SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 1, 2000
OR
__ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
0-17541
(Commission File No.)
PRESSTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0415170
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
9 Commercial Street, Hudson, New Hampshire 03051-3907
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (603) 595-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 10, 2000, was approximately
$665,000,000.
As of March 10, 2000, there were 32,575,188 shares of the registrant's common
stock outstanding.
Documents Incorporated by Reference:
Parts of the definitive Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on June 19, 2000 are incorporated by reference into Part
III of this Form 10-K.
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PART I
Item 1. Business.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Certain statements contained in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve a number
of known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, the risks of uncertainty of patent protection, the risks of
uncertainty of strategic alliances, the impact of third-party suppliers,
manufacturing constraints or difficulties, market acceptance of and demand for
the Company's products and resulting revenues, development of technology and
manufacturing capabilities, impact of competitive products and pricing,
litigation and other risks detailed in this report and the Company's other
filings with the Securities and Exchange Commission. The words "looking
forward," "believe," "demonstrate," "intend," "expect," "estimate,"
"anticipate," "likely" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made.
Set forth below is a glossary of certain terms used in this report:
A2 (4-up) a printing term referring to a standard paper
size capable of printing four 8.5" x 11"
pages on a sheet of paper
A3 (2-up) a printing term referring to a standard paper
size capable of printing two 8.5" x 11" pages
on a sheet of paper
Ablation a controlled detachment/vaporization caused
by a thermal event. This process is used
during the imaging of the Company's
PEARL(R)consumables
Computer-to-plate (CTP), a general term referring to the exposure of
(direct-to-plate) lithographic plate material from a digital
database, off-press
Dampening solution Traditional lithographic printing chemical
bath used to coat the non-image areas of a
printing plate
Direct Imaging (DI(R)) Digital imaging systems that allow image
information technologies carriers (film and
plates) to be imaged from a digital database,
on- and off-press
Dots per inch (dpi) a measurement of the resolving power or the
addressability of an imaging device
Effluents waste materials that flow from photographic
processing equipment, which are often toxic
in nature
GTO-DI the first generation of direct imaging,
waterless presses available in two, four and
five printing station configurations, a joint
effort between Heidelberg and Presstek
Halftone a printing reproduction process which
converts the image into dots of various sizes
and equal spacing between centers
Heidelberg Heidelberger Druckmaschinen AG, the world's
largest printing press manufacturer,
headquartered in Heidelberg, Germany
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Hydrophobic/ used in lithographic printing to describe
Hydrophilic whether a material will reject water
(hydrophobic) or will be water receptive
(hydrophilic)
Infrared lying outside of the visible spectrum beyond
its red-end characterized by longer
wavelengths; used in the Company's thermal
imaging process
Large Format a printing term referring to printing layouts
that include four or more pages on a single
sheet of paper
Lithographic printing from a single plane surface under
the principle that image area carries ink and
the nonimage area does not, and that ink and
water do not mix
Off-press Making a printing plate from either an analog
or digital source independently of the press
on which it will be used
Oleophilic/ used in printing to describe whether a
Oleophobic material will be ink receptive (oleophilic)
or reject ink (oleophobic)
On-demand a manufacturing philosophy when applied to
printing provides faster service, shorter run
lengths and less inventory
On-press the use of Presstek's direct imaging
technologies to make a plate directly from a
digital file on the press
PEARL(R) the name associated with Presstek's current
laser imaging technologies and related
products and consumables
PEARL imaging systems the Presstek components required to convert a
conventional printing press into a direct
imaging press, including laser diode arrays,
computers, electronics
PEARLsetter(TM)/Dimension400(TM) the Company's product line of computer-to-
PEARLhdp(TM) plate, off-press plate making and digital
proofing equipment
Photosensitive silver halide emulsions exposed by a reaction
to light requiring a subsequent chemical
development and stabilization process
Plate making the process of applying a printable image to
a printing plate
Prepress Graphic arts operations and methodologies
that occur prior to the printing process;
typically these include photography,
scanning, image assembly, color correction,
exposure of image carriers (film and/or
plate), proofing
Proofer/proof a machine that creates an image that is a
simulation of what will be printed, or the
simulated image itself.
Quickmaster DI the second generation of direct imaging,
waterless presses, highly automated with
roll-fed PEARL plate material, a joint
development effort between Heidelberg and
Presstek
Semiconductor laser diode a high-powered, infrared imaging technology
employed in the PEARL imaging system
Short-run markets/printing a graphic arts classification used to denote
an emerging trend for lower print quantities
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Thermally-based a method of digitally exposing a material via
the heat generated from a laser beam
Vapor deposition process a technology to accurately, uniformly coat
substrates in a controlled environment
Waterless a lithographic printing method that uses dry
offset printing plates and inks so that it
does not require a dampening system
"YAG" laser one of the more commonly used laser sources
for direct-to-plate imaging systems
General
Presstek, Inc. (the "Company" or "Presstek"), incorporated in Delaware, was
founded in September 1987 as a development company to find a new way to produce
color offset printing. This new printing method would take full advantage of
computer based, electronic prepress processes which were rapidly becoming
available and expedite the design, image manipulation, page assembly and related
aspects used to produce high quality color pages in a totally digital manner. At
that time, digitally created pages could not be easily converted to finished,
four or more color offset printed pages. The process used involved costly and
time consuming methods including the use of specialized photosensitive film
recording systems and related plate exposure devices along with the need to
chemically process these photosensitive analog films and plates. These
photographically based methods generated waste effluents that were difficult to
dispose of in an environmentally sound manner. The Company's objective was to
eliminate these non-digital processes and develop a new system that would allow
digitally formatted file data to be used to image a plate directly on the
printing press. This would reduce cost, eliminate the time it normally takes to
make films and plates, and improve the quality of the finished printed offset
page.
The Company's development work ultimately led to the commercialization of
its proprietary PEARL(R) based direct imaging technology. This direct imaging
technology, which uses high powered semiconductor laser diodes and thermal
ablation printing plate materials, is currently being used in a variety of both
on-press and off-press applications. The Company has also recently developed its
next-generation DI(R) technology, the ProFire(TM) integrated imaging system.
With ProFire, the Company has developed a highly advanced laser imaging
technology combining all the components of a thermal imager in one compact
package. The Company believes that both PEARL and DI represent a technological
breakthrough for the worldwide printing and publishing industry, since they can
be used for both on-press and off-press applications. This capability provides a
number of new applications for direct imaging systems and proprietary thermal
based digital media and consumable printing plates. The Company's past
investments in its proprietary digital imaging technologies have resulted in
more than 160 patents issued or allowed and 160 applications pending throughout
the world. The Company believes these patents, together with its twelve years of
experience in developing digital imaging systems place the Company in a
significant position in the markets it has chosen to serve. To further
strengthen its patent portfolio, the Company acquired R/H Consulting, Inc.
("R/H") in 1999 and Heath Custom Press, Inc. ("Heath") in 1998. See "Patents and
Proprietary Rights".
The Company discontinued the operations of its Delta V Technologies, Inc.
("Delta V") subsidiary at the end of fiscal 1999 to allow the Company to further
focus its efforts on the core business of digital imaging and plate
manufacturing. Located in Tucson, Arizona, Delta V was engaged in the
development, manufacture and sale of vacuum deposition coating equipment for
vacuum coating applications. As a result of the divestiture of Delta V, the
Company incurred a $8.5 million loss on disposal of discontinued operations for
fiscal 1999. This included actual closing costs and operating losses incurred in
the fourth quarter of fiscal 1999 of $2.2 million, a provision of $1.6 million
for anticipated closing costs, $6.1 million related to the write off of goodwill
and other intangible assets, and a reduction in other asset values of $1.6
million. These costs were partially offset by proceeds of $3.0 million received
from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing of its
intellectual property relating to vacuum-deposited polymer multilayer
technology.
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Strategy, Background, and Important Relationships
The Company's business strategy is based in part on alliances and
relationships with major companies in the graphic arts industry and other
markets. This strategy includes licensing the intellectual property; specialized
product development based on the Company's proprietary technologies; and the
manufacture of imaging systems for inclusion in other manufacturers' products.
The manufacture of the Company's own end user and private label products, as
well as the manufacture of proprietary thermal plate materials for use in
Presstek's and other manufacturers' imaging hardware and printing presses, is
also an important aspect of the business strategy.
This strategy led to the development of an important and long-term
relationship with Heidelberger Druckmaschinen AG ("Heidelberg"), the world's
largest manufacturer of printing presses and printing equipment, based in
Germany. This relationship was formalized with the signing of a Master Agreement
and a Technology License Agreement in January 1991. The Master Agreement and
Technology License Agreement are sometimes collectively referred to hereafter as
the "Heidelberg Agreements."
The Heidelberg Agreements
The Heidelberg Agreements and amendments govern the Company's relationship
with Heidelberg and relate to the integration of the PEARL Direct Imaging
technology into various presses manufactured by Heidelberg. The manufacture of
components, at specified rates, for such presses and the commercialization of
such presses are also covered.
The Heidelberg Agreements expire in December 2011 subject to certain early
termination and extension provisions. Under these agreements, Heidelberg agreed
to pay royalties to the Company based on the net sales prices of various
specified types of Heidelberg presses on which the Company's PEARL Direct
Imaging technology would be used. Pursuant to the Heidelberg Agreements,
Heidelberg has been provided with certain exclusive rights for use of the PEARL
Direct Imaging technology for the Quickmaster DI format size. The Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used in the Quickmaster DI.
In fiscal 1998 and 1999 the Company materially reduced production levels of
direct imaging systems used in the Quickmaster DI press, based on requirements
from Heidelberg. The Company received orders in fiscal 1999 from Heidelberg in
connection with its direct imaging systems used in the Quickmaster DI. Based on
the delivery schedule for these orders, the Company resumed production with
initial low level shipments of its direct imaging systems late in the third
quarter of fiscal 1999. The Company expects to continue shipments through the
end of fiscal 2000. Additionally, the Company believes production levels through
the end of fiscal 2000 will increase in line with the actual rate of Quickmaster
DI's made by Heidelberg.
Other Business Relationships
In addition to its association with Heidelberg, the Company has also
developed and expanded business relationships with other companies in the
industry. Certain of these relationships involve proposed new products that the
Company believes may be available late in fiscal 2000. There can be no
assurance, however that these products will be commercially successful or
produce significant revenues for the Company.
Adamovske Strojirny a.s. ("Adast"), a Czech Republic company, which uses
the Company's direct imaging technology on a larger format (19" x 26")
multicolor offset press, has announced, together with the Company, a highly
automated, two-page direct imaging printing press. This press will use the
Company's internal automated plate cylinder design and PEARLdry Plus plates.
Imation Corp. ("Imation") and the Company have jointly developed a new
method for the production of true halftone "dot for dot" color proofs using
Presstek's computer-to-plate imaging system, the PEARLhdp(TM), specially
modified for this application. Imation is also now marketing the PEARLhdp and
providing all sales support and service worldwide.
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Fuji Photo Film Ltd., ("Fuji"), one of the world's leading suppliers to the
graphic communications industry, announced with the Company in 1997, the signing
of a long-range Development and Sales Agreement which will involve the use of
the Company's proprietary intellectual property, and the sale of Presstek's
off-press CTP imagers and PEARLgold(TM) plates in Japan.
The Company has entered into an agreement with Sakurai's Graphic Systems of
Japan ("Sakurai") to provide the newest version of its DI technology for
Sakurai's larger format multicolor offset press. When used in DI mode, this
press will also use the Company's PEARLgold plate media.
Presstek and Akiyama Printing Machinery Manufacturing Corp., of Japan
("Akiyama"), have also jointly announced a development program to create a DI
version of Akiyama's J Print press for the book printing market. The new J Print
press will incorporate the Company's direct imaging and digital plate media
technologies.
Scitex Corporation Limited ("Scitex"), a leading supplier of electronic
pre-press products and systems, along with KBA-Planeta AG, a major supplier of
medium and large format sheet-fed offset printing presses, established a joint
venture to develop, produce and market a new digital offset press. This new
press, the 74 Karat uses the Company's direct imaging and related intellectual
property under license from Presstek, and Presstek's patented thermal ablation
printing plates.
Nilpeter A/S ("Nilpeter"), of Denmark is marketing an offset label press
that utilizes the Company's digital imaging technology and printing plates.
Alcoa Packaging Equipment, a division of the Aluminum Company of America,
("Alcoa"), has publicly shown a new method of printing halftone images on
beverage cans that is based on Presstek's digital imaging technology and thermal
ablation printing plates.
The Company also signed a non-binding agreement with Xerox Corporation
("Xerox"), to form a strategic alliance. The potential alliance, if consummated,
is expected to result in the interface of the Xerox DigiPath(TM) workflows with
the Company's digitally based products. There can be no assurance however, that
a formal strategic alliance with Xerox will be achieved.
The Company is pursuing other business relationships that it believes
should result in broader use of the Company's digital imaging and printing plate
technologies in existing, as well as, new applications. There can be no
assurance, however, that the Company, any Company product or any products
incorporating the Company's technology will be able to compete successfully in
the market.
The Company has also established a worldwide distribution network through
which it markets, sells and supports its computer-to-plate and PEARL thermal
plate products. This network currently encompasses 34 dealers located worldwide
and includes the largest graphic arts dealer in the United States, the Pitman
Company, which sells its products through multiple branch locations. In
addition, Fuji Graphic Systems Canada is the Company's exclusive dealer for its
products in Canada.
The Company's PEARL and DI Digital Imaging Systems and Their Manufacture
The Company's PEARL digital imaging system is composed of a series of solid
state semiconductor laser diodes held in a fixed array that can range in size,
depending on the application, from as few as 8 diodes to as many as 32 or more
diodes. Each diode is under computer control and can be turned off and on at
high speeds, usually measured in microseconds. When the diode is turned on it
creates a miniature, precise, micron-measured beam of high powered, infrared
laser light. The beam is focused on a specific area on the surface of the
thermal printing plate causing this area of the plate to instantaneously heat
up, creating an ablation effect and producing a microscopic hole. This hole on
the surface of the printing plate is ink receptive. The area surrounding the
hole that has not been exposed to the laser beam is not, thus an image can be
created by controlling the placement of each laser beam. This laser-based
imaging concept is used on both the Company's computer-to-press and
computer-to-plate systems.
The Company's most recent laser imaging technology, ProFire, integrates the
lasers, laser drivers, digital electronics, and motion control into a single
package design that can be adapted to many computer-to-
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plate devices or direct imaging presses. ProFire has three major components: the
FirePower(TM) laser diode system, made up of unique four-beam laser diodes and
laser drivers, the integrated motion system that controls the placement of the
laser diodes, and the FireStation(TM) digital controller and data server. This
highly modular system allows the Company to expand the number of diodes mounted
on a fixed array, increasing speed and overall imaging performance. Due to its
compact size, the integrated imaging module fits universally within the side
rails of most printing presses. The drop-in module is also more easily
incorporated into computer-to-plate products for off-press imaging.
The manufacturing of these imaging systems has recently moved to the
Company's 55 Executive Drive facility located in Hudson, New Hampshire.
The Company uses a number of outside vendors who supply many of the imaging
system's components and assemblies. These assemblies and components are
manufactured and assembled by the Company into completed systems - either
computer-to-press, direct imaging systems such as the Quickmaster DI systems, or
PEARLsetter(TM) computer-to-plate imaging systems. Both of these systems use
semiconductor laser diode devices built to the Company's specifications and
currently supplied by one source pursuant to a supply agreement. The Company
believes however, that there are several sources available to manufacture the
laser diodes to its specifications, if required in the future.
The Company's PEARL Digital Media and Plates and Their Manufacture
The Company continues to develop its proprietary thermally-based consumable
plate products that are imaged by both its own direct imaging systems as well as
high-energy laser-based, computer-to-plate and direct-to-press systems offered
by companies such as Scitex, Creo and others.
