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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 3, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NO. 0-17541
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PRESSTEK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 02-0415170
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 EXECUTIVE DRIVE, HUDSON, NEW HAMPSHIRE 03051-4903
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (603) 595-7000
--------------
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 9, 2004, there were 34,725,208 shares of the registrant's common
stock, $.01 par value per share, outstanding.
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PRESSTEK, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets as of July 3, 2004 (unaudited) and
January 3, 2004 3
Statements of Operations for the three and six months
ended July 3, 2004 and June 28, 2003 (unaudited)
4
Statements of Cash Flows for the six months ended July 3, 2004
and June 28, 2003 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
=====================================================================================================================
ITEM 1. FINANCIAL STATEMENTS
PRESSTEK, INC.
BALANCE SHEETS JULY 3, 2004 January 3, 2004
(IN THOUSANDS, EXCEPT SHARE DATA) (unaudited)
---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,194 $ 28,196
Accounts receivable, net of allowance for losses
of $1,693 and $1,892, in fiscal 2004 and 2003, respectively 16,051 14,922
Inventories 13,007 12,354
Other current assets 2,557 1,064
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Total current assets 65,809 56,536
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PROPERTY, PLANT AND EQUIPMENT, NET 42,418 45,732
OTHER ASSETS:
Patent application costs and license rights, net 3,028 3,419
Other 1,369 841
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Total other assets 4,397 4,260
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TOTAL $ 112,624 $ 106,528
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt 2,143 $ 2,143
Accounts payable 6,725 4,750
Accrued expenses 6,175 7,131
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Total current liabilities 15,043 14,024
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LONG-TERM DEBT, NET OF CURRENT PORTION 11,250 12,321
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized
1,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value; authorized 75,000,000 shares;
issued and outstanding 34,585,608 shares at
July 3, 2004; 34,202,175 shares at January 3, 2004 346 342
Additional paid-in capital 100,567 97,769
Comprehensive loss (47) (47)
Accumulated deficit (14,535) (17,881)
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Total stockholders' equity 86,331 80,183
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TOTAL $ 112,624 $ 106,528
=====================================================================================================================
See accompanying notes to financial statements
3
PRESSTEK, INC.
STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
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JULY 3, 2004 June 28, 2003 JULY 3, 2004 June 28, 2003
-----------------------------------------------------------------------------------------------------------------------------
REVENUE:
Product sales $ 22,585 $ 22,043 $ 45,698 $ 43,332
Royalties and fees from licensees 112 476 313 1,629
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Total revenue 22,697 22,519 46,011 44,961
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COSTS AND EXPENSES:
Cost of products sold 13,553 12,890 28,085 25,842
Research and product development 1,645 1,874 3,321 3,824
Sales, marketing and customer support 3,747 3,060 6,885 5,914
General and administrative 2,244 2,221 4,512 4,965
Special charges and (credits) -- 550 (296) 550
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Total costs and expenses 21,189 20,595 42,507 41,095
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INCOME FROM OPERATIONS 1,508 1,924 3,504 3,866
OTHER INCOME (EXPENSE), NET:
Interest income 97 79 191 151
Interest expense (104) (198) (213) (423)
Other, net (54) 20 (136) 21
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Total other expense, net (61) (99) (158) (251)
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INCOME BEFORE INCOME TAXES 1,447 1,825 3,346 3,615
PROVISION FOR INCOME TAXES -- -- -- --
NET INCOME $ 1,447 $ 1,825 $ 3,346 $ 3,615
=============================================================================================================================
EARNINGS PER SHARE - BASIC: $ 0.04 $ 0.05 $ 0.10 $ 0.11
=============================================================================================================================
EARNINGS PER SHARE - DILUTED: $ 0.04 $ 0.05 $ 0.09 $ 0.11
=============================================================================================================================
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - BASIC 34,438 34,156 34,352 34,149
=============================================================================================================================
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING - DILUTED 35,364 34,283 35,258 34,211
=============================================================================================================================
See accompanying notes to financial statements
4
PRESSTEK, INC.
STATEMENTS OF CASH FLOWS (unaudited)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JULY 3, 2004 June 28, 2003
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CASH FLOWS - OPERATING ACTIVITIES:
Net Income $ 3,346 $ 3,615
Adjustments to reconcile net income to net cash provided
by operating activities:
Special charges and discontinued programs (296) 550
Depreciation and amortization 4,242 4,408
Provision for warranty and other costs 615 993
Provision for losses on accounts receivable 168 791
Changes in operating assets and liabilities:
Accounts receivable (1,281) (2,285)
Inventories (522) 1,660
Other current assets (1,493) (604)
Accounts payable 1,975 369
Accrued expenses (2,003) (1,761)
Other 104 (99)
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Net cash provided by operating activities 4,855 7,637
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CASH FLOWS - INVESTING ACTIVITIES:
Purchases of property, plant and equipment (588) (697)
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Net cash used in investing activities (588) (697)
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CASH FLOWS - FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 2,802 108
Repayment of term loan (1,071) (593)
Repayment of lease line of credit -- (952)
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Net cash provided by (used in) financing activities 1,731 (1,437)
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INCREASE IN CASH AND CASH EQUIVALENTS 5,998 5,503
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 28,196 17,563
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CASH AND CASH EQUIVALENTS END OF PERIOD $ 34,194 $ 23,066
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 213 $ 424
=====================================================================================================================
Income taxes $ -- $ --
=====================================================================================================================
See accompanying notes to financial statements
5
PRESSTEK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JULY 3, 2004
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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NATURE OF BUSINESS - Presstek, Inc. ("Presstek", or "the Company") is a
manufacturer, developer and marketer of digital laser imaging and chemistry-free
plate technologies for the printing and graphic arts industries. Presstek's
products and applications incorporate its patented direct imaging ("DI(R)"),
technologies and consumables for computer-to-plate, ("CTP") and direct-to-press
applications. The Company's subsidiary, Lasertel, Inc. ("Lasertel") is engaged
in the manufacture and development of high-powered laser diodes for the Company
and external customers.
The Company operates in two reportable segments, the Digital Imaging Products
segment and the Lasertel segment. The Digital Imaging Products segment is
primarily engaged in the development, manufacture and sale of patented digital
imaging systems and printing plate technologies for CTP and direct-to-press
applications. The Lasertel segment is primarily engaged in the manufacture and
development of high-powered laser diodes for Presstek and other customers.
BASIS OF PRESENTATION - The financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The financial information included in this quarterly report should be read in
conjunction with the Company's audited financial statements and related notes
thereto for the fiscal year ended January 3, 2004. The January 3, 2004
information has been derived directly from the annual financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included and all such adjustments were normal and
recurring. Operating results for the three and six months ended July 3, 2004 are
not necessarily indicative of the results that may be expected for the fiscal
year ending January 1, 2005.
FISCAL YEAR - The Company operates and reports on a 52 or 53 week fiscal year
ending on the Saturday closest to December 31. Accordingly, the financial
statements include the thirteen-week periods ended July 3, 2004 ("the second
quarter of fiscal 2004") and June 28, 2003 ("the second quarter of fiscal
2003"), and the twenty-six week periods ended July 3, 2004 ("the first six
months of fiscal 2004"), and June 28, 2003 ("the first six months of fiscal
2003").
USE OF ESTIMATES - The Company prepares its financial statements in accordance
with US generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and related disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. The
Company evaluates its estimates, including those related to product returns,
inventories, income taxes, warranty obligations, and litigation on an on-going
basis. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE RECOGNITION - The Company recognizes revenue when persuasive evidence of
an agreement exists, delivery has occurred or services have been rendered, the
price to the customer is fixed or determinable, collection is reasonably
assured, and no future services are required.
