form10q.htm
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 September 27, 2008
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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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10
Glenville Street
Greenwich,
Connecticut
(Address
of Principal Executive Offices)
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06831
(Zip
Code)
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(203)
769-8032
Registrant’s
telephone number, including area code
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, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large
accelerated filer o
Accelerated filer þ
Non-accelerated filer
o
Smaller reporting company o
(do not check
if a smaller reporting company)
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
October 31, 2008, there were 36,637,181 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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Consolidated
Balance Sheets as of September 27, 2008 and December 29, 2007
(Unaudited)
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3
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Consolidated
Statements of Operations for the three and nine months ended September 27,
2008 and September 29, 2007 (Unaudited)
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4
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Consolidated
Statements of Cash Flows for the nine months ended September 27, 2008 and
September 29, 2007 (Unaudited)
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5
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Notes
to Consolidated Financial Statements (Unaudited)
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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Item
4.
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Controls
and Procedures
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39
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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42
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Item
6.
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Exhibits
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43
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Signatures
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44
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This
Quarterly Report of Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. See “Information Regarding
Forward-Looking Statements” under Part 1 – Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the Quarterly
Report on Form 10-Q.
DI is a registered trademark of
Presstek, Inc.
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
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PRESSTEK,
INC. AND SUBSIDIARIES
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CONSOLIDATED
BALANCE SHEETS
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|
(in
thousands, except share data)
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|
(Unaudited)
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|
September
27,
|
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|
December
29,
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|
2008
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|
|
2007
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|
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|
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ASSETS
|
|
|
|
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Current
assets
|
|
|
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Cash
and cash equivalents
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|
$ |
2,634 |
|
|
$ |
12,558 |
|
Accounts
receivable, net
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|
|
34,911 |
|
|
|
41,094 |
|
Inventories
|
|
|
43,439 |
|
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|
45,010 |
|
Assets
of discontinued operations
|
|
|
13,727 |
|
|
|
16,689 |
|
Deferred
income taxes
|
|
|
7,356 |
|
|
|
6,740 |
|
Other
current assets
|
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|
4,453 |
|
|
|
4,594 |
|
Total
current assets
|
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|
106,520 |
|
|
|
126,685 |
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|
|
|
|
|
|
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Property,
plant and equipment, net
|
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|
25,773 |
|
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|
29,049 |
|
Goodwill
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|
19,891 |
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|
|
19,891 |
|
Intangible
assets, net
|
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|
4,481 |
|
|
|
5,209 |
|
Deferred
income taxes
|
|
|
9,463 |
|
|
|
11,124 |
|
Other
noncurrent assets
|
|
|
569 |
|
|
|
869 |
|
|
|
|
|
|
|
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|
Total
assets
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|
$ |
166,697 |
|
|
$ |
192,827 |
|
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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
