Form 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended July 1, 2006
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from to
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Commission
file number 0-17541
PRESSTEK,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
(State
or other Jurisdiction of
Incorporation
or Organization)
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02-0415170
(I.R.S.
Employer Identification No.)
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55
Executive Drive
Hudson,
New Hampshire
(Address
of Principal Executive Offices)
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03051-4903
(Zip
Code)
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Registrant’s
telephone number, including area code (603) 595-7000
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
þ
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
one):
Large
accelerated filer £ Accelerated
filer R Non-accelerated
filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
þ
As
of
August 3, 2006, there were 35,616,983 shares of the Registrant’s Common Stock,
$0.01 par value, outstanding.
PRESSTEK,
INC.
INDEX
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PAGE
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Consolidated
Financial Statements
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3
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4
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5
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6
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Item
2.
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22
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Item
3.
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36
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Item
4.
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36
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PART
II
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OTHER
INFORMATION
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Item
1.
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37
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Item
1A.
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37
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Item
4.
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37
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Item
6.
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38
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39
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PART
I. FINANCIAL INFORMATION
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Item
1. Consolidated Financial Statements
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PRESSTEK,
INC.
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(in
thousands, except share and per-share data)
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(Unaudited)
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July
1,
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December
31,
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2006
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2005
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$
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8,566
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$
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5,615
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Accounts
receivable, net
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54,490
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44,088
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Inventories,
net
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40,812
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50,083
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Other
current assets
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2,904
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1,175
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Total
current assets
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106,772
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100,961
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Property,
plant and equipment, net
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44,131
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45,250
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Intangible
assets, net
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11,728
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11,974
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Goodwill
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23,089
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23,089
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Other
noncurrent assets
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687
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213
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Total
assets
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$
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186,407
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$
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181,487
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities
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Current
portion of long-term debt and capital lease obligation
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$
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7,036
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$
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7,037
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Line
of credit
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7,466
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6,036
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Accounts
payable
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24,528
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21,199
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Accrued
expenses
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12,078
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16,718
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Deferred
revenue
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8,887
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8,579
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Total
current liabilities
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59,995
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59,569
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Long-term
debt and capital lease obligation, less current portion
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19,054
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22,570
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Deferred
income taxes
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1,187
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715
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Total
liabilities
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80,236
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82,854
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Commitments
and contingencies (See Note 20)
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Stockholders'
equity
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Preferred
stock, $0.01 par value, 1,000,000 shares authorized, no shares
issued
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-
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-
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Common
stock, $0.01 par value, 75,000,000 shares authorized, 35,602,090
and
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35,366,024
shares issued and outstanding at July 1, 2006 and
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December
31, 2005, respectively
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356
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354
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Additional
paid-in capital
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108,016
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106,268
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Accumulated
other comprehensive income (loss)
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259
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(59
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)
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Accumulated
deficit
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(2,460
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)
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(7,930
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)
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Total
stockholders' equity
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106,171
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98,633
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Total
liabilities and stockholders' equity
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$
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186,407
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$
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181,487
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The
accompanying notes are an integral part of these consolidated financial
statements.
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-
3
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PRESSTEK,
INC.
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(in
thousands, except per-share data)
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(Unaudited)
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Three
months ended
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Six
months ended
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July
1,
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July
2,
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July
1,
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July
2,
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2006
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2005
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2006
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2005
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Revenue
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Product
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$
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62,552
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$
|
57,804
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$
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120,934
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$
|
114,872
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Service
and parts
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11,680
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11,916
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23,864
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25,243
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Total
revenue
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74,232
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69,720
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144,798
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140,115
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Cost
of revenue
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Product
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44,477
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40,292
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86,122
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81,746
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Service
and parts
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|
8,694
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|
8,144
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16,979
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|
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16,943
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|
Total
cost of revenue
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|
53,171
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|
48,436
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103,101
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|
98,689
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Gross
profit
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21,061
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21,284
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41,697
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41,426
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Operating
expenses
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|
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|
|
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Research
and development
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|
1,680
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|
1,931
|
|
|
3,225
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|
4,053
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|
Sales,
marketing and customer support
|
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|
10,967
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|
10,077
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|
19,996
|
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|
19,886
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|
General
and administrative
|
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|
3,823
|
|
|
5,205
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|
9,203
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|
|
10,649
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|
Amortization
of intangible assets
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|
|
785
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|
|
577
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|
|
1,593
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|
1,165
|
|
Restructuring
and special charges
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|
-
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|
-
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|
-
|
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|
982
|
|
Total
operating expenses
|
|
|
17,255
|
|
|
17,790
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|
|
34,017
|
|
|
36,735
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|
|
|
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|
|
|
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Income
from operations
|
|
|
3,806
|
|
|
3,494
|
|
|
7,680
|
|
|
4,691
|
|
Interest
and other income (expense), net
|
|
|
(616
|
)
|
|
(955
|
)
|
|
(1,168
|
)
|
|
(1,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income
from operations before income taxes
|
|
|
3,190
|
|
|
2,539
|
|
|
6,512
|
|
|
3,110
|
|
Provision
for income taxes
|
|
|
444
|
|
|
200
|
|
|
1,042
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
income
|
|
$
|
2,746
|
|
$
|
2,339
|
|
$
|
5,470
|
|
$
|
2,820
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Earnings
per common share
|
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Basic
|
|
$
|
0.08
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|
$
|
0.07
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|
$
|
0.15
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|
$
|
0.08
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|
Diluted
|
|
$
|
0.08
|
|
$
|
0.07
|
|
$
|
0.15
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
35,637
|
|
|
35,083
|
|
|
35,506
|
|
|
34,936
|
|
Dilutive
effect of options
|
|
|
419
|
|
|
528
|
|
|
456
|
|
|
525
|
|
Weighed
average shares outstanding - diluted
|
|
|
36,056
|
|
|
35,611
|
|
|
35,962
|
|
|
35,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
-
4
-
|
PRESSTEK,
INC. AND SUBSIDIARIES
|
|
(in
thousands)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
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|
|
Six months
ended
|
|
|
|
|
July
1,
|
|
|
July
2,
|
|
|
|
|
2006
|
|
|
2005
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,470
|
|
$
|
2,820
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,543
|
|
|
4,377
|
|
Amortization
of intangible assets
|
|
|
1,593
|
|
|
1,165
|
|
Restructuring
and special charges
|
|
|
-
|
|
|
982
|
|
Provision
for warranty costs
|
|
|
1,531
|
|
|
1,031
|
|
Provision
(credit) for accounts receivable allowances
|
|
|
(155
|
)
|
|
785
|
|
Share-based
payments
|
|
|
61
|
|
|
23
|
|
Loss
on disposal of assets
|
|
|
59
|
|
|
54
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,362
|
)
|
|
926
|
|
Inventories
|
|
|
9,096
|
|
|
413
|
|
Other
current assets
|
|
|
(1,717
|
)
|
|
(733
|
)
|
Other
noncurrent assets
|
|
|
(69
|
)
|
|
(148
|
)
|
Accounts
payable
|
|
|
3,239
|
|
|
8,158
|
|
Accrued
expenses
|
|
|
(5,274
|
)
|
|
(4,528
|
)
|
Deferred
revenue
|
|
|
299
|
|
|
(1,128
|
)
|
Net
cash provided by operating activities
|
|
|
7,314
|
|
|
14,197
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(2,358
|
)
|
|
(3,044
|
)
|
Payments
related to business acquisitions
|
|
|
(395
|
)
|
|
(1,091
|
)
|
Investment
in patents and other intangible assets
|
|
|
(1,403
|
)
|
|
(212
|
)
|
Net
cash used in investing activities
|
|
|
(4,156
|
)
|
|
(4,347
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
1,689
|
|
|
1,371
|
|
Repayments
of term loan and capital lease
|
|
|
(3,517
|
)
|
|
(2,000
|
)
|
Net
borrowings (repayments) under line of credit agreement
|
|
|
1,430
|
|
|
(6,822
|
)
|
Net
cash used in financing activities
|
|
|
(398
|
)
|
|
(7,451
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
191
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,951
|
|
|
2,356
|
|
Cash
and cash equivalents, beginning of period
|
|
|
5,615
|
|
|
8,739
|
|
Cash
and cash equivalents, end of period
|
|
$
|
8,566
|
|
$
|
11,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
1,030
|
|
$
|
1,318
|
|
Cash
paid for income taxes
|
|
$
|
415
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
-
5
-
|
PRESSTEK,
INC.
July
1,
2006
(Unaudited)
1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
In
the
opinion of management, the accompanying consolidated financial statements of
Presstek, Inc. and its subsidiaries (“Presstek,” the “Company,” “we” or “us”)
contain all adjustments, including normal recurring adjustments, necessary
to
present fairly Presstek’s financial position as of July 1, 2006, its results of
operations for the three and six months ended July 1, 2006 and July 2, 2005
and
its cash flows for the six months ended July 1, 2006 and July 2, 2005, in
accordance with U.S. generally accepted accounting principles (“GAAP”) and the
interim reporting requirements of Form 10-Q. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared
in
accordance with U.S. GAAP have been condensed or omitted.
The
results of the three and six months ended July 1, 2006 are not necessarily
indicative of the results to be expected for the year ended December 30, 2006.
The information contained in this Quarterly Report on Form 10-Q should be read
in conjunction with the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Quantitative and Qualitative Disclosures
About Market Risk” and the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2005, filed with the U.S. Securities and Exchange Commission (“SEC”) on
March 16, 2006.
The
Company’s operations are currently organized into three business segments: (i)
Presstek; (ii) Precision; and (iii) Lasertel. The Presstek segment is primarily
engaged in the development, manufacture, sale and servicing of the Company’s
patented digital imaging systems and patented printing plate technologies as
well as traditional, analog systems and related equipment and supplies for
the
graphic arts and printing industries, primarily the short-run, full-color market
segment. The Precision segment manufactures chemistry-free digital and
conventional printing plates for both web and sheet-fed printing applications
for sale to the Presstek segment and to external customers. The Lasertel segment
manufactures and develops high-powered laser diodes for the Presstek segment
and
for sale to external customers. Any future changes to this organizational
structure may result in changes to the business segments currently
disclosed.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions and balances have been
eliminated.
The
Company operates and reports on a 52- or 53-week, fiscal year ending on the
Saturday closest to December 31. Accordingly, the accompanying consolidated
financial statements include the thirteen and twenty-six week periods ended
July
1, 2006 (the “second quarter and first six months of fiscal 2006”) and July 2,
2005 (the “second quarter and first six months of fiscal 2005”).
Earnings
per Share
Earnings
per share is computed under the provisions of SFAS No. 128, “Earnings per Share”
(“SFAS 128”). Accordingly, basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. For periods in which there is net income, diluted earnings
per share is determined by using the weighted average number of common and
dilutive common equivalent shares outstanding during the period unless the
effect is antidilutive. Potential dilutive common shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants.
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
Approximately
844,000 and 861,000 options to purchase common stock were excluded from the
calculation of diluted earnings per share for the three months ended July 1,
2006 and July 2, 2005, respectively, as their effect would be antidilutive.
Approximately 838,000 and 584,000 options to purchase common stock were excluded
from the calculation of diluted earnings per share for the six months ended
July
1, 2006 and July 2, 2005, respectively, as their effect would be
antidilutive.
Foreign
Currency Translation
The
Company’s foreign subsidiaries use the local currency as their functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
at current rates of exchange in effect at the balance sheet date. The resulting
unrealized gains or losses are reported under the caption “Accumulated other
comprehensive income (loss)” in the Company’s Consolidated Financial Statements.
Revenues and expenses from these subsidiaries are translated at average monthly
exchange rates in effect for the periods in which the transactions occur. Gains
and losses arising from these foreign currency transactions are reported as
a
component of “Interest and other income (expense), net” in the Company’s
Consolidated Statements of Income. The Company recorded losses on foreign
currency transactions of approximately $66,000 and $334,000 for the three months
ended July 1, 2006 and July 2, 2005, respectively, and $163,000 and $386,000
for
the six months ended July 1, 2006 and July 2, 2005, respectively.