The Company's PEARL digital media and plates are available in waterless
form, such as PEARLdry(TM) Plus for the Quickmaster DI, PEARLgold for presses
equipped with dampening systems, or Anthem(TM), the Company's recently announced
thermal plate for computer-to-plate imaging. All of these plates are based on
the Company's proprietary thermal ablation imaging technology, which means they
respond to heat and not to light. Presstek's plates are able to convert the
laser light into heat because of a special metalized layer that is sensitive to
the wave length of the laser light source. The Company's plate materials have a
wide infrared spectral sensitivity range (800 to 1200 nanometers) and can be
used with a variety of both "YAG" and semiconductor diode laser imaging systems.
The Company's latest plate technology, Anthem, is the first in an
anticipated family of plates for wet offset lithography. Anthem is a grained
anodized aluminum plate based on Presstek's patented imaging technology and
combines ablative imaging and chemically-free cleaning with run lengths of up to
100,000 impressions. The Anthem plate runs with a wide range of fountain
chemistry and inks and can be imaged on many thermal computer-to-plate systems.
Anthem's market includes a broad base of installed conventional wet offset
presses, currently the largest segment of the printing industry. The Company
believes this wet offset plate product has broad market potential due to the
large number of wet offset printing presses installed on a worldwide basis.
There can be no assurance, however that printers currently equipped with
conventional wet offset presses will purchase computer-to-plate systems that use
Anthem plates.
PEARLgold is a first generation plate for wet, lithographic offset printing
specifically targeted to the short-run, color market. It requires no post
imaging cleaning or chemical processing. PEARLgold is an ablation based printing
plate using a metalized infrared absorbing material with an additional metalized
layer placed over the infrared absorber. This additional metal layer is a
hydrophilic material and ink will not adhere to it (ink, which is oil based, and
water do not mix) but ink will adhere to those areas of the plate that have been
ablated away by the laser beam thus forming a printable image. The market
opportunity for the first generation PEARLgold plate is limited to short-run
(25,000 impressions or less) applications and may require modifications of press
conditions to accommodate the characteristics of this unique, no-process plate
technology. The Company is continuing to develop this plate and believes that
future generations of PEARLgold will be suitable for use in markets requiring
longer run lengths. Although, the Company believes it can compete successfully
in this newly developing market, there can be no assurances that it can do so.
The PEARLdry Plus is a second generation plate based on the Company's
PEARLdry technology. The PEARLdry Plus plate uses a specially formulated
silicone material that is coated over the metalized infrared
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absorbing layer. The silicone layer is oleophobic and when the imaging laser
causes the ablation process to occur, the resulting hole created by the laser in
the silicone becomes ink receptive. Presstek's PEARLdry Plus plates are used in
the Quickmaster DI, the GTO-DI, the Adast 705C DI, the Scitex/KBA 74 Karat, the
Alcoa can decorating imaging system and the Kammann CD Imaging system. Other
direct-to-plate systems also are able to image the Company's PEARLdry Plus plate
that can then be used on a conventional waterless press.
The Company's PEARL digital plate products are manufactured at the
Company's facility located at 55 Executive Drive in Hudson, New Hampshire. This
building now includes the Company's thin film vacuum sputtering coater, plate
converting and finishing equipment, and the new atmospheric coater which the
Company expects will be operational in the first half of 2000. The Company's new
Anthem thermal plate is currently manufactured by one source under an existing
supply agreement.
The Company may still need to enter into manufacturing agreements with
third parties as it more vertically integrates the manufacturing of its PEARL
digital plate products, and believes there currently are several sources
available to manufacture these consumable products.
The PEARLsetter Product Line
The PEARLsetter is a computer-to-plate imaging device that can image both
the Company's wet and dry thermal offset plates in both an A3 (2-up) and A2
(4-up) format size. The product can produce completely imaged printing plates,
ready to be mounted on a printing press, within 4 to 8 minutes, depending on the
resolution (number of dots per inch) chosen by the user. If the PEARLsetter is
imaging PEARLgold plates, these plates can be mounted immediately on the press
with no further cleaning or processing. In the case of PEARLdry plates, the user
must first wipe the ablated debris from the imaging process off the surface of
the plate. Anthem plates require a simple water wash after imaging to prepare
the plate for mounting on the press.
The Company has recently announced the first in a series of new thermal
computer-to-plate devices, the Dimension400(TM). The Dimension400 utilizes
Presstek's next-generation direct imaging technology. The Dimension400 will
image most thermal plates including the Company's own Anthem thermal plate.
In addition to making printing plates, a specially modified PEARLsetter
product referred to as the PEARLhdp (halftone digital proofer), which uses
proofing materials supplied by Imation is also being manufactured by the
Company. This halftone proofing system offers the user the ability to make
proofs that replicate the dot structure used for imaging plates. Imation is
currently marketing this product.
The Company has entered into distribution agreements with 34 graphic arts
dealers to sell, support and service its products in various countries around
the world. The Company has also entered into Original Equipment Manufacturer
("OEM") arrangements or reseller relationships with respect to the PEARLsetter
product line and/or its PEARL based consumable products with companies such as
Sakurai Machinery Company and Fuji Photo Film Co. Ltd. These agreements permit
the OEM resellers to sell the PEARL based products under their own label.
The Company continues to develop and commercialize its PEARL and DI based
computer-to-plate and Imation proofing systems. However, there can be no
assurance that the Company will be able to successfully complete or
commercialize these or other products, or enter into any additional arrangements
which will result in the further commercialization of its PEARLsetter based
product line.
Market acceptance for any products incorporating the Company's various
technologies and proprietary know-how will require substantial marketing efforts
and the expenditure of significant sums, either by the Company, and/or its
strategic and OEM partners. There can be no assurance that any existing or new
products will achieve market acceptance or be commercially viable.
Patents, Trademarks and Proprietary Rights
As of March 10, 2000, the Company and its subsidiaries hold eighty-seven
U.S. patents, (including three design patents), of which the Company has elected
to maintain sixty-seven in force. The Company has also been issued fifty-four
foreign patents, and has received notice of allowance, for twenty-one additional
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patents consisting of six U.S. and fifteen foreign. The Company has applied for
and is pursuing its applications for twenty-four additional U.S. patents and one
hundred thirty-nine foreign patents. The Company also holds two registered
trademarks, PEARL and DI. The Company anticipates that it will apply for
additional patents, trademarks, and copyrights, as deemed appropriate. There can
be no assurance as to the issuance of any such patents or the breadth or degree
of protection which the Company's patents or copyrights may afford the Company.
There is rapid technological development in the computer and image reproduction
industries, resulting in extensive patent filings and a rapid rate of issuance
of new patents. Although the Company believes that its technology has been
independently developed, and that the products it markets and proposes to market
will not infringe on the patents, or violate other proprietary rights of others,
it is possible that such infringement of existing or future patents, or
violation of proprietary rights may occur. In such event the Company may be
required to modify its design or obtain a license. No assurance can be given
that the Company will be able to do so in a timely manner, upon acceptable terms
and conditions, or at all. The failure to do any of the foregoing could have a
material adverse effect on the Company. Furthermore, there can be no assurance
that the Company will have the financial or other resources necessary to
successfully defend a patent infringement or proprietary rights violation
action. Moreover, the Company may be unable, for financial or other reasons, to
enforce its rights under any of its patents.
The Company intends to rely on proprietary know-how and to employ various
methods to protect its source code, concepts, ideas and documentation of its
proprietary software, which methods may include copyrights. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop such know-how or obtain access to the
Company's know-how or software codes, concepts, ideas and documentation.
Furthermore, although the Company has and expects to have confidentiality
agreements with its employees and appropriate vendors, there can be no assurance
that such arrangements will adequately protect the Company's trade secrets.
Competition
The Company believes that its imaging, thermal plate and other intellectual
property, its proprietary technologies, its thermal plate manufacturing
facilities, along with its strategic alliances and worldwide distribution
network, provide the Company with a competitive advantage. However, the Company
is also aware of a number of other companies that address markets in which
Presstek products are used, and are competitive to the Company's proprietary
direct imaging, thermal plate technologies and related capabilities.
In the area of direct imaging and the short-run, on-demand market,
potential competitive companies use electrophotographic technology, sometimes
referred to as xerography, as the basis of their product lines. These companies
include, among others, Canon Inc., Indigo N.V., Xeikon N.V., and Xerox
Corporation. Agfa Gevaert N.V, IBM, and Scitex are marketing product versions
manufactured by these companies. These electrophotographic imaging systems use
either wet or dry toners to create one to four color images on paper and
typically offer resolutions of between 400 and 800 dots per inch.
The Company is aware that most of the major entities in the graphic arts
industry have developed and/or are developing and marketing off-press
computer-to-plate imaging systems. To date, these devices, for the most part,
utilize printing plates that require a post imaging photochemical developing
step and/or other post processing steps such as heat treatment. Potential
competitors in this area include, among others, Agfa Gevaert N.V., Creo Products
Inc., DaiNippon Screen Mfg, Ltd., Heidelberger Druckmaschinen AG, Krause GmbH,
Scitex Corporation Ltd., combinations of these companies, and other smaller or
lesser known companies. The Company's PEARLsetter computer-to-plate, off-press
plate imaging system is, in the Company's opinion, a further technological
advancement because it eliminates the need for post chemical processing. The
Company believes however, that some of the graphic arts companies mentioned
above are likely to be working on similar plate concepts that would eliminate
the need for post image chemical processing.
The Company also anticipates competition from printing plate manufacturing
companies that manufacture, or have the potential to manufacture, digital
thermal plates. Such companies include Agfa Gevaert N.V., Kodak Polychrome
Graphics LLC, Fuji Photo Film Co., Ltd., and others.
Products incorporating the Company's technologies can also be expected to
face competition from conventional methods of printing and creating printing
plates. While these methods are considered by the
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Company to be more costly, less efficient and are not as environmentally
conscious as those being implemented by the Company, they do offer their users
the ability to continue to employ their existing means of print and plate
production. Companies offering these more traditional means and methods are also
refining these technologies to make them more acceptable to the market.
Most of the companies marketing competitive products or with the potential
to do so are well established, have substantially greater financial and other
resources than the Company, and have established records in the development,
sale and service of products. There can be no assurance that the Company, any
Company product or any products incorporating the Company's technology will be
able to compete successfully in the future.
Research and Development
Research and product development expenses were $17.7 million, $15.4 million
and $10.7 million in fiscal 1999, 1998 and 1997 respectively, related to the
Company's continued development of products incorporating its PEARL and DI
technologies.
Backlog
As of March 10, 2000, the Company and its subsidiaries had a backlog of
products and royalties under contract aggregating approximately $19.3 million
compared to a backlog of approximately $21.6 million as of March 11, 1999.
Substantially all backlog of products as of March 10, 2000 is expected to ship
in 2000.
Employees
As of March 10, 2000, the Company and its subsidiaries had two hundred
fifty-five employees. One hundred twenty-five are engaged primarily in
engineering, research and development, service and marketing; ninety-four are
engaged primarily in manufacturing, manufacturing engineering and quality
control; and thirty six are engaged primarily in corporate management,
administration and finance. The Company considers its relationship with its
employees to be good.
Item 2. Properties.
The Company is located in three facilities in Hudson, New Hampshire.
The Company leases approximately 36,000 square feet of property at 9
Commercial Street. The Company's corporate offices and marketing operations
occupy 18,000 square feet, 6,000 square feet are being utilized as general
warehouse space, and the Company is subleasing 12,000 square feet of this
facility. The lease specifies a base monthly rent of $15,281, adjusted annually,
plus a pro rata share of real estate taxes, utilities, and certain other
expenses. The lease expires on June 30, 2000, subject to an option to renew for
an additional three years and the Company's right of first refusal to purchase
the property. The Company expects to relocate these operations to its corporate
headquarters at 55 Executive Drive, Hudson, NH.
The Company also leases approximately 50,000 square feet of property at 18
Hampshire Drive. This facility houses the consumables and equipment research and
development groups. The lease of these premises, which expires in May 2001,
provides for rent at the rate of $16,667 per month, adjusted annually, plus a
pro rata share of real estate taxes, utilities, and certain other expenses. The
Company is currently negotiating to extend the lease for two additional years.
The Company leases certain other property in Hudson, New Hampshire which is
not considered to be material.
The Company's equipment and consumable product manufacturing operations are
located in a 100,000 square foot facility at 55 Executive Drive, which the
Company owns. The Company began construction of the second phase of this
facility in February 2000. This additional facility will include the Company's
corporate offices, sales and marketing facilities, as well as additional
manufacturing facilities for its manufacture of its digital media and consumable
products.
10
<PAGE>
The Company owns a 70,000 square foot facility in Tucson, Arizona, which is
currently available for sale. This facility previously housed the manufacturing
operations of Delta V. The Company discontinued the operations of Delta V in
fiscal 1999.
The Company's properties at 55 Executive Drive in Hudson, New Hampshire and
Tucson, Arizona with an aggregate cost of $17.0 million are secured by a
ten-year mortgage term loan in the principal amount of $6.9 million.
Item 3. Legal Proceedings.
As previously disclosed, seven federal class action lawsuits were filed
against the Company and others, all of which have been consolidated before the
United States District Court, District of New Hampshire, under the common
caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly
filed and served a Second Consolidated Amended Class Action Complaint naming the
Company, certain of its present or former officers and directors ("the Berke
Officer and Director Defendants"), and other parties as defendants. The
plaintiffs allege, among other things, that the Company and/or the Berke Officer
and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities
Exchange Act of 1934, (the "Exchange Act") and Rule 10b-5 ("Rule 10b-5")
promulgated thereunder, and violated New Hampshire law; and that the Berke
Officer and Director Defendants violated Section 20(a) ("Sect. 20(a)") Section
20A of the Exchange Act. The Complaint alleges, among other things, that the
Company and/or the Berke Officer and Director Defendants issued false and
misleading reports, failed to disclose material facts including a misstatement
of earnings in the Company's financial statements for the first quarter ended
March 30, 1996, misstated or failed to fully disclose the Company's supply
contracts with, payments received from, sales made by, backlog of orders
received from, and delays in production by the Company's principal customer, the
alleged circulation of, and alleged failure to correct certain research reports
concerning the Company that contained alleged misrepresentations regarding
allegedly inflated financial projections and the alleged failure to properly
disclose the scope of an investigation by the Securities and Exchange Commission
("SEC"). Certain of the Berke Officer and Director Defendants are alleged to
have sold the Company's common stock at artificially inflated prices while in
possession of material non-public information concerning the Company. The
plaintiffs seek unspecified compensatory and punitive damages, attorney and
expert fees and other costs and expenses incurred by the plaintiffs in
connection with the action.
On March 30, 1999 the United States District Court for the District of New
Hampshire issued orders dismissing several of the claims brought against the
Company and others in the Berke lawsuit.
As previously disclosed, on July 16, 1996, Richard Strauss commenced a
derivative suit on behalf of the Company in the Court of Chancery of the State
of Delaware, New Castle County, against certain officers and directors of the
Company ("the Strauss Officer and Director Defendants"). The plaintiff alleges
that the Strauss Officer and Director Defendants breached their fiduciary duties
to the Company and its public stockholders and wasted corporate assets, by
making allegedly false and misleading statements of fact or concealing material
facts concerning the viability of the Company's "key" patent and its proprietary
interest in its PEARL technology, causing the Company to fail to properly
disclose the scope of an investigation by the SEC, and causing the Company to
misstate its financial results for the first quarter of 1996. The plaintiff also
alleges that certain of the Strauss Officer and Director Defendants sold
securities of the Company at inflated prices while they were in possession of
material non-public information concerning the Company. The plaintiff alleges
that the actions of the Officer and Director Defendants resulted in breaches of
Sect. 10(b) and Rule 10b-5 which resulted in other lawsuits being commenced
against the Company which will require the Company to expend resources to
defend. The plaintiff seeks to recover, on behalf of the Company, unspecified
damages allegedly sustained by the Company as a result of the defendants'
alleged breaches of fiduciary duty, disgorgement of any profits derived from
their sale of the Company's common stock, as well as other relief. This action
had been stayed pending the outcome of the Berke action.