|
|
$ |
3,246 |
|
|
$ |
7,035 |
|
Line
of credit
|
|
|
11,890 |
|
|
|
20,000 |
|
Accounts
payable
|
|
|
14,761 |
|
|
|
17,312 |
|
Accrued
expenses
|
|
|
15,500 |
|
|
|
23,212 |
|
Deferred
revenue
|
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|
6,902 |
|
|
|
7,100 |
|
Liabilities
of discontinued operations
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|
5,995 |
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|
2,776 |
|
Total
current liabilities
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|
58,294 |
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|
77,435 |
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Long-term
debt and capital lease obligation, less current portion
|
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|
834 |
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|
8,500 |
|
Other
long-term liabilities
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|
58 |
|
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|
- |
|
|
|
|
|
|
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Total
liabilities
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|
59,186 |
|
|
|
85,935 |
|
|
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Commitments
and contingencies (See Note 19)
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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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- |
|
Common
stock, $0.01 par value, 75,000,000 shares authorized, 36,619,078
and
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36,565,474
shares issued and outstanding at September 27, 2008 and
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|
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|
December
29, 2007, respectively
|
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|
366 |
|
|
|
366 |
|
Additional
paid-in capital
|
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|
117,426 |
|
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|
115,884 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(871 |
) |
|
|
1,032 |
|
Accumulated
deficit
|
|
|
(9,410 |
) |
|
|
(10,390 |
) |
Total
stockholders' equity
|
|
|
107,511 |
|
|
|
106,892 |
|
|
|
|
|
|
|
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|
Total
liabilities and stockholders' equity
|
|
$ |
166,697 |
|
|
$ |
192,827 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
PRESSTEK,
INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(in
thousands, except per-share data)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three
months ended
|
|
|
Nine
months ended
|
|
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|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
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Revenue
|
|
|
|
|
|
|
|
|
|
|
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|
Product
|
|
$ |
40,288 |
|
|
$ |
48,174 |
|
|
$ |
124,764 |
|
|
$ |
158,414 |
|
Service
and parts
|
|
|
8,246 |
|
|
|
9,488 |
|
|
|
26,170 |
|
|
|
29,276 |
|
Total
revenue
|
|
|
48,534 |
|
|
|
57,662 |
|
|
|
150,934 |
|
|
|
187,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
25,589 |
|
|
|
34,457 |
|
|
|
78,659 |
|
|
|
112,696 |
|
Service
and parts
|
|
|
6,096 |
|
|
|
8,097 |
|
|
|
19,561 |
|
|
|
24,568 |
|
Total
cost of revenue
|
|
|
31,685 |
|
|
|
42,554 |
|
|
|
98,220 |
|
|
|
137,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,849 |
|
|
|
15,108 |
|
|
|
52,714 |
|
|
|
50,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,059 |
|
|
|
1,212 |
|
|
|
3,697 |
|
|
|
3,789 |
|
Sales,
marketing and customer support
|
|
|
7,088 |
|
|
|
9,315 |
|
|
|
22,411 |
|
|
|
29,810 |
|
General
and administrative
|
|
|
5,932 |
|
|
|
8,796 |
|
|
|
18,321 |
|
|
|
23,603 |
|
Amortization
of intangible assets
|
|
|
258 |
|
|
|
517 |
|
|
|
823 |
|
|
|
1,819 |
|
Restructuring
and other charges
|
|
|
374 |
|
|
|
399 |
|
|
|
1,569 |
|
|
|
1,527 |
|
Total
operating expenses
|
|
|
14,711 |
|
|
|
20,239 |
|
|
|
46,821 |
|
|
|
60,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,138 |
|
|
|
(5,131 |
) |
|
|
5,893 |
|
|
|
(10,122 |
) |
Interest
and other income (expense), net
|
|
|
(359 |
) |
|
|
(285 |
) |
|
|
(646 |
) |
|
|
(1,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
1,779 |
|
|
|
(5,416 |
) |
|
|
5,247 |
|
|
|
(11,732 |
) |
Provision
(benefit) for income taxes
|
|
|
1,153 |
|
|
|
(2,732 |
) |
|
|
2,731 |
|
|
|
(3,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
626 |
|
|
|
(2,684 |
) |
|
|
2,516 |
|
|
|
(8,191 |
) |
Loss
from discontinued operations, net of tax
|
|
|
(431 |
) |
|
|
(932 |
) |
|
|
(1,536 |
) |
|
|
(1,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
195 |
|
|
$ |
(3,616 |
) |
|
$ |
980 |
|
|
$ |
(9,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.02 |
|
|
$ |
(0.07 |
) |
|
$ |
0.07 |
|
|
$ |
(0.23 |
) |
Loss
from discontinued operations
|
|
|
(0.01 |
) |
|
|
(0.03 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
0.02 |
|
|
$ |
(0.07 |
) |
|
$ |
0.07 |
|
|
$ |
(0.23 |
) |
Loss
from discontinued operations
|
|
|
(0.01 |
) |
|
|
(0.03 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