Legal
Expenses Incurred to Defend Patents
The
Company monitors the anticipated outcome of legal actions, and if it determines
the success of the defense of a patent is probable, and so long as the Company
believes that the future economic benefit of the patent will be increased,
the
Company capitalizes external legal costs incurred in the defense of these
patents, up to the level of the expected increased future economic benefit.
If
changes in the anticipated outcome occur, the Company writes off any capitalized
costs in the period the change is determined. The Company capitalized $0.9
million in the six months ended July 1, 2006, and $0 in fiscal 2005. While
the
Company believes it is probable the Company will be successful in defending
its
patents, there can be no assurance of future success.
Reclassifications
Certain
amounts in prior periods have been reclassified to conform to current
presentation.
Use
of Estimates
The
Company prepares its financial statements in accordance with U.S. GAAP. The
preparation of these financial statements 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. Estimates and assumptions also affect the amount of revenues and
expenses during the reported period. Management believes the most judgmental
estimates include those related to product returns, warranty obligations,
allowance for doubtful accounts, slow-moving and obsolete inventories, income
taxes, the valuation of goodwill, other intangible assets and tangible
long-lived assets, share-based payments and litigation. The Company bases its
estimates and judgments on historical experience and various other appropriate
factors, the results of which form the basis for making judgments about the
carrying values of assets and liabilities and the amounts of revenues and
expenses that are not readily apparent from other sources. Actual results could
differ from those estimates.
For
a
complete discussion of our critical accounting policies and estimates, refer
to
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005,
which was filed with the SEC on March 16, 2006. There were no
significant
changes to the Company’s critical accounting policies during the first half of
fiscal 2006, with the exception of the policies below:
Revenue
Recognition
The
Company’s revenue recognition policies, which were disclosed in its Annual
Report on Form 10-K for the year ended December 31, 2005, filed with the SEC
on
March 16, 2006, were expanded in the first quarter of fiscal 2006 to include
the
following:
Sales
Transactions Financed by the Company
In
fiscal
2006, the Company began to periodically enter into sales-type leases resulting
from the marketing of the Company’s and complementary third-party products.
These transactions typically have seven year terms and are collateralized by
a
security interest in the underlying assets. These transactions are accounted
for
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13,
Accounting
for Leases (“SFAS
13”).
The
long-term portion of financing receivables is included in Other noncurrent
assets in the Company’s Consolidated Balance Sheet at July 1, 2006.
Share-Based
Payments
Prior
to
December 31, 2005, the Company’s employee stock compensation plans were
accounted for in accordance with Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees
(“APB
25”) and related interpretations. Generally, no employee stock-based
compensation cost was recognized in the income statement prior to December
31,
2005, as stock options granted under the plans had fixed terms, including an
exercise price equal to the market value of the underlying common stock on
the
date of grant. As of January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No.123(R), Share-Based
Payment
(“SFAS
123R”) using the modified prospective method, which requires measurement of
compensation cost at fair value on the date of grant and recognition of
compensation expense over the service period for awards expected to vest. In
December 2005, prior to the adoption of SFAS 123R, the Company accelerated
the
vesting of all outstanding employee stock options as of December 31, 2005 in
order to avoid fair value-based compensation charges for those options in future
periods. The Company used the Black-Scholes valuation model to calculate the
compensation expense related to shares of common stock subject to purchase
under
the Company’s Employee Stock Purchase Plan (“ESPP”) in the first six months of
fiscal 2006. This is consistent with the valuation techniques previously
utilized for options in footnote disclosures required under SFAS 123R, as
amended by SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB
Statement No. 123.
For
options to purchase common stock granted after the adoption of SFAS 123R, the
Company is required to utilize an estimated forfeiture rate when calculating
the
expense for the period, whereas SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
123”) permitted companies to record forfeitures based on actual forfeitures,
which was Presstek’s historical policy under SFAS 123. An estimated forfeiture
rate is calculated based on then-current facts and circumstances at the time
the
Company grants options to purchase its common stock. For further information
regarding the assumptions used in determining share-based payment expense
related to the Company’s ESPP and options to purchase common stock, see Note
12.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold
and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Adoption is required
as of the beginning of the first fiscal year that begins after December 15,
2006. The Company is currently reviewing FIN 48 to determine its impact on
results of operations, financial position and cash flows upon
adoption.
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
In
March
2006, the Financial Accounting Standards Board issued SFAS No. 156, Accounting
for Servicing of Financial Assets
(“SFAS
156”), which requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value. SFAS 156 permits, but does
not
require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. Adoption is required as of the beginning of the
first
fiscal year that begins after September 15, 2006. The Company is currently
reviewing SFAS 156 to determine its impact on results of operations, financial
position and cash flows upon adoption.
2.
ACCOUNTS RECEIVABLE AND RELATED ALLOWANCES, NET
The
components of Accounts receivable, net of allowances, in the Consolidated
Balance Sheets are as follows (in thousands):
|
|
July
1,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
57,436
|
|
$
|
47,495
|
|
Less
allowances
|
|
|
(2,946
|
)
|
|
(3,407
|
)
|
|
|
$
|
54,490
|
|
$
|
44,088
|
|
3.
INVENTORIES, NET
Inventories
include material, direct labor and related manufacturing overhead, and are
stated at the lower of cost (determined on a first-in, first-out basis) or
net
realizable value. Based upon a consideration of quantities on hand, actual
and
projected sales volume, slow-moving and obsolete inventory is written down
to
its net realizable value.
The
components of Inventories, net of reserves, in the Consolidated Balance Sheets
are as follows (in thousands):
|
|
July
1,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
5.910
|
|
$
|
7,945
|
|
Work
in process
|
|
|
8,899
|
|
|
8,953
|
|
Finished
goods
|
|
|
26,003
|
|
|
33,185
|
|
|
|
$
|
40,812
|
|
$
|
50,083
|
|
4.
PROPERTY, PLANT AND EQUIPMENT, NET
The
components of Property, plant and equipment, net, in the Consolidated Balance
Sheets are as follows (in
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
thousands):
|
|
July
1,
2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Land
and improvements
|
|
$
|
2,279
|
|
$
|
2,241
|
|
Buildings
and leasehold improvements
|
|
|
29,126
|
|
|
28,902
|
|
Production
and other equipment
|
|
|
55,054
|
|
|
52,018
|
|
Office
furniture and equipment
|
|
|
7,288
|
|
|
6,668
|
|
Construction
in process
|
|
|
2,304
|
|
|
3,882
|
|
Total
property, plant and equipment, at cost
|
|
|
96,051
|
|
|
93,711
|
|
Accumulated
depreciation and amortization
|
|
|
(51,920
|
)
|
|
(48,461
|
)
|
|
|
$
|
44,131
|
|
$
|
45,250
|
|
Construction
in process is primarily related to production equipment not yet placed into
service. The amount reported at July 1, 2006, includes $0.6 million related
to a
new service management system, which the Company purchased in the first quarter
of fiscal 2006 and is in the process of implementing. The Company is
capitalizing all applicable costs in accordance with AICPA Statement of Position
No. 98-1, Accounting
for Costs of Computer Software Developed or Obtained for Internal
Use,
and
estimates that the total cost of implementation will approximate $1.8
million.
Property,
plant and equipment at July 1, 2006 and December 31, 2005 includes $110,000
in
office furniture and equipment and related accumulated depreciation of $21,000
and $3,000, respectively, associated with a capital lease.
The
Company recorded depreciation expense of $1.8 million and $2.2 million in the
second quarter of fiscal 2006 and fiscal 2005, respectively, and $3.5 million
and $4.4 million in the first six months of fiscal 2006 and fiscal 2005,
respectively. Under the Company’s financing arrangements (see Note 6), all
property, plant and equipment is pledged as security.
5.
INTANGIBLE ASSETS AND GOODWILL
Intangible
assets consist of patents, intellectual property, license agreements, loan
origination fees and certain identifiable intangible assets resulting from
business combinations, including trade names, customer relationships,
non-compete covenants and software licenses.
The
Company commences amortization of capitalized costs related to either patents
or
purchased intellectual property at the time the respective asset has been placed
into service. At July 1, 2006 and December 31, 2005, the Company had recorded
$2.6 million and $1.5 million, respectively, of costs related to patents and
intellectual property not yet in service.
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
The
components of the Company’s identifiable intangible assets are as follows (in
thousands):
|
|
July
1, 2006
|
|
December
31, 2005
|
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Cost
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and intellectual property
|
|
$
|
12,188
|
|
$
|
6,687
|
|
$
|
10,840
|
|
$
|
6,173
|
|
Trade
names
|
|
|
2,360
|
|
|
1,416
|
|
|
2,360
|
|
|
1,001
|
|
Customer
relationships
|
|
|
5,483
|
|
|
1,336
|
|
|
5,483
|
|
|
876
|
|
Software
licenses
|
|
|
450
|
|
|
250
|
|
|
450
|
|
|
175
|
|
License
agreements
|
|
|
750
|
|
|
97
|
|
|
750
|
|
|
11
|
|
Non-compete
covenants
|
|
|
100
|
|
|
38
|
|
|
100
|
|
|
28
|
|
Loan
origination fees
|
|
|
332
|
|
|
111
|
|
|
332
|
|
|
77
|
|
|
|
$
|
21,663
|
|
$
|
9,935
|
|
$
|
20,315
|
|
$
|
8,341
|
|
The
Company recorded amortization expense for its identifiable intangible assets
of
$0.8 million and $0.6 million in the second quarters of fiscal 2006 and fiscal
2005, respectively, and $1.6 million and $1.2 million in the first six months
of
fiscal 2006 and fiscal 2005, respectively. For purposes of estimating total
future amortization expense Presstek’s identifiable intangible assets at July 1,
2006, the Company has estimated both when the patents and intellectual property
currently not in service would be placed into service, and their respective
useful lives. Estimated future amortization expense for the Company’s
identifiable intangible assets at July 1, 2006, are as follows (in
thousands):
Remainder
of fiscal 2006
|
|
$
|
1,719
|
|
Fiscal
2007
|
|
$
|
2,925
|
|
Fiscal
2008
|
|
$
|
1,947
|
|
Fiscal
2009
|
|
$
|
1,653
|
|
Fiscal
2010
|
|
$
|
1,342
|
|
Thereafter
|
|
$
|
2,142
|
|
The
carrying amounts of goodwill recorded by the Company’s Presstek and Precision
business segments were $17.9 million and $5.2 million, respectively, at July
1,
2006. There have been no changes to these amounts since December 31,
2005.
In
accordance with the goodwill provisions of SFAS No. 142, Goodwill
and Other Intangible Assets,
goodwill and intangible assets with indefinite lives are tested annually, on
the
first day of the third quarter, for impairment. The Company’s impairment review
is based on a fair value test. The Company uses its judgment in assessing
whether assets may have become impaired between annual impairment tests.
Indicators such as unexpected adverse business conditions, economic factors,
unanticipated technological change or competitive activities, loss of key
personnel and acts by governments and courts may signal that an asset has been
impaired. Should the fair value of goodwill, as determined by the Company at
any
measurement date, fall below its carrying value, a charge for impairment will
be
recorded in the period. No charge for impairment was recorded in the first
six
months of fiscal 2006.
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
6.
FINANCING ARRANGEMENTS
The
components of the Company’s outstanding borrowings at July 1, 2006 and December
31, 2005 are as follows (in thousands):
|
|
July
1,
2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Term
loan
|
|
$
|
26,000
|
|
$
|
29,500
|
|
Line
of credit
|
|
|
7,466
|
|
|
6,036
|
|
Capital
lease
|
|
|
90
|
|
|
107
|
|
|
|
|
33,556
|
|
|
35,643
|
|
Less
current portion
|
|
|
(14,502
|
)
|
|
(13,073
|
)
|
Long-term
debt
|
|
$
|
19,054
|
|
$
|
22,570
|
|
The
Company’s Senior Secured Credit Facilities (the “Facilities”) include a $35.0
million five-year secured term loan (the “Term Loan”) and a $45.0 million
five-year secured revolving line of credit (the “Revolver”). The Company granted
a security interest in all of its assets in favor of the lenders under the
Facilities. In addition, under the Facilities agreement, the Company is
prohibited from declaring or distributing dividends to
shareholders.