6
The Company generates revenue through four main sources; equipment sales, laser
diode sales, consumable sales and license agreements with manufacturers who
incorporate the company's technology into their products. The Company also
generates revenue through the sale of installation services, training, support
services and equipment maintenance contracts, although historically these items
have not been a significant source of revenue.
The Company records revenue for product sales net of estimated returns, which
are adjusted periodically, based upon historical rates of return. Equipment
revenue and any related royalties for products sold to original equipment
manufacturers is recognized at the time of shipment. Contracts with OEM's do not
include price protection or product return rights. Revenue for equipment sold to
distributors, whereby the distributor is responsible for installation, is
recognized at shipment. Revenue for equipment sold to distributors whereby the
Company is responsible for installation, for which the installation is not
deemed inconsequential, is recognized upon completion of installation and
customer acceptance. Contracts with distributors do not include price protection
or product return rights, however the Company may elect in certain circumstances
to accept returns for product. Revenue for installation services is recognized
after installation has occurred. Revenue related to service maintenance
agreements is recognized ratably over the duration of the particular contract.
Revenue for training and support services are recognized upon completion of the
training and services. Certain fees and other reimbursements are recognized as
revenue when the related services have been performed or the revenue otherwise
earned. Deferred revenue includes certain customer advances received as a result
of the Company's distribution agreements. This revenue is recognized as product
is shipped or services are performed. The Company may enter into multiple
element arrangements. When equipment, consumables, installation and maintenance
agreements are contained in a single arrangement, revenue is allocated to the
various elements based upon the fair market value of each element. Fair market
value is generally determined based upon the price charged when the element is
sold separately.
STOCK-BASED COMPENSATION - The Company accounts for stock options and other
equity instruments granted to employees under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), as permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). APB 25 provides for
compensation cost to be recognized over the vesting period of the options based
on the difference, if any, between the fair market value of the Company's stock
and the option price on the grant date. As the Company has only issued fixed
term stock option grants at or above the quoted market price on the date of the
grant, there is no compensation expense recognized in the accompanying financial
statements. The Company adopted the disclosure provisions of SFAS 123, which
requires the Company to provide pro forma disclosure of net income and earnings
per share as if the optional fair value method had been applied to determine
compensation costs for the Company's stock-based compensation plans.
7
Accordingly, the Company's net income and net income per share for the three and
six months ended July 3, 2004 and June 28, 2003, would have been reduced to the
pro forma amounts indicated in the following table:
THREE MONTHS ENDED SIX MONTHS ENDED
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(IN THOUSANDS EXCEPT PER SHARE DATA) JULY 3, 2004 June 28, 2003 JULY 3, 2004 June 28, 2003
-------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 1,447 $ 1,825 $ 3,346 $ 3,615
Less:
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Total stock-based employee compensation expense (575) (664) (1,147) (1,333)
-------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 872 $ 1,161 $ 2,199 $ 2,282
=========================================================================================================================
Net income per common share, as reported:
Basic $ 0.04 $ 0.05 $ 0.10 $ 0.11
=========================================================================================================================
Diluted $ 0.04 $ 0.05 $ 0.09 $ 0.11
=========================================================================================================================
Pro forma net income per common share:
Basic $ 0.03 $ 0.03 $ 0.06 $ 0.07
=========================================================================================================================
Diluted $ 0.02 $ 0.03 $ 0.06 $ 0.07
=========================================================================================================================
The above pro forma net income and net income per share do not consider any
related tax benefit from stock option exercises.
The Company used the Black-Scholes option-pricing model to estimate the weighted
average fair value of $6.39 and $3.70 for each stock option issued in the second
quarter and first six months of fiscal 2004 and 2003, respectively, using the
following weighted average assumptions for both the second quarter and first six
months of fiscal 2004 and 2003:
2004 2003
--------------------------------------------------------
Dividend yield NONE None
Expected volatility 69.79% 73.62%
Risk free interest rate 3.35% 3.15%
Expected option life 5.50 6.59
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2. INVENTORIES
-----------
Inventories consisted of the following at July 3, 2004 and January 3, 2004:
(IN THOUSANDS) JULY 3, 2004 January 3, 2004
---------------------------------------------------------------------
Raw materials $ 3,693 $ 2,782
Work in process 3,737 2,939
Finished goods 5,577 6,633
---------------------------------------------------------------------
Total inventories $ 13,007 $ 12,354
=====================================================================
8
3. PROPERTY, PLANT AND EQUIPMENT, NET
----------------------------------
Property, plant and equipment, net consisted of the following at July 3, 2004
and January 3, 2004:
(IN THOUSANDS) JULY 3, 2004 January 3, 2004
----------------------------------------------------------------------------------------
At cost:
Land and improvements $ 2,038 $ 2,038
Buildings and leasehold improvements 24,518 24,518
Production equipment and other 47,170 46,931
Office furniture and equipment 4,944 4,831
----------------------------------------------------------------------------------------
78,670 78,318
Less accumulated depreciation (36,252) (32,586)
----------------------------------------------------------------------------------------
Total property, plant and equipment, net $ 42,418 $ 45,732
========================================================================================
All property and equipment is pledged as security for long-term debt. See Note 5
4. ACCRUED EXPENSES
----------------
Accrued expenses consisted of the following at July 3, 2004 and January 3, 2004:
(IN THOUSANDS) JULY 3, 2004 January 3, 2004
----------------------------------------------------------------------------------------
Accrued payroll and benefits $ 1,875 $ 2,154
Accrued warranty 907 935
Accrued special charges 477 1,055
Accrued royalties 1,067 1,057
Other current liabilities 1,849 1,930
----------------------------------------------------------------------------------------
Total accrued expenses $ 6,175 $ 7,131
========================================================================================
5. LONG-TERM DEBT
--------------
Long-term debt consisted of the following at July 3, 2004 and January 3, 2004:
(IN THOUSANDS) JULY 3, 2004 January 3, 2004
----------------------------------------------------------------------------------------
Mortgage term loans $ 13,393 $ 14,464
Less current portion (2,143) (2,143)
----------------------------------------------------------------------------------------
Total long-term debt, net of current portion $ 11,250 $ 12,321
========================================================================================
9
6. INCOME TAXES
The Company did not record a provision for federal or state income taxes for the
second quarter and first six months of fiscal 2004, as a result of the
utilization of federal and state net operating loss carryforwards, and the
utilization of state tax credits. These deferred tax assets were previously
fully reserved. The Company did not record a provision for federal or state
income taxes for the second quarter and first six months of fiscal 2003 as a
result of the utilization of federal and state net operating loss carryforwards.
Although the Company recorded profits in the second quarter and first six months
of fiscal 2004 and 2003, a full valuation allowance has been applied on the net
deferred tax assets, as a result of the significant losses incurred in prior
years. The Company will continue to assess the expected future results and
review its deferred tax position in each interim and fiscal period.