$ |
(0.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
36,603 |
|
|
|
36,545 |
|
|
|
36,586 |
|
|
|
36,080 |
|
Dilutive
effect of options
|
|
|
13 |
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
Weighed
average shares outstanding - diluted
|
|
|
36,616 |
|
|
|
36,545 |
|
|
|
36,598 |
|
|
|
36,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
PRESSTEK,
INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(in
thousands)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
|
|
September
27,
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
980 |
|
|
$ |
(9,424 |
) |
Add
loss from discontinued operations
|
|
|
1,536 |
|
|
|
1,233 |
|
Income
(loss) from continuing operations
|
|
|
2,516 |
|
|
|
(8,191 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
Depreciation
|
|
|
3,608 |
|
|
|
4,179 |
|
Amortization
of intangible assets
|
|
|
823 |
|
|
|
1,819 |
|
Restructuring
and other charges
|
|
|
166 |
|
|
|
- |
|
Writedown
of asset to net realizable value
|
|
|
422 |
|
|
|
- |
|
Provision
for warranty costs
|
|
|
350 |
|
|
|
2,854 |
|
Provision
for accounts receivable allowances
|
|
|
746 |
|
|
|
1,087 |
|
Stock
compensation expense
|
|
|
1,321 |
|
|
|
3,447 |
|
Deferred
income taxes
|
|
|
1,045 |
|
|
|
(4,429 |
) |
Loss
on disposal of assets
|
|
|
37 |
|
|
|
72 |
|
Changes
in operating assets and liabilities, net of effects from business
acquisitions and divestitures:
|
|
Accounts
receivable
|
|
|
6,073 |
|
|
|
1,651 |
|
Inventories
|
|
|
1,381 |
|
|
|
(3,247 |
) |
Other
current assets
|
|
|
164 |
|
|
|
(532 |
) |
Other
noncurrent assets
|
|
|
(142 |
) |
|
|
70 |
|
Accounts
payable
|
|
|
(2,612 |
) |
|
|
(5,387 |
) |
Accrued
expenses
|
|
|
(9,041 |
) |
|
|
1,717 |
|
Restructuring
and other charges
|
|
|
981 |
|
|
|
1,527 |
|
Deferred
revenue
|
|
|
(187 |
) |
|
|
(347 |
) |
Net
cash provided by (used in) operating activities
|
|
|
7,651 |
|
|
|
(3,710 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(946 |
) |
|
|
(2,114 |
) |
Business
acquisitions, net of cash acquired
|
|
|
- |
|
|
|
(20 |
) |
Investment
in patents and other intangible assets
|
|
|
(125 |
) |
|
|
(58 |
) |
Net
cash used in investing activities
|
|
|
(1,071 |
) |
|
|
(2,192 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
221 |
|
|
|
3,069 |
|
Repayments
of term loan and capital lease
|
|
|
(11,455 |
) |
|
|
(5,274 |
) |
Net
borrowings (repayments) under line of credit agreement
|
|
|
(8,110 |
) |
|
|
6,000 |
|
Net
cash provided by (used in) financing activities
|
|
|
(19,344 |
) |
|
|
3,795 |
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) discontinued operations
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
(3,145 |
) |
|
|
(305 |
) |
Investing
activities
|
|
|
7,811 |
|
|
|
(419 |
) |
Financing
activities
|
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) discontinued operations
|
|
|
4,666 |
|
|
|
(724 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,826 |
) |
|
|
667 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(9,924 |
) |
|
|
(2,164 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
12,558 |
|
|
|
9,547 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,634 |
|
|
$ |
7,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,384 |
|
|
$ |
2,417 |
|
Cash
paid for income taxes
|
|
$ |
547 |
|
|
$ |
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
September
27, 2008
(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 September 27, 2008 and
December 29, 2007, its results of operations for the three and nine months ended
September 27, 2008 and September 29, 2007 and its cash flows for the nine months
ended September 27, 2008 and September 29, 2007, in accordance with U.S.
generally accepted accounting principles (“U.S. 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 nine months ended September 27, 2008 are not
necessarily indicative of the results to be expected for the year ending January
3, 2009. 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 29, 2007, filed with the U.S. Securities and
Exchange Commission (“SEC”) on April 30, 2008.
The
Company’s operations are currently organized into two segments: (i) Presstek and
(ii) 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 Lasertel segment manufactures and develops high-powered
laser diodes and related laser products for the Presstek segment and for sale to
external customers. The Lasertel segment has been presented as
discontinued operations in the third quarter of fiscal 2008 as the operations
are currently held for sale. The Lasertel business will continue to
operate as normal, as will all of its marketing and new business/product
development activities. Presstek has no intentions to shut down the
business. Any future changes to this organizational structure may
result in changes to the 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 thirty-nine week periods ended
September 27, 2008 (the “third quarter and first nine months of fiscal 2008” or
“the nine months ended September 27, 2008”) and September 29, 2007 (the “third
quarter and first nine of fiscal 2007” or “the nine months ended September 29,
2007”).