The
Company has the option of selecting an interest rate for the Facilities equal
to
either: (a) the then applicable London Inter-Bank Offer Rate plus 1.25% to
4.0%
per annum, depending on certain results of the Company’s financial performance;
or (b) the Prime Rate, as defined in the Facilities agreement, plus up to 1.75%
per annum, depending on certain results of the Company’s financial
performance.
The
Facilities are available to the Company for working capital requirements,
capital expenditures, business acquisitions and general corporate
purposes.
At
July
1, 2006 and December 31, 2005, the Company had outstanding balances on the
Revolver of $7.5 million and $6.0 million, respectively, with interest rates
of
7.4% and 6.9%, respectively. At July 1, 2006, there were $10.3 million of
outstanding letters of credit, thereby reducing the amount available under
the
Revolver to $27.2 million at that date.
The
Term
Loan requires quarterly principal payments of $1.75 million, with a final
settlement of all remaining principal and unpaid interest on November 4, 2009.
At July 1, 2006 and December 31, 2005, outstanding balances under the Term
Loan
were $26.0 million and $29.5 million, respectively, with interest rates of
7.5%
for both periods.
The
weighted average interest rate on the Company’s short-term borrowings was 7.5%
at July 1, 2006.
Under
the
terms of the Revolver and Term Loan, the Company is required to meet various
financial covenants on a quarterly and annual basis, including maximum funded
debt to EBITDA (earnings before interest, taxes, depreciation, amortization
and
restructuring and special charges) and minimum fixed charge coverage covenants.
At July 1, 2006, the Company was in compliance with all financial
covenants.
On
November 23, 2005, the Company acquired equipment of $110,000 qualifying for
capital lease treatment under
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
SFAS
No.
13, Accounting
for Leases
(“SFAS
13”). The equipment is reflected in property, plant and equipment and the
current and long-term principal amounts of the lease obligation are included
in
current and long-term debt and capital lease obligations in the Company’s
Consolidated Balance Sheets.
The
Company’s Revolver and Term Loan principal repayment commitments and capital
lease principal and interest repayment commitments are as follows (in
thousands):
Remainder
of 2006
|
|
$
|
10,986
|
|
2007
|
|
$
|
7,041
|
|
2008
|
|
$
|
7,029
|
|
2009
|
|
$
|
8,500
|
|
The
amounts above do not include interest payments on any outstanding principal
balances for the Revolver and Term Loan because the interest rates on these
financing arrangements are not fixed.
7.
ACCRUED EXPENSES
The
components of the Company’s accrued expenses in the Consolidated Balance Sheets
at July 1, 2006 and December 31, 2005 are as follows (in
thousands):
|
|
July
1,
2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Accrued
payroll and employee benefits
|
|
$
|
5,441
|
|
$
|
8,266
|
|
Accrued
warranty
|
|
|
1,310
|
|
|
1,483
|
|
Accrued
integration costs
|
|
|
945
|
|
|
1,337
|
|
Accrued
restructuring and special charges
|
|
|
341
|
|
|
482
|
|
Accrued
royalties
|
|
|
356
|
|
|
344
|
|
Accrued
income taxes
|
|
|
457
|
|
|
312
|
|
Other
|
|
|
3,228
|
|
|
4,494
|
|
|
|
$
|
12,078
|
|
$
|
16,718
|
|
8.
ACCRUED WARRANTY
Product
warranty activity in the first six months of fiscal 2006 is as follows (in
thousands):
Balance
at December 31, 2005
|
|
$
|
1,483
|
|
Accruals
for warranties
|
|
|
1,531
|
|
Charges
to accrual for warranty costs
|
|
|
(1,704
|
)
|
Balance
at July 1, 2006
|
|
$
|
1,310
|
|
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
9.
DEFERRED REVENUE
The
components of deferred revenue are as follows (in thousands):
|
|
July
1,
2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Deferred
service revenue
|
|
$
|
8,636
|
|
$
|
7,951
|
|
Deferred
product revenue
|
|
|
251
|
|
|
628
|
|
|
|
$
|
8,887
|
|
$
|
8,579
|
|
10.
ACCRUED INTEGRATION COSTS
In
2005
and 2004 the Company recorded integration cost accruals related to its 2004
business acquisitions. The activity related to these integration cost accruals
for the first six months of fiscal 2006 is as follows (in
thousands):
|
|
Balance
December
31,
2005
|
|
Utilization
|
|
Currency
Translation
|
|
Balance
July
1,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and fringe benefits
|
|
$
|
1,242
|
|
$
|
(362
|
)
|
$
|
3
|
|
$
|
883
|
|
Lease
termination and other costs
|
|
|
95
|
|
|
(33
|
)
|
|
--
|
|
|
62
|
|
|
|
$
|
1,337
|
|
$
|
(395
|
)
|
$
|
3
|
|
$
|
945
|
|
The
Company anticipates that the payments related to the above initiatives will
be
completed in fiscal 2006.
11.
RESTRUCTURING AND SPECIAL CHARGES
In
the
first quarter of fiscal 2005, the Company recorded restructuring and special
charges aggregating $1.0 million for the Presstek and Precision business
segments. Of this amount, $0.9 million related to the Presstek segment and
$0.1
million related to the Precision segment. These charges included severance
and
fringe benefit costs, executive and other contractual obligations and a
settlement with previously terminated employees. The Company did not record
any
restructuring and special charges in the first six months of fiscal
2006.
The
activity for the first six months of fiscal 2006 related to the Company’s
restructuring and special charges accruals is as follows (in
thousands):
|
|
Balance
December
31,
2005
|
|
Utilization
|
|
Balance
July
1,
2006
|
|
|
|
|
|
|
|
|
|
Severance
and fringe benefits
|
|
$
|
482
|
|
$
|
(141
|
)
|
$
|
341
|
|
The
Company anticipates that the payments related to the above initiatives will
be
completed in fiscal 2006.
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
12.
SHARE-BASED PAYMENTS
Prior
to
December 31, 2005, the Company’s employee stock-based compensation plans were
accounted for in accordance with APB 25 and related interpretations. Generally,
no stock option-based employee compensation cost was recognized in the income
statement prior to December 31, 2005, as stock options granted under the plans
had fixed terms, including an exercise price equal to the market value of the
underlying common stock on the date of grant.
On
December 31, 2005, the Company accelerated the vesting of all unvested
outstanding options to purchase common stock previously issued to directors
and
employees, including officers. As a result of these actions, the Company
eliminated approximately $1.3 million in pre-tax compensation expense in fiscal
2006 and $0.7 million thereafter related to these options. Under the pro forma
disclosure requirements of SFAS 123, the Company recognized approximately $4.0
million of stock-based compensation in fiscal 2005, including the expense
relating to the accelerated vesting of stock options.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS 123R, using the modified prospective method, which requires measurement
of
compensation cost at fair value on the date of grant and recognition of
compensation expense over the service period for awards expected to vest. As
a
result, the Company recorded approximately $30,000 and $61,000 of share-based
payment expense related to its ESPP in the second quarter and first six months
of fiscal 2006, respectively. The Company did not grant any stock options during
either the second quarter or first six months ended July 1, 2006; accordingly,
no compensation expense related to stock options was recognized in either
period. The Company’s ESPP provides for the issuance of common stock at a
purchase price of not less than 85% of the fair market value at the date of
grant or the first day of the offering period, whichever is lower. There were
805,868 shares available for purchase by employees under this plan at July
1,
2006. The fair value of stock options is determined using the Black-Scholes
valuation model, which is consistent with the valuation techniques previously
utilized for options in footnote disclosures required under SFAS 123R, as
amended by SFAS 148.
Valuation
Assumptions
The
fair
value of the shares of common stock issued under the Company’s ESPP was
estimated on the commencement date of the offering period using the
Black-Scholes valuation model with the following
assumptions:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
1, 2006
|
|
July
1, 2006
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.99
|
%
|
|
4.69
|
%
|
Volatility
|
|
|
53.25
|
%
|
|
53.19
|
%
|
Expected
life (in years)
|
|
|
0.25
|
|
|
0.25
|
|
Dividend
yield
|
|
|
None
|
|
|
None
|
|
Based
on
the above assumptions, the fair value of the stock purchase rights under the
Company’s ESPP for the second quarter and first six months of fiscal 2006 was
$1.83 and $1.84, respectively.
In
the
quarter and six months ended July 2, 2005, 126,352 options and 607,252 options,
respectively, to purchase the Company’s common stock were granted with weighted
average fair values of $10.36 and $8.68, respectively. The
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
fair
value of the options granted and shares of common stock under the Company’s ESPP
was estimated on the date of grant using the Black-Scholes valuation model
with
the following assumptions:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
2, 2005
|
|
July
2, 2005
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.95
|
%
|
|
3.95
|
%
|
Volatility
|
|
|
59.69
|
%
|
|
59.69
|
%
|
Expected
life (in years)
|
|
|
7.82
|
|
|
7.82
|
|
Dividend
yield
|
|
|
None
|
|
|
None
|
|
Expected
volatilities are based on historical volatilities of Presstek’s common stock.
The expected life represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to vesting
schedules, the Company’s historical exercise patterns and the ESPP purchase
period. The risk-free rate is based on the U.S. Treasury STRIPS (Separate
Trading of Registered Interest and Principal of Securities) rate for the period
corresponding to the expected life of the options or ESPP purchase
period.
Fair
Value Disclosures - Prior to SFAS 123R Adoption
SFAS
123R
requires the presentation of pro forma information for the comparative period
prior to the adoption as if the Company had accounted for all its employee
stock-based compensation plans under the fair value method of the original
SFAS
123. The following table illustrates the effect on net income and earnings
per
share if the Company had applied the fair value-based method of SFAS 123 to
its
awards for the purpose of recording expense for stock-based compensation (in
thousands, except per-share data):
|
|
Three
months ended
July
2, 2005
|
|
Six
months ended
July
2, 2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
2,339
|
|
$
|
2,820
|
|
Add:
stock-based compensation expense recognized
|
|
|
12
|
|
|
23
|
|
Deduct:
total stock-based employee compensation determined under the
fair-value-based method for all awards, net of related tax
effects
|
|
|
(788
|
)
|
|
(1,460
|
)
|
Pro
forma net income
|
|
$
|
1,563
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
Earnings
per common share, as reported
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.07
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
Pro
forma loss per common share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.04
|
|
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
Stock
Option Activity
Stock
option activity for the six months ended July 1, 2006 is summarized as
follows:
|
|
Shares
|
|
Weighted
average
exercise
price
|
|
Weighted
average remaining contractual life
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
3,101,475
|
|
$
|
8.86
|
|
|
|
|
|
Granted
|
|
|
--
|
|
$
|
--
|
|
|
|
|
|
Exercised
|
|
|
(217,283
|
)
|
$
|
7.00
|
|
|
|
|
|
Canceled/expired
|
|
|
(18,150
|
)
|
$
|
11.45
|
|
|
|
|
|
|
|
Outstanding
at July 1, 2006
|
|
|
2,866,042
|
|
$
|
8.98
|
|
|
5.91
years
|
|
$
0.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at July 1, 2006
|
|
|
2,866,042
|
|
$
|
8.98
|
|
|
5.91
years
|
|
$
0.9 million
|
During
the three and six months ended July 1, 2006, the total intrinsic value of stock
options exercised was $0.2 million and $1.0 million, respectively.
13.
INTEREST AND OTHER INCOME AND EXPENSE
The
components of Interest and other income (expense), net, in the Company’s
Consolidated Statements of Income are as follows (in thousands):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
1,
2006
|
|
July
2,
2005
|
|
July
1,
2006
|
|
July
2,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(553
|
)
|
$
|
(693
|
)
|
$
|
(1,030
|
)
|
$
|
(1,318
|
)
|
Interest
income
|
|
|
16
|
|
|
48
|
|
|
43
|
|
|
97
|
|
Other
income (expense), net
|
|
|
(79
|
)
|
|
(310
|
)
|
|
(181
|
)
|
|
(360
|
)
|
|
|
$
|
(616
|
)
|
$
|
(955
|
)
|
$
|
(1,168
|
)
|
$
|
(1,581
|
)
|
The
amounts reported as other income (expense), net, primarily relate to gains
or
losses on foreign currency transactions for all periods presented.
14.