7. EARNINGS PER SHARE
The following represents the calculation of basic and diluted earnings per share
for the three and six months ended July 3, 2004 and June 28, 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) JULY 3, 2004 JUNE 28, 2003 JULY 3, 2004 JUNE 28, 2003
---------------------------------------- -------------------- --------------------- -------------------- ---------------------
Net income $ 1,447 $ 1,825 $ 3,346 $ 3,615
---------------------------------------- -------------------- --------------------- -------------------- ---------------------
Weighted average common shares
Outstanding - Basic 34,438 34,156 34,352 34,149
---------------------------------------- -------------------- --------------------- -------------------- ---------------------
Weighted average common stock
Equivalents 926 127 906 62
---------------------------------------- -------------------- --------------------- -------------------- ---------------------
Weighted average common shares
Outstanding - Diluted 35,364 34,283 35,258 34,211
======================================== ==================== ===================== ==================== =====================
Earnings per share - Basic: $ 0.04 $ 0.05 $ 0.10 $ 0.11
======================================== ==================== ===================== ==================== =====================
Earnings per share - Diluted: $ 0.04 $ 0.05 $ 0.09 $ 0.11
======================================== ==================== ===================== ==================== =====================
Options and warrants to purchase 844,107 and 841,477 shares of common stock at
exercise prices ranging from $10.75 to $22.75 per share were outstanding during
a portion of the second quarter and first six months of fiscal 2004,
respectively, but were not included in the computation of diluted earnings per
share as the exercise prices of the options and warrants were greater than the
average market price of the shares of common stock. Options and warrants to
purchase 2,485,172 and 2,536,047 shares of common stock at exercise prices
ranging from $5.32 to $22.75 per share were outstanding during a portion of the
second quarter and first six months of fiscal 2003, respectively, but were not
included in the computation of diluted earnings per share as the exercise prices
of the options and warrants were greater than the average market price of the
shares of common stock.
8. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and all changes in stockholder's
equity except those due to investments by owners and distributions to owners.
For the second quarter and first six months of fiscal 2004 and fiscal 2003,
respectively, comprehensive income was comprised solely of net income.
10
9. SEGMENT INFORMATION
The following table presents a summary of the Company's operations by segment
for the three and first six months ended July 3, 2004 and June 28, 2003:
DIGITAL
IMAGING INTER-
(IN THOUSANDS) PRODUCTS LASERTEL SEGMENT TOTAL
---------------------------------------- ------------- -------------- -------------- ------------
THREE MONTHS ENDED JULY 3, 2004
---------------------------------------- ------------- -------------- -------------- ------------
REVENUE $ 22,124 $ 1,783 $ (1,210) $ 22,697
INCOME (LOSS) FROM OPERATIONS 2,332 (824) - 1,508
TOTAL ASSETS 98,765 13,859 - 112,624
Three months ended June 28, 2003
---------------------------------------- ------------- -------------- -------------- ------------
Revenue $ 22,191 $ 1,713 $ (1,385) $ 22,519
Income (loss) from operations 2,920 (996) - 1,924
Total assets 89,007 15,119 - 104,126
SIX MONTHS ENDED JULY 3, 2004
---------------------------------------- ------------- -------------- -------------- ------------
REVENUE $ 44,898 $ 3,139 $ (2,026) $ 46,011
INCOME (LOSS) FROM OPERATIONS 5,575 (2,071) - 3,504
TOTAL ASSETS 98,765 13,859 - 112,624
Six months ended June 28, 2003
---------------------------------------- ------------- -------------- -------------- ------------
Revenue $ 44,358 $ 3,458 $ (2,855) $ 44,961
Income (loss) from operations 5,935 (2,069) - 3,866
Total assets 89,007 15,119 - 104,126
10. DISCONTINUED PROGRAMS AND SPECIAL CHARGES
In fiscal 2002, as a result of various repositioning programs, the Company
recorded a charge of $3.7 million to cost of products sold and $6.0 million in
special charges. These charges included inventory, equipment and other asset
write-downs, severance and fringe benefit costs, executive and other contractual
obligations.
In fiscal 2003 the Company expanded its repositioning actions to reduce costs,
which had been initiated in the second quarter of fiscal 2002. As a result, the
Company recorded a charge of $550,000, primarily related to severance and fringe
benefit costs associated with the reduction of approximately forty-three
employees.
In the first quarter of fiscal 2004, the Company reversed $296,000 in excess
special charges related to severance and fringe benefits accrued in fiscal 2003
and 2002, as a result of lower fringe benefit costs.
11
The following tables summarize the activity related to the discontinued programs
and special charges and accrued balances for the six months ended July 3, 2004:
ADDITIONAL
PROVISIONS UTILIZATION
BALANCE AT THROUGH THROUGH BALANCE AT
(IN THOUSANDS) JANUARY 3, 2004 JULY 3, 2004 JULY 3, 2004 JULY 3, 2004
---------------------------------- --------------- ------------- ------------ ------------
Executive contractual obligations $ 699 $ (24) $ (267) $ 408
Severance and fringe benefits 356 (272) (15) 69
---------------------------------- --------------- ------------- ------------ ------------
Total accrued special charges
and discontinued programs $ 1,055 $ (296) $ (282) $ 477
================================== =============== ============= ============ ============
The cumulative cash paid by the Company at July 3, 2004 as a result of the
forgoing repositioning actions totaled $4.7 million. The Company anticipates the
remaining payments related to the discontinued programs and special charges will
be completed by May 2005.
11. ACQUISITIONS
On July 13, 2004, the Company entered into an asset purchase agreement with
A.B.Dick Company ("A.B.Dick") under which it agreed to acquire the business and
assets of A.B.Dick through a U.S. Bankruptcy Code section 363, asset sale.
A.B.Dick manufactures and markets equipment and supplies for the graphic arts
and printing industries, and also provides continuing service and support.
A.B.Dick filed for Chapter 11 bankruptcy protection on July 13, 2004. The
transaction, valued at approximately $40 million, is subject to Bankruptcy Court
approval. The Company also has an agreement with Key Corporate Capital, Inc.,
A.B.Dick's current lender, to provide $7.0 million in debtor-in-possession
financing to fund A.B.Dick's post-petition operating expenses and to meet
supplier and employee commitments through the completion of the sale
proceedings, which are anticipated to be completed in the fourth quarter of
2004. Currently there is a motion pending before the Bankruptcy court to approve
the terms of the Company's proposed asset purchase agreement with A.B.Dick,
however there may be other potential competing bidders. Though the Company is
unaware of any potential competing bidders, it is possible that stakeholders in
the bankruptcy process may actively solicit competing bidders. In connection
with the acquisition, the Company has incurred approximately $1.2 million in
costs for legal and advisory services. These costs are currently included in
other current assets, and will be added to the purchase price if the Company's
bid is successful, or expensed if the acquisition is not completed.
On July 30, 2004, the Company acquired the stock of Precision Lithograining
Corporation, and its affiliated company SDK Realty Corp. ("Precision") of South
Hadley, Massachusetts, an independent plate manufacturer, for approximately
$12.3 million in cash. Precision provides the Company with its Anthem and
Freedom printing plates, and is also a provider of other conventional and
digital printing plates for both web and sheet-fed printing applications.