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Earnings
(Loss) per Share
Basic
earnings (loss) 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.
Approximately
4,088,000 and 3,661,400 options to purchase common stock were excluded from the
calculation of diluted earnings (loss) per share for the three months ended
September 27, 2008 and September 29, 2007, respectively, as their effect would
be antidilutive. Approximately 4,058,200 and 3,661,400 options to
purchase common stock were excluded from the calculation of diluted earnings
(loss) per share for the nine months ended September 27, 2008 and September 29,
2007, respectively, as their effect would be antidilutive.
Foreign
Currency Translation and Transactions
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. Revenues and expenses from these subsidiaries are translated at
average monthly exchange rates in effect for the periods in which the
transactions occur. The resulting unrealized gains or losses are
reported under the caption “Accumulated other comprehensive income (loss)” in
the Company’s Consolidated Financial Statements.
Gains and
losses arising from foreign currency transactions are reported as a component of
Interest and other income (expense), net in the Company’s Consolidated
Statements of Operations. The Company recorded a loss on foreign
currency transactions of approximately $0.3 million for the three months ended
September 27, 2008 and a gain of $0.3 million for the three months ended
September 29, 2007 and a loss of $0.2 million and a gain of $29,000 for the nine
months ended September 27, 2008 and September 29, 2007,
respectively.
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 reported revenue and expenses during the
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, intangible assets, long-lived assets and deferred tax assets;
stock-based compensation and litigation. The Company bases its
estimates and assumptions 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 revenue 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 29, 2007,
which was filed with the SEC on April 30, 2008. There were no
significant changes to the Company’s critical accounting policies during the
nine months ended September 27, 2008.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Recent
Accounting Pronouncements
As of
December 30, 2007, the company has adopted SFAS No. 157 Fair Value Measurements
("SFAS 157"). SFAS 157 provides guidance for using fair value to
measure assets and liabilities. The Financial Accounting Standards Board
has subsequently issued FASB Staff Position No FAS 157-2, which grants a
one-year delay for FAS 157 on the fair value measurement for nonfinancial assets
and nonfinancial liabilities for fiscal years beginning after November 15, 2008.
At this time, we have adopted the FAS 157 as it relates to our financial assets
and liabilities only. The adoption of SFAS 157 did not have a material impact on
our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which permits entities to
choose to measure, on an item-by-item basis, specified financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are required to be reported in
earnings at each reporting date. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The provisions of this statement are required
to be applied prospectively. The Company adopted SFAS 159 in the first quarter
of 2008. The adoption of SFAS 159 did not have a material impact on our
consolidated financial statements.
In
June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities ("EITF 07-3"). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective basis,
for fiscal years beginning after December 15, 2007 and was adopted by the
Company in the first quarter of fiscal 2008. The adoption of EITF 07-3 did not
have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective as of
the beginning of an entity's fiscal year that begins after December 15,
2008, and will be adopted by the Company in the first quarter of fiscal 2009.
The Company will apply SFAS 141R prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
In
December 2007, the FASB issued Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160), which is effective for
fiscal years beginning after December 15, 2008. This statement requires all
entities to report non-controlling (minority) interests in subsidiaries in the
same manner– as equity in the consolidated financial statements. This eliminates
the diversity that currently exists in accounting for transactions between an
entity and non-controlling interests by requiring that they be treated as equity
transactions. The Company will be required to adopt the provisions of
SFAS 160 in the first quarter of 2009 and is currently evaluating the
impact of such adoption on its Consolidated Financial Statements.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
2.
DISCONTINUED OPERATIONS
The
Company accounts for its discontinued operations under the provisions of SFAS
No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets (SFAS 144). Accordingly,
results of operations and the related expenses associated with discontinued
operations have been classified as “Loss from discontinued operations, net of
tax” in the accompanying Consolidated Statements of Operations. Assets and
liabilities of discontinued operations have been reclassified and reflected on
the accompanying Consolidated Balance Sheets as “Assets of discontinued
operations” and “Liabilities of discontinued operations.” For comparative
purposes, all prior periods presented have been reclassified on a consistent
basis. Discontinued operations for the periods presented are
comprised of Precision analog newspaper business and Lasertel.