11
<PAGE>
As previously disclosed, on March 14, 1997, James P. Cassidy commenced a
derivative suit on behalf of the Company in the United States District Court for
the District of New Hampshire against, among others, certain of the Company's
officers and directors (the "Cassidy Officer and Director Defendants"). The
plaintiff alleges that the Cassidy Officer and Director Defendants breached
their fiduciary duty to the Company and its public stockholders and wasted
corporate assets by making false and misleading statements of fact or concealing
material facts concerning the scope and viability of the Company's "key" patents
and its proprietary interest in its PEARL technology, and causing the Company to
issue false and misleading reports or failure to disclose material facts
including a misstatement of earnings in the Company's financial statements for
the year ended December 30, 1995, and for the first quarter ended March 30,
1996. The plaintiff also alleges that certain of the Cassidy Officer and
Director Defendants sold securities of the Company at inflated prices while they
were in possession of material non-public information concerning the Company.
The plaintiff also alleges that the actions of the Cassidy Officer and Director
Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in
other lawsuits being commenced against the Company which will require the
Company to expend resources to defend, and also constituted gross negligence and
breaches of their contractual obligations to the Company. The plaintiff seeks to
recover on behalf of the Company unspecified damages allegedly sustained by the
Company as a result of the Defendants' actions as alleged, disgorgement of any
profits from the sale of the Company's common stock, as well as other relief
against the defendants.
As previously disclosed, on June 16, 1997, Seena Stevens Silverman
commenced a purported class action in the United States District Court for the
District of New Hampshire against the Company and certain of its present and/or
former officers and directors (the "Silverman Officer and Director Defendants"),
and other parties. The plaintiff purports to bring this action on behalf of a
class of persons who sold put options in the common stock of the Company between
November 7, 1995 and June 20, 1996. The complaint alleges, among other things,
that the Company and/or the Silverman Officer and Director Defendants violated
Sect. 10(b) and Rule 10b-5, and violated New Hampshire law; and that the
Silverman Officer and Director Defendants violated Sect. 20(a). The plaintiff
alleges that the defendants defrauded the putative class members by manipulating
the price and supply of the Company's common stock, issuing false and misleading
statements regarding the nature of the Company's proprietary PEARL technology,
failing to disclose the true depth and target of an investigation by the SEC,
and making misleading statements regarding the Company's claims to its PEARL
technology and its contract with the Company's principal customer. The plaintiff
also alleges that certain of the Silverman Officer and Director Defendants sold
securities of the Company at inflated prices while they were in possession of
material non-public information concerning the Company. The plaintiff seeks to
recover unspecified compensatory and punitive damages on behalf of the putative
class, as well other relief.
The Company has recently entered into an agreement with the plaintiffs to
settle the class action lawsuit, and has executed a memorandum of understanding
with respect to settlement of the derivative law suits. Under the terms of the
class action settlement, $22.0 million, in the form of shares of the Company's
common stock, will be paid to the class, with the number of shares to be issued
determined by a formula valuing the stock at different time periods. The Company
has reserved the right to pay the settlement in cash at the time the settlement
becomes effective. In the memorandum of understanding in the derivative
litigation, the Company has agreed to certain therapeutic improvements to its
internal policies, some of which have already been instituted, including Company
policies on insider trading, the functioning and membership of its audit
committee, and policies pertaining to corporate communications. The settlement
of both the class action and derivative actions require final approval of the
United States District Court. The Company has recorded a charge of $23.2 million
in the fourth quarter of fiscal 1999 related to the settlement. See Note 14 of
notes to the financial statements.
In August 1999 Creo Products, Inc., ("Creo"), filed an action in the United
States District Court for the District of Delaware against the Company asserting
that Creo has a "reasonable apprehension that it will be sued by Presstek for
infringement" of two of the Company's patents and seeking a declaration that
Creo's products "do not and will not infringe any valid and enforceable claims"
of the patents in question. In September 1999, the Company filed a counterclaim
against Creo for patent infringement. The Company claims that Creo has infringed
two direct imaging patents owned by the Company which were recently the subject
of re-examination by the U. S. Patent and Trademark Office.
Presstek intends to vigorously enforce its patent rights.
In February, 2000 a complaint was filed by PPG, Inc. against Delta V in the
United States District Court for the Western District of Pennsylvania alleging
that Delta V sold to the plaintiff that certain vacuum coating equipment, did
not meet certain product specifications. In its complaint, which has not yet
been served on Delta V, the plaintiff is seeking damages in excess of $5.0
million. The Company intends to vigorously defend this action.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock has traded in the over-the-counter market on the
NASDAQ National Market System under the symbol PRST since July 18, 1990, and,
prior thereto, from May 11, 1990, to July 17, 1990, traded on the NASDAQ System.
From the Company's initial public offering until May 11, 1990, the principal
redemption date of the Warrants, the Company's Units, common stock and Warrants
were traded on the NASDAQ System. The following table sets forth, for the
periods indicated, the high and low sales prices of the Company's common stock
as reported by NASDAQ.
Fiscal Year Ended
January 1, 2000 High Low
- --------------- ---- ---
First Quarter $11 7/16 $ 6 13/16
Second Quarter 9 7/8 6 1/2
Third Quarter 7 15/16 5
Fourth Quarter 19 7/8 5 15/16
Fiscal Year Ended
January 2, 1999
- ---------------
First Quarter $30 1/4 $15
Second Quarter 18 5/8 10 15/16
Third Quarter 13 13/16 7 1/4
Fourth Quarter 10 5 1/4
On March 10, 2000 there were 1,308 holders of record of the Company's
common stock.
Dividend Policy
To date, the Company has not paid any cash dividends on its common stock.
The payment of cash dividends, if any in the future, is within the discretion of
the Company's Board of Directors and will depend upon the Company's earnings,
its capital requirements and financial condition and other relevant factors. The
Board of Directors does not intend to declare any cash dividends in the
foreseeable future, but instead intends to retain all earnings, if any, for use
in the Company's business operations.
Issuance of Unregistered Securities
During the quarter ended January 1, 2000, the Company issued to certain
employees, options to purchase 4,000 shares of its common stock pursuant to the
Company's 1991 Stock Option Plan. These options were granted at prices ranging
from $7.31 to $15.88 per share with expiration dates ranging between October 4,
and December 13, 2009. The foregoing options were issued pursuant to the
exemption from registration provided by Section 2(a)(3) and/or Section 4(2) of
the Securities Act of 1933 (the "Act").
On November 19, 1999 the Company issued 142,855 unregistered shares of
common stock for the acquisition of R/H Consulting, Inc. in a private
transaction exempt under 4(2) of the Act and Regulation D thereunder.
13
<PAGE>
Item 6. Selected Financial Data
The following selected financial data of the Company has been derived from
the financial statements of the Company appearing elsewhere herein (except for
the statement of operations data for the years ended December 28, 1996 and
December 30, 1995 and the balance sheet data at January 3, 1998, December 28,
1996 and December 30, 1995, which is not included in such financial statements).
All references to common shares and earnings (loss) per share data have been
restated retroactively to reflect the fiscal 1997 and fiscal 1995 two-for-one
stock splits, effected in the form of stock dividends.
<TABLE>
<CAPTION>
Statements of Operations
JAN 1, JAN 2, JAN 3, DEC 28, DEC 30,
For the Fiscal Years Ended 2000 1999 1998 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues: $ 54,964 $ 74,165 $ 89,793 $ 46,678 $ 27,611
Costs and Expenses:
Costs of products sold 33,326 46,606 43,854 20,409 14,924
Engineering and product development 17,671 15,413 10,656 8,894 6,155
Sales and marketing 5,934 5,620 4,302 2,588 1,727
General and administrative 6,006 8,845 5,162 3,736 2,050
Provision for settlement of shareholder litigation(1) 23,200 -- -- -- --
-------- -------- -------- -------- --------
Total costs and expenses 86,137 76,484 63,974 35,627 24,856
-------- -------- -------- -------- --------
Other Income (Expense):
Dividend and interest, net 501 623 374 782 327
Other, net 38 109 (244) (228) (2)
-------- -------- -------- -------- --------
Other income, net 539 732 130 554 325
-------- -------- -------- -------- --------
Income (Loss) From Continuing Operations (30,634) (1,587) 25,949 11,605 3,080
Provision for Income Taxes(2) -- -- 9,460 3,984 220
-------- -------- -------- -------- --------
Income (Loss) From Continuing Operations (30,634) (1,587) 16,489 7,621 2,860
Discontinued Operations:(3)
Loss from discontinued operations (448) (1,094) (2,117) (500) --
Loss on disposal of discontinued operations (8,534) -- -- -- --
-------- -------- -------- -------- --------
Loss From Discontinued Operations (8,982) (1,094) (2,117) (500) --
-------- -------- -------- -------- --------
Net Income (Loss) $(39,616) $ (2,681) $ 14,372 $ 7,121 $ 2,860
======== ======== ======== ======== ========
Earnings (Loss) Per Share - Basic:
From continuing operations $ (0.95) $ (0.05) $ 0.53 $ 0.26 $ 0.10
======== ======== ======== ======== ========
From discontinued operations $ (0.28) $ (0.03) $ (0.07) $ (0.02) $ --
======== ======== ======== ======== ========
Earnings (Loss) Per Share - Basic $ (1.23) $ (0.08) $ 0.46 $ 0.24 $ 0.10
======== ======== ======== ======== ========
Earnings (Loss) Per Share - Diluted:
From continuing operations $ (0.95) $ (0.05) $ 0.50 $ 0.23 $ 0.09
======== ======== ======== ======== ========
From discontinued operations $ (0.28) $ (0.03) $ (0.06) $ (0.02) $ --
======== ======== ======== ======== ========
Earnings (Loss) Per Share - Diluted $ (1.23) $ (0.08) $ 0.44 $ 0.21 $ 0.09
======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding - Basic 32,336 31,986 31,300 29,858 29,124
======== ======== ======== ======== ========
Weighted Average Common Shares Outstanding - Diluted 32,336 31,986 32,695 33,163 31,710
======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
Item 6. Selected Financial Data - Continued:
Balance Sheet Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
JAN 1, JAN 2, JAN 3, DEC 28, DEC 30,
As of 2000 1999 1998 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Working Capital $ 25,373 $ 37,080 $ 32,962 $ 29,179 $ 16,837
Total Assets 94,633 106,670 99,655 66,618 26,669
Short-Term Debt 1,024 522 4,800 -- --
Long-Term Debt 8,830 5,922 -- -- --
Other Long-Term Liabilities 22,950 -- -- -- --
Stockholders' Equity 49,855 87,453 85,990 57,443 22,726
Cash Dividends -- -- -- -- --
</TABLE>
1. Provision for the proposed settlements with the plaintiffs in the class
actions and related derivative suits filed in 1996. See Note 14 of notes to
the financial statements.
2. Tax expense in fiscal 1997 and 1996 represented charges in lieu of income
taxes, although no tax was payable as a result of stock compensation
deductions. Accordingly, no tax benefit was recorded in fiscal 1999. See
Note 5 of notes to the financial statements.
3. Includes the operations of Delta V Technologies, Inc., which were divested
in fiscal 1999. See Note 3 of notes to the financial statements.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Background
Presstek, Inc. (The "Company" or "Presstek"), incorporated in Delaware, was
founded in September 1987 as a development company. It was established to find a
new way to produce color offset printing. Heidelberger Druckmaschinen AG
("Heidelberg"), the world's largest printing press manufacturer, and the Company
established a relationship that was formalized in 1991. In 1993 the Company
completed the development of its high resolution, semiconductor based laser
diode imaging and thermal plate technology referred to as PEARL(R). PEARL's
thermal laser imaging technology enables its customers to image various types of
Presstek printing plates either off-press or on-press which may then be used to
produce high-quality, full color lithographic printed materials for the printing
and graphic arts industries. These printed materials typically can be produced
at a lower cost than traditional competitive methods. The PEARL-based GTO-DI was
introduced in late 1993, and in May of 1995, Heidelberg introduced the
Quickmaster DI. The Quickmaster DI design is centered around Presstek's digital
imaging and plate technology, and includes the Company's patented automatic
plate changing cylinder. The unique design feeds plates from inside the
cylinder, eliminating the need to manually change plates between jobs. The
Company began shipment of its PEARL-based Quickmaster direct imaging systems to
Heidelberg in the second quarter of 1995. The Company estimates that as of the
end of 1999, there are more than 1,100 PEARL-equipped GTO-DI and Quickmaster DI
presses installed utilizing the Company's proprietary consumable printing
plates.
The Company is also engaged in the development of additional PEARL and
DI(R) products that incorporate its patented, proprietary, digital imaging
system and process free thermal ablation printing plate technologies for
computer-to-plate and direct-to-press applications. During fiscal 1996, the
Company began shipments of its PEARL platesetter, referred to as the
PEARLsetter. The PEARLsetter is a computer-to-plate imaging system that images
both the Company's wet and dry offset plates. Also in 1996, the Company began
shipments of its direct imaging system for a larger format Adast (19" x 26")
multicolor press, the Adast 705C DI series of presses. In fiscal 1998 the
Company began shipments of its PEARLhdp laser imaging system. The PEARLhdp,
jointly developed with Imation Corp., is a digital halftone, proofing device. It
can produce true halftone "dot for dot" color press proofs using the Company's
computer-to-plate imaging system specially modified for this unique application.
The Company has entered into a comprehensive agreement whereby Imation Corp. has
been granted exclusive rights for sales, marketing and distribution of the
PEARLhdp proofing system.
The Company also has agreements with a number of other companies including
Scitex Corporation LTD., Nilpeter A/S, Werner Kammann Maschinenfabrik GmbH,
Alcoa Packaging Equipment, Sakurai Graphic Systems Corp., Fuji Photo Film Co.,
Ltd. and Akiyama Printing Machinery Manufacturing Corporation. These agreements
typically are for the use of the Company's direct imaging systems, technology
licenses, and/or thermal plate materials. They include a variety of "direct-to"
offset printing applications ranging from high quality label production and
printing on aluminum cans to the production of normal four-color printing.
During the third quarter of fiscal 1999 the Company determined to sell or
otherwise discontinue the operations of its Delta V Technologies, Inc., ("Delta
V") subsidiary to allow the Company to further focus its efforts on the core
business of digital imaging and plate manufacturing. Located in Tucson, Arizona,
Delta V was engaged in the development, manufacture, and sale of vacuum
deposition coating equipment for vacuum coating applications. The Company
discontinued the operations of Delta V as of the end of fiscal 1999.
As a result of the divestiture of Delta V, the Company incurred a $8.5
million loss on disposal of discontinued operations for the fiscal year ended
January 1, 2000. This included actual closing costs and operating losses
incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision for
anticipated closing costs of $1.6 million, $6.1 million related to the write off
of goodwill and other intangibles assets, and a reduction in other asset values
of $1.6 million. These costs were partially offset by proceeds of $3.0 million
received from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing
of the Company's intellectual property relating to vacuum-deposited polymer
multilayer technology. Delta V is reported separately as a discontinued
operation, and prior periods have been restated in the Company's financial
statements, related footnotes and the management's discussion and analysis to
conform to this presentation.
16
<PAGE>
In November 1999 the Company acquired 100% of the stock of R/H Consulting,
Inc. ("R/H"). R/H was principally engaged in the research and development of
laser imageable printing plates. R/H was purchased for $500,000 and 142,855
shares of the Company's common stock. The excess purchase price over book value
of net assets acquired of $1.9 million has been allocated to the patents
acquired. The acquisition was accounted for as a purchase and accordingly the
results of R/H's operations subsequent to November 1999 (which are immaterial)
have been included in the financial statements for fiscal 1999. The results of
R/H's operations for 1999 and 1998 would not have had a material impact on the
Company's results of operations for the comparable periods.
In October 1998, the Company sold, for their book value, certain assets of
Heath Custom Press, Inc. ("Heath"), which had been purchased in January 1998 for
94,865 unregistered shares of the Company's common stock. Heath was engaged in
the design and manufacture of custom printing presses.