In connection with the acquisitions, the Company received a commitment from
Citizens Bank New Hampshire, KeyBank, and BankNorth for $80.0 million in Senior
Secured Credit Facilities (the "Facilities") to replace the Company's existing
credit facilities. The proposed terms of the Facilities include a $35.0 million
five year secured Term Loan and a $45.0 million five year secured Revolving Line
of Credit (the "Revolver"). The Term Loan would be used to refinance bank debt,
and to partially finance the acquisition of A.B.Dick. The Revolver would be used
for working capital requirements, capital expenditures, acquisitions, and
general corporate purposes. The interest rate would range from Prime to Prime
plus 1.25%, or from LIBOR plus 1.25% to LIBOR plus 3.5%, based on certain
financial covenants.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain statements contained in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our expectations
for our financial and operating performance in 2004 and beyond; the adequacy of
internal cash and working capital for our operations; the strength of our
various strategic partnerships (both on manufacturing and distribution); our
ability to secure other strategic alliances and relationships; our expectations
regarding Presstek's strategy for growth; our expectations and plans regarding
market penetration, including the strength and scope of our distribution
channels and our expectations regarding sales of DI presses in Europe; our
expectations regarding our new OEM relationships with Heidelberg Druckmaschinen,
AG, ("Heidelberg"); our expectations regarding the sale of our products and use
of our technology including pricing; our expectations regarding the manufacture
and performance of existing, planned and recently introduced products; the
effects, market acceptance, or pricing of competitive products, including the
impact of a competitive plate product introduced by a strategic partner or other
competitor in the marketplace; the placement of orders for direct imaging kits;
our expectations regarding the effects and benefits of the Company's
streamlining of operations and reductions in force; the market success of, and
benefits achieved by the use of new products; and the expected effect of
adopting recently issued accounting standards, among others. Such
forward-looking statements involve a number of known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors that could cause or contribute to such differences include, but are not
limited to, our dependency on our strategic partners (both for manufacturing and
distribution); the ability of the Company to complete the purchase of the assets
of the A.B. Dick Company ("A.B. Dick") and to achieve the intended benefits of
the acquisition; the ability of the Company to achieve the intended benefits of
the acquisition of Precision Lithograining Corporation ("Precision");
uncertainty surrounding patent protection; shortages of critical or sole-source
component supplies; the availability and quality of Lasertel's laser diodes;
manufacturing constraints or difficulties (as well as manufacturing difficulties
experienced by our subsidiaries or sub-manufacturing partners and their capacity
constraints); the impact of general market factors in the print industry
generally and the economy as a whole; market acceptance of and demand for our
products and resulting revenues; the introduction and market acceptance of
competitive products; risk and impact of litigation; and other risks detailed in
the Company's reports on file with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the fiscal year ended January 3,
2004 filed on March 18, 2004, as well as those discussed elsewhere in this
report. The words "looking forward," "looking ahead," "believe(s)," "should,"
"plan," "expect(s)," "project(s)," "anticipate(s)," "may," "likely,"
"potential," "opportunity" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statements were
made; and readers are advised to consider such forward-looking statements in
light of the risks set forth below. Presstek undertakes no obligation to update
any forward-looking statements contained in this Quarterly Report on Form 10-Q.
OVERVIEW
Presstek Inc. ("Presstek") is a developer, manufacturer, and marketer of digital
laser imaging and chemistry-free plate technologies for the printing and graphic
arts industries. Presstek's products and applications incorporate its patented
Direct Imaging ("DI(R)") technologies and consumables for direct-to-press and
computer-to-plate ("CTP") applications. Presstek's DI technology enables "direct
to press" or on-press imaging, whereby the printing plates are imaged on the
press directly from digital files, bypassing numerous prepress procedures and
chemical processes in preparing jobs for presswork. Our imaging technology also
enables computer-to-plate or off-press imaging whereby operators of conventional
printing presses image plates directly from digital files to a CTP device. The
printer then uses these imaged plates on a traditional printing press, but
without the chemical processes required for conventional plates.
13
Our patented DI thermal laser diode product family enables customers to produce
high quality, full-color lithographic printed materials more quickly and cost
effectively than with conventional methods. Presstek's patented DI, CTP and
plate products eliminate photographic darkrooms, film, and toxic chemical
processing, which results in reduced printing cycle time and lowers the
effective cost of production for commercial printers. Presstek solutions make it
easier for printers to meet increasing customer demand for shorter print runs,
faster turnaround times and improved cost competitiveness, with an
environmentally friendly process that avoids the chemicals associated with plate
development.
Our DI technologies are marketed to leading press manufacturers to be
incorporated into their direct imaging presses, and are used in our Dimension(R)
series of CTP systems. Our patented ProFire(R) laser imaging system, and our
recently introduced ProFire Excel imaging system, represent the next generation
technology which can be adapted to many DI presses and CTP devices. Presstek's
Dimension CTP systems incorporate the ProFire(R) system and use our
chemistry-free printing plates, Applause(R) and Anthem(R).
Lasertel, Inc. ("Lasertel"), a subsidiary of Presstek, is primarily engaged in
the manufacture and development of high-powered laser diodes. Lasertel's
products include semiconductor lasers and active components for the graphics and
defense industries. Lasertel offers high-powered laser diodes in both standard
and customized configurations, including chip on sub-mount, un-mounted bars, and
fiber-coupled devices, to support various applications.
We operate in two reportable segments, the Digital Imaging Products segment and
the Lasertel segment. The Digital Imaging Products segment is primarily engaged
in the development, manufacture and sale of patented digital imaging systems and
printing plate technologies for direct-to-press, or on-press, applications and
CTP, or off-press, applications. The Lasertel segment is primarily engaged in
the development and manufacture of high-powered laser diodes for use by Presstek
and for sale to external customers.
We generate revenue through four main sources: the sale of our equipment,
including DI presses, CTP devices, and imaging kits incorporated by leading
press manufacturers into direct imaging presses for the graphic arts industry;
the sale of high-powered laser diodes for the industrial and defense industries;
the sale of our proprietary consumables; and license agreements with
manufacturers that incorporate our technology into their products. Our business
strategy is centered on maximizing the sale of consumable products, and
therefore our business efforts focus on the sale of "consumable burning engines"
such as our DI presses and CTP devices. We rely on partnerships with press
manufacturers such as Ryobi Limited ("Ryobi"), Heidelberg and Koenig & Bauer, AG
("KBA") to manufacture presses that use our proprietary consumables. We also
rely on distribution partners, such as Kodak Polychrome Graphics ("KPG") to sell
and distribute press and CTP systems and the related proprietary consumable
products.
Historically we have been reliant on Heidelberg for a material share of our
revenue. In fiscal 2002, we initiated a process to evaluate our resources and
strategically re-focus the business. During this re-alignment, we concluded that
we needed to reposition and rescale our resources, and implemented cost savings
programs in fiscal 2002 and 2003 to return to profitability. We expanded our
strategic relationships with other press manufacturers and distributors such as
Ryobi, KBA, and KPG to develop and distribute presses that incorporate our
imaging technology and use our proprietary consumables, so as to lessen our
reliance on any one partner. We are working with other CTP manufacturers to
qualify our consumables on their systems. We believe this shift in strategy
fundamentally enhances Presstek's ability to expand and control its business. In
the first six months of 2004, we've continued the growth of our new technology
business, which consists of all business other than the Quickmaster DI platform
products, and are focused on expanding our digital product and services
offerings.
We have recently pursued strategic acquisitions that are designed, in part, to
improve the manufacturing and distribution capabilities of the Company, and to
enhance the Company's over-all position within the graphic arts industry.
Generally, our strategy is to identify candidates for acquisition that will meet
these
14
goals as well as being accretive within the first twelve months following
the acquisition, and for which we have the capacity to effectively manage.
Recently, we announced two such acquisitions: Precision, of South Hadley,
Massachusetts and A.B. Dick, of Niles Illinois.
15
RESULTS OF OPERATIONS
REVENUE
Revenue for the second quarter and first six months of fiscal 2004 of $22.7
million and $46.0 million, respectively, consisted of product sales, customer
support revenue, royalties and license fees. Revenue for the second quarter and
first six months of fiscal 2004 increased $178,000 or 1% and $1.1 million or 2%,
respectively, as compared to $22.5 million and $45.0 million for the second
quarter and first six months of fiscal 2003.