INCOME TAXES
The
Company’s effective tax rate was 13.9% and 16.0% for the three and six months
ended July 1, 2006, respectively, and 7.9% and 9.3% for the three and six months
ended July 2, 2005, respectively. Presstek’s effective tax rate generally
differs from the U.S. federal statutory rate of 35% due to the tax rate benefits
associated with utilization of net operating loss carryforwards. The provision
for the three and six month periods ending July 1,
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
2006
and
July 2, 2005 primarily relates to the recognition of foreign tax, state tax
and
deferred tax liability.
For
tax
purposes, a portion of the Company’s goodwill is amortizable over 15 years. For
book purposes, goodwill is not amortized, but tested for impairment annually.
The tax amortization of goodwill will result in a taxable temporary difference,
which will not be reversed until the related book intangible asset is impaired
or written off. Therefore, it may not be offset by deductible temporary
differences currently on the books, such as net operating loss carryforwards,
which expire within a definite period. As a result, the Company must recognize
a
net deferred tax liability.
The
Company provides for income taxes at the end of each interim period based on
the
estimated effective tax rate for the full fiscal year. Cumulative adjustments
to
the tax provision are recorded in the interim period in which a change in the
estimated annual effective rate is determined.
15.
COMPREHENSIVE INCOME
Comprehensive
income is comprised of net income, plus all changes in equity of the Company
during the period from non-owner sources. These changes in equity are recorded
as adjustments to Accumulated other comprehensive income (loss) in the Company’s
Consolidated Balance Sheets. The primary components of Accumulated other
comprehensive income (loss) are unrealized gains or losses on foreign currency
translation. The components of comprehensive income are as follows (in
thousands):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
1,
2006
|
|
July
2,
2005
|
|
July
1,
2006
|
|
July
2,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,746
|
|
$
|
2,339
|
|
$
|
5,470
|
|
$
|
2,820
|
|
Changes
in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
foreign currency translation gains (losses)
|
|
|
279
|
|
|
(120
|
)
|
|
318
|
|
|
(263
|
)
|
Comprehensive
income
|
|
$
|
3,025
|
|
$
|
2,219
|
|
$
|
5,788
|
|
$
|
2,557
|
|
16.
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The
Company is a market-focused high-technology company that designs, manufactures
and distributes proprietary and non-proprietary solutions to the graphic arts
industries, primarily serving short-run, full-color customers worldwide. The
Company’s operations are currently organized into three business segments: (i)
Presstek; (ii) Precision; and (iii) Lasertel. Segment operating results are
based on the current organizational structure reviewed by the Company’s
management to evaluate the results of each business. A description of the types
of products and services provided by each business segment follows.
· |
Presstek
is
primarily engaged in the development, manufacture, sale and servicing
of
our patented digital imaging systems and patented printing plate
technologies as well as traditional, analog systems and related equipment
and supplies for the graphic arts and printing industries, primarily
the
short-run, full-color market
segment.
|
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
· |
Precision
manufactures chemistry-free digital and conventional printing plates
for
both web and sheet-fed printing applications for sale to Presstek
and to
external customers.
|
· |
Lasertel
manufactures and develops high-powered laser diodes for Presstek
and for
sale to external customers.
|
The
Company is currently reviewing its internal management reporting structure
to
determine whether a separate corporate segment would provide greater visibility
to each business segment’s results of operations. Should the Company implement
such a change, it would be reflected in the Company’s segment disclosures in
subsequent reporting periods.
Selected
operating results information for each business segment is as follows (in
thousands):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
1,
2006
|
|
July
2,
2005
|
|
July
1,
2006
|
|
July
2,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presstek
|
|
$
|
68,996
|
|
$
|
65,169
|
|
$
|
135,133
|
|
$
|
130,529
|
|
Precision
|
|
|
5,695
|
|
|
6,216
|
|
|
10,592
|
|
|
12,933
|
|
Lasertel
|
|
|
2,657
|
|
|
1,693
|
|
|
5,259
|
|
|
3,561
|
|
Total
revenue, including inter-segment
|
|
|
77,348
|
|
|
73,078
|
|
|
150,984
|
|
|
147,023
|
|
Inter-segment
revenue
|
|
|
(3,116
|
)
|
|
(3,358
|
)
|
|
(6,186
|
)
|
|
(6,908
|
)
|
|
|
$
|
74,232
|
|
$
|
69,720
|
|
$
|
144,798
|
|
$
|
140,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presstek
|
|
$
|
68,996
|
|
$
|
65,169
|
|
$
|
135,133
|
|
$
|
130,529
|
|
Precision
|
|
|
3,350
|
|
|
3,823
|
|
|
6,588
|
|
|
8,121
|
|
Lasertel
|
|
|
1,886
|
|
|
728
|
|
|
3,077
|
|
|
1,465
|
|
|
|
$
|
74,232
|
|
$
|
69,720
|
|
$
|
144,798
|
|
$
|
140,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presstek
|
|
$
|
3,777
|
|
$
|
4,185
|
|
$
|
8,587
|
|
$
|
6,695
|
|
Precision
|
|
|
331
|
|
|
410
|
|
|
104
|
|
|
10
|
|
Lasertel
|
|
|
(302
|
)
|
|
(1,101
|
)
|
|
(1,011
|
)
|
|
(2,014
|
)
|
|
|
$
|
3,806
|
|
$
|
3,494
|
|
$
|
7,680
|
|
$
|
4,691
|
|
Intersegment
revenues and costs are eliminated from each segment prior to review of segment
results by the Company’s management. Accordingly, the amounts of intersegment
revenues allocable to each individual segment have been excluded from the table
above.
Asset
information for the Company’s business segments as of July 1, 2006 and December
31, 2005 is as follows (in
PRESSTEK,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July
1,
2006
(Unaudited)
thousands):
|
|
July
1,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
Presstek
|
|
$
|
156,655
|
|
$
|
150,491
|
|
Precision
|
|
|
17,159
|
|
|
19,186
|
|
Lasertel
|
|
|
12,593
|
|
|
11,810
|
|
|
|
$
|
186,407
|
|
$
|
181,487
|
|
The
Company’s classification of revenue by geographic area is determined by the
location of the Company’s customer. The following table summarizes revenue
information by geographic area (in thousands):
|
|
Three
months ended
|
|
Six
month ended
|
|
|
|
July
1,
2006
|
|
July
2,
2005
|
|
July
1,
2006
|
|
July
2,
2005
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
48,093
|
|
$
|
40,074
|
|
$
|
95,970
|
|
$
|
88,544
|
|
United
Kingdom
|
|
|
10,053
|
|
|
9,632
|
|
|
16,544
|
|
|
16,790
|
|
Canada
|
|
|
4,315
|
|
|
3,393
|
|
|
7,898
|
|
|
6,677
|
|
Germany
|
|
|
2,437
|
|
|
3,181
|
|
|
5,345
|
|
|
7,284
|
|
Japan
|
|
|
1,773
|
|
|
2,495
|
|
|
3,514
|
|
|
4,142
|
|
All
other
|
|
|
7,561
|
|
|
10,946
|
|
|
15,527
|
|
|
16,678
|
|
|
|
$
|
74,232
|
|
$
|
69,720
|
|
$
|
144,798
|
|
$
|
140,115
|
|
The
Company’s long-lived assets by geographic area are as follows (in
thousands):
|
|
July
1,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
United
States
|
|
$
|
78,498
|
|
$
|
79,462
|
|
United
Kingdom
|
|
|
770
|
|
|
682
|
|
Canada
|
|
|
367
|
|
|
382
|
|
|
|
$
|
79,635
|
|
$
|
80,526
|
|
17.
MAJOR CUSTOMERS
The
Company did not have any customer that accounted for more than 10% of revenues
in the second quarter or first six months of fiscal 2006 or fiscal 2005, or
any
customer that accounted for more than 10% of outstanding accounts receivable
at
July 1, 2006 or December 31, 2005.
18.
RELATED PARTIES
The
Company engages the services of Amster, Rothstein & Ebenstein, a law firm of
which a member of the
Company’s
Board of Directors is a partner. Expenses incurred for services from this law
firm were $1.1 million and $1.3 million for the second quarter and first six
months of fiscal 2006, respectively, and $0.1 million and $0.2 million for
the
second quarter and first six months of fiscal 2005, respectively.
19.
LITIGATION
On
July
26, 2006, the Company filed an action against the Illinois State Treasurer’s
Office, Judy Baar Topinka, Treasurer of the State of Illinois, and Joshua Joyce,
Director, Unclaimed Property Division, Illinois State Treasurer’s Office,
seeking judicial review of a final administrative decision of the Treasurer
of
the State of Illinois (“State Treasurer”) which determined the ownership of
approximately $2.6 million resulting from the sale of unclaimed stock under
the
Illinois Uniform Disposition of Unclaimed Property Act, (the “Act” or “UDUPA”),
codified at 765 ILCS 1025/1 et
seq. The
State
Treasurer received a claim to approximately $2.6 million and, without holding
a
hearing, allowed the claim without sufficient evidentiary support. This
determination became final and the funds were released to a claimant who was
not
the rightful owner. Presstek is seeking a reversal of the administrative
decision and compensation because the State Treasurer’s actions constitute an
unconstitutional taking of Plaintiff’s property without just compensation in
violation of Article I, Section 15 of the Illinois State Constitution and the
Fifth Amendment to the United States Constitution.
20.
COMMITMENTS AND CONTINGENCIES
In
fiscal
2000, we entered into an agreement with Fuji Photo Film Co., Ltd., whereby
minimum royalty payments to Fuji are required based on specified sales volumes
of our A3 format size four-color sheet-fed press. The agreement provides for
payment of up to a maximum of $14.0 million in royalties, with an aggregate
minimum of $6.0 million over its term. As of July 1, 2006, the Company had
paid
Fuji $5.7 million related to this agreement. We currently expect future sales
volume to be sufficient to satisfy minimum commitments under the agreement.
In
the event of a volume shortfall over t he term of the agreement, we are
obligated to fund the shortfall as a lump-sum payment. Were such lump-sum
payment required, we do not believe the amount of the payment will be
material.
The
Company has change of control agreements with certain of its employees that
provide them with benefits should their employment with the Company be
terminated other than for cause or their disability or death, or if they resign
for good reason, as defined in these agreements, within a certain period of
time
from the date of any change of control of the Company.
From
time
to time the Company has engaged in sales of equipment that is leased by or
intended to be leased by a third party purchaser to another party. In certain
situations, the Company may retain recourse obligations to a financing
institution involved in providing financing to the ultimate lessee in the event
the lessee of the equipment defaults on its lease obligations. In certain such
instances, the Company may refurbish and remarket the equipment on behalf of
the
financing company, should the ultimate lessee default on payment of the lease.
In certain circumstances, should the resale price of such equipment fall below
certain predetermined levels, the Company would, under these arrangements,
reimburse the financing company for any such shortfall in sale price (a
“shortfall payment”). Generally, the Company’s liability for these recourse
agreements is limited to 9.9% or less of the amount outstanding. The maximum
amount for which the Company may be liable to the financial institution for
the
shortfall payment was approximately $0.9 million at July 1, 2006.