The Company operates and reports on a 52/53, week fiscal year, ending on
the Saturday closest to December 31. Accordingly, the financial statements
include the 52 week period ended January 1, 2000 ("fiscal 1999"), the 52 week
period ended January 2, 1999 ("fiscal 1998"), and the 53 week period ended
January 3, 1998 ("fiscal 1997").
As a result of the divestiture of Delta V, the Company determined that it
operates in one reportable segment, the development and manufacture of digital
imaging and printing plate technologies for the printing and graphic arts
industry.
Results of Operations
Fiscal 1999 versus Fiscal 1998
Revenues
Revenues for fiscal 1999 and 1998 of $55.0 million and $74.2 million,
respectively, consisted of product sales, royalties, fees and other
reimbursements. Revenues for fiscal 1999 decreased $19.2 million or 26% as
compared to fiscal 1998. Product sales for fiscal 1999 were $47.9 million as
compared to $60.8 million in fiscal 1998, a decrease of $12.9 million or 21%.
The decrease was due primarily to a decrease of shipments to Heidelberg for
direct imaging systems used in the Quickmaster DI, and a decrease in sales of
custom printing press products. These decreases were partially offset by an
increase in sales of the Company's proprietary digital media and consumable
products. The revenues generated from the sale of the Company's PEARLdry(TM) and
other consumable products were $37.1 million for fiscal 1999, an increase of
$8.8 million or 31%, as compared to $28.3 million in fiscal 1998. These
consumable product revenues included $17.2 million and $11.4 million for fiscal
1999 and 1998, respectively, sold under the Company's agreements with Heidelberg
and its distributors.
Royalties and fees from licensees for fiscal 1999 of $7.0 million decreased
$6.3 million or 47% as compared to royalties and fees of $13.3 million for
fiscal 1998. Royalties decreased $7.0 million or 91% comparing fiscal 1999 to
fiscal 1998 offset by an increase in engineering fees primarily from Fuji Photo
Film Co., Ltd., of $634,000 or 11% in fiscal 1999. The decrease is primarily the
result of the reduction in shipments of direct imaging systems to Heidelberg for
use in the Quickmaster DI.
Revenues generated under the Company's agreements with Heidelberg and its
distributors were $21.6 million in fiscal 1999, a decrease of $20.5 million or
49% from fiscal 1998 revenues of $42.1 million. Revenues from Heidelberg
represented 39% and 57% of total revenues for the fiscal years 1999 and 1998,
respectively.
In fiscal 1998 and 1999, the Company materially reduced production levels
of direct imaging systems used in the Quickmaster DI press, based on
requirements from Heidelberg. The Company received orders in fiscal 1999 from
Heidelberg in connection with its direct imaging systems used in the Quickmaster
DI. Based on the delivery schedule for these orders, the Company resumed
production with initial low level shipments of its direct imaging systems late
in the third quarter of fiscal 1999. The Company expects to continue shipments
through the end of fiscal 2000. Additionally, the Company believes production
levels through the end of fiscal 2000 will increase in line with the actual rate
of Quickmaster DI's made by Heidelberg.
17
<PAGE>
The Company believes that revenues will increase in fiscal 2000 as compared
to fiscal 1999, primarily due to the increased requirements for the direct
imaging systems used in the Quickmaster DI, and related increases for the
Company's proprietary consumables sold for the Quickmaster DI and other
equipment. There can be no assurance, however that the Company will achieve
these anticipated revenue increases.
Cost of Products Sold
Cost of products sold consists of the costs of material, labor and overhead
as well as future warranty costs associated with product sales. Cost of products
sold for fiscal 1999 were $33.3 million, a decrease of $13.3 million or 29% as
compared to fiscal 1998. The gross margin increase to 30% in fiscal 1999 from
23% in fiscal 1998 is primarily the result of economies related to increased
manufacturing volumes of proprietary digital media and consumable products, a
reduction in allowances provided as a result of product requirement changes and
inventory obsolescence, offset by inefficiencies related to reduced
manufacturing volumes of direct imaging systems sold to Heidelberg for use in
its Quickmaster DI.
The Company anticipates that the gross margin on product sales will
continue to improve in fiscal 2000, as the Company increases production volumes
for its direct imaging systems sold to Heidelberg and implements process
improvements for its digital media and consumable products. There can be no
assurance however that the actual gross margins will not be lower than
anticipated.
Research and Product Development
Research and product development expenses consist primarily of payroll and
related expenses for personnel, parts and supplies, and contracted services
required to conduct the Company's equipment and consumable product development
efforts.
Research and product development expenses were $17.7 million or 32% of
revenues for fiscal 1999 as compared to $15.4 million or 21% of fiscal 1998
revenues. The increase resulted principally from increased expenditures for
labor and professional services related to the Company's continued development
of products incorporating its PEARL and DI technologies. Included in these
development efforts were significant expenditures for the Company's digital
plate media and consumable products, as well as expenditures for its
next-generation ProFire(TM) integrated imaging system and other product
development efforts. These increased expenditures were also a result of
increased engineering programs related to the development contract with Fuji
Photo Film Co., Ltd.
The Company expects these increased development expenditures to continue
through fiscal 2000, as it prepares for the introduction of its next-generation
integrated imaging system, expands its offerings of proprietary consumable
printing plates, and pursues the development of additional products for the
DRUPA 2000 international printing-media trade show. There can be no assurance
however, that these expenses will not be greater than anticipated.
Sales and Marketing
Sales and marketing expenses consist primarily of payroll and related
expenses for personnel, advertising and promotional expenses, and travel costs.
Sales and marketing expenses were $5.9 million or 11% of revenues for fiscal
1999 compared to $5.6 million or 8% of fiscal 1998 revenues. The increase
resulted primarily from increased expenditures for labor and professional
services, and other related costs associated with the Company's attendance at
trade shows and the continued expansion of its worldwide sales, distribution and
customer support network.
It is expected that these expenditures will continue to increase through
fiscal 2000 as the Company continues to expand its direct sales force and
customer support network for its products. The Company also expects a
significant increase in expenditures in the second quarter of fiscal 2000, as a
result of its planned attendance at Drupa 2000 in May. There can be no
assurance, however, that these expenditures will not be greater than currently
anticipated.
General and Administrative
General and administrative expenses consist primarily of payroll and
related expenses for personnel, and contracted professional services. General
and administrative expenses for fiscal 1999 were $6.0 million or 11% of revenues
compared to $8.8 million or 12% of fiscal 1998 revenues. The decrease of $2.8
million related primarily to decreases in expenditures for contracted
professional services required to conduct the finance, information systems, and
administrative functions of the Company, as well as, the reduction in the
18
<PAGE>
provision for uncollectable accounts. The Company recorded a charge of $2.2
million for certain disputed and uncollectable accounts in fiscal 1998.
The Company anticipates that general and administrative costs for fiscal
2000 will increase over current levels, however, there can be no assurance that
these expenses will not be greater than anticipated.
Provision For the Settlement of Shareholder Litigation
The Company has recorded a charge of $23.2 million in fiscal 1999 related
to the proposed settlement with the plaintiffs in the class actions which were
filed in 1996 in the United States District Court for the District of New
Hampshire on behalf of the Company's shareholders, and with the plaintiffs in
the related derivative suits. The charge includes the $22.9 million settlement,
and related administrative costs in the amount of $250,000.
Other Income and Expense
Other income was $539,000 or 1% of revenues for fiscal 1999 compared to
$732,000 or 1% of revenues for fiscal 1998. The decrease of $193,000 is
primarily the result of a decrease in average cash balances available for
investment, as well as interest expense incurred on the Company's lease line of
credit with Keybank National Association.
Provision for Income Taxes
The Company did not record provisions for federal or state income taxes or
charges in lieu of federal or state income taxes for fiscal 1999 and 1998, as a
result of the net operating losses incurred prior to tax deductions related to
stock compensation in both periods.
Loss from Continuing Operations
As a result of the foregoing, the Company had losses from continuing
operations of $30.6 million for fiscal 1999, as compared to losses from
continuing operations of $1.6 million for fiscal 1998.
Loss from Discontinued Operations
The results of operations of Delta V are presented as discontinued
operations. For fiscal 1999 the Company incurred a loss from discontinued
operations of $448,000, as compared to a loss of $1.1 million for fiscal 1998.
In addition, for fiscal 1999 the Company recorded a loss on disposal of its
discontinued operations of $8.5 million. This included actual closing costs and
operating losses incurred in the fourth quarter of fiscal 1999 of $2.2 million,
a provision for anticipated closing costs of $1.6 million, $6.1 million related
to the write off of goodwill and other intangible assets, and a reduction in
other asset values of $1.6 million. These costs were partially offset by
proceeds of $3.0 million received from 3M for the licensing of the Company's
intellectual property relating to vacuum-deposited polymer multilayer
technology.
Fiscal 1998 versus Fiscal 1997
Revenues
Revenues for fiscal year 1998 of $74.2 million consisting of product sales,
royalties, fees and other reimbursements, decreased $15.6 million or 17% as
compared to revenues of $89.8 million for fiscal 1997.
Net product sales for fiscal 1998 of $60.8 million decreased $10.5 million
or 15% as compared to net product sales of $71.3 million in fiscal 1997,
primarily as a result of a reduction in sales volume of direct imaging systems
to Heidelberg for use in the Quickmaster DI. These reductions were partially
offset by the increased sales volume of custom printing presses as a result of
the acquisition of Heath in 1998, as well as increased sales volume of the
Company's proprietary thermal printing plates. The revenues generated from the
sale of the Company's PEARLdry and other consumable products were $28.3 million
for the fiscal year 1998, an increase of $10.8 million or 62% over fiscal 1997
due to increased sales volume.
19
<PAGE>
Royalties and fees from licensees for fiscal 1998 of $13.3 million
decreased $5.2 million or 28% as compared to royalties and fees of $18.5 million
for fiscal 1997. Royalties decreased $9.5 million or 56% comparing fiscal 1998
to fiscal 1997, as a result of the reduction in sales volume of direct imaging
systems to Heidelberg for use in the Quickmaster DI. Engineering fees increased
$4.3 million or 302% in fiscal 1998 primarily as a result of engineering and
other fees received from Fuji Photo Film Co., Ltd. Included in fiscal 1997 were
certain fees related to the Company's agreement to license its on-press imaging
patents to Scitex Corporation Ltd.
Revenues generated under the Company's agreements with Heidelberg and its
distributors were $42.1 million in fiscal 1998, a decrease of $31.6 million or
43% from fiscal 1997 revenues of $73.7 million. Revenues from Heidelberg
represented 57% and 82% of total revenues for the fiscal years 1998 and 1997,
respectively.
Cost of Products Sold
Cost of products sold for fiscal 1998 were $46.6 million, an increase of
$2.8 million or 6% as compared to fiscal 1997. The gross margin decrease to 23%
from 38% in fiscal 1997 was primarily the result of reduced manufacturing volume
of the direct imaging systems sold to Heidelberg for use in the QM-DI, as well
as increased fixed costs associated with the Hudson, New Hampshire manufacturing
operations. Also included in fiscal 1998 was an allowance of $1.3 million
provided to a major supplier as a result of a change in requirements and an
allowance of $1.6 million for inventory obsolescence as a result of the planned
introduction of the Company's next-generation laser technology.
Research and Product Development
Research and product development expenses were $15.4 million or 21% of
revenues for fiscal 1998 as compared to $10.7 million or 12% of fiscal 1997
revenues. The increase resulted principally from increased expenditures for
parts and supplies related to the Company's continued development of products
incorporating its PEARL technology. Included in these development efforts were
significant expenditures for the Company's PEARLgold(TM) and other consumable
products as well as expenditures for its next-generation laser diode technology
and other product development efforts. These increased expenditures were also a
result of increased engineering programs related to the development contract
with Fuji Photo Film Co., Ltd.
Sales and Marketing
Sales and marketing expenses were $5.6 million or 8% of revenues for fiscal
1998 compared to $4.3 million or 5% of fiscal 1997 revenues. The increase
resulted primarily from increased expenditures for professional services and
other related costs associated with the Company's attendance at trade shows and
the continued expansion of its worldwide sales, distribution and technical
support network.
General and Administrative
General and administrative expenses for fiscal 1998 were $8.8 million or
12% of revenues compared to $5.2 million or 6% of fiscal 1997 revenues. The
increase of $3.6 million related primarily to increased expenditures for
additional personnel required to conduct, the finance, information systems, and
administrative functions of the Company. In addition, the Company recorded a
charge of $2.2 million for certain disputed and uncollectable accounts.
Other Income and Expense
Other income was $732,000 or 1% of revenues for fiscal 1998 compared to
$130,000 or .1% of revenues for fiscal 1997. The increase of $602,000 can be
attributed to increased interest income earned as a result of higher average
balances of funds available for investment, the gain from the sale of a parcel
of land in Hudson, New Hampshire, as well as the absence of foreign exchange
losses incurred on certain receivables from Heidelberg in fiscal 1997.
20
<PAGE>
Provision for Income Taxes
For fiscal 1998, the Company did not record a provision for income taxes as
a result of the tax loss prior to deductions related to stock compensation for
the period. The provision for income taxes for fiscal 1997 represents the tax
benefit arising from stock option deductions and the realization of net
operating loss carryforwards resulting from compensation deductions for tax
purposes. The tax benefit related to such stock option deductions has been
recorded as additional paid in capital.
Income (Loss) from Continuing Operations
As a result of the foregoing, the Company had losses from continuing
operations of $1.6 million for fiscal 1998, compared to net income from
continuing operations of $16.5 million for fiscal 1997.
Loss from Discontinued Operations
The results of operations of Delta V are presented as discontinued
operations. For fiscal 1998 the Company recorded a loss from discontinued
operations of $1.1 million compared to a loss of $2.1 million for fiscal 1997.
Liquidity and Capital Resources
At January 1, 2000, the Company had cash and cash equivalents of $18.7
million and working capital of $25.4 million as compared to cash and cash
equivalents of $19.1 million and working capital of $37.1 million at January 2,
1999.
Net cash provided by operating activities of continuing operations was $8.4
million for the fiscal year ended January 1, 2000. The cash flow resulted
primarily from reductions in accounts receivable and inventories of $9.7
million, less the loss from continuing operations of $30.6 million, offset by
non-cash items of depreciation and amortization of $5.7 million, provisions for
uncollectable accounts of $1.8 million, and the provision for the settlement of
shareholder litigation of $23.0 million. Cash flow from continuing operations
was also affected by the decrease in billings in excess of costs and estimated
earnings on uncompleted contracts of $2.0 million. This decrease was primarily
the result of a decrease in advance payments related to the Company's
development program with Fuji Photo Film Co., Ltd.
Net cash used in investing activities of continuing operations was $12.9
million for the fiscal year ended January 1, 2000 and consisted primarily of
additions to property, plant and equipment used in the Company's business of
$11.8 million. These additions included $6.8 million for additional plate
manufacturing equipment that is expected to reduce the cost of manufacturing the
Company's proprietary digital media and consumable products and $885,000 for
additional equipment that will enhance the Company's development capabilities.
Net cash provided by financing activities during the fiscal year ended
January 1, 2000 totaled $4.0 million and consisted primarily of the proceeds
from Company's lease line of credit of $4.0 million and proceeds from the
issuance of common stock of $608,000, offset by payments on the mortgage term
loan and the lease line of credit of $630,000.
In September 1999, the Company borrowed $4.0 million against a $10.0
million lease line of credit facility from Keybank National Association.
Borrowings are secured by equipment valued at $5.2 million. The loan bears a
variable rate of interest, currently 7.25%, based upon the prime rate, with a
fixed rate conversion provision. Principal and interest on the lease line of
credit facility are payable in 84 monthly installments beginning October 31,
1999. The commitment for the balance of $6.0 million available under the lease
line of credit is scheduled to expire on April 30, 2000.
The Company's credit facilities with Citizens Bank New Hampshire,
("Citizens") include a ten-year mortgage term loan and a revolving line of
credit loan. The mortgage term loan in the amount of $6.9 million, is secured by
land and buildings with a cost of approximately $17.0 million. 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%, (7.82% at January 1, 2000)
for the remaining five years. Principal and interest payments during the first
five years of the
21
<PAGE>
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.
