9(a) shall not be reduced by any compensation which the
Employee may receive from other employment with another employer after
termination of his employment with the Employer.
(b) A "change in control of the Company," for purposes of this Agreement,
shall be deemed to have taken place if: (i) a third person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of
1934, becomes the beneficial owner of shares of the Holding Company having
20 percent or more of the total number of votes that may be cast for the
election of directors of the Company; or (ii) as the result of, or in
connection with, any cash tender or exchange offer, merger, or other
business
6
<PAGE>
combination, sale of assets or contested election, or any combination of
the foregoing transactions, the persons who were directors of the Company
before such transaction shall cease to constitute a majority of the Board
of Directors of the Company or any successor institution.
(c) Notwithstanding any other provisions of this Agreement or of any other
agreement, contract, or understanding heretofore or hereafter entered into
by the Employee with the Employer, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 9(c) ("Other Agreements"), and notwithstanding
any formal or informal plan or other arrangement heretofore or hereafter
adopted by the Employer for the direct or indirect provision of
compensation to the Employee (including groups or classes of participants
or beneficiaries of which the Employee is a member), whether or not such
compensation is deferred, is in cash, or is in the form of a benefit to or
for the Employee (a "Benefit Plan"), the Employee shall not have any right
to receive any payment or other benefit under this Agreement, any Other
Agreement, or any Benefit Plan if such payment or benefit, taking into
account all other payments or benefits to or for the Employee under this
Agreement, all Other Agreements, and all Benefit Plans, would cause any
payment to the Employee under this Agreement to be considered a "parachute
payment" within the meaning of Section 280G(b)(2) of the Internal Revenue
Code as then in effect (a "Parachute Payment"), as determined by a
nationally recognized accounting firm selected by the Board. In the event
that the receipt of any such payment or benefit under this Agreement, any
Other Agreement, or any Benefit Plan would cause the Employee to be
considered to have received a Parachute Payment under this Agreement, then
the Employee shall have the right, in the Employee's sole discretion, to
designate those payments or benefits under this Agreement, any Other
Agreements, and/or any Benefit Plans, which should be reduced or eliminated
so as to avoid having the payment to the Employee under this Agreement be
deemed to be a Parachute Payment.
10. Expenses. The Employee is authorized to incur, during the Term of this
Agreement, reasonable expenses for promoting the business of the Employer,
including without limitation expenses for entertainment, travel and similar
items. The Employer will promptly reimburse the Employee for all such expenses,
upon the presentation by the Employee, from time to time, of an itemized account
of such expenses.
11. Legal Expenses. The Employer shall indemnify and hold harmless the
Employee from and against any and all costs and liabilities, including without
limitation reasonable attorneys' fees, arising out of or in connection with
becoming, being or having been an officer or director of the Employer, except in
relation to matters as to which the Employee shall be finally adjudged not to
have acted in good faith in the reasonable belief that his action or failure to
act was in the best interest of the Employer. In addition, the Employer shall
pay
7
<PAGE>
all legal costs and reasonable attorneys' fees above the sum of $40,000.00,
arising out of or in connection with any claim brought against Employee pursuant
to a certain letter agreement dated January 1, 1998 between Employee and Kodak
Polychrome Graphics LLC.
12. Successors and Assigns; Assumption by Successors. All rights hereunder
shall inure to the benefit of the parties hereto, their personal or legal
representatives, heirs, successors or assigns. This Agreement may not be
assigned or pledged by the Employee. The Employer will require any successor
(whether direct or indirect, by purchase, assignment, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Employer in any consensual transaction expressly to assume this Agreement and to
agree to perform hereunder in the same manner and to the same extent that the
Employer would be required to perform if no such succession had taken place.
References herein to the Employer will be understood to refer to the successor
or successors of the Employer, respectively.
13. Other Contracts. The Employee shall not, during the Term of this
Agreement, have any other paid employment (other than with a subsidiary or
affiliate of the Employer) except with the prior approval of the Board of
Directors of the Employer.
14. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior employment agreements and
understandings, whether written or oral, except the Employer's offer letter
dated July 29, 1998 which accompanies and is incorporated by reference in this
Agreement.
15. Amendments or Additions; Action by Boards of Directors. No amendments
or additions to this Agreement shall be binding unless in writing and signed by
the parties. The prior approval by a two-thirds (2/3) vote of the full Board of
Directors of Employer shall be required in order to authorize any amendments or
additions to this Agreement, or to take any action under this Agreement
involving any termination of the employment of the Employee with or without
Cause under Section 8(a) hereof.
16. Section Headings. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
17. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Governing Law. This Agreement shall be governed by the laws of the
United States where applicable and otherwise by the laws of the State of New
Hampshire, except the choice of law rules thereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement this _______
day of ___ , 1998.
PRESSTEK, INC.
By: /s/ Richard A. Williams
------------------------------------------
Richard A. Williams
Chief Executive Officer and Vice Chairman
/s/ Robert W. Hallman
----------------------------------------
Robert W. Hallman (the "Employee")
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from form 10-Q at
October 3, 1998 and is qualified in its entirety by reference to such finanacial
information
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 11,282,439
<SECURITIES> 16,029,482
<RECEIVABLES> 19,984,339
<ALLOWANCES> 665,000
<INVENTORY> 13,261,848<F1>
<CURRENT-ASSETS> 60,570,692
<PP&E> 55,379,747
<DEPRECIATION> 9,354,983
<TOTAL-ASSETS> 116,102,310
<CURRENT-LIABILITIES> 15,639,773
<BONDS> 0
0
0
<COMMON> 321,752
<OTHER-SE> 94,065,113
<TOTAL-LIABILITY-AND-EQUITY> 116,102,310
<SALES> 57,018,783
<TOTAL-REVENUES> 67,786,741
<CGS> 40,352,751
<TOTAL-COSTS> 40,352,751
<OTHER-EXPENSES> 11,384,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,082
<INCOME-PRETAX> 5,193,534
<INCOME-TAX> 2,090,000
<INCOME-CONTINUING> 3,103,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,103,534
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
<FN>
<F1> Includes $788,086 costs and estimated earnings in excess of billings on
uncompleted contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 2,694,492
<SECURITIES> 3,073,971
<RECEIVABLES> 24,313,213
<ALLOWANCES> 222,000
<INVENTORY> 14,748,931<F1>
<CURRENT-ASSETS> 45,074,538
<PP&E> 47,154,664
<DEPRECIATION> 5,613,314
<TOTAL-ASSETS> 94,747,862
<CURRENT-LIABILITIES> 16,476,144
<BONDS> 0
0
0
<COMMON> 317,520
<OTHER-SE> 77,670,375
<TOTAL-LIABILITY-AND-EQUITY> 94,747,862
<SALES> 51,843,996
<TOTAL-REVENUES> 65,197,581
<CGS> 32,739,979
<TOTAL-COSTS> 32,739,979
<OTHER-EXPENSES> 7,706,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,826,853
<INCOME-TAX> 6,650,000
<INCOME-CONTINUING> 10,176,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,176,853
<EPS-PRIMARY> 0.32<F2>
<EPS-DILUTED> 0.31<F2>
<FN>
<F1> Includes $1,317,195 costs and estimated earnings in excess of billings on
uncompleted contracts.