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:
Statements
other than those of historical fact 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, without limitation,
statements regarding the following:
|
•
|
|
our
expectations of our financial and operating performance in 2006 and
beyond;
|
|
|
|
•
|
|
the
adequacy of internal cash and working capital for our
operations;
|
|
|
|
•
|
|
manufacturing
constraints and difficulties;
|
|
|
|
•
|
|
the
introduction of competitive products into the
marketplace;
|
|
|
|
•
|
|
management’s
plans and goals for our subsidiaries;
|
|
|
|
•
|
|
the
ability of the Company and its divisions to generate positive cash
flows
in the near-term, or to otherwise be profitable;
|
|
|
|
•
|
|
our
ability to produce commercially competitive products;
|
|
|
|
•
|
|
the
strength of our various strategic partnerships, both on manufacturing
and
distribution;
|
|
|
|
•
|
|
our
ability to secure other strategic alliances and
relationships;
|
|
|
|
•
|
|
our
expectations regarding the Company’s strategy for growth, including
statements regarding the Company’s expectations for continued product mix
improvement;
|
|
|
|
•
|
|
our
expectations regarding the balance, independence and control of our
business;
|
|
|
|
•
|
|
our
expectations and plans regarding market penetration, including the
strength and scope of our distribution channels and our expectations
regarding sales of Direct Imaging presses or computer-to-plate
devices;
|
|
|
|
•
|
|
the
commercialization and marketing of our technology;
|
|
|
|
•
|
|
our
expectations regarding performance of existing, planned and recently
introduced products;
|
|
|
|
•
|
|
the
adequacy of our intellectual property protections and our ability
to
protect and enforce our intellectual property rights;
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
risks, uncertainties and other factors that could cause or contribute to such
differences include:
|
•
|
|
market
acceptance of and demand for our products and resulting
revenues;
|
|
|
|
•
|
|
our
ability to meet our stated financial objectives;
|
|
|
|
•
|
|
our
dependency on our strategic partners, both on manufacturing and
distribution;
|
|
|
|
•
|
|
the
introduction of competitive products into the
marketplace;
|
|
|
|
•
|
|
shortages
of critical or sole-source component
supplies;
|
|
|
|
•
|
|
the
availability and quality of Lasertel’s laser diodes;
|
|
|
|
•
|
|
the
performance and market acceptance of our recently-introduced products,
and
our ability to invest in new product development;
|
|
|
|
•
|
|
manufacturing
constraints or difficulties (as well as manufacturing difficulties
experienced by our sub-manufacturing partners and their capacity
constraints); and
|
|
|
|
•
|
|
the
impact of general market factors in the print industry generally
and the
economy as a whole, including the potential effects of
inflation.
|
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 of this report and readers are advised to consider such
forward-looking statements in light of the risks set forth herein. Presstek
undertakes no obligation to update any forward-looking statements contained
in
this Quarterly Report on Form 10-Q, except as required by law.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related
notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the risks
described in “Part I, Item 1A, Risk Factors” of our Annual Report on Form 10-K
for the year ended December 31, 2005, as filed with the SEC on March 16,
2006.
Overview
of the Company
The
Company is a market-focused high-technology company that designs, manufactures
and distributes proprietary and non-proprietary solutions to the graphic arts
industries, primarily serving short-run, full-color customers worldwide. We
are
helping to lead the industry’s transformation from analog print production
methods to digital imaging technology. We are a leader in the development of
advanced printing systems using digital imaging equipment and consumables-based
solutions that economically benefit the user through a streamlined workflow
and
chemistry-free, environmentally responsible operation. We are also a leading
sales and service channel in the small to mid-sized commercial, quick and
in-plant printing markets offering a wide range of solutions to over 20,000
customers worldwide.
Presstek’s
business model is a capital equipment and consumables (razor and blade) model.
In this model, almost 70% of our revenue is recurring revenue. Our model is
designed so that each placement of either a Direct Imaging Press or a Computer
to Plate system generally results in recurring aftermarket revenue for
consumables and service.
Through
our various operations, we:
· |
provide
advanced print solutions through the development and manufacture
of
digital laser imaging equipment and advanced technology chemistry-free
printing plates, which we call consumables, for commercial and in-plant
print providers targeting the growing market for high quality, fast
turnaround short-run color
printing;
|
· |
are
a leading sales and services company delivering Presstek digital
solutions
and solutions from other manufacturing partners through our direct
sales
and service force and through distribution partners
worldwide;
|
· |
manufacture
semiconductor solid state laser diodes for Presstek imaging applications
and for use in external applications;
and
|
· |
manufacture
and distribute printing plates for conventional print
applications.
|
We
have
developed a proprietary system by which digital images are transferred onto
printing plates for Direct Imaging on-press applications and for
computer-to-plate applications. We refer to Direct Imaging as DI and
computer-to-plate as CtP. Our chemistry-free digital imaging systems enable
customers to produce high-quality, full color lithographic printed materials
more quickly and cost effectively than conventional methods that employ more
complicated workflows and toxic chemical processing. This results in reduced
printing cycle time and lowers the effective cost of production for commercial
printers. Our solutions make it more cost effective for printers to meet the
increasing demand for shorter print runs, higher quality color and faster
turn-around times.
Our
ground breaking DI technology is marketed to leading press manufacturers. Our
Presstek business segment supplies these manufacturers with imaging kits
complete with optical assemblies and software which are integrated into the
manufacturers’ presses. This process results in a DI press, which is designed to
image our printing plates. Similar digital imaging technologies are used in
our
CtP systems. Our Presstek business segment also designs and manufactures CtP
systems that incorporate our technology to image our chemistry-free printing
plates.
In
addition to marketing, selling and servicing our proprietary digital products,
we also market, sell and service traditional, or analog products for the
commercial print market. This analog equipment is manufactured by third party
strategic partners and the analog consumables are manufactured by either us
or
our strategic partners. The addition of these non-proprietary products and
our
ability to directly sell and service them was made possible by the ABDick and
Precision acquisitions, which we completed in 2004.
Our
operations are currently organized into three business segments: (i) Presstek;
(ii) Precision; and (iii) Lasertel. Segment operating results are based on
the
current organizational structure reviewed by our management to evaluate the
results of each business. A description of the types of products and services
provided by each business segment follows.
· |
Presstek
is
primarily engaged in the development, manufacture, sale and servicing
of
our patented digital imaging systems and patented printing plate
technologies as well as traditional, analog systems and related equipment
and supplies for the graphic arts and printing industries, primarily
the
short-run, full-color market
segment.
|
· |
Precision
manufactures chemistry-free digital and conventional printing plates
for
both web and sheet-fed printing applications for sale to Presstek
and to
external customers.
|
· |
Lasertel
manufactures and develops high-powered laser diodes for Presstek
and for
sale to external customers.
|
We
generate revenue through four main sources: (i) the sale of our equipment,
including DI presses and CtP devices, as well as imaging kits, which are
incorporated by leading press manufacturers into direct imaging presses for
the
graphic arts industry; (ii) the sale of high-powered laser diodes for the
graphic arts, defense and industrial sectors; (iii) the sale of our proprietary
and non-proprietary consumables and supplies; and (iv) the servicing of offset
printing systems and analog and CtP systems and related equipment.
Our
business strategy is centered on maximizing the sale of consumable products,
such as printing plates, and therefore our business efforts focus on the sale
of
“consumable burning engines” such as our DI presses and CtP devices. Our
strategy to grow our consumables has two parts. The first part is to increase
the number of our DI and CtP units (together, referred to as CBEs) in the field.
By increasing the number of CBEs, we will increase the demand for our
consumables.
To
complement our direct sales efforts, in certain territories, we maintain
relationships with key press manufacturers such as Ryobi Limited, Heidelberger
Druckmaschinen AG, or Heidelberg, and Koenig & Bower AG, or KBA, who
market
printing presses and press solutions that use our proprietary consumables.
We
also maintain relationships with key distribution partners, such as Eastman
Kodak, to sell, distribute and service press systems and the related proprietary
consumable products.
Another
method of growing the market for consumables is to develop consumables that
can
be imaged by non-Presstek devices. In addition to expanding our base of our
CBEs, an element of our focus is to reach beyond our proprietary systems and
penetrate the installed base of CtP devices in all market segments with our
chemistry free and process-free offerings. The first step in executing this
strategy was the launch of our proprietary Aurora chemistry-free printing plate
designed to be used with CBEs manufactured by thermal CtP market leaders, such
as Screen and Kodak. We continue to work with other CtP manufacturers to qualify
our consumables on their systems. We believe this shift in strategy
fundamentally enhances our ability to expand and control our
business.
We
operate and report on a 52- or 53-week, fiscal year ending on the Saturday
closest to December 31. Accordingly, the consolidated financial statements
include the financial reports for the 13-week and 26-week periods ended July
1,
2006, which we refer to as the second quarter and first half of fiscal 2006,
and
the 13-week and 26-week periods ended July 2, 2005, which we refer to as the
second quarter and first half of fiscal 2005.
We
intend
the discussion of our financial condition and results of operations that follows
to provide information that will assist in understanding our consolidated
financial statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that accounted for those
changes, as well as how certain accounting principles, policies and estimates
affect our consolidated financial statements.
The
discussion of results of operations at the consolidated level is presented
together with results of operations by business segment.
RESULTS
OF OPERATIONS
Results
of operations in dollars and as a percentage of revenue were as follows (in
thousands of dollars):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
July
1, 2006
|
|
July
2, 2005
|
|
July
1, 2006
|
|
July
2, 2005
|
|
|
|
|
|
%
of
revenue
|
|
|
|
%
of
revenue
|
|
|
|
%
of
revenue
|
|
|
|
%
of
revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
62,552
|
|
|
84.3
|
|
$
|
57,804
|
|
|
82.9
|
|
$
|
120,934
|
|
|
83.5
|
|
$
|
114,872
|
|
|
82.0
|
|
Service
and parts
|
|
|
11,680
|
|
|
15.7
|
|
|
11,916
|
|
|
17.1
|
|
|
23,864
|
|
|
16.5
|
|
|
25,243
|
|
|
18.0
|
|
Total
revenue
|
|
|
74,232
|
|
|
100.0
|
|
|
69,720
|
|
|
100.0
|
|
|
144,798
|
|
|
100.0
|
|
|
140,115
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product
|
|
|
44,477
|
|
|
59.9
|
|
|
40,292
|
|
|
57.8
|
|
|
86,122
|
|
|
59.5
|
|
|
81,746
|
|
|
58.3
|
|
Cost
of service and parts
|
|
|
8,694
|
|
|
11.7
|
|
|
8,144
|
|
|
11.7
|
|
|
16,979
|
|
|
11.7
|
|
|
16,943
|
|
|
12.1
|
|
Total
cost of revenue
|
|
|
53,171
|
|
|
71.6
|
|
|
48,436
|
|
|
69.5
|
|
|
103,101
|
|
|
71.2
|
|
|
98,689
|
|
|
70.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
21,061
|
|
|
28.4
|
|
|
21,284
|
|
|
30.5
|
|
|
41,697
|
|
|
28.8
|
|
|
41,426
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and product development
|
|
|
1,680
|
|
|
2.3
|
|
|
1,931
|
|
|
2.8
|
|
|
3,225
|
|
|
2.2
|
|
|
4,053
|
|
|
2.9
|
|
Sales,
marketing and customer support
|
|
|
10,967
|
|
|
14.8
|
|
|
10,077
|
|
|
14.4
|
|
|
19,996
|
|
|
13.8
|
|
|
19,886
|
|
|
14.2
|
|
General
and administrative
|
|
|
3,823
|
|
|
5.1
|
|
|
5,205
|
|
|
7.5
|
|
|
9,203
|
|
|
6.4
|
|
|
10,649
|
|
|
7.6
|
|
Amortization
of intangible assets
|
|
|
785
|
|
|
1.1
|
|
|
577
|
|
|
0.8
|
|
|
1,593
|
|
|
1.1
|
|
|
1,165
|
|
|
0.9
|
|
Restructuring
and special charges
|
|
|
-
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
-
|
|
|
-
|
|
|
982
|
|
|
0.7
|
|
Total
operating expenses
|
|
|
17,255
|
|
|
23.3
|
|
|
17,790
|
|
|
25.5
|
|
|
34,017
|
|
|
23.5
|
|
|
36,735
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,806
|
|
|
5.1
|
|
|
3,494
|
|
|
5.0
|
|
|
7,680
|
|
|
5.3
|
|
|
4,691
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other expense, net
|
|
|
(616
|
)
|
|
(0.8
|
)
|
|
(955
|
)
|
|
(1.4
|
)
|
|
(1,168
|
)
|
|
(0.8
|
)
|
|
(1,581
|
)
|
|
(1.1
|
)
|
Provision
for income taxes
|
|
|
444
|
|
|
0.6
|
|
|
200
|
|
|
0.3
|
|
|
1,042
|
|
|
0.7
|
|
|
290
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,746
|
|
|
3.7
|
|
$
|
2,339
|
|
|
3.3
|
|
$
|
5,470
|
|
|
3.8
|
|
$
|
2,820
|
|
|
2.0
|
|
Three
and six months ended July 1, 2006 compared to three and six months ended July
2,
2005
Revenue
Consolidated
Revenue
Consolidated
revenues were $74.2 million and $144.8 million in the second quarter and first
half of fiscal 2006, respectively, compared to $69.7 million and $140.1 million
in the same periods of the prior year. The increases in both the three and
six
month current year periods are primarily attributable to higher digital sales,
partially offset by reduced analog sales.