The revolving line of credit loan, under which the Company may borrow $10.0
million, is secured by substantially all of the Company's assets. Interest on
the line of credit is payable at the LIBOR rate plus 1.50% (7.32% at January 1,
2000). The loan agreement terminates on July 31, 2000, at which date, the entire
principal and accrued interest is due and payable. The Company currently has
$10.0 million available under the line of credit loan agreement.
Under the terms of the mortgage term loan, the lease line of credit and the
revolving line of credit agreements, the Company is required to meet certain
financial covenants on a quarterly and annual basis. At January 1, 2000, the
Company was in compliance with all debt covenants.
The Company has approved expenditures for fiscal 2000 of $5.0 million for
the second phase of its corporate headquarters at 55 Executive Drive. The
Company will initially fund the construction through existing funds and cash
flow from operations. This additional facility will include the Company's
corporate offices, sales and marketing operations, as well as additional
manufacturing facilities, and is expected to be completed in October 2000.
The Company believes that existing, funds, cash flows from operations, and
cash available under its revolving line of credit and lease line of credit
should be sufficient to satisfy working capital requirements and capital
expenditures for the next twelve months.
Effect of Inflation
Inflation has not had, and is not expected to have, a material impact upon
the Company's operations.
Net Operating Loss Carryforwards
As of January 1, 2000, the Company had net operating loss carryforwards
totaling approximately $38.0 million resulting from stock compensation
deductions, for tax purposes, relative to stock option plans and $15.0 million
resulting from operating losses. To the extent net operating losses resulting
from stock option plan compensation deductions become realizable, the benefit
will be credited directly to additional paid in capital. The amount of the net
operating loss carryforwards that may be utilized in any future period may be
subject to certain limitations, based upon changes in the ownership of the
Company's common stock.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 (as amended
by SFAS No. 137) is effective for fiscal years beginning after June 15, 2000.
The Company does not presently enter into any transactions involving derivative
financial instruments and, accordingly, does not anticipate the new standard
will have any effect on its financial statements for the foreseeable future.
Year 2000
The Company established a program to determine the impact of the Y2K issue
on the software and hardware utilized in the Company's internal operations and
incorporated in its products manufactured for sale to customers. This assessment
included applications and systems software, information technology ("IT")
infrastructure, manufacturing and process control technology, products and
services, and third party suppliers and customers. As of the date of this
report, the Company successfully completed the Y2K transition with no
significant impact to its business, results of operations, or financial
condition. The total costs associated with becoming Y2K compliant were not
material to the Company's financial position or operations. Costs incurred
22
<PAGE>
through January 1, 2000 have been incurred as part of normal IT operating costs.
The Company will continue to monitor its critical systems and infrastructure
throughout the year 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk from changes in interest rates
primarily as a result of its borrowing and investing activities. The Company
does not enter into interest rate swap agreements or other speculative or
leveraged transactions. The Company currently has no material exposure to
interest rate fluctuations on its short-term investments or variable rate debt
instruments.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by Item 8 of Form 10-K appear after Item
14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable
23
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item will be set forth under the caption
"Election of Directors" and "Executive Officers" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on June 19, 2000, to be filed with the
Securities and Exchange Commission (the "Proxy Statement"), and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will be set forth under the caption
"Voting Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will be set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, and is
incorporated herein by reference.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
Page
----
Report of Independent Certified Public
Accountants F-2
Balance Sheets as of January 1, 2000,
and January 2, 1999 F-3
Statements of Operations for the fiscal years
ended January 1, 2000, January 2, 1999, and
January 3, 1998 F-4
Statements of Changes in Stockholders' Equity
for the fiscal years ended
January 1, 2000, January 2, 1999, and
January 3, 1998 F-5
Statements of Cash Flows for the fiscal
years ended January 1, 2000, January 2, 1999,
and January 3, 1998 F-6
Notes to Financial Statements F-7
(a)(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts and Reserves. FS-1
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) Exhibits
Exhibit
Number Description
3(a) Amended and Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended June 29, 1996.
3(b) By-laws of the Company.***
10(a) Confidentiality Agreement between the Company and Heidelberger
Druckmaschinen A.G., effective December 7, 1989 as amended,
incorporated by reference to Exhibit 10(i) of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
10(b) Master Agreement effective January 1, 1991, by and between
Heidelberger Druckmaschinen Aktiengesellschaft and the Company,
incorporated by reference to the Company's Form 8-K, dated January 1,
1991.
25
<PAGE>
10(c) Technology License effective January 1, 1991, by and between
Heidelberger Druckmaschinen Aktiengesellschaft and the Company,
incorporated by reference to the Company's Form 8-K, dated January 1,
1991.
10(d) Memorandum of Performance No. 3 dated April 27, 1993, to the Master
Agreement, Technology License, and Supply Agreement between the
Company and Heidelberger Druckmaschinen Aktiengesellschaft,
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1993.
10(e) Modification to Memorandum of Performance No. 3 dated April 27, 1993,
to the Master Agreement, Technology License, and Supply Agreement
between the Company and Heidelberger Druckmaschinen
Aktiengesellschaft.+
10(f) Memorandum of Understanding No. 4 dated November 9, 1995, to the
Master Agreement and Technology License and Supply Agreement between
the Company and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)
10(g) Lease relating to real property located at 9 Commercial St., Hudson,
NH. +++
10(h) Lease relating to real property located at 18-20 Hampshire Dr.,
Hudson, New Hampshire. +++
10(i)(1) Employment Agreement dated March 30, 1999 between the Company and
Richard Williams. ****
10(j)(1) 1991 Stock Option Plan. *
10(k)(1) 1994 Stock Option Plan. +
10(l)(1) Non-Employee Director Stock Option Plan. ****
10(m)(1) 1997 Interim Stock Option Plan. ++
10(n) Memorandum of Understanding No. 5 dated March 7, 1997 between the
Company and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I)
10(o) Amendment to Loan Agreement between the Company and Citizens Bank, New
Hampshire. ****
10(p) Replacement Revolving Line of Credit Promissory Note in favor of
Citizens Bank, New Hampshire. ****
10(q)(1) 1998 Stock Incentive Plan ++++
10(r)(1) Employment Agreement by and between the Company and Robert W. Hallman.
+++++
10(s)(1) Master Security agreement and related Promissory Note, by and between
the Company and Keycorp Leasing, a Division of Key Corporate Capital,
Inc., dated September 27, 1999, incorporated by reference to the
Company's Form 10-Q for the quarter ended October 1, 1999.
10(t) Amendment to existing loan agreement with Citizens Bank, New
Hampshire.
10(u) Amendment to existing loan agreement with Keybank Corporate Capital,
Inc.
11 Calculations of earnings per share
21 Subsidiaries of the Company.
23(a) Consent of BDO Seidman, LLP.
27 Financial Data Schedule (for SEC use only)
26
<PAGE>
(b) No Form 8-K's were filed during the quarter ended January 1, 2000.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
* Previously filed as an exhibit to the Company's Annual report on Form
10-K for the fiscal year ended December 31, 1991 and incorporated by
reference thereto.
** Previously filed as an exhibit to the Company's Form 8-K for the event
dated February 15, 1996 and incorporated by reference thereto.
*** Previously filed as an exhibit with the Company's Form 10-K for the
fiscal year ended December 30, 1995 and incorporated by reference
thereto.
**** Previously filed as an exhibit with the Company's Form 10-K for the
fiscal year ended January 2, 1999.
(I) The SEC has granted the Company's request of confidential treatment
with respect to a portion of this exhibit.
+ Previously filed as an exhibit to the Company's Annual report on Form
10-K for the fiscal year ended December 31, 1994 and incorporated by
reference thereto.
++ Incorporated by reference to the exhibit filed with the Company's
Quarterly report on Form 10-Q for the quarter ended September 27,
1997.
+++ Previously filed as an exhibit filed with the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996 and
incorporated by reference thereto.
++++ Incorporated by reference to the exhibit to the Company's April 23,
1998 Proxy Statement.
+++++ Previously filed as an exhibit filed with the Company's Quarterly
report on Form 10-Q for the Quarter ended October 3, 1998 and
incorporated by reference thereto.
(1) Denotes management employment contracts or compensatory plans.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Balance Sheets as of January 1, 2000
and January 2, 1999 F-3
Statements of Operations for the fiscal years ended
January 1, 2000, January 2, 1999, and
January 3, 1998 F-4
Statements of Changes in Stockholders' Equity
for the fiscal years ended January 1, 2000,
January 2, 1999, and January 3, 1998 F-5
Statements of Cash Flows for the fiscal years ended
January 1, 2000, January 2, 1999, and
January 3, 1998 F-6
Notes to Financial Statements F-7
Financial Statement Schedule:
Schedule II - Valuation and qualifying accounts
and reserves FS-1
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Presstek, Inc.
Hudson, New Hampshire
We have audited the accompanying balance sheets of Presstek, Inc. as of January
1, 2000 and January 2, 1999, and the related statements of operations, changes
in stockholders' equity, and cash flows for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998. We have also audited the financial
statement schedule listed in the accompanying index. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Presstek, Inc. at January 1, 2000
and January 2, 1999, and the results of its operations and its cash flows for
the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
New York, New York
February 14, 2000, except for note 14, as to which the date is March 24, 2000.
F-2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PRESSTEK, INC.
BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,653 $ 19,057
Accounts receivable, net of allowance for losses
Of $3,302 and $2,536 in fiscal 1999 and 1998, respectively 11,645 20,626
Inventories 7,214 9,724
Other current assets 859 968
-------- --------
Total current assets 38,371 50,375
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 45,695 39,497
-------- --------
OTHER ASSETS:
Patent application costs and license rights, net 5,126 3,195
Other 146 176
Net non-current assets of discontinued operations 5,295 13,427
-------- --------
Total other assets 10,567 16,798
-------- --------
TOTAL $ 94,633 $106,670
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 1,024 $ 522
Accounts payable and accrued expenses 8,844 8,893
Accrued salaries and employee benefits 1,269 937
Billings in excess of costs and estimated
Earnings on uncompleted contracts 44 1,995
Net current liabilities of discontinued operations 1,817 948
-------- --------
Total current liabilities 12,998 13,295
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION 8,830 5,922
-------- --------
OTHER LONG-TERM LIABILITIES 22,950 --
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares issues or outstanding -- --
Common stock, $.01 par value; authorized 75,000,000 shares;
Issued and outstanding 32,515,651 shares at January 1, 2000;
32,276,263 shares at January 2, 1999 325 323
Additional paid-in capital 69,312 67,296
Retained earnings (deficit) (19,782) 19,834
-------- --------
Total stockholders' equity 49,855 87,453
-------- --------
TOTAL $ 94,633 $106,670
======== ========
</TABLE>
See notes to financial statements
F-3
<PAGE>
PRESSTEK, INC.
STATEMENTS OF OPERATIONS
For the Fiscal Years Ended
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Product sales $ 47,948 $ 60,833 $ 71,278
Royalties and fees from licensees 7,016 13,332 18,515
-------- -------- --------
Total revenues 54,964 74,165 89,793
-------- -------- --------
COSTS AND EXPENSES:
Cost of products sold 33,326 46,606 43,854
Research and product development 17,671 15,413 10,656
Sales and marketing 5,934 5,620 4,302
General and administrative 6,006 8,845 5,162
Provision for settlement of shareholder litigation 23,200 -- --
-------- -------- --------
Total costs and expenses 86,137 76,484 63,974
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (31,173) (2,319) 25,819
-------- -------- --------
OTHER INCOME (EXPENSE):
Dividend and interest, net 501 623 374
Other, net 38 109 (244)
-------- -------- --------
Total other income, net 539 732 130
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (30,634) (1,587) 25,949
PROVISION FOR INCOME TAXES -- -- 9,460
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (30,634) (1,587) 16,489
-------- -------- --------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (448) (1,094) (2,117)
Loss on disposal of discontinued operations (8,534) -- --
-------- -------- --------
LOSS FROM DISCONTINUED OPERATIONS (8,982) (1,094) (2,117)
-------- -------- --------
NET INCOME (LOSS) $(39,616) $ (2,681) $ 14,372
======== ======== ========
EARNINGS (LOSS) PER SHARE - BASIC:
FROM CONTINUING OPERATIONS $ (0.95) $ (0.05) $ 0.53
======== ======== ========
FROM DISCONTINUED OPERATIONS $ (0.28) $ (0.03) $ (0.07)
======== ======== ========
EARNINGS (LOSS) PER SHARE - BASIC $ (1.23) $ (0.08) $ 0.46
======== ======== ========
EARNINGS (LOSS) PER SHARE - DILUTED:
FROM CONTINUING OPERATIONS $ (0.95) $ (0.05) $ 0.50
======== ======== ========
FROM DISCONTINUED OPERATIONS $ (0.28) $ (0.03) $ (0.06)
======== ======== ========
EARNINGS (LOSS) PER SHARE - DILUTED $ (1.23) $ (0.08) $ 0.44
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 32,336 31,986 31,300
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 32,336 31,986 32,695
======== ======== ========
</TABLE>
See notes to financial statements
F-4
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Fiscal Years Ended
January 1, 2000, January 2, 1999, January 3, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 28, 1996 15,392 $ 154 $ 49,188 $ 8,143
Comprehensive income:
Net income for the fiscal year 14,372
Other comprehensive income (loss):
Unrealized gain on marketable securities
Comprehensive income for the fiscal year
Issuance of common stock relative to the
exercise of incentive and non-qualified stock
options at $2.85 - $35.00 per share 924 10 4,855
Two-for-one stock split effected in the form
Of a 100% stock dividend 15,551 155 (155)
Tax benefit arising from stock option deductions -- -- 9,269 --
-------- -------- -------- --------
BALANCE AT JANUARY 3, 1998 31,867 319 63,157 22,515
Comprehensive loss:
Net loss for the fiscal year (2,681)
Other comprehensive loss:
Unrealized gain on marketable securities
Comprehensive loss for the fiscal year
Issuance of unregistered shares of common stock relative to the
acquisition of Heath Custom Press, Inc. at $25.38 per share 94 1 2,406
Issuance of common stock relative to the exercise of
incentive and non-qualified stock options at $2.85 - $10.94
per share 315 3 1,733 --
-------- -------- -------- --------
BALANCE AT JANUARY 2, 1999 32,276 323 67,296 19,834
Comprehensive loss:
Net loss for the fiscal year (39,616)
Other comprehensive loss:
Comprehensive loss for the fiscal year
Issuance of unregistered shares of common stock
relative to the acquisition of R/H Consulting, Inc.
at $9.875 per share 143 1 1,409
Issuance of common stock relative to the exercise of incentive
and non-qualified stock options at $3.55 - $13.75 per share 97 1 607 --
-------- -------- -------- --------
BALANCE AT JANUARY 1, 2000 32,516 $ 325 $ 69,312 $(19,782)
======== ======== ======== ========
<CAPTION>
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------- ------
<S> <C> <C>
BALANCE AT DECEMBER 28, 1996 $ (43) $ 57,442
Comprehensive income:
Net income for the fiscal year 14,372
Other comprehensive income (loss):
Unrealized gain on marketable securities 42 42
--------
Comprehensive income for the fiscal year 14,414
--------
Issuance of common stock relative to the
exercise of incentive and non-qualified stock
options at $2.85 - $35.00 per share 4,865
Two-for-one stock split effected in the form
Of a 100% stock dividend --
Tax benefit arising from stock option deductions -- 9,269
-------- --------
BALANCE AT JANUARY 3, 1998 (1) 85,990
Comprehensive loss:
Net loss for the fiscal year (2,681)
Other comprehensive loss:
Unrealized gain on marketable securities 1 1
--------
Comprehensive loss for the fiscal year (2,680)
--------
Issuance of unregistered shares of common stock relative to the
acquisition of Heath Custom Press, Inc. at $25.38 per share 2,407
Issuance of common stock relative to the exercise of
incentive and non-qualified stock options at $2.85 - $10.94
per share -- 1,736
-------- --------
BALANCE AT JANUARY 2, 1999 (0) 87,453
Comprehensive loss:
Net loss for the fiscal year (39,616)
Other comprehensive loss --
--------
Comprehensive loss for the fiscal year (39,616)
--------
Issuance of unregistered shares of common stock
relative to the acquisition of R/H Consulting, Inc.