Product sales for the Digital Imaging Products segment, which includes the sale
of equipment and spare parts, consumables and customer support services, were
$22.0 million for the second quarter of fiscal 2004, an increase of $301,000 or
1% as compared to $21.7 million for the comparable period in fiscal 2003. This
increase was due primarily to volume increases in consumable sales of $573,000,
offset by volume decreases in equipment sales of $84,000, as well as a decrease
of $188,000 in customer support revenue.
Equipment sales were $7.6 million for the second quarter of fiscal 2004, a
decrease of $84,000, or 1% as compared to the second quarter of fiscal 2003.
This decrease was primarily due to volume and price decreases of approximately
$1.0 million and $167,000 respectively, in sales of press products, partially
offset by volume increases in sales of our CTP Dimension platesetter and spare
parts of $1.9 million less price decreases of $645,000.
Consumable sales were $14.1 million for the second quarter of fiscal 2004, an
increase of $573,000, or 4%, as compared to $13.6 million for the second quarter
of fiscal 2003. Sales of our new technology consumables in the second quarter of
fiscal 2004 increased $2.6 million as compared to the second quarter of fiscal
2003, primarily as a result of the increase in the installed base of new
technology equipment using our proprietary consumable. Partially offsetting the
increase in new technology consumable sales was a volume decrease of $1.7
million in sales of consumables used on the Quickmaster DI press platform. Price
decreases as a result of our OEM agreements with Heidelberg and Heidelberg USA
also reduced revenue by approximately $262,000.
Product sales for the Digital Imaging Products segment were $44.6 million for
the first six months of fiscal 2004, an increase of $1.9 million or 4% as
compared to $42.7 million for the comparable period in fiscal 2003. This was due
primarily to volume increases in equipment sales of approximately $2.1 million,
offset by decreases of $199,000 in customer support services and $76,000 in
consumable sales.
Equipment sales were $16.7 million for the first six months of fiscal 2004, an
increase of $2.1 million, or 15% as compared to $14.5 million for the comparable
period in fiscal 2003. This increase relates primarily to volume increases of
approximately $377,000 in sales of press products and $5.1 million in sales of
CTP Dimensions and spare parts, offset in part by volume decreases of
approximately $2.0 million in sales of direct imaging systems for use in the
Quickmaster DI and $1.4 million in CTP sales.
Consumable sales were $27.1 million for the first six months of fiscal 2004, an
increase of $76,000. or less than 1%, as compared to $27.2 million for the first
six months of fiscal 2003. Sales of our new technology consumables in the first
six months of fiscal 2004 increased $4.6 million as compared to the comparable
period in fiscal 2003, primarily as a result of the increase in the installed
base of new technology equipment using our proprietary consumable. Offsetting
the increase in new technology consumable sales was a volume decrease of $4.1
million in sales of consumables used on the Quickmaster DI press platform. Price
decreases as a result of our OEM agreements with Heidelberg and Heidelberg USA
also reduced revenue by approximately $507,000.
Consumable and equipment sales under our agreements with Heidelberg and its
distributors of $3.1 million and $6.2 million for the second quarter and first
six months of fiscal 2004 decreased $1.1 million or 26% and $5.2 million or 46%,
respectively, as compared to $3.6 million and $11.4 million in the comparable
periods in fiscal 2003.
16
Customer support revenue decreased by $188,000 and $199,000 for the second
quarter and first six months of fiscal 2004, respectively, primarily as a result
of outsourcing these services to a third party.
Royalties and fees from licensees for the second quarter of fiscal 2004 were
$112,000, a decrease of $364,000 or 76%, as compared to $476,000 for the
comparable period in fiscal 2003. This decrease relates primarily to a reduction
in fees generated from our distribution agreement with Xerox. Royalties and fees
from licensees for the first six months of fiscal 2004 were $313,000, a decrease
of $1.3 million or 81%, as compared to $1.6 million for the comparable period in
fiscal 2003. This decrease relates primarily to a reduction in fees generated
from our distribution agreement with Xerox, as well as a decrease in royalties
as a result of decreased shipments to Heidelberg of direct imaging kits used in
the Quickmaster DI. Heidelberg has indicated that as a result of the global
economic slowdown, it has an inventory of direct imaging kits on hand to support
its production requirements. We currently believe that orders for direct imaging
kits will resume sometime in late fiscal 2004, however, there can be no
assurance that any orders will be received.
Revenue from Heidelberg represented 14% of total revenue for the second quarter
and first six months of fiscal 2004, as compared to 16% and 25% of total revenue
for the comparable periods in fiscal 2003, respectively.
In July 2003, we entered into a global OEM consumable supply agreement with
Heidelberg, which includes a separate agreement with Heidelberg USA that
provided us with certain preferred supplier rights, which vary based on
territory, time period and sales volume. Under the terms of the OEM agreements,
which include minimum volume commitments from Heidelberg and Heidelberg USA, we
manufacture and supply Heidelberg branded consumable plate products for the
Heidelberg Quickmaster DI press. Shipments to Heidelberg of the branded
consumable product began in August 2003. In June 2004, Heidelberg USA notified
us of their intention to terminate the OEM consumable supply agreement,
effective December 31, 2004. The action taken by Heidelberg USA will affect the
minimum purchase requirements for the branded product covered by these
agreements, although branded product may still be available to Heidelberg USA.
The company also has an alternative Presstek branded product for Heidelberg
Quickmaster DI customers available through other distribution channels. This
action by Heidelberg USA does not affect our agreement with Heidelberg.
Heidelberg is also marketing a competitive plate product as an alternative to
Presstek's PEARLdry for the Quickmaster DI. The introduction of a competitive
plate could reduce the revenue generated by Presstek under its agreements with
Heidelberg including the OEM consumables supply agreements entered into in July
2003. It could also lead to downward pricing pressure on our full line of
spooled consumable products, which could have a material adverse effect on our
business, results of operations and financial condition.
Product sales to external customers for the Lasertel segment, including the sale
of products for defense industry applications, were $573,000 and $1.1 million
for the second quarter and first six months of fiscal 2004, respectively, an
increase of $245,000 or 75% and $510,000 or 85%, as compared to $328,000 and
$603,000 for the comparable periods in fiscal 2003, respectively.
COST OF PRODUCTS SOLD
Cost of products sold consists of the cost of material, labor and overhead,
shipping and handling costs and warranty expenses.
Cost of products sold for the Digital Imaging Products segment was $12.6 million
or 57% of revenue for the second quarter of fiscal 2004, an increase of $327,000
or 3%, as compared to $12.2 million or 55% of revenue, for the comparable period
in fiscal 2003. Cost of products sold was $25.8 million or 58% of revenue for
the first six months of fiscal 2004, an increase of $1.4 million or 6%, as
compared to $24.5 million or 55% of revenue, for the comparable period in fiscal
2003. These increases relate primarily to the increase in production costs
driven by increased product sales.
17
Gross margin as a percentage of total revenue for the Digital Imaging Products
segment was 43% and 42%, respectively, for the second quarter and first six
months of fiscal 2004, as compared to 45% for each of the second quarter and
first six months of fiscal 2003. The decrease in gross margin for the second
quarter and first six months of fiscal 2004 was primarily the result of the
reduction in sales of direct imaging systems to Heidelberg for use in the
Quickmaster DI, price reductions related to consumables used in the Quickmaster
DI, and product mix.