Equipment
revenues were $27.3 million and $50.9 million in the second quarter and first
half of fiscal 2006, respectively, increases of $6.2 million, or 29.4%, and
$9.8
million, or 23.6%, from the comparable prior year periods.
These increases are primarily due to increased DI and Vector TX52 unit sales,
combined with increases in Lasertel’s external revenues of $1.2 million and $1.6
million in the second quarter and first half of fiscal 2006, respectively.
These
increases were partially offset by lower analog consumables revenues in both
Presstek and
Precision,
and lower service and parts revenues in the North American market. We continue
to make progress in transitioning the majority of our customer base to digital
solutions, sales of which increased from approximately 59% of revenue in the
second quarter of fiscal 2005 to approximately 69% of revenue in the second
quarter of fiscal 2006, and from approximately 58% of revenue in the first
half
of fiscal 2005 to approximately 67% of revenue in the first half of fiscal
2006.
Sales of CBEs decreased 4.9% in the second quarter of fiscal 2006; however,
sales of CBEs increased 10.4% on a fiscal 2006 year-to-date basis, compared
to
the same prior year periods. The decrease in the current quarter primarily
relates to lower CtP sales, while the increase in the current year-to-date
period is principally the result of higher sales of DI presses, coupled with
sales of our new Vector TX52, which became available in the fourth quarter
of
fiscal 2005. In addition, we are increasing our emphasis on the direct sales
channel. Our direct sales force sold 55 and 88 DI presses in the second quarter
and first half of fiscal 2006, respectively, compared to 6 and 9 DI presses
in
the same periods of the prior year.
Sales
of
analog equipment decreased from $6.8 million in the second quarter of fiscal
2005 to $4.0 million in the second quarter of fiscal 2006, and from $12.8
million in the first half of fiscal 2005 to $8.3 million in the first half
of
fiscal 2006. The decline in both current year periods is consistent with our
transition of our customer base from primarily analog to digital solutions.
However, we anticipate that sales of analog solutions will level off and
stabilize as a percentage of our total revenues in the near-term.
Revenues
from consumable product sales declined by $1.4 million, to $35.2 million, and
by
$3.7 million, to $70.0 million, in the second quarter and first half of fiscal
2006, respectively, compared to the same prior year periods. The
reductions in the current year periods are primarily attributable to the
slowdown in analog sales in the Presstek segment, which declined by $2.1 million
and $4.4 million, respectively, in the second quarter and first half of fiscal
2006, compared to the same prior year periods, coupled with decreases in
Precision’s external revenues of $0.5 million and $1.5 million, respectively.
These amounts were offset by increased DI sales, which benefited significantly
from new distribution agreements with Heidelberg in both the United States
and
Europe.
Service
and parts revenues were $11.7 million and $23.9 million in the second quarter
and first half of fiscal 2006, respectively, reflecting decreases of $0.2
million, or 1.7%, and $1.4 million, or 5.5%, from the comparable prior year
periods. These decreases are primarily the result of the shifting of some our
less profitable legacy service contracts to a time and materials model, as
we
continue to transition our customers from primarily analog to digital
technology.
Segment
Revenue
In
fiscal
2005, we implemented a new internal management reporting structure in connection
with organizational changes related to the integration of the ABDick business
into our Presstek business. We analyzed the impact of this integration on our
operating segments and concluded that the results of operations and balance
sheet information for the former ABDick segment should be combined with those
of
the former Presstek segment and reported as the new Presstek business segment.
Accordingly, the historical results of the Presstek segment included herein
have
been restated to include the results of the former ABDick segment. We are
currently reviewing our internal management reporting structure to determine
whether a separate corporate segment would provide better visibility to each
business segment’s operations. Should we implement such a change, it would be
reflected in our segment disclosures in subsequent reporting
periods.
The
following business segment revenue information includes intersegment revenues
for the Precision and Lasertel segments. Intersegment revenues are eliminated
in
consolidation.
Revenue
for the Presstek segment was $69.0 million and $135.1 million in the second
quarter and first half of fiscal 2006, respectively, reflecting increases of
$3.8 million, or 5.8%, and $4.6 million, or 3.5%, compared to the same periods
of the prior year. Equipment revenues increased $5.1 million and $8.1 million
in
the second quarter and first half of fiscal 2006, respectively. These amounts
were partially offset by lower consumables revenues and lower service and parts
revenues. Revenues from digital solutions increased $8.8 million, or 21.9%,
in
the second quarter of fiscal 2006, and $14.3 million, or 17.9%, in the first
half of fiscal 2006, compared to the same prior year periods. Digital solutions
also increased as a percentage of segment revenue, from approximately 62% and
61% of segment
revenues
in the second quarter and first half of fiscal 2005, respectively, to
approximately 71% and 70% in the second quarter and first half of fiscal 2006,
respectively.
Presstek’s
equipment revenues benefited from an increase in DI equipment sales, which
accounted for $14.9 million and $25.8 million in the second quarter and first
half of fiscal 2006, respectively, compared to $6.9 million and $13.9 million
in
the same prior year periods. Product equipment sales were also favorably
impacted by the launch of a new generation CtP system, the Vector TX52, into
both United States and European markets in the fourth quarter of fiscal 2005.
The Vector TX52 contributed $1.0 million and $3.2 million of revenue in the
second quarter and first half of fiscal 2006, respectively. These increases
were
offset by $2.6 million and $4.1 million of reduced sales of our conventional
analog equipment in the second quarter and first half of fiscal 2006,
respectively, compared to the same prior year periods, as well as lower sales
of
Dimension products in the first quarter of fiscal 2006, which was driven by
pricing pressure in the marketplace.
The
Presstek segment’s consumables sales decreased $1.0 million, to $31.8 million,
in the second quarter of fiscal 2006, and $2.2 million, to $63.4 million, in
the
first half of fiscal 2006, compared to the same prior year periods. These
decreases in the current year periods are primarily attributable to lower analog
sales compared to a strong prior year analog demand from ABDick customers
following the acquisition by Presstek and the continuing market transition
from
analog to digital solutions in 2006. In the latter part of fiscal 2005, we
entered into two strategic relationships for our consumables: (i) Heidelberg
named the Quickmaster DI as a preferred plate; and (ii) Screen USA agreed to
market our consumable plate products for non-Presstek proprietary CtP systems.
These relationships contributed to $1.3 million and $2.4 million increases
in DI
consumables sales in the second quarter and first half of fiscal 2006,
respectively. However, these increases were more than offset by the decline
in
analog consumables sales.
The
Presstek segment’s service and parts revenues decreased $0.2 million, or 1.9%,
and $1.4 million, or 5.4%, in the second quarter and first half of fiscal 2006,
respectively, compared to the same prior year periods. This decrease is
primarily attributable to lower contract service and parts revenues resulting
from the current market transition from primarily analog to digital
equipment.
Revenue
for the Precision segment was $5.7 million in the second quarter of fiscal
2006,
a decrease of $0.5 million, or 8.4%, compared to $6.2 million in the second
quarter of fiscal 2005. Revenue was $10.6 million in the first half of fiscal
2006, a decrease of $2.3 million, or 18.1%, compared to $12.9 million in the
second quarter of fiscal 2005. This
decrease is primarily attributable to lower order levels from a key customer,
partially offset by higher sales to the Presstek segment.
Revenue
for the Lasertel segment increased 56.9%, to $2.7 million, and 47.7%, to $5.3
million, in the second quarter and first half of fiscal 2006, respectively,
compared to the same periods in the prior year. This increase is primarily
attributable to the addition of two new customers, coupled with higher sales
to
the Presstek segment.
Cost
of Revenue
Consolidated
Cost of Revenue
Consolidated
cost of product, consisting of costs of material, labor and overhead, shipping
and handling costs and warranty expenses, was $44.5 million and $86.1 million
in
the second quarter and first half of fiscal 2006, respectively, increases of
$4.2 million and $4.4 million compared to the same periods of the prior year.
The increase in cost is attributable to higher sales volumes and a higher mix
of
equipment sales.
Consolidated
cost of service and parts was $8.7 million and $17.0 million in the second
quarter of and first half of fiscal 2006, respectively, compared to $8.1 million
and $16.9 million in the same prior year periods. The increase in cost is
primarily attributable to higher travel costs resulting from increased fuel
costs and higher technology costs related to upgrading the communications and
logistics capabilities of our service technicians and engineers.
Segment
Cost of Revenue
Cost
of
revenue for the Presstek segment was $49.1 million in the second quarter of
fiscal 2006, an increase of $6.9 million, compared to $42.2 million in the
second quarter of fiscal 2005. Cost of revenue for the Presstek segment was
$94.8 million in the first half of fiscal 2006, an increase of $7.5 million,
compared to $87.3 million in the same period of fiscal 2005. The increases
in
both current year periods are primarily the result of higher revenues and a
higher mix of equipment sales, which have historically lower
margins.
Cost
of
revenue for the Precision segment was $5.0 million and $9.8 million in the
second quarter and first half of fiscal 2006, respectively, decreases of $1.0
million and $2.1 million compared to the same prior year periods. The decrease
in the current year period is primarily the result of lower revenues for the
segment.
Cost
of
revenue for the Lasertel segment was $2.2 million and $4.7 million in the second
quarter and first half of fiscal 2006, respectively, compared to $2.5 million
and $4.3 million in the same prior year periods. The decrease in the second
quarter of fiscal 2006 is primarily attributable to our continued focus on
inventory management to help manage manufacturing expenses, offset by increased
sales volumes.
Gross
Margin
Gross
margin as a percentage of total revenue was 28.4% in the second quarter of
fiscal 2006, compared to 30.5% in the second quarter of fiscal 2005. Gross
margin as a percentage of total revenue in the first half of fiscal 2006 was
28.8%, compared to 29.6% in the same prior year period. The decline in gross
margin on total revenue is primarily attributable to higher service costs,
the
decrease in analog service revenue and the increase of equipment in our product
mix.
Gross
margin as a percentage of product revenue was 28.9% and 28.8% in the second
quarter and first half of fiscal 2006, respectively, compared to 30.3% and
28.8%
in the same prior year periods. The decline in the current year periods is
primarily attributable to a higher mix of equipment sales.
Gross
margin as a percentage of service and parts revenue decreased to 25.6% and
28.9%
in the second quarter and first half of fiscal 2006, compared to 31.7% and
32.9%
in the same periods of the prior year. The decreases in the current year periods
are primarily attributable to the aforementioned decrease in analog service
revenue. We are working to transition our legacy analog service contracts to
a
time and materials model, which has exerted downward pressure on margins in
the
short-term. Gross margins were also impacted by higher fuel costs, as well
as
higher technology costs related to upgrading the communications and logistics
capabilities of our service technicians and engineers.
Research
and Development
Research
and development expenses primarily consist of payroll and related expenses
for
personnel, parts and supplies, and contracted services required to conduct
our
equipment, consumables and laser diode development efforts. Our research and
development team also contribute to the development, presentation and launch
of
new technology products at key industry shows in the United States and
Europe.
Consolidated
research and development expenses were $1.7 million in the second quarter of
fiscal 2006, a $0.3 million decrease from the comparable prior year quarter,
and
$3.2 million in the first half of fiscal 2006, a $0.8 million decrease from
the
same prior year period. The decrease is principally attributable to efficiencies
realized from the integration of the acquired ABDick business into the Company
during the fourth quarter of fiscal 2005.
Research
and development expenses for the Presstek segment were $1.3 million and $2.5
million in the second quarter and first half of fiscal 2006, respectively,
decreases of $0.4 million and $0.9 million from the same periods of the prior
year. The decrease is primarily attributable to the aforementioned efficiencies
realized from the integration of the ABDick business into the
Company.
Research
and development expenses for the Precision segment were $0.1 million in the
second quarters of both fiscal 2006 and fiscal 2005. Research and development
expenses for first six months of fiscal 2006 and fiscal 2005 were $0.23 million
and $0.28 million, respectively. The reduction in fiscal 2006 is primarily
attributable to the completion in 2005 of certain new product
testing.