at $9.875 per share 1,410
Issuance of common stock relative to the exercise of incentive
and non-qualified stock options at $3.55 - $13.75 per share -- 608
-------- --------
BALANCE AT JANUARY 1, 2000 $ (0) $ 49,855
======== ========
</TABLE>
See notes to financial statements
F-5
<PAGE>
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
(in thousands)
<TABLE>
<CAPTION>
January 1, January 2, January 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Income (loss) from continuing operations $(30,634) $ (1,587) $ 16,489
Adjustments to reconcile income (loss) from continuing operations
To net cash provided by operating activities of continuing operations:
Tax benefit arising from stock option deductions -- -- 9,269
Depreciation 5,113 3,502 1,803
Amortization 569 547 456
Provision for warranty and other costs 290 679 1,113
Provision for losses on accounts receivable 1,790 4,655 1,053
Provision for shareholder litigation settlement 22,950 -- --
Other, net 41 38 34
Changes in operating assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable 7,191 1,392 (11,232)
Decrease (increase) in inventories 2,510 4,093 (2,569)
Decrease in costs and estimated earnings in excess of
billings on uncompleted contracts -- 899 182
Decrease (increase) in other current assets 109 (538) (47)
Increase (decrease) in accounts payable and accrued expenses 100 (702) (1,607)
Increase in accrued salaries and employee benefits 332 117 56
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,951) 1,995 --
-------- -------- --------
Net cash provided by operating activities of continuing operations 8,410 15,090 15,000
Net cash provided by (used in) operating activities of discontinued operations (7,196) 744 (864)
-------- -------- --------
Net cash provided by operating activities 1,214 15,834 14,136
-------- -------- --------
CASH FLOWS - INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired (494) -- --
Purchases of property, plant and equipment (11,812) (6,410) (22,758)
Proceeds from sale of land and equipment 459 442 538
Proceeds from sale of certain net assets
of Heath Custom Press, Inc. -- 732 --
Increase in other assets (1,005) (584) (365)
Sales and maturities of marketable securities -- 1,000 5,452
-------- -------- --------
Net cash used in investing activities of continuing operations (12,852) (4,820) (17,133)
Net cash provided by (used in) investing activities of discontinued operations 7,215 85 (5,152)
-------- -------- --------
Net cash used in investing activities (5,637) (4,735) (22,285)
-------- -------- --------
CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from sale of common stock 608 1,736 4,865
Proceeds from mortgage term loan -- 6,900 --
Repayments of mortgage term loan (518) (456) --
Proceeds from lease line of credit 4,041 -- --
Repayments of lease line of credit (112) -- --
Proceeds from (net payments of) revolving line of credit -- (4,800) 4,800
Payment of Heath Custom Press, Inc.'s
revolving line of credit -- (600) --
-------- -------- --------
Net cash provided by financing activities 4,019 2,780 9,665
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (404) 13,879 1,516
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 19,057 4,939 3,423
Cash acquired from Heath Custom Press, Inc. -- 239 --
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 18,653 $ 19,057 $ 4,939
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 114 $ 225 $ 171
======== ======== ========
Income taxes $ -- $ 250 $ 90
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITY:
Common stock issued and net assets acquired relating
To the acquisition of RH Consulting, Inc. $ 1,410 $ -- $ --
======== ======== ========
Common stock issued and net assets acquired relating
To the acquisition of Heath Custom Press, Inc. $ -- $ 2,407 $ --
======== ======== ========
</TABLE>
See notes to financial statements
F-6
<PAGE>
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Presstek, Inc.("Presstek", or "the Company") is a
leading developer of non-photographic, digital imaging and printing plate
technologies for the printing and graphic arts industries. Presstek's products
and applications incorporate PEARL(R) and DI(R) digital imaging technologies and
utilize PEARL consumables for computer-to-plate and direct-to-press
applications. The Company's patented DI and PEARL thermal laser diode family of
products enables its customers to produce high quality, full-color lithographic
printed materials more quickly and cost efficiently.
In November 1999 the Company acquired 100% of the stock of R/H Consulting,
Inc. ("R/H"). R/H was principally engaged in the research and development of
laser imageable printing plates. See Note 2 of notes to the financial
statements. In January 1998, the Company acquired 100% of the stock of Heath
Custom Press, Inc. ("Heath"). In October 1998 the Company sold certain assets of
Heath, which was engaged in the design and manufacture of custom printing
presses. See Note 2 of notes to the financial statements.
The divestiture of Delta V Technologies, Inc. ("Delta V") was recorded in
the quarter ended October 2, 1999, and the financial statements for all periods
reflect Delta V as a discontinued operation. All of the following notes, unless
otherwise indicated, refer to the continuing operations of Presstek. See Note 3
of notes to the financial statements.
As a result of the divestiture of Delta V, the Company determined that it
operates in one reportable business segment, the development and manufacture of
digital imaging and printing plate technologies for the printing and graphic
arts industries.
Principles of Consolidation - The financial statements for the fiscal years
ended January 1, 2000, January 2, 1999, and January 3, 1998, include the
accounts of the Company and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated.
Fiscal Year - The Company operates and reports on a 52/53, week fiscal year
ending on the Saturday closest to December 31. Accordingly, the financial
statements include the 52 week period ended January 1, 2000 ("fiscal 1999"), the
52 week period ended January 2, 1999 ("fiscal 1998"), and the 53 week period
ended January 3, 1998 ("fiscal 1997').
Use of Estimates - The Company prepares its financial statements in
conformity with generally accepted accounting principles. This requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Many of the Company's estimates and assumptions used in the financial
statements relate to the Company's products, which are subject to rapid
technological change. It is reasonably possible that changes may occur in the
near term that would affect management's estimates with respect to the carrying
values of inventories, property plant and equipment, patents, and software
development costs.
Reclassification - Certain prior fiscal years' accounts have been
reclassified for comparative purposes to conform to the presentation in the
current fiscal year.
Revenue Recognition - The Company records revenues on product sales and
related royalties at the time of shipment. Certain fees and other reimbursements
are recognized as revenue when the related services have been performed or the
revenues otherwise earned.
Revenues from fixed-price and modified fixed-price development contracts
are recognized on the percentage-of-completion method, measured by the
percentage of costs incurred to date compared to the estimated total of direct
costs for each contract. As contracts can extend over one or more accounting
periods,
F-7
<PAGE>
revisions in costs and earnings estimated during the course of the work are
reflected during the accounting period in which the facts that required such
revisions become known.
Product Warranties - The Company warrants its products against defects in
material and workmanship for a period of one year. Anticipated future warranty
costs are accrued by a charge to expense as products are shipped and the related
revenue recognized. At January 1, 2000 and January 2, 1999, accrued expenses
included accrued warranty costs of $1.0 million and $930,000.
Research and Development Costs - Research and development costs are
expensed as incurred for financial reporting purposes. Such costs aggregated
$17.7 million, $15.4 million, and $10.7 million, for fiscal 1999, 1998 and 1997,
respectively.
Comprehensive Income - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" in the
first quarter of fiscal 1998. SFAS No 130 sets standards for the reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is comprised of net income and all changes in stockholders'
equity except those due to investments by owners and distributions to owners,
which for the Company includes unrealized gains (losses) on marketable
securities. The Company has elected to disclose comprehensive income in its
Statement of Changes in Stockholders' Equity.
Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss) per
share is computed by dividing net income (loss) by the weighted average numbers
of shares of common stock outstanding during the period. Diluted earnings (loss)
per share is computed giving effect to all diluted potential common shares that
were outstanding during the period. Dilutive potential common shares consist of
the incremental common shares issuable upon the exercise of stock options. For
fiscal 1999 and 1998, potentially dilutive securities that related to shares
issuable upon the exercise of stock options granted by the Company were
excluded, as their effect was antidilutive. See Note 4 of notes to the financial
statements.
Cash Equivalents, and Marketable Securities - For purposes of reporting
cash flows, the Company considers all savings deposits, certificates of deposit,
money market funds and deposits purchased, and short term investments with a
maturity of three months or less to be cash equivalents. Marketable securities
are classified as available for sale and are stated at fair market value. All
unrealized gains and losses, if any, are recorded as a separate component of
stockholders' equity. At January 1, 2000 and January 2, 1999 cash and cash
equivalents consisted of cash balances on deposit and money market funds, and
high-quality debt securities and commercial paper with a maturity of three
months or less.
Fair Value of Financial Instruments - The carrying values of cash
equivalents, accounts receivable, and accounts payable approximate fair value
due to the short-term maturity of these instruments. The carrying amounts of the
Company's bank borrowings under its lease line of credit agreement approximates
fair value because the interest rates are based on floating rates identified by
reference to market rates. The fair value of the Company's other long-term debt
is estimated based on quoted market prices. At January 1, 2000, the fair value
of the Company's long term debt approximated carrying value.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consists primarily of cash
equivalents and accounts receivable. The Company invests in high-quality money
market instruments, securities of the U.S government, and high-quality corporate
issues. Account receivables are generally unsecured and are derived from the
Company's customers located around the world. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential credit
losses. Concentration of credit risk with respect to account receivables results
from a significant portion of the Company's receivables concentrated with two
major customers. See Note 10 of notes to the financial statements.
F-8
<PAGE>
Inventories - Inventories are valued at the lower of cost or market value,
with cost determined using the first-in, first-out method. At January 1, 2000
and January 2, 1999, inventories consisted of the following:
1999 1998
(In thousands)
Raw materials $1,915 $7,156
Work in process 3,055 690
Finished goods 2,244 1,878
------ ------
Total $7,214 $9,724
====== ======
Property, Plant and Equipment - Property, plant and equipment are stated at
cost and are depreciated using a straight-line method for both financial
reporting and for tax purposes over their estimated useful lives (ranging from 3
to 30 years). Leasehold improvements are amortized over the life of the lease
for financial reporting purposes.
Patent Application Costs and License Rights - Patent application costs
represent the expense of preparing and filing applications to patent the
Company's proprietary technologies, in addition to certain patent and license
rights obtained in the Company's acquisitions. Such costs are amortized over a
period ranging from five to seven years, beginning on the date the patents or
rights are issued or acquired. Amortization expense for fiscal 1999, 1998 and
1997, was $516,000, $453,000, and $145,000, respectively.
Software Development Costs - Software development costs for products and
certain product enhancements are capitalized subsequent to the establishment of
their technological feasibility (as defined in Statement of Financial Accounting
Standards No. 86) based upon the existence of working models of the products
which are ready for initial customer testing. Costs incurred prior to such
technological feasibility or subsequent to a product's general release to
customers are expensed as incurred. During fiscal 1999, 1998 and 1997, the
Company did not incur material costs subject to capitalization. Through fiscal
1996, the Company incurred and capitalized $895,000 million of costs subject to
capitalization. Amortization of these costs commenced in fiscal 1995 when the
related product was released to customers. Amortization expense reported for the
fiscal years 1999, 1998, and 1997, were $40,000, $80,000, and $311,000,
respectively. Amortization expense is based upon the ratio that current gross
revenues bear to total estimated gross revenues, which was an amount greater
than amortization on a straight-line method over the estimated economic life of
the product from three to five years. As of January 1, 2000, all software
development costs have been fully amortized.
Long Lived Assets - Long-lived assets, such as intangible assets and
property and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. As a result of the divestiture of Delta V, the
Company recorded a charge of $6.1 million related to the write down of goodwill
and other intangibles. No other write downs were necessary for fiscal 1999, 1998
and 1997.
Stock-Based Compensation - The Company accounts for stock options granted
to employees under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as permitted by Statement
of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for
Stock-Based Compensation. APB 25 provides for compensation cost to be recognized
over the vesting period of the options based on the difference, if any, between
the fair market value of the Company's stock and the option price on the grant
date. SFAS 123 requires companies that follow APB 25 to provide pro forma
disclosure of the effect of applying the optional fair value method. See Note 8
of notes to the financial statements.
Effect of New Accounting Pronouncements - In June 1998 the Financial
Accounting Standards Board, issued Statement of Financial Accounting Standards
No. 133; "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
No. 133"). SFAS No. 133 (as amended by SFAS No. 137) requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The Company does not
presently enter into any transactions involving derivative financial instruments
and,
F-9
<PAGE>
accordingly, does not anticipate the new standard will have any effect on its
financial statements for the foreseeable future.
2. BUSINESS ACQUISITIONS
In November 1999 the Company acquired 100% of the stock of R/H Consulting,
Inc. ("R/H"). R/H was principally engaged in the research and development of
laser imageable printing plates. R/H was purchased for $500,000 and 142,855
shares of the Company's common stock. The excess purchase price over book value
of net assets acquired of $1.9 million has been allocated to the patents
acquired. The acquisition was accounted for as a purchase and, accordingly, the
results of R/H's operations subsequent to November 1999 (which are immaterial)
have been included in the financial statements for fiscal 1999. The results of
R/H's operations for 1999 and 1998 would not have had a material impact on the
Company's results of operations for the comparable periods.
In January 1998, the Company acquired 100% of the stock of Heath. Heath was
engaged in the design and manufacture of custom printing presses. Heath was
purchased for 94,865 unregistered shares of the Company's common stock. The
purchase price of $2.4 million has been allocated to assets acquired and
liabilities assumed based on the fair market value at the date of acquisition as
follows: current assets, $2.2 million; patents, $1.8 million; long-term assets,
$.2 million; other liabilities, $1.8 million. The acquisition was accounted for
as a purchase and, accordingly, the results of Heath's operations have been
included in the Company's financial statements for the fiscal year 1999 and
1998. The results of Heath's operations would not have had a material impact on
the Company's results of operations for fiscal 1997.
In October 1998, the Company sold certain assets of Heath for $1.0 million,
which approximated book value. The Company retained all rights to Heath's
patents.
3. DISCONTINUED OPERATIONS
During the third quarter of fiscal 1999 the Company determined to sell or
otherwise discontinue the operations of its Delta V subsidiary to allow the
Company to further focus its efforts on the core business of digital imaging and
plate manufacturing. Located in Tucson, Arizona, Delta V was engaged in the
development, manufacture, and sale of vacuum deposition coating equipment for
vacuum coating applications. The Company discontinued the operations of Delta V
at the end of fiscal 1999.
As a result of the divestiture of Delta V, the Company incurred a $8.5
million loss on disposal of discontinued operations for fiscal year ended
January 1, 2000. This included actual closing costs and operating losses
incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision for
anticipated closing costs of $1.6 million, $6.1 million related to the write off
of goodwill and other intangibles assets, and a reduction in other asset values
of $1.6 million. These costs were partially offset by proceeds of $3.0 million
received from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing
of the Company's intellectual property relating to vacuum-deposited polymer
mulitayer technology.
Delta V is reported separately as a discontinued operation, and prior
periods have been restated in the financial statements and related footnotes.