Cost of products sold for the Lasertel segment was $1.0 million for the second
quarter of fiscal 2004, an increase of approximately $334,000 or 51%, as
compared to $653,000 for the comparable period in fiscal 2003. Cost of products
sold for the Lasertel segment was $2.3 million for the first six months of
fiscal 2004, an increase of approximately $871,000 or 63%, as compared to $1.4
million for the comparable period in fiscal 2003. This increase relates
primarily to lower absorption of labor and overhead costs as a result of
inventory reductions in the first quarter of fiscal 2004. The cost of products
sold for the Lasertel segment is comprised of the cost of material, direct labor
and manufacturing overhead associated with the production of laser diodes for
both Presstek and external customers. As the Lasertel factory is operating at
approximately 30% capacity, the unabsorbed manufacturing overhead associated
with the low production level of these diodes is higher. Lasertel margins would
be expected to improve if more production overhead is absorbed by higher sales
volume, either to Presstek or external customers.
RESEARCH AND PRODUCT DEVELOPMENT
Research and product development expenses consist primarily of payroll and
related expenses for personnel, parts and supplies, and contracted services
required to conduct our equipment, consumables and high-powered laser diode
product development efforts.
Research and product development expenses for the Digital Imaging Products
segment were $1.5 million or 7% of revenue, for the second quarter of fiscal
2004, a decrease of $87,000 or 5%, as compared to $1.6 million or 7% of revenue
for the comparable period in fiscal 2003. This decrease relates primarily to
reduced expenses related to salaries and benefits as a result of headcount
reductions in the second quarter of 2003.
Research and product development expenses for the Digital Imaging Products
segment were $3.0 million or 7% of revenue for the first six months of fiscal
2004, a decrease of $258,000 as compared to $3.3 million or 7% of revenue for
the comparable period in fiscal 2003. This decrease relates primarily to reduced
expenses for salaries and benefits totaling approximately $597,000 as a result
of headcount reductions in the second quarter of 2003. This decrease was offset
in part by increased spending for parts and supplies approximating $260,000 for
development efforts related to the SureFire imaging technology introduced in May
2004 at the Drupa trade show.
Research and product development expenses for the Lasertel segment were $107,000
for the second quarter of fiscal 2004, a decrease of $142,000, as compared to
$249,000 for the comparable period in fiscal 2003. This decrease consists
primarily of a decrease in spending for parts and supplies and professional
services approximating $100,000 related to Lasertel's research and product
development activities.
Research and product development expenses for the Lasertel segment were
$274,000, for the first six months of fiscal 2004, a decrease of $245,000, as
compared to $519,000 for the comparable period in fiscal 2003. This decrease
consists primarily of a decrease in spending for parts and supplies and
professional services approximating $150,000 related to Lasertel's research and
product development activities, as well as a decrease in spending for salaries
and benefits related to headcount reductions in the second quarter of fiscal
2003.
18
SALES, MARKETING AND CUSTOMER SUPPORT
Sales, marketing and customer support expenses consist primarily of payroll and
related expenses for personnel, advertising, trade shows, promotional expenses,
and travel costs related to our sales, marketing and customer support
activities.
Sales, marketing and customer support expenses for the Digital Imaging Products
segment were $3.6 million or 16% of revenue, for the second quarter of fiscal
2004, an increase of $670,000, as compared to $3.0 million or 13% of revenue for
the comparable period in fiscal 2003. This increase relates primarily to
increased spending for trade show related travel and expenses of $450,000 as a
result of our attendance at the Drupa trade show held in May 2004. Additionally,
salaries and benefits increased approximately $260,000 as a result of an
increase in headcount.
Sales, marketing and customer support expenses for the Digital Imaging Products
segment were $6.7 million or 15% of revenue, for the first six months of fiscal
2004, an increase of $911,000, as compared to $5.7 million or 13% of revenue for
the comparable period in fiscal 2003. This increase relates primarily to
increased spending for trade show related travel and expenses approximating
$450,000, as a result of our attendance at the Drupa trade show held in May
2004. Additionally, salaries and benefits increased approximately $271,000 as a
result of an increase in headcount, as well as, an increase of $251,000 to
support promotional activities directed at product distribution.
Sales and marketing expenses for the Lasertel segment were $122,000 and $233,000
for the second quarter and first six months of fiscal 2004, respectively, an
increase of $17,000 and $60,000, as compared to $105,000 and $173,000 for the
comparable periods in fiscal 2003, respectively. These increases relate
primarily to increased travel expenses as a result of trade show attendance.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of payroll and related
expenses for personnel, and contracted professional services necessary to
conduct our finance, information systems, human resources and administrative
activities.
General and administrative expenses for the Digital Imaging Products segment
were $2.1 million or 9% of revenue, for the second quarter of fiscal 2004, an
increase of $83,000, as compared to $2.0 million or 9% of revenue for the
comparable period in fiscal 2003. This increase relates primarily to increased
spending for professional and contractor fees totaling approximately $230,000,
offset by approximately $113,000 in a reduction of bad debt expense.
General and administrative expenses for the Digital Imaging Products segment
were $4.1 million or 9% of revenue, for the first six months of fiscal 2004, a
decrease of $357,000, as compared to $4.4 million or 10% of revenue for the
comparable period in fiscal 2003. This decrease relates primarily to a reduction
in bad debt expense of approximately $400,000, as well as decreased expenses
related to salaries and benefits of $207,000 as a result of headcount
reductions. These decreases were offset in part by increased spending related to
professional services of $184,000.
In connection with the proposed acquisition of A.B.Dick, the Company has
incurred approximately $1.2 million in costs for legal and advisory services.
These costs are currently included in other assets, and will be added to the
purchase price if the Company's bid is successful, or expensed to general and
administrative expenses if the acquisition is not completed.
General and administrative expenses for the Lasertel segment were $178,000 and
$420,000, for the second quarter and first six months of fiscal 2004,
respectively, a decrease of $60,000 and $96,000, as compared to $238,000 and
$516,000, for the comparable periods in fiscal 2003, respectively. These
decreases relate primarily to a decrease in salaries and benefits as a result of
lower head count.
19
DISCONTINUED PROGRAMS AND SPECIAL CHARGES
In fiscal 2002, as a result of various repositioning programs, the Company
recorded a charge of $3.7 million to cost of products sold and $6.0 million in
special charges. These charges included inventory, equipment and other asset
write-downs, severance and fringe benefit costs, executive and other contractual
obligations.
In fiscal 2003 the Company expanded its repositioning actions to reduce costs,
which had been initiated in the second quarter of fiscal 2002. As a result the
Company recorded a charge of $550,000, primarily related to severance and fringe
benefit costs associated with the reduction of approximately forty-three
employees.
In the first quarter of fiscal 2004, the Company reversed $296,000 in excess
special charges related to severance and fringe benefits accrued in fiscal 2003
and 2002.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income and expense,
and other miscellaneous income (expense).
Interest income was $97,000 for the second quarter of fiscal 2004, an increase
of $18,000, as compared to $79,000 for the comparable period in fiscal 2003, as
a result of higher cash balances available for investment. Interest expense was
$104,000 for the second quarter of fiscal 2004, a decrease of $94,000, as
compared to $198,000 for the comparable period in fiscal 2003, as a result of
lower average debt balances and lower interest rates on borrowings. Other
expense, net was a loss of $54,000 for the second quarter of fiscal 2004, an
increased loss of $74,000, as compared to a gain of $20,000 for the comparable
period in fiscal 2003. This loss is mainly comprised of losses incurred for
foreign currency conversion on our accounts receivable balance.