Research
and development expenses for the Lasertel segment were $0.3 million in the
second quarter of fiscal 2006, compared to $0.16 million in the second quarter
fiscal 2005, and $0.5 million in the first half of fiscal 2006, compared to
$0.3
million in the first half of fiscal 2005. The increase is attributable to higher
personnel costs resulting from increased staffing levels.
While
we
expect to invest an estimated $7.0 million internally in research and
development in fiscal 2006, we continue to implement our strategy to identify
and collaborate with third parties in development activities designed to
leverage the Company’s technology and innovation.
Sales,
Marketing and Customer Support
Sales,
marketing and customer support expenses primarily consist of payroll and related
expenses for personnel, advertising, trade shows, promotional expenses, and
travel costs associated with sales, marketing and customer support
activities.
To
improve operations, we took steps in fiscal 2005 to strengthen capacity and
capability within the sales, marketing and customer support area through
reorganization, training in advanced technology products and services, and
changes in key personnel. We also eliminated costs, primarily for customer
support and marketing personnel by integrating the U.S. marketing and customer
support operations into the Presstek segment. As we continue to pursue
initiatives designed to drive penetration of Presstek technology in the
marketplace, we expect expenses in this area to increase in absolute dollars
in
future periods.
Sales,
marketing and customer support expenses for the Presstek segment were $10.8
million and $19.6 million in the second quarter and first half of fiscal 2006,
respectively, increases of $0.9 million and $0.2 million from the comparable
prior year periods. The increase in the second quarter of fiscal 2006 is
primarily attributable to trade expenses related to the IPEX trade show, held
in
Europe in April 2006, coupled with higher personnel costs resulting from the
segment’s increased sales. These factors also accounted for the increase in the
first half of fiscal 2006, compared to the prior year period; however, on a
year-to-date basis, reduced costs in the first quarter of fiscal 2006 partially
offset these second quarter increases.
Sales,
marketing and customer support expenses for the Precision segment were $0.1
million in the second quarters of both fiscal 2006 and fiscal 2005, and $0.13
million and $0.19 million in the second halves of fiscal 2006 and 2005,
respectively.
Sales,
marketing and customer support expenses for the Lasertel segment were virtually
unchanged, at approximately $0.13 million in the second quarter of fiscal 2006
and $0.12 million in the comparable period of fiscal 2005. The amounts for
the
first six months were also virtually unchanged at $0.29 million in the first
six
months of fiscal 2006 and $0.27 million in the same period of fiscal
2005.
General
and Administrative
Consolidated
general and administrative expenses, primarily comprised of payroll and related
expenses for personnel, and contracted professional services necessary to
conduct our finance, information systems, human resources and administrative
activities, were $3.8 million and $5.2 million in the second quarters of fiscal
2006 and fiscal 2005. Consolidated general and administrative expenses for
the
first half of fiscal 2006 were $9.2 million, a decrease of $1.4 million from
the
same period of the prior year. The decreases are primarily attributable to
the
current year cost savings achieved by the integration of the ABDick U.S.
operations into Presstek, including a reduction in the allowance for doubtful
accounts due to our increased focus on cash collection activities in the United
States.
Consolidated
general and administrative expenses were 5.2% and 7.5% of revenues in the second
quarters of fiscal 2006 and fiscal 2005, respectively, and 6.4% and 7.6% of
revenues in the first halves of fiscal 2006 and fiscal 2005, respectively.
We anticipate that general and administrative expenses will
return to levels experienced in the first quarter of fiscal 2006. However,
we
anticipate that general and administrative expenses will continue to decrease
as
a percentage of revenue in future periods, provided we continue to experience
revenue growth, as our strategy is to position the growth of general and
administrative expenses at lower rates than the growth of revenue and as the
impact of integration actions is fully realized.
General
and administrative expenses for the Presstek segment were $3.4 million in the
second quarter of fiscal 2006, compared to $4.8 million in the second quarter
of
fiscal 2005. General and administrative expenses for the first half of fiscal
2006 were $8.4 million, compared to $9.7 million in the comparative period
of
fiscal 2005. The decrease in both current year periods is primarily attributable
to the elimination of redundant costs resulting from the integration of the
ABDick U.S. operations into the segment.
General
and administrative expenses for the Precision segment were $0.1 million and
$0.17 million in the second quarters of fiscal 2006 and fiscal 2005,
respectively, and $0.23 million and $0.46 million in the first halves of fiscal
2006 and fiscal 2005, respectively. The decreases from the prior year periods
are primarily attributable to headcount reductions in fiscal 2005.
General
and administrative expenses for the Lasertel segment were $0.3 million in the
second quarter of fiscal 2006, a $0.1 million increase from the same period
of
the prior year. General and administrative expenses were $0.6 million and $0.5
million for the first halves of fiscal 2006 and fiscal 2005, respectively.
The
increases in the current year periods are primarily attributable to higher
personnel costs.
Amortization
of Intangible Assets
Amortization
expense of $0.8 million and $0.6 million in the second quarters of fiscal 2006
and fiscal 2005, respectively, and $1.6 million and $1.2 million in the first
halves of fiscal 2006 and fiscal 2005 respectively, relates to intangible assets
recorded in connection with the Company’s 2004 ABDick and Precision
acquisitions, patents and other purchased intangible assets.
Restructuring
and Special Charges
In
the
first half of fiscal 2005, the Company recorded $1.0 million of restructuring
and special charges related to Precision and ABDick to results of operations.
These charges consisted of severance and fringe benefit costs, executive and
other contractual obligations, and a settlement with previously terminated
employees.
Interest
and Other Income/Expense, Net
Interest
expense was $0.6 million and $0.7 million in the second quarters of fiscal
2006
and fiscal 2005, respectively, and $1.0 million and $1.3 million in the first
halves of fiscal 2006 and fiscal 2005, respectively. The decreases in both
current year periods are attributable to lower outstanding long-term debt
resulting from the pay down of principal, partially offset by higher interest
rates in the current fiscal year.
We
recorded interest income of $16,000 and $48,000 in the second quarters of fiscal
2006 and fiscal 2005, respectively, and $43,000 and $97,000 in the first halves
of fiscal 2006 and fiscal 2005, respectively.
The
primary component of other income/expense, net, of $0.1 million and $0.2 million
of expense in the second quarter and first half of fiscal 2006, respectively,
and $0.3 million of and $0.4 million of expense in the comparable prior year
periods relates to losses on foreign currency transactions.
Provision
for Income Taxes
Our
effective tax rate was 16.0% for the first half of fiscal 2006 and 9.3% for
the
first half of fiscal 2005. Our effective tax rate differs from the U.S. federal
statutory rate of 35% due to the tax rate benefits associated with utilization
of net operating loss carryforwards. The provisions in both fiscal year periods
primarily relate to the recognition of foreign tax, state tax and deferred
tax
liability. For tax purposes, a portion of the Company’s goodwill is amortizable
over 15 years. For book purposes, goodwill is not amortized, but tested for
impairment annually. The tax amortization of goodwill will result in a taxable
temporary difference, which will not be reversed until the related book
intangible asset is impaired or written off. Therefore, it may not be offset
by
deductible temporary differences currently on the books, such as net operating
loss carryforwards, which expire within a definite period. As a result, the
Company must recognize a net deferred tax liability.
At
July
1, 2006, we had net deferred tax assets of approximately $36 million that were
subject to consideration of a valuation allowance. A full valuation allowance
has been provided against the net deferred tax assets in the United States
due
to the uncertainty of their realization. In the future, continued sustained
profitability will cause us to reassess the need for the valuation allowance.
We
may be required to recognize these deferred tax assets through the reduction
of
the valuation allowance which would result in a material benefit to our results
of operations and adjustments to recorded goodwill and shareholder equity in
the
period in which the benefit is determined.
Liquidity
and Capital Resources
We
finance our operating and capital investment requirements primarily through
cash
flows from operations and borrowings. At July 1, 2006, we had $8.6 million
of
cash and $46.8 million of working capital, compared to $5.6 million of cash
and
$41.4 million of working capital at December 31, 2005.
Our
operating activities provided $7.3 million of cash in the first half of fiscal
2006. Cash provided by operating activities came from net income, after
adjustments for non-cash depreciation, amortization, provisions for warranty
costs and accounts receivable allowances, stock compensation expense and losses
on the disposal of assets. Net income and non-cash items were further benefited
from a decrease in inventory levels of $9.1 million and increases of $3.2
million and $0.3 million in accounts payable and deferred revenue, respectively.
The decrease in inventory levels reflects our continued focus on aggressive
inventory management, coupled with higher sales levels in the latter part of
the
second quarter. Accounts payable increases primarily relate to the timing of
purchases and payments to suppliers, and increases to deferred revenue primarily
represent increased service agreements on equipment sales. These amounts were
partially offset by increases of $10.4 million and $1.7 million in accounts
receivable and other current assets, respectively, and a decrease of $5.3
million in accrued expenses. Accounts receivable increases in the first six
months of fiscal 2006 are primarily attributable to increased revenues in the
third month of the second quarter, compared to the prior fiscal year-end. Days
sales outstanding (“DSO”) were 55 at July 1, 2006 and 53 at December 31, 2005.
The increase in DSO is primarily the result of the higher sales generated in
the
latter part of the second quarter, coupled with in-house financing arrangements
with several customers, which result in longer-term accounts receivable amounts.
Lower accrued expense levels primarily relate to previously accrued
payroll-related costs.
We
used
$4.2 million of net cash for investing activities in the first six months of
fiscal 2006, comprised of $2.4 million of additions to property, plant and
equipment, $1.7 million of investments in patents and other intangible assets
and $0.4 million of transaction and accrued integration costs paid related
to
the acquisition of the ABDick business. Our additions to property, plant and
equipment primarily relate to production equipment and investments in our
infrastructure, including costs related to the implementation of a new service
management system. Our investment in patents and other intangible assets
includes $0.9 million of capitalized patent defense costs.
Our
financing activities used $0.4 million of net cash, comprised of $1.7 million
of
cash received from the exercise of stock options and purchase of common stock
under our employee stock purchase program and $1.4 million of net borrowings
under our current line of credit. These amounts were offset by payments on
our
current term loan and capital lease aggregating $3.5 million.
Our
current Senior Secured Credit Facilities, referred to as the Facilities, include
a $35.0 million five year secured term loan, referred to as the Term Loan,
and a
$45.0 million five year secured revolving line of credit, referred to as the
Revolver, which replaced our then-existing term loan and revolver entered into
in October 2003. At July 1, 2006, we had $10.3 million outstanding under letters
of credit, thereby reducing the amount available under the Revolver to $27.2
million. At July 1, 2006 and December 31, 2005, the interest rates on the
outstanding balance of the Revolver were 7.4% and 6.9%, respectively. Principal
payments on the Term Loan are made in consecutive quarterly installments of
$1.75 million, with a final settlement of all remaining principal and unpaid
interest on November 4, 2009. The Facilities were used to partially finance
the
acquisition of the business of ABDick, and are available for working capital
requirements, capital expenditures, acquisitions, and general corporate
purposes. Borrowings under the Facilities bear interest at either (i) the London
InterBank Offered Rate, or LIBOR, plus applicable margins or (ii) the Prime
Rate, as defined in the agreement, plus applicable margins. The applicable
margins range from 1.25% to 4.0% for LIBOR, or up to 1.75% for the Prime Rate,
based on certain financial performance. At both July 1, 2006 and December 31,
2005, the effective interest rate on the Term Loan was 7.5%.
Under
the
terms of the Revolver and Term Loan, we are required to meet various financial
covenants on a quarterly and annual basis, including maximum funded debt to
EBITDA, a non-U.S. GAAP measurement that we define as earnings before interest,
taxes, depreciation, amortization and restructuring and special charges, and
minimum fixed charge coverage covenants. At July 1, 2006, we were in compliance
with all financial covenants.
On
November 23, 2005, we purchased equipment under a capital lease arrangement
qualifying under SFAS No. 13, Accounting
for Leases
(“SFAS
13”). The equipment is included as a component of property, plant and equipment
and the current and long-term principal amounts of the lease obligation are
included in our Consolidated Balance Sheets.
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, would be available on acceptable
terms.
Our
anticipated capital expenditures for fiscal 2006 range between $5.0 million
and
$7.0 million, including expenditures related to our computer systems
infrastructure and equipment to be used in the production of our DI and CTP
equipment and consumable products.