<F2> Restated to reflect subsequent adoption of SFAS 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JUN-28-1997
<CASH> 2,347,898
<SECURITIES> 3,083,697
<RECEIVABLES> 16,244,216
<ALLOWANCES> 280,914
<INVENTORY> 15,578,791<F1>
<CURRENT-ASSETS> 37,669,567
<PP&E> 40,829,960
<DEPRECIATION> 5,058,754
<TOTAL-ASSETS> 81,632,120
<CURRENT-LIABILITIES> 12,601,181
<BONDS> 0
0
0
<COMMON> 310,752
<OTHER-SE> 68,443,053
<TOTAL-LIABILITY-AND-EQUITY> 81,632,120
<SALES> 32,323,182
<TOTAL-REVENUES> 40,903,857
<CGS> 20,548,769
<TOTAL-COSTS> 20,548,769
<OTHER-EXPENSES> 4,811,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,417,433
<INCOME-TAX> 4,305,000
<INCOME-CONTINUING> 6,112,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,112,433
<EPS-PRIMARY> 0.19<F2>
<EPS-DILUTED> 0.19<F2>
<FN>
<F1> Includes $2,119,512 costs and estimated earnings in excess of billings on
uncompleted contracts.
<F2> Restated to reflect subsequent adoption of SFAS 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> MAR-29-1997
<CASH> 2,946,213
<SECURITIES> 3,033,899
<RECEIVABLES> 18,642,685
<ALLOWANCES> 220,606
<INVENTORY> 13,792,216<F1>
<CURRENT-ASSETS> 38,645,301
<PP&E> 31,835,387
<DEPRECIATION> 4,660,235
<TOTAL-ASSETS> 74,142,603
<CURRENT-LIABILITIES> 11,850,179
<BONDS> 0
0
0
<COMMON> 153,987
<OTHER-SE> 61,873,484
<TOTAL-LIABILITY-AND-EQUITY> 74,142,603
<SALES> 16,346,956
<TOTAL-REVENUES> 20,007,652
<CGS> 10,607,114
<TOTAL-COSTS> 10,607,114
<OTHER-EXPENSES> 2,267,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,782,101
<INCOME-TAX> 1,880,000
<INCOME-CONTINUING> 2,902,101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,902,101
<EPS-PRIMARY> 0.09<F2>
<EPS-DILUTED> 0.09<F2>
<FN>
<F1> Includes $1,699,585 costs and estimated earnings in excess of billings on
uncompleted contracts.
<F2> Restated to reflect: (i) effect of a subsequent 2-1 common stock split in
the form of a stock dividend paid in July 1997; and (ii) adoption of SFAS
128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-30-1995 DEC-28-1996
<PERIOD-END> DEC-30-1995 DEC-28-1996
<CASH> 3,628,021 3,530,866
<SECURITIES> 3,050,825 6,602,854
<RECEIVABLES> 7,968,559 17,490,020
<ALLOWANCES> 80,000 184,000
<INVENTORY> 5,861,743<F1> 12,264,794<F1>
<CURRENT-ASSETS> 20,779,179 40,559,821
<PP&E> 7,314,401 23,947,886
<DEPRECIATION> 3,023,089 4,230,674
<TOTAL-ASSETS> 26,668,618 68,823,096
<CURRENT-LIABILITIES> 3,942,182 11,380,574
<BONDS> 0 0
0 0
0 0
<COMMON> 147,653 153,923
<OTHER-SE> 22,578,783 57,288,599
<TOTAL-LIABILITY-AND-EQUITY> 26,668,618 68,823,096
<SALES> 20,028,548 33,569,400
<TOTAL-REVENUES> 27,611,456 48,627,569
<CGS> 14,923,968 21,825,697
<TOTAL-COSTS> 14,923,968 21,825,697
<OTHER-EXPENSES> 6,155,421 8,894,420
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,079,628 11,121,289
<INCOME-TAX> 220,000 4,000,000
<INCOME-CONTINUING> 2,859,628 7,121,289
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,859,628 7,121,289
<EPS-PRIMARY> 0.10<F2> 0.24<F2>
<EPS-DILUTED> 0.09<F2> 0.21<F2>
<FN>
<F1> Includes $246,000 and $1,625,137 costs and estimated earnings in excess of
billings on uncompleted contracts.
<F2> Restated to reflect: (i) effect of a subsequent 2-1 common stock split in
the form of a stock dividend paid in July 1997; and (ii) adoption of SFAS
128.
</FN>
</TABLE>