Interest income was $191,000 for the first six months of fiscal 2004, an
increase of $40,000, as compared to $151,000 for the comparable period in fiscal
2003, as a result of higher cash balances available for investment. Interest
expense was $213,000 for the first six months of fiscal 2004, a decrease of
$210,000, as compared to $423,000 for the comparable period in fiscal 2003, as a
result of lower average debt balances and lower interest rates on borrowings.
Other expense, net was a loss of $136,000 for the first six months of fiscal
2004, an increased loss of $157,000, as compared to a gain of $21,000 for the
comparable period in fiscal 2003. This loss is mainly comprised of losses
incurred for foreign currency conversion on our accounts receivable balance.
20
PROVISION FOR INCOME TAXES
We did not record a provision for federal or state income taxes for the second
quarter and first six months of fiscal 2004, as a result of the utilization of
federal and state net operating loss carryforwards, and the utilization of state
tax credits. We did not record a provision for federal or state income taxes for
the second quarter and first six months of fiscal 2003 as a result of the
utilization of federal and state net operating loss carryforwards.
Although we recorded profits in the second quarter and first six months of
fiscal 2004 and 2003, we are applying a full valuation allowance on our net
deferred tax assets, as we have incurred significant losses in prior years. We
will continue to assess our expected future results and review our deferred tax
position in each interim and fiscal period.
NET INCOME
As a result of the foregoing, we had net income of $1.4 million and $3.3 million
for the second quarter and first six months of fiscal 2004, as compared to net
income of $1.8 million and $3.6 million for the second quarter and first six
months of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operating and capital investment requirements primarily through
cash flows from operations and borrowings. At July 3, 2004, we had cash and cash
equivalents of $34.2 million and working capital of $50.8 million as compared to
cash and cash equivalents of $28.2 million and working capital of $42.5 million
at January 3, 2004. The increase in cash and cash equivalents of $6.0 million
for the first six months fiscal 2004 was primarily due to net cash provided by
operating activities of $4.9 million and financing activities of $1.7 million,
offset by $588,000 in cash used in investing activities.
Net cash provided by operating activities was $4.9 million for the first six
months of fiscal 2004, as compared to $7.6 million for the first six months of
fiscal 2003. The primary sources of cash from operating activities were net
income of $3.3 million, non-cash charges of depreciation, amortization and other
charges of $4.7 million, and a decrease in working capital and non-current
assets of $3.1 million. Net cash provided by operating activities decreased $2.8
million for the first six months of fiscal 2004 as compared to the first six
months of 2003, primarily as a result of the reduction in non-cash charges for
depreciation, amortization and other charges of $2.0 million, and a decrease in
net income of $300,000 as well as a decrease in working capital of $500,000.
Net cash used in investing activities was $588,000 for the first six months of
fiscal 2004 as compared to $697,000 for the first six months of fiscal 2003, and
consisted primarily of additions to property, plant and equipment used in the
business.
Net cash provided by financing activities was $1.7 million for the first six
months of fiscal 2004, as compared to $1.4 million used by financing activities
in the first six months of fiscal 2003, and consisted primarily of cash received
from the exercise of stock options in the amount of $2.8 million, offset by
payments on term loans of $1.1 million. Net cash provided by financing
activities increased $3.2 million for the first six months of fiscal 2004 as
compared to the first six months of 2003, primarily as a result of the increase
in cash received from the exercise of stock options of $2.8 million, and the
reduction in debt repayments of $500,000.
In October 2003, we replaced our existing credit facilities, entering into a
$50.0 million senior secured credit facility jointly with two lenders. This new
credit facility includes a $35.0 million revolving line of credit (the
"Revolver") and a $15.0 million term loan (the "Term Loan"). These credit
facilities are secured by all our assets, and bear interest, at our election, at
either the prime rate or the LIBOR rate, plus an applicable margin based on
certain financial ratios, ranging from a minimum of 0.25% to a maximum of 2.5%.
21
The Revolver is a five-year loan, expiring in September 2010, under which we may
borrow a maximum of $35.0 million, reduced by the amount of all letters of
credit outstanding. Advances under the Revolver may be used to finance working
capital requirements, capital expenditures, and future acquisitions as permitted
under the loan agreement. At July 3, 2004, we had $30.5 million available under
the revolving line of credit loan, reduced by $4.5 million outstanding under
standby letters of credit.
The Term Loan is a five-year loan in the amount of $15.0 million. Under the Term
Loan, principal and interest payments are due in nineteen quarterly installments
of $535,714 plus interest, with a final payment of all remaining principal and
accrued and unpaid interest due on September 30, 2008. At July 3, 2004, the
effective interest rate was 2.86%. Proceeds from the Term Loan were used to
re-finance all debt outstanding under our previous credit facilities.
Under the terms of the Revolver and Term Loan, we are required to meet various
financial covenants on a quarterly and annual basis, including maximum funded
debt to EBITDA and minimum fixed charge coverage covenants. As of July 3, 2004,
we were in compliance with all financial covenants.
On July 13, 2004, we entered into an asset purchase agreement with A.B.Dick
Company under which we agreed to acquire the business and assets of A.B.Dick
through a U.S. Bankruptcy Code section 363 asset sale. A.B.Dick manufactures and
markets equipment and supplies for the graphic arts and printing industries, and
provides continuing service and support. A.B.Dick filed for Chapter 11
bankruptcy protection on July 13, 2004. The transaction, valued at approximately
$40 million, is subject to Bankruptcy Court approval. We also have an agreement
with Key Corporate Capital, Inc., A.B.Dick's current lender, to provide $7
million in debtor-in-possession financing to fund A.B.Dick's post-petition
operating expenses and to meet supplier and employee commitments through the
completion of the sale proceedings, which are anticipated to be completed in the
fourth quarter of 2004. Currently there is a motion pending before the
Bankruptcy court to approve the terms of the Company's proposed asset purchase
agreement with A.B.Dick, however there may be other potential competing bidders.
Though the Company is unaware of any potential competing bidders, it is possible
that stakeholders in the bankruptcy process may actively solicit competing
bidders. In connection with the acquisition, we have incurred approximately $1.2
million in costs for legal and advisory services. These costs are currently
included in other current assets, and will be added to the purchase price if the
Company's bid is successful, or expensed if the acquisition is not completed.
On July 30, 2004, we acquired the stock of Precision Lithograining Corporation
and its affiliated company SDK Realty Corp., ("Precision") of South Hadley,
Massachusetts, an independent plate manufacturer, for approximately $12.3
million in cash. Precision provides Anthem and Freedom printing plates to us,
and is also a provider of other conventional and digital printing plates for
both web and sheet-fed printing applications.
In connection with the acquisitions, we received a commitment from Citizens Bank
New Hampshire, KeyBank, and BankNorth for $80.0 million in Senior Secured Credit
Facilities (the "Facilities") to replace the Company's existing credit
facilities. The proposed terms of the Facilities include a $35.0 million five
year secured Term Loan and a $45.0 million five year secured Revolving Line of
Credit (the "Revolver"). The Term Loan would be used to refinance bank debt, and
to partially finance the acquisition of A.B.Dick. The Revolver would be used for
working capital requirements, capital expenditures, acquisitions, and general
corporate purposes. The interest rate would range from Prime to Prime plus
1.25%, or from LIBOR plus 1.25% to LIBOR plus 3.5%, based on certain financial
covenants.