Commitments
and Contingencies
In
fiscal
2000, we entered into an agreement with Fuji Photo Film Co., Ltd., whereby
minimum royalty payments to Fuji are required based on specified sales volumes
of our A3 format size four-color sheet-fed press. The agreement provides for
payment of up to a maximum of $14.0 million in royalties, with an aggregate
minimum of $6.0 million over its term. As of July 1, 2006, the Company had
paid
Fuji $5.7 million related to this agreement. We currently expect future sales
volume to be sufficient to satisfy minimum commitments under the agreement.
In
the event of a volume shortfall over the term of the agreement, we would be
obligated to pay the difference between the shortfall and $6.0 million minimum
as a lump-sum payment. Were such lump-sum payment required, we do not believe
the amount of the payment will be material.
We
have
employment agreements with certain of our employees, some of which include
change of control agreements that provide them with benefits should their
employment with us be terminated other than for cause or their disability or
death, or if they resign for good reason, as defined in these agreements, within
a certain period of time from the date of any change of control of
us.
From
time
to time we have engaged in sales of equipment that is leased by or intended
to
be leased by a third party purchaser to another party. In certain situations,
we
may retain recourse obligations to a financing institution involved in providing
financing to the ultimate lessee in the event the lessee of the equipment
defaults on its lease obligations. In certain such instances, we may refurbish
and remarket the equipment on behalf of the financing company, should the
ultimate lessee default on payment of the lease. In certain circumstances,
should the resale
price
of
such equipment fall below certain predetermined levels, we would, under these
arrangements, reimburse the financing company for any such shortfall in sale
price (a “shortfall payment”). The maximum contingent obligation under these
shortfall payment arrangements is estimated to be $0.9 million at July 1,
2006.
Effect
of Inflation
Inflation
has not had, and is not expected to have, a material impact on our financial
conditions or results of operations.
Critical
Accounting Policies and Estimates
General
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which have
been
prepared in accordance with U.S. generally accepted accounting principles.
The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities.
On an
ongoing basis, we evaluate our estimates, including those related to product
returns, warranty obligations, allowances for doubtful accounts, slow-moving
and
obsolete inventories, long-lived assets, share-based payments and litigation.
We
base our 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.
For
a
complete discussion of our critical accounting policies and estimates, refer
to
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005,
which was filed with the SEC on March 16, 2006. There were no significant
changes to the Company’s critical accounting policies during the first half of
fiscal 2006, with the exception of the policies below:
Revenue
Recognition
Our
revenue recognition policies, which we disclosed in our Annual Report on Form
10-K for the year ended December 31, 2005, filed with the SEC on March 16,
2006,
were expanded in the first quarter of fiscal 2006 to include the
following:
Sales
Transactions Financed by the Company
In
fiscal
2006, the Company began to periodically enter into sales-type leases resulting
from the marketing of the Company’s and complementary third-party products.
These transactions typically have seven year terms and are collateralized by
a
security interest in the underlying assets. These transactions are accounted
for
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13,
Accounting
for Leases (“SFAS
13”).
The
long-term portion of financing receivables is included in Other noncurrent
assets in the Company’s Consolidated Balance Sheet at July 1, 2006.
Share-Based
Payments
Prior
to
December 31, 2005, our employee stock compensation plans were accounted for
in
accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees
(“APB
25”) and related interpretations. Generally, no employee stock-based
compensation cost was recognized in the income statement prior to December
31,
2005, as stock options granted under the plans had fixed terms, including an
exercise price equal to the market value of the underlying common stock on
the
date of grant. As of January 1, 2006, we adopted the fair value recognition
provisions of SFAS No.123(R), Share-Based
Payment
(“SFAS
123R”) using the modified prospective method, which requires measurement of
compensation cost at fair value on the date of grant and recognition of
compensation expense over the service period for awards expected to vest. In
December 2005, prior
to
the
adoption of SFAS 123R, we accelerated the vesting of all outstanding employee
stock options as of December 31, 2005 in order to avoid fair value-based
compensation charges for those options in future periods. We used the
Black-Scholes valuation model to calculate the compensation expense related
to
shares of common stock subject to purchase under the Company’s Employee Stock
Purchase Plan (“ESPP”) in the first quarter of fiscal 2006. This is consistent
with the valuation techniques previously utilized for options in footnote
disclosures required under SFAS 123R, as amended by SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB
Statement No. 123.
For
options to purchase common stock granted after the adoption of SFAS 123R, we
are
required to utilize an estimated forfeiture rate when calculating the expense
for the period, whereas SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
123”) permitted companies to record forfeitures based on actual forfeitures,
which was our historical policy under SFAS 123. An estimated forfeiture rate
is
calculated based on then-current facts and circumstances at the time we grant
options to purchase our common stock. For further information regarding the
assumptions used in determining share-based payment expense related to our
ESPP
and options to purchase common stock, see Note 12 to our consolidated financial
statements.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold
and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Adoption is required
as of the beginning of the first fiscal year that begins after December 15,
2006. We are currently reviewing FIN 48 to determine its impact on our results
of operations and financial position upon adoption.
In
March
2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets
(“SFAS
156”), which requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value. SFAS 156 permits, but does
not
require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. Adoption is required as of the beginning of the
first
fiscal year that begins after September 15, 2006. We are currently reviewing
SFAS 156 to determine its impact on our results of operations and financial
position upon adoption.
Off-Balance
Sheet Arrangements
We
do not
participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities (“SPEs”), which would have been
established for the purpose of facilitating off-balance sheet arrangements
or
other contractually narrow or limited purpose. At July 1, 2006, we were not
involved in any unconsolidated SPE transactions.
Item
3.
Quantitative and Qualitative Disclosures About Market
Risk
We
are
exposed to a variety of market risks, including changes in interest rates
primarily as a result of our borrowing and investing activities, commodity
price
risk and foreign currency fluctuations. The Company has established procedures
to manage its fluctuations in interest rates and foreign currency exchange
rates.
Our
long-term borrowings are in variable rate instruments, with interest rates
tied
to either the Prime Rate or the LIBOR. A 100 basis point change in these rates
would have an impact of approximately $0.3 million on our annual interest
expense, assuming consistent levels of floating rate debt with those held at
July 1, 2006.
Commodity
price movements create a market risk by affecting the price we must pay for
certain raw materials. The Company purchases aluminum for use in manufacturing
consumables products and is embedded in certain components we purchase from
major suppliers. From time to time, we enter into agreements with certain
suppliers to manage price risks within a specified range of prices; however,
our
suppliers generally pass on significant commodity price changes to us in the
form of revised prices on future purchases. In general, the Company has not
used
commodity forward or option contracts to manage this market risk.
The
Company operates foreign subsidiaries in Canada and Europe and is exposed to
foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales, anticipated purchases and assets and liabilities denominated
in currencies other than the U.S. dollar. Presstek routinely evaluates whether
the foreign exchange risk associated with its foreign currency exposures acts
as
a natural foreign currency hedge for other offsetting amounts denominated in
the
same currency. In general, the Company does not hedge the net assets or net
income of its foreign subsidiaries. In addition, certain key customers and
strategic partners are not located in the United States. As a result, these
parties may be subject to fluctuations in foreign exchange rates. If their
home
country currency were to decrease in value relative to the United States dollar,
their ability to purchase and 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, certain major 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 1, 2006, we have, under the supervision and with the participation of
Presstek’s management, including its Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of Presstek’s
disclosure controls and procedures pursuant to Rules 13a-15(e) promulgated
under
the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the
period covered by this report. Based upon that evaluation, Presstek’s Chief
Executive Officer and Chief Financial Officer concluded that, as of July 1,
2006, 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 Control Over Financial Reporting
There
were no material changes in Presstek’s internal control over financial reporting
that occurred during the quarter ended July 1, 2006 that have materially
affected or are reasonably likely to materially affect our internal control
over
financial reporting.
PRESSTEK,
INC.
PART
II OTHER INFORMATION
On
July
26, 2006, the Company filed an action against the Illinois State Treasurer’s
Office, Judy Baar Topinka, Treasurer of the State of Illinois, and Joshua Joyce,
Director, Unclaimed Property Division, Illinois State Treasurer’s Office,
seeking judicial review of a final administrative decision of the Treasurer
of
the State of Illinois (“State Treasurer”) which determined the ownership of
approximately $2.6 million resulting from the sale of unclaimed stock under
the
Illinois Uniform Disposition of Unclaimed Property Act, (the “Act” or “UDUPA”),
codified at 765 ILCS 1025/1 et
seq. The
State
Treasurer received a claim to approximately $2.6 million and, without holding
a
hearing, allowed the claim without sufficient evidentiary support. This
determination became final and the funds were released to a claimant who was
not
the rightful owner. Presstek is seeking a reversal of the administrative
decision and compensation because the State Treasurer’s actions constitute an
unconstitutional taking of Plaintiff’s property without just compensation in
violation of Article I, Section 15 of the Illinois State Constitution and the
Fifth Amendment to the United States Constitution.
There
have been no material changes to the Risk Factors as previously disclosed in
our
Annual Report on Form 10-K, as filed with the SEC on March 16,
2006.
Item
4. Submission of Matters to a Vote of Security
Holders
(a) On
June
7, 2006, the Company held its Annual Meeting of Stockholders.
(b) The
contents of Item 4(b) are included in Item 4(c)(1) below, which is incorporated
herein by reference.
(c) At
such
meeting, the stockholders of the Company voted:
(1)
To
elect eight directors to the Company’s Board of Directors for the ensuing year.
The votes cast were as follows:
Nominees
|
|
Votes
For
|
|
Votes
Against
|
|
Votes
Withheld
|
|
Abstained
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
J. Marino
|
|
|
31,387,582
|
|
|
N/A
|
|
|
415,000
|
|
|
N/A
|
|
|
N/A
|
|
John
W. Dreyer
|
|
|
31,598,989
|
|
|
N/A
|
|
|
203,693
|
|
|
N/A
|
|
|
N/A
|
|
Daniel
S. Ebenstein
|
|
|
26,221,200
|
|
|
N/A
|
|
|
5,581,482
|
|
|
N/A
|
|
|
N/A
|
|
Dr.
Lawrence Howard
|
|
|
26,612,044
|
|
|
N/A
|
|
|
5,190,638
|
|
|
N/A
|
|
|
N/A
|
|
Michael
D. Moffitt
|
|
|
31,656,349
|
|
|
N/A
|
|
|
146,333
|
|
|
N/A
|
|
|
N/A
|
|
Brian
Mullaney
|
|
|
31,603,477
|
|
|
N/A
|
|
|
199,205
|
|
|
N/A
|
|
|
N/A
|
|
Steven
N. Rappaport
|
|
|
31,456,123
|
|
|
N/A
|
|
|
346,559
|
|
|
N/A
|
|
|
N/A
|
|
Donald
C. Waite, III
|
|
|
31,595,791
|
|
|
N/A
|
|
|
206,891
|
|
|
N/A
|
|
|
N/A
|
|
(2)
To
ratify, through a non-binding vote to be considered by the Board in selecting
an
independent registered public accounting firm, the selection of BDO Seidman,
LLP
as the Company’s independent auditors for the fiscal year ending December 30,
2006. The votes cast were as follows:
Votes
For
|
|
Votes
Against
|
|
Votes
Withheld
|
|
Abstained
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
31,475,508
|
|
|
301,813
|
|
|
N/A
|
|
|
25,361
|
|
|
N/A
|
|
On
June
19, 2006, the Company’s Board of Directors, through its Audit Committee,
dismissed BDO Seidman, LLP as the Company’s independent registered public
accounting firm.
On
June
22, 2006, the Company’s Board of Directors, through its Audit Committee, engaged
KPMG LLP as the Company’s new independent registered public accounting
firm.
Exhibit
No.
|
Description
|
|
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|
|
|
PRESSTEK,
INC.
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 10, 2006
|
/s/
Edward J. Marino
|
|
Edward
J. Marino
President
and Chief Executive Officer
(Principal
Executive Officer)
|
Date:
August 10, 2006
|
/s/
Moosa E. Moosa
|
|
Moosa
E. Moosa
Executive
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
PRESSTEK,
INC.
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
|