Precision
During
December 2006, the Company terminated production in South Hadley, Massachusetts
of Precision-branded analog plates used in newspaper applications.
Results
of operations of the discontinued analog newspaper business of Precision consist
of the following (in thousands, except per-share data):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
Revenues
from external customers
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
195 |
|
Income
(loss) before income taxes
|
|
|
31 |
|
|
|
16 |
|
|
|
137 |
|
|
|
(132 |
) |
Provision
(benefit) from income taxes
|
|
|
-- |
|
|
|
6 |
|
|
|
43 |
|
|
|
(54 |
) |
Income
(loss) from discontinued operations
|
|
$ |
31 |
|
|
$ |
10 |
|
|
$ |
94 |
|
|
$ |
(78 |
) |
Earnings
(loss) per share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Assets
and liabilities of the Precision analog newspapers business of discontinued
operations consist of the following (in thousands):
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
$ |
2 |
|
|
$ |
15 |
|
Total
current assets
|
|
$ |
2 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
189 |
|
|
$ |
189 |
|
Accrued
expenses
|
|
|
71 |
|
|
|
699 |
|
Total
current liabilities
|
|
$ |
260 |
|
|
$ |
888 |
|
|
|
|
|
|
|
|
|
|
Lasertel
On
September 24, 2008, the Board of Directors approved a plan to sell the Lasertel
subsidiary as the Lasertel business is not a core focus for the Presstek
graphics business. Although Lasertel is a supplier of diodes for the Company, it
has grown its presence in the external market, and management believes that
Lasertel would be in a better position to realize its full potential in
conjunction with other companies or investors who can focus resources on the
external market. The disposal of this asset group is currently
anticipated to be an asset sale and to occur within a one year
period. As such, the Company has presented the results of operations
of this subsidiary within discontinued operations, classified the assets as
“Assets of discontinued operations” and liabilities as “Liabilities of
discontinued operations”. The Lasertel business will continue to operate as it
previously operated, including its marketing and new business/product
development activities. Presstek has no intentions to shut down the
business.
Results
of operations of the discontinued business of Lasertel consist of the following
(in thousands, except per-share data):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
Revenues
from external customers
|
|
$ |
2,535 |
|
|
$ |
1,950 |
|
|
$ |
6,833 |
|
|
$ |
5,825 |
|
Loss
before income taxes
|
|
|
(733 |
) |
|
|
(1,534 |
) |
|
|
(2,636 |
) |
|
|
(1,881 |
) |
Benefit
from income taxes
|
|
|
(271 |
) |
|
|
(592 |
) |
|
|
(1,006 |
) |
|
|
(726 |
) |
Loss
from discontinued operations
|
|
$ |
(462 |
) |
|
$ |
(942 |
) |
|
$ |
(1,630 |
) |
|
$ |
(1,155 |
) |
Loss
per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
Assets
and liabilities of the discontinued business of Lasertel consist of the
following (in thousands):
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
-- |
|
|
$ |
691 |
|
Receivables,
net
|
|
|
2,826 |
|
|
|
1,785 |
|
Inventories
|
|
|
4,766 |
|
|
|
4,074 |
|
Other
current assets
|
|
|
542 |
|
|
|
72 |
|
Property,
plant & equipment, net
|
|
|
4,692 |
|
|
|
8,974 |
|
Intangible
assets, net
|
|
|
899 |
|
|
|
1,078 |
|
Total
assets
|
|
$ |
13,725 |
|
|
$ |
16,674 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
733 |
|
|
$ |
1,291 |
|
Accrued
expenses
|
|
|
518 |
|
|
|
501 |
|
Deferred
revenue
|
|
|
-- |
|
|
|
96 |
|
Deferred
gain
|
|
|
4,484 |
|
|
|
-- |
|
Total
Liabilities
|
|
$ |
5,735 |
|
|
$ |
$$1,888 |
|
3. FAIR VALUES OF FINANCIAL
INSTRUMENTS
|
The
Company adopted SFAS No. 157, Fair Value Measurements, for
financial assets and financial liabilities in the first quarter of fiscal 2008,