22
We have future contractual payment obligations through 2010 that primarily
relate to debt, acquisition and financing and royalty obligations, executive
contractual obligations and operating leases. The following tables represent our
future commitments at July 3, 2004 and January 3, 2004:
AS OF JULY 3, 2004 LESS THAN ONE TO THREE TO MORE THAN
(IN THOUSANDS) TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
-------------------------------------------------------------------------------------------------------
Credit facilities $ 13,393 $ 2,143 $ 6,429 $ 4,821 $ --
Acquisition commitment 12,300 12,300 -- -- --
Royalty obligation 10,767 1,200 9,567 -- --
Financing commitment 7,000 7,000 -- -- --
Executive contractual obligations 2,383 722 1,661 -- --
Operating leases 196 63 133 -- --
-------------------------------------------------------------------------------------------------------
Total contractual obligations $ 46,039 $ 23,428 $ 17,790 $ 4,821 $ --
=======================================================================================================
AS OF JANUARY 3, 2004 LESS THAN ONE TO THREE TO MORE THAN
(IN THOUSANDS) TOTAL ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
-------------------------------------------------------------------------------------------------------
Credit facilities $ 14,464 $ 2,143 $ 6,429 $ 5,892 $ --
Royalty obligation 11,147 1,200 9,947 -- --
Executive contractual obligations 2,999 1,338 1,661 -- --
Operating leases 186 107 79 -- --
-------------------------------------------------------------------------------------------------------
Total contractual obligations $ 28,796 $ 4,788 $ 18,116 $ 5,892 $ --
=======================================================================================================
Our anticipated capital expenditures for fiscal 2004 are approximately $3.0
million, and primarily relate to the purchase of capital equipment to be used in
the production of our DI and CTP equipment and consumable products.
Heidelberg is marketing a competitive plate product as an alternative to
Presstek's PEARLdry for the Quickmaster DI. The introduction of a competitive
plate could reduce the revenue generated by Presstek under its agreements with
Heidelberg including the OEM consumables supply agreements entered into in July
2003. It could also lead to downward pricing pressure on our full line of
spooled consumable products, which could have a material adverse effect on our
business, results of operations and financial condition.
We believe that existing funds, cash flows from operations, and cash available
under our Revolver should be sufficient to satisfy working capital requirements
and capital expenditures through the next twelve months. There can be no
assurance, however, that we will not require additional financing, or that such
additional financing, if needed, will be available on acceptable terms.
EFFECT OF INFLATION
Inflation has not had, and is not expected to have, a material impact upon our
operations.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates primarily as a
result of our borrowing activities, and to a lesser extent, our investing
activities. Our long-term borrowings are in variable rate instruments, with
interest rates tied to either the prime rate or the London Interbank Offered
Rate ("LIBOR"). A 100 basis point change in these rates would have an impact of
approximately $150,000 on our annual interest expense, assuming consistent
levels of floating rate debt with those held as of the end of fiscal 2003. In
the fourth quarter of fiscal 2003, we entered into interest rate floors and caps
to manage net exposure to interest rate fluctuations related to our borrowings.
We have some exposure to foreign currency exchange rate risk as a limited number
of our sales and purchase transactions are denominated in the European euro and
the Japanese yen. In addition, some of our customers and strategic partners are
not located in the United States, and are themselves subject to fluctuations in
foreign exchange rates. If the home country currency of these customers and
strategic partners were to decrease in value relative to the United States
dollar, their ability to purchase and/or market our products could be adversely
affected and our products may become less competitive to them. This may have an
adverse impact on our business. Likewise, some of our suppliers are not located
in the United States and thus, such suppliers are subject to foreign exchange
rate risks in transactions with us. Decreases in the value of their home,
country currency versus that of the United States dollar could cause
fluctuations in supply pricing which could have an adverse effect on our
business.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
As of July 3, 2004, we have, under the supervision and with the participation of
the Presstek's management, including its Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of Presstek's disclosure controls
and procedures pursuant to Rule 13a-15(b) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that
evaluation, Presstek's Chief Executive Officer and Chief Financial Officer
concluded that, as of the July 3, 2004 Presstek's disclosure controls and
procedures are effective in ensuring that material information relating to
Presstek (including its consolidated subsidiaries) required to be disclosed by
Presstek in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, including ensuring
that such material information is accumulated and communicated to Presstek's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no changes in Presstek's internal controls or in other factors that
could significantly affect Presstek's controls in the quarter ended July 3, 2004
that has materially affected, or is reasonably likely to affect our internal
control over financial reporting.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I - Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 2004 filed with the Commission on March 18, 2004 for a
description of certain legal proceedings involving the Company. All of such
information is hereby incorporated by reference in response to this item.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 8, 2004, the Company held its Annual Meeting of Stockholders.
(b) Not Applicable.
(c) At such meeting, the stockholders of the Company voted:
(1) To elect seven (7) Directors to serve for the ensuing year. The votes cast
were as follows:
Votes Votes Broker
Nominees Votes For Against Withheld Abstained Non Votes
--------------------- ------------ --------- ----------- ----------- -----------
Edward J. Marino 27,107,207 N/A 3,047,491 N/A N/A
John W. Dreyer 29,588,430 N/A 566,268 N/A N/A
Daniel S. Ebenstein 27,306,971 N/A 2,847,727 N/A N/A
Dr. Lawrence Howard 26,625,215 N/A 3,529,483 N/A N/A
Michael D. Moffitt 27,469,208 N/A 2,685,490 N/A N/A
Stephen N. Rappaport 29,675,760 N/A 478,938 N/A N/A
Donald C. Waite, III 29,687,776 N/A 475,922 N/A N/A
(2) To ratify the selection of BDO Seidman, LLP, as the Company's independent
auditors for the fiscal year ending January 1, 2005. The votes cast were as
follows:
Votes Votes Broker
Votes For Against Withheld Abstained Non Votes
------------ --------- ----------- ----------- -----------
29,618,531 273,248 N/A 262,919 N/A
(d) Not Applicable.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-4(a) of
the Exchange Act (furnished herewith).
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer pursuant to Rule 13a-4(a) of the Exchange Act (furnished
herewith).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
(b) Reports on Form 8-K
A Form 8-K was filed on June 3, 2004 furnishing information pursuant to
Item 5 relating to the press release of Presstek dated June 3, 2004
announcing that it had signed an agreement to acquire Precision
Lithograining Corporation in a cash transaction valued at approximately $13
million.
A Form 8-K was filed on July 13, 2004 furnishing information pursuant to
Item 5 relating to the press release of Presstek dated July 13, 2004
announcing that it entered into an asset purchase agreement with A.B. Dick
Company under which we agreed to acquire the buisiness and assets of A.B
Dick through a U.S. Bankruptcy Code Section 363 asset sale.
A Form 8-K was filed on April 29, 2004 furnishing information pursuant to
Item 9 and 12 relating to the press release of Presstek, Inc., dated April
29, 2004 reporting Presstek Inc.'s financial results for the fiscal quarter
ended April 3, 2004.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRESSTEK, INC.
(Registrant)
Date: August 12, 2004 /s/ Edward J. Marino
----------------------------------------
By: Edward J. Marino
President and Chief Executive Officer
(Principal Executive and Duly Authorized
Officer)
Date: August 12, 2004 /s/ Moosa E. Moosa
----------------------------------------
By: Moosa E. Moosa
Vice President - Finance,
Chief Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
27
EXHIBIT INDEX
No. Description
--- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-4(a) of
the Exchange Act (furnished herewith).
31.2 Certification of Chief Financial Officer and Principal Accounting
Officer pursuant to Rule 13a- 4(a) of the Exchange Act (furnished
herewith).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).