Revenues and income from discontinued operations for fiscal 1999, 1998 and
1997 were as follows:
1999 1998 1997
------- ------- -------
(amounts in thousands)
Revenues $ 7,248 $10,221 $ 1,769
Costs and expenses 8,365 11,479 3,979
------- ------- -------
Loss from operations (1,117) (1,258) (2,210)
Other income 669 164 93
------- ------- -------
Net loss from discontinued operations $ (448) $(1,094) $(2,117)
======= ======= =======
F-10
<PAGE>
Net assets of discontinued operations at January 1, 2000 and January 2,
1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(amounts in thousands)
<S> <C> <C>
Cash $ 222 $ 224
Accounts receivable 700 12
Other current assets 1 968
Accrual for anticipated closing costs (1,626) --
Other current liabilities (1,114) (2,152)
-------- -------
Net current liabilities of
discontinued operations $ (1,817) $ (948)
======== =======
Land and buildings $ 5,295 $ 5,491
Equipment -- 1,405
Goodwill -- 5,996
Other -- 535
-------- -------
Net non-current assets of discontinued operations $ 5,295 $13,427
======== =======
</TABLE>
4. EARNINGS (LOSS) PER SHARE
The following represents the calculation of basic and diluted earnings
(loss) per share for fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(amounts in thousands, except per share data)
<S> <C> <C> <C>
Income (loss) from continuing operations $(30,634) $(1,587) $16,489
Loss from discontinued operations (8,982) (1,094) (2,117)
-------- ------- -------
Net income (loss) $(39,616) $(2,681) $14,372
======== ======= =======
Weighted average common shares 32,336 31,986 31,300
Outstanding - Basic
Effect of assumed conversion
of stock options -- -- 1,395
-------- ------- -------
Weighted average common shares
Outstanding - Diluted 32,336 31,986 32,695
======== ======= =======
Earnings (loss) per share - Basic:
From continuing operations $ (0.95) $ (0.05) $ 0.53
======== ======= =======
From discontinued operations $ (0.28) $ (0.03) $ (0.07)
======== ======= =======
Earnings (loss) per share - Basic $ (1.23) $ (0.08) $ 0.46
======== ======= =======
Earnings (loss) per share - Diluted:
From continuing operations $ (0.95) $ (0.05) $ 0.50
======== ======= =======
From discontinued operations $ (0.28) $ (0.03) $ (0.06)
======== ======= =======
Earnings (loss) per share - Diluted $ (1.23) $ (0.08) $ 0.44
======== ======= =======
</TABLE>
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.
All stock options outstanding are excluded from the fiscal 1999 and 1998
calculation of diluted loss per share, as their effect would be anti-dilutive.
Options to purchase 1,111,000 shares of common stock at exercise prices ranging
from $26.56 to $49.38 per share were outstanding during a portion of fiscal
1997. These options were not included in the computation of diluted earnings per
share as the exercise prices of the options were greater than the average market
price of the common shares. These options, which expire between January 2, 2001
and December 22, 2003, were all outstanding at the end of fiscal 1997.
F-11
<PAGE>
5. INCOME TAXES
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The primary objectives of accounting
for income taxes are to (a) recognize the amount of tax payable for the current
fiscal year (b) recognize the amount of deferred tax liability or asset for the
future tax consequences of events that have been reflected in the Company's
financial statements or tax returns.
The components of the provision for income taxes for fiscal 1999, 1998 and
1997 were as follows:
1999 1997 1998
-------- -------- --------
(In thousands)
Current tax expense - State $ -- $ -- $ 191
Charge in lieu of income taxes:
Federal -- -- 7,740
State -- -- 1,529
-------- -------- --------
Total provision $ -- $ -- $ 9,460
======== ======== ========
The Company did not record a provision for United States federal or state
income taxes or a charge in lieu of federal or state income taxes due to the tax
losses in fiscal 1999 and 1998, prior to the deductions related to stock
compensation. The charge in lieu of income taxes included in the fiscal 1997
provision for income taxes represents the tax benefit arising from stock option
deductions in that year and the realization of net operating loss carryforwards
resulting from such deductions for tax purposes. The tax benefit related to such
stock option deductions has been recorded as additional paid in capital.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Deferred tax assets and
liabilities consisted of the following at January 1, 2000, and January 2, 1999:
1999 1998
-------- --------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards $ 18,500 $ 13,300
Tax credits 3,600 2,200
Warranty provisions, litigation and otheraccruals 11,400 3,000
-------- --------
Gross deferred tax assets 33,500 18,500
-------- --------
Deferred tax liabilities:
Amortizable and depreciable assets 400 650
Accumulated depreciation and amortization 5,100 5,000
-------- --------
Gross deferred tax liabilities 5,500 5,650
-------- --------
28,000 12,850
Less valuation allowance (27,950) (12,800)
-------- --------
Deferred tax asset - net $ 50 $ 50
======== ========
The $50,000 deferred tax asset was included in other current assets at
January 1, 2000 and January 2, 1999. The valuation allowance increased $15.2
million and $1.1 million in fiscal 1999 and 1998, respectively.
F-12
<PAGE>
The difference between income taxes at the United States federal income tax
rate and the effective income tax rate was as follows for fiscal 1999, 1998 and
1997:
1999 1998 1997
---- ---- ----
Computed at federal statutory rate (34)% (34)% 35%
State tax, net of federal benefit -% -% 4%
Increase in valuation allowance 34% 34% 1%
--- --- ---
Effective rate, net 0% 0% 40%
=== === ===
As of January 1, 2000, the Company had net operating loss carryforwards
totaling approximately $53.0 million of which $38.0 million resulted from
compensation deductions for tax purposes relative to stock option plans and
$15.0 million resulted from operating losses. To the extent net operating losses
resulting from stock option plan compensation deductions become realizable, the
benefit will be credited directly to additional paid in capital. The amount of
the net operating loss carryforwards that may be utilized to offset future
taxable income, when earned, may be subject to certain limitations, based upon
changes in the ownership of the Company's common stock. The following is a
breakdown of the net operating losses and their expiration dates:
Amount of Remaining
Net Operating
Expiration date Loss Carryforwards
--------------- ------------------
(in thousands)
2005 $ 2,240
2006 5,020
2008 50
2009 500
2010 9,570
2011 14,850
2012 4,410
2013 1,080
2014 15,230
In addition, the Company has available tax credit carryforwards (adjusted
to reflect provisions of the Tax Reform Act of 1986) of approximately $3.6
million which are available to offset future income tax liabilities when
incurred.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost consisted of the following at
January 1, 2000 and January 2,1999:
1999 1998
-------- --------
(in thousands)
Land and improvements $ 1,115 $ 1,489
Buildings and leasehold improvements 15,611 14,304
Production equipment and other 34,452 31,291
Construction in progress 8,341 1,167
-------- --------
59,519 48,251
Less accumulated depreciation (13,824) (8,754)
-------- --------
$ 45,695 $ 39,497
======== ========
The Company's construction in progress includes $6.8 million for additional
plate manufacturing equipment that is expected to reduce the cost of
manufacturing the Company's proprietary digital media and consumable products,
$885,000 for additional equipment that will enhance the Company's development
capabilities, and other test equipment of $656,000. The Company anticipates
completion of its current equipment construction in progress in the first half
of 2000, with an estimated cost to complete of approximately $1.7 million.
F-13
<PAGE>
7. LONG-TERM DEBT
Long-term debt consisted of the following at January 1, 2000 and January 2,
1999:
1999 1998
---- ----
(in thousands)
Mortgage term loan $ 5,925 $ 6,444
Lease line of credit 3,929 -
------- -------
9,854 6,444
Less current portion (1,024) (522)
------- -------
$ 8,830 $ 5,922
======= =======
In September 1999, the Company borrowed $4.0 million against a $10.0
million lease line of credit facility from Keybank National Association.
Borrowings are secured by equipment valued at $5.2 million. The loan bears a
variable rate of interest based upon the prime rate, currently 7.25%, with a
fixed rate conversion provision. Principle and interest on the lease line of
credit facility are payable in 84 monthly installments beginning October 31,
1999. The commitment for the balance of $6.0 million available under the lease
line of credit is scheduled to expire on April 30, 2000.
The Company's credit facilities with Citizens Bank New Hampshire
("Citizens"), include a ten-year mortgage term loan and a revolving line of
credit loan. The mortgage term loan in the amount of $6.9 million, is secured by
land and buildings with a cost of approximately $17.0 million. 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%, (7.82% at January 1, 2000)
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.
The revolving line of credit loan, under which the Company may borrow $10.0
million, is secured by substantially all of the Company's assets. Interest on
the line of credit is payable at the LIBOR rate plus 1.50% (7.32% at January 1,
2000). The loan agreement terminates on July 31, 2000, at which date, the entire
principal and accrued interest is due and payable. The Company currently has
$10.0 million available under the line of credit loan agreement.
As of January 1, 2000, aggregate debt maturities for Long-Term Debt were as
follows:
(in thousands)
2000 $1,024
2001 1,107
2002 1,190
2003 1,278
2004 1,373
Under the terms of the mortgage term loan, the lease line of credit and the
revolving line of credit agreements, the Company is required to meet certain
financial covenants on a quarterly and annual basis. At January 1, 2000, the
Company was in compliance with all debt covenants.
8. STOCKHOLDERS' EQUITY
References herein to shares, options, warrants and the prices per share
have been restated for all stock splits, effected in the form of stock
dividends.
Preferred Stock - The Company's certificate of incorporation empowers the
Board of Directors, without stockholder approval, to issue up to 1,000,000
shares of $.01 par value preferred stock, with dividend, liquidation,
conversion, and voting or other rights to be determined upon issuance by the
Board of Directors.
F-14
<PAGE>
Restricted Stock Purchase Plan - On August 22, 1988 the Company adopted a
Restricted Stock Purchase Plan ("the Purchase Plan"). The Purchase Plan
originally authorizing the sale of up to 125,000 shares of common stock to its
employees at a price to be determined by the Board of Directors, but in no event
to be less than $.01 per share or greater than 110% of the then fair market
value. This plan expired August 21, 1998.
Stock Option Plans - As of January 1, 2000 the Company had four stock
option plans in effect. The 1991 Stock Option Plan (the "1991 Plan"), the 1994
Stock Option Plan (the "1994 Plan"), the 1997 Interim Stock Option Plan (the
"1997 Plan") and the 1998 Stock Incentive Plan (the "1998 Plan"). The 1988 Stock
Option Plan (the "1988 Plan") expired on August 21, 1998. No future grants will
be issued under this plan, however 18,743 shares remain outstanding and will
expire according to the specified expiration terms under the individual grants.
The 1991 Plan and the 1994 Plan provide for the award of options, to key
employees and other persons, to purchase up to 2,500,000 shares of the Company's
common stock. Options granted under these plans may be either Incentive Stock
Options ("ISOs") or Nonqualified Options ("NQOs"). Generally, ISOs may only be
granted to employees of the Company, at an exercise price of not less than fair
market value of the stock at the date of grant. NQOs may be granted to any
person, at any exercise price not less than par value, within the discretion of
the Board of Directors or a committee appointed by the Board of Directors
("Committee"). The 1997 Plan provides for the award of options to key employees
and other persons, to purchase up to 250,000 shares of the Company's common
stock. Only NQOs may be granted under this plan.
Under the 1997, 1994 and 1991 Plans, any options granted will generally
become exercisable in increments over a period not to exceed ten years from the
date of grant, to be determined by the Board of Directors or Committee. These
options generally will expire not more than ten years from the date of grant.
The 1998 Plan provides for the award (collectively "awards") of stock
options, restricted stock, deferred stock, and other stock based awards to
officers, directors, employees, and other key persons. A total of 3,000,000
shares of common stock, subject to anti-dilution adjustments have been reserved
for this plan. Options under the 1998 Plan become exercisable upon the earlier
of a date set by the Board of Directors or Committee at the time of grant or the
close of business on the day before the tenth anniversary of the stock options'
date of grant. Options become exercisable the day before the fifth anniversary
of the date of grant in the case of an ISO.
Director Stock Option Plan - The Company's Non-employee Director Stock
Option Plan (the "Director Plan") allows only non-employee directors of the
Company (other than Robert Howard or Dr. Lawrence Howard) to receive grants
under the Director Plan. The Director Plan provides that eligible directors
automatically receive a grant of options to purchase 5,000 shares of common
stock at fair market value upon first becoming a director and, thereafter, an
annual grant, in January of each year, of options to purchase 2,500 shares at
fair market value. Options granted under this plan become 100% exercisable after
one year and terminate five years from date of grant.
F-15
<PAGE>
The following table summarizes information about stock options outstanding
at January 1, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Outstanding Weighted-Average Exercisable as
Range of as of Remaining Weighted-Average of Weighted-Average
Exercise Prices 1/1/00 Contractual Years Exercise Price 1/1/00 Exercise Price
--------------- ------ ----------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$2.85 - $ 7.19 563,850 9.4 $6.84 1,300 $ 4.85
$7.20 - $ 7.89 867,338 5.5 $7.72 706,338 $ 7.76
$7.90 - $13.74 618,915 6.2 $9.72 403,415 $ 9.99
$13.75 887,200 8.2 $13.75 491,025 $ 13.75
$13.76 - $22.00 146,500 6.2 $14.36 57,000 $ 14.67
--------- ---------
3,083,803 7.1 $10.01 1,659,078 $ 10.31
========= =========
</TABLE>
Information concerning all stock option activity under the 1988, 1991,
1994, 1997, 1998 and the Director Plans for the fiscal years ended January 1,
2000, January 2, 1999 and January 3, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Option Option Price Average Price
Shares Per Share Per Share
--------- ------------ -------------
<S> <C> <C> <C>
Outstanding at
December 28, 1996 3,593,332 $ 2.85 - $49.62 $12.92
Granted 604,600 $ 22.00 - $49.38 $29.70
Exercised (1,082,002) $ 2.85 - $35.00 $ 4.50
Cancelled/Expired (83,250) $ 7.90 - $44.75 $35.91
---------
Outstanding at
January 3, 1998 3,032,680 $ 2.85 - $49.62 $18.64
Granted 1,503,000 $ 7.19 - $25.00 $13.40
Exercised (314,844) $ 2.85 - $10.94 $ 5.51
Cancelled/Expired (1,719,800) $ 4.85 - $49.63 $26.96
---------
Outstanding at
January 2, 1999 2,501,036 $ 3.55 - $44.75 $11.43
Granted 817,000 $ 5.88 - $15.88 $ 7.16
Exercised (96,533) $ 3.55 - $13.75 $ 6.30
Cancelled/Expired (137,700) $ 5.50 - $44.75 $21.48
---------
Outstanding at
January 1, 2000 3,083,803 $ 4.85 - $16.81 $10.01
=========
</TABLE>
The incentive and nonqualified stock options summarized in the previous
table were granted under various vesting schedules ranging from immediate to
five years, with termination dates ranging from five to ten years from dates of
grant and may be subject to earlier termination as provided in the plans.
F-16
<PAGE>
In April 1998, the Company repriced grants previously issued between April
10, 1995 and March 30, 1998 under its 1988, 1991, 1994, 1997 and Non-Employee
Director Stock Option Plans. A total of 1,127,000 options with exercise prices
ranging from $18.00 to $49.63 per share were repriced to $13.75 or $14.75 per
share. These options are reflected in the previous table as options granted and
cancelled for fiscal 1998.
In September 1999, the Company extended the expiration dates to ten years
for all eligible stock options originally granted with expiration dates of six
years. As the market value on the date of extension was less than the exercise
price of the options, no compensation expense was recorded. The grants were
treated as newly issued for purposes of the pro forma disclosure of net loss and
loss per share indicated in the table below.
The proceeds to the Company from stock options exercised during fiscal
years 1999, 1998 and 1997, totaled $608,000, $1.7 million, and $4.9 million,
respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", requires the Company to provide pro
forma disclosure of net income and earnings per share as if the optional fair
value method had been applied to determine compensation costs for the Company's
Stock Option plans. The Company has used the Black-Scholes option-pricing model
to estimate the fair value of $9.25, $7.22, and $13.21, respectively, for each
stock option issued in fiscal 1999, 1998, and 1997 using he following weighted
average assumptions: a risk-free interest rate of 6.13%, 5.11%, and 5.62%; an
expected option life of 6.68 years, 4.09 years, and 4.65 years; expected
volatility of 79.6%, 72.92%, and 65.84%; and no dividends paid.
Accordingly, the Company's net income (loss) and earnings per share would
have been reduced to the pro forma amounts indicated in the following table:
1999 1998 1997
-------- ------- -------
(In thousands, except per share data)
Net income (loss)
As reported $(39,616) $(2,681) $14,372
Pro forma $(60,981) $(9,036) $ 8,772
Earnings (loss)
per share - Basic
As reported $ (1.23) $ (.08) $ .46
Pro forma $ (1.89) $ (.28) $ .28
Earnings (loss)
per share - Diluted
As reported $ (1.23) $ (.08) $ .44
Pro forma $ (1.89) $ (.28) $ .27
The above pro forma's net income (loss) and net income (loss) per share do
not recognize the related tax benefits in fiscal 1997 of $2.0 million, as these
deferred tax assets would be fully offset by a valuation allowance. There was no
related tax benefit for fiscal 1999 or 1998.
In November 1999, the Company issued 142,855 shares of its common stock at
$9.875 to acquire the net assets of R/H for an aggregate cost of $1.4 million,
plus $500,000 paid to certain of its officers.
9. RELATED PARTIES
During fiscal 1999, 1998, and 1997, the Company recorded sales of equipment
and consumables to Pitman Company ("Pitman") of $15.5 million, $13.7 million and
$7.6 million, respectively. At January 1, 2000 and January 2, 1999, the Company
had accounts receivable from Pitman of $2.4 million and $3.8 million,
F-17
<PAGE>
respectively. John Dreyer, who has been a director of the Company since February
1996, is Pitman's President and Chief Executive Officer.
On February 28, 1998, the Company made a loan to Robert E. Verrando in the
amount of $200,000 at an interest rate of 8% per annum, with the principal and
accrued interest payable on demand. At January 1, 2000 and January 2, 1999,
$185,000 and $213,000, respectively was due to the Company. Mr. Verrando was the
President and Chief Operating Officer of the Company from February 1996 to
January 1999 when he retired from these positions. He was appointed Secretary of
the Company in September 1998. He also remains a director on the Company's Board
of Directors, and a consultant to the Company.
The Company paid Robert Howard, the Company's Chairman Emeritus for
consulting services provided to the Company. In each of the fiscal years 1999
and 1998 the Company paid $133,000, and in fiscal 1997 the Company paid
$145,000. The Company had a payable to Mr. Howard of $12,000 for consulting
services at January 1, 2000 and January 2, 1999. In fiscal 1998 and 1997 the
Company subleased certain of its office facilities as a tenant-at-will from Mr.
Howard. Payments totaled $38,000 for fiscal 1998 and $36,000 for fiscal 1997.
10. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The geographic information included in the following table for fiscal 1999,
1998 and 1997 attributes revenues to the geographic locations based on the
location of the Company's customer.
1999 1998 1997
------- ------- -------
(in thousands)
Geographic Revenues:
United States $20,636 $23,243 $ 9,679
Germany 14,100 40,824 70,726
Japan 8,106 4,912 1,438
All Other 12,122 5,186 7,950
------- ------- -------
$54,964 $74,165 $89,793
======= ======= =======
Revenues generated under the Company's agreements with Heidelberg and its
distributors totaled $21.6 million, $42.1 million, and $73.7 million for fiscal
1999, 1998, and 1997, respectively. Accounts receivable from Heidelberg totaled
$6.5 million and $12.4 million, respectively, at January 1, 2000, and January 2,
1999. Revenues generated under the Company's agreements with Pitman totaled
$15.5 million, $13.7 million and $7.6 million for fiscal 1999, 1998 and 1997,
respectively. Accounts receivable from Pitman totaled $2.4 million and $3.8
million, respectively, at January 1, 2000 and January 2, 1999. No other customer
represented more than ten percent of the Company's revenues in fiscal 1999,
1998, and 1997.
11. COMMITMENTS AND CONTINGENCIES
The Company leases a number of its facilities under non-cancelable
operating leases, many of which contain renewal options. The agreements
generally require minimum monthly rents, adjusted annually, plus a pro rata
share of real estate taxes and certain other expenses. Total rental expenses as
a result of these agreements were $449,000 $513,000, and $542,000 for fiscal
1999, 1998, and 1997, respectively. As of January 1, 2000, future minimum lease
payments under these agreements were as follows:
2000 $300,000
2001 93,000
2002 4,000
--------
Total $397,000
========
The Company has employment agreements with two key executive officers. The
agreements provide for minimum salary levels, subject to periodic review by the
Company's Board of Directors. The employment agreements also contain certain
change in control provisions, as defined, which entitle each executive to
receive up to three times his five-year average annual compensation. The
Company's maximum contingent liability under such agreements as of January 1,
2000 would be $1.3 million.
F-18
<PAGE>
12. HEIDELBERG AGREEMENTS
In January 1991, the Company entered into a Master Agreement and a
Technology License Agreement (collectively referred to as the "Heidelberg
Agreements") with Heidelberg.
The Heidelberg Agreements and amendments govern the Company's relationship
with Heidelberg and relate to the integration of the PEARL Direct Imaging
technology into various presses manufactured by Heidelberg. The manufacture of
components, at specified rates, for such presses and the commercialization of
such presses are also covered.
The Heidelberg Agreements expire in December 2011 subject to certain early
termination and extension provisions. Under these agreements, Heidelberg agreed
to pay royalties to the Company based on the net sales prices of various
specified types of Heidelberg presses on which the Company's PEARL Direct
Imaging technology would be used. Pursuant to the Heidelberg Agreements,
Heidelberg has been provided with certain exclusive rights for use of the PEARL
Direct Imaging technology for the Quickmaster DI format size. The Master
Agreement has also been modified to provide Heidelberg with a fixed royalty rate
for the Company's PEARL Direct Imaging systems used in the Quickmaster DI.
In fiscal 1998 and 1999, the Company materially reduced production levels
of direct imaging systems used in the Quickmaster DI press, based on
requirements from Heidelberg. The Company received orders in fiscal 1999 from
Heidelberg in connection with its direct imaging systems used in the Quickmaster
DI. Based on the delivery schedule for these orders, the Company resumed
production with initial low level shipments of its direct imaging systems late
in the third quarter of fiscal 1999. The Company expects to continue shipments
through the end of fiscal 2000. Additionally, the Company believes production
levels through the end of fiscal 2000 will increase in line with the actual rate
of Quickmaster DI's made by Heidelberg.
13. 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, under the common
caption "Bill Berke, et al. V. Presstek, Inc., et al. ("Berke"), and a single
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) and 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.
On March 30, 1999 the United States District Court for the District of New
Hampshire issued orders dismissing several of the claims brought against the
Company and others in the Berke lawsuit.
The Company has entered into an agreement with the plaintiffs to settle the
class action lawsuit, and has executed a memorandum of understanding with
respect to settlement of the derivative law suits. Under
F-19
<PAGE>
the terms of the class action settlement, $22.0 million, in the form of shares
of the Company's common stock, will be paid to the class, with the number of
shares to be issued determined by a formula valuing the stock at different time
periods. The Company has reserved the right to pay the settlement in cash at the
time the settlement becomes effective. In the memorandum of understanding in the
derivative litigation, the Company has agreed to certain therapeutic
improvements to its internal policies, some of which have already been
instituted, including Company policies on insider trading, the functioning and
membership of its audit committee, and the policies pertaining to corporate
communications. The settlement of both the class action and derivative actions
require final approval of the United States District Court. The Company has
recorded a charge of $23.2 million in the fourth quarter of fiscal 1999 related
to the settlement. See Note 14 of notes to financial statements.
In August 1999 Creo Products, Inc., ("Creo"), filed an action in the United
States District Court for the District of Delaware against the Company asserting
that Creo has a "reasonable apprehension that it will be sued by Presstek for
infringement" of two of the Company's patents and seeking a declaration that
Creo's products "do not and will not infringe any valid and enforceable claims"
of the patents in question. In September 1999, the Company filed a counterclaim
against Creo for patent infringement. The Company claims that Creo has infringed
two direct imaging patents owned by the Company which were recently the subject
of re-examination by the U.S. Patent and Trademark Office.
The Company intends to vigorously enforce its patent rights.
The Company is involved in other litigation arising out of the ordinary
course of business. Management believes that these matters will not have a
material adverse effect on the accompanying financial statements.
14. FOURTH QUARTER ADJUSTMENTS
On March 24, 2000, subject to approval by the court, the Company reached a
settlement with the plaintiffs in the class actions, filed in 1996 on behalf of
the Company's shareholders against the Company and certain other defendants,
including but not limited to certain of the Company's officers and directors.
These actions were consolidated in the United States District Court, District of
New Hampshire. The Company has also reached a settlement with the plaintiffs in
the related derivative suits filed on behalf of the Company in the Chancery
Court of the State of Delaware and in the United States District Court, District
of New Hampshire. Under the terms of the settlement, the Company will issue
common stock in the amount of $22.9 million. The Company has recorded a charge
of $23.2 million in the fourth quarter of fiscal 1999 related to the settlement,
which includes the $22.9 million settlement and related administrative costs in
the amount of $250,000.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRESSTEK, INC.
Dated: March 31, 2000 By: /S/ Robert W. Hallman
----------------------------
Robert W. Hallman
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard A. Williams Chairman of the Board, and March 31, 2000
- ------------------------ Chief Scientific Officer
Richard A. Williams
/s/ Robert W. Hallman Chief Executive Officer, March 31, 2000
- ------------------------ President, and Director
Robert W. Hallman (Principal Executive Officer)
/s/ Robert Howard Director March 31, 2000
- ------------------------
Robert Howard
/s/ Dr. Lawrence Howard Director March 31, 2000
- ------------------------
Dr. Lawrence Howard
/s/ Robert E. Verrando Director March 31, 2000
- ------------------------
Robert E. Verrando
/s/ Harold N. Sparks Director March 31, 2000
- ------------------------
Harold N. Sparks
/s/ John W. Dreyer Director March 31, 2000
- ------------------------
John W. Dreyer
- ------------------------
/s/ John B. Evans Director March 31, 2000
- ------------------------
John B. Evan
/s/ Edward J. Marino Director March 31, 2000
- ------------------------
Edward J. Marino
/s/ Daniel S. Ebenstein Director March 31, 2000
- ------------------------
Daniel S. Ebenstein
/s/ Neil Rossen Chief Financial Officer March 31, 2000
- ------------------------ (Principal Financial and
Neil Rossen Accounting Officer)
</TABLE>
28
<PAGE>
PRESSTEK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Charges
Balance at Charged to Charged to Add Balance at
Fiscal Beginning of Costs and Other Account (Deduct) End of
Year Description Fiscal Year Expenses Describe Describe Fiscal Year
---- ----------- ----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 Allowance for losses on
accounts receivable $ 184 $1,074 $ -- $ (317) (1) $ 941
====== ====== ====== ======= ======
Warranty reserve 486 1,114 -- (717) (2) 883
====== ====== ====== ======= ======
1998 Allowance for losses on
accounts receivable $ 941 $5,006 $ 169(3) $(3,580) (1) $2,536
====== ====== ====== ======= ======
Warranty reserve 883 679 -- (632) (2) 930
====== ====== ====== ======= ======
1999 Allowance for losses on
accounts receivable $2,536 $2,240 $ -- $(1,474) (1) $3,302
====== ====== ====== ======= ======
Warranty reserve 930 290 -- (263) (2) 957
====== ====== ====== ======= ======
</TABLE>
(1) Allowance for losses
(2) Warranty expenditures
(3) Heath Custom Press, Inc. Acquisition
FS -1
875 Elm Street
Manchester, NH 03101
(603) 634-6000
March 22, 2000
Mr. Neil Rossen, CFO
Presstek, Inc.
9 Commercial Street
Hudson, NH 03051-3907
Dear Neil:
I am writing to communicate that Citizens Bank has approved the following
changes to the existing Loan Agreement.
Effective December 31, 1999, the definition of `Tangible Capital Base" will be
modified. The new definition shall read: "Tangible Capital Base" means total
shareholders' equity less intangible assets less subordinated debt plus any
non-cash liability recorded as a result of the Shareholder Class Action Lawsuit,
all as determined in accordance with generally accepted accounting principles
from Borrower's financial statements delivered to the bank in accordance with
the covenants of the Borrower in the Loan Agreement.
I will coordinate the preparation of legal documents and call you next week for
an appropriate time to close this modification. Please don't hesitate to call
should you have any questions.
Regards,
/s/ John Mercier
John Mercier
Vice-President
KeyBank
One Canal Plaza
Portland, ME 04101-4035
March 28, 2000
Neil Rossen, CFO
Presstek, Inc.
9 Commercial Street Tel: (800) 452-8762
Hudson, NH 03051-3907
Dear Neil:
Please be advised that KeyBank National Association has approved the following
changes to the financial covenant definitions in our Loan Agreement effective
12/31/1999:
"Tangible Capital Base" means Tangible Net Worth plus Subordinated Debt plus any
non-cash liability recorded as a result of the Shareholder Class Action Suit,
all as determined in accordance with GAAP.
"Debt" means all of the Lessee's liabilities less any non-cash liability
recorded as a result of the Shareholder Class Action Suit, all as determined in
accordance with GAAP.
A condition of approval is that the Borrower shall notify the Bank of any
election to settle the Shareholder Class Action Suit in cash. Such settlement in
cash shall require Bank approval.
We will be forwarding documentation for your review and signature to document
these changes. Please call if you have any questions.
Sincerely,
/s/ Noel B. Graydon
Noel B. Graydon
Senior Vice President
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Presstek, Inc.
Hudson, New Hampshire
We hereby consent to the incorporation by reference in the respective
Registration Statements on Forms S-8 (Nos. 33-80466, 33-61215, 33-39337, and
333-76905) and on Forms S-3 (Nos. 333-2299 and 33-48342) of Presstek, Inc. and
in the Prospectuses constituting part of such Registration Statements of our
report dated February 14, 2000 (except for note 14, as to which the date is
March 24, 2000 ) relating to the financial statements and schedule of Presstek,
Inc. appearing in the Company's Annual Report on Form 10-K for the year ended
January 1, 2000
We also consent to the references to us under the caption "Experts" in the
Prospectuses.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
New York, New York
March 30, 2000
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<LEGEND>
This schedule contains summary financial information extracted from form 10K at
January 1, 2000. and is qualified in its entirety by reference to such financial
statements
</LEGEND>
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<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 18,653,000
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<RECEIVABLES> 14,947,000
<ALLOWANCES> 3,302,000
<INVENTORY> 7,214,000
<CURRENT-ASSETS> 38,371,000
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<TOTAL-ASSETS> 94,633,000
<CURRENT-LIABILITIES> 12,998,000
<BONDS> 8,830,000
0
0
<COMMON> 325,000
<OTHER-SE> 49,530,000
<TOTAL-LIABILITY-AND-EQUITY> 94,633,000
<SALES> 47,948,000
<TOTAL-REVENUES> 54,964,000
<CGS> 33,326,000
<TOTAL-COSTS> 33,326,000
<OTHER-EXPENSES> 17,671,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (501,000)
<INCOME-PRETAX> (30,634,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,634,000)
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<CHANGES> 0
<NET-INCOME> (39,616,000)
<EPS-BASIC> (1.23)
<EPS-DILUTED> (1.23)
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<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 19,057,000
<SECURITIES> 0
<RECEIVABLES> 23,162,000
<ALLOWANCES> 2,536,000
<INVENTORY> 9,724,000
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0
0
<COMMON> 323,000
<OTHER-SE> 87,130,000
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<SALES> 60,833,000
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<CGS> 46,606,000
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<OTHER-EXPENSES> 15,413,000
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<INTEREST-EXPENSE> (623,000)
<INCOME-PRETAX> (1,587,000)
<INCOME-TAX> 0
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<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 4,939,000
<SECURITIES> 1,008,000
<RECEIVABLES> 27,132,000
<ALLOWANCES> 941,000
<INVENTORY> 13,160,000
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<DEPRECIATION> 5,864,000
<TOTAL-ASSETS> 99,655,000
<CURRENT-LIABILITIES> 13,665,000
<BONDS> 0
0
0
<COMMON> 319,000
<OTHER-SE> 85,671,000
<TOTAL-LIABILITY-AND-EQUITY> 99,655,000
<SALES> 71,278,000
<TOTAL-REVENUES> 89,793,000
<CGS> 43,854,000
<TOTAL-COSTS> 43,854,000
<OTHER-EXPENSES> 10,656,000
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<INCOME-PRETAX> 25,949,000
<INCOME-TAX> 9,460,000
<INCOME-CONTINUING> 16,489,000
<DISCONTINUED> (2,117,000)
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<EPS-BASIC> 0.46
<EPS-DILUTED> 0.44
</TABLE>