which did not have a material impact on the Company’s consolidated financial
statements. In accordance with FASB Staff Position (“FSP FAS”) 157-2, Effective Date of FASB Statement
No. 157, the Company has deferred application of
SFAS No. 157 until January 4, 2009, the beginning of the next fiscal
year, in relation to nonrecurring nonfinancial assets and nonfinancial
liabilities including goodwill impairment testing, asset retirement obligations,
long-lived asset impairments and exit and disposal
activities.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
4. ACCOUNTS
RECEIVABLE, NET
The
components of Accounts receivable are as follows (in thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
37,233 |
|
|
$ |
43,632 |
|
Less
allowances
|
|
|
(2,322 |
) |
|
|
(2,538 |
) |
|
|
$ |
34,911 |
|
|
$ |
41,094 |
|
5. INVENTORIES
The
components of Inventories are as follows (in thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
3,287 |
|
|
$ |
3,660 |
|
Work
in process
|
|
|
5,248 |
|
|
|
4,939 |
|
Finished
goods
|
|
|
34,904 |
|
|
|
36,411 |
|
|
|
$ |
43,439 |
|
|
$ |
45,010 |
|
During
the nine months ended September 27, 2008 and September 29, 2007, the Company
disposed of $2.4 million and $3.5 million, respectively, of excess and obsolete
inventories. The inventories disposed were primarily comprised of
machine components and repair parts relating to technology that is no longer
produced or serviced by the Company, and were fully reserved for prior to
disposal.
6. PROPERTY,
PLANT AND EQUIPMENT, NET
The
components of Property, plant and equipment, net, are as follows (in
thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Land
and improvements
|
|
$ |
1,302 |
|
|
$ |
1,363 |
|
Buildings
and leasehold improvements
|
|
|
22,169 |
|
|
|
22,695 |
|
Production
and other equipment
|
|
|
42,368 |
|
|
|
42,204 |
|
Office
furniture and equipment
|
|
|
9,397 |
|
|
|
7,098 |
|
Construction
in process
|
|
|
406 |
|
|
|
2,355 |
|
Total
property, plant and equipment, at cost
|
|
|
75,642 |
|
|
|
75,715 |
|
Accumulated
depreciation and amortization
|
|
|
(49,869 |
) |
|
|
(46,666 |
) |
Net
property, plant and equipment
|
|
$ |
25,773 |
|
|
$ |
29,049 |
|
Construction
in process is generally related to production equipment and information
technology systems not yet placed into service.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Property,
plant and equipment at September 27, 2008 and December 29, 2007 includes
$110,000 of office furniture and equipment and related accumulated depreciation
of $104,000 and $77,000, respectively, associated with a capital
lease.
The
Company recorded depreciation expense of $1.1 million and $3.6 million in the
third quarter and first nine months of fiscal 2008, respectively, and $1.4
million and $4.2 million in the third quarter and first nine months of fiscal
2007, respectively. Under the Company’s financing arrangements (see
Note 8), all property, plant and equipment are pledged as security.
7. 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 both September 27, 2008 and December 29, 2007, the
Company had recorded $0.5 million related to patents and intellectual property
not yet in service.
The
components of the Company’s identifiable intangible assets are as follows (in
thousands):
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
and intellectual property
|
|
$ |
9,435 |
|
|
$ |
7,735 |
|
|
$ |
9,360 |
|
|
$ |
7,323 |
|
Trade
names
|
|
|
2,360 |
|
|
|
2,360 |
|
|
|
2,360 |
|
|
|
2,360 |
|
Customer
relationships
|
|
|
4,452 |
|
|
|
2,140 |
|
|
|
4,452 |
|
|
|
1,855 |
|
Software
licenses
|
|
|
450 |
|
|
|
450 |
|
|
|
450 |
|
|
|
450 |
|
License
agreements
|
|
|
750 |
|
|
|
353 |
|
|
|
750 |
|
|
|
296 |
|
Non-compete
covenants
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Loan
origination fees
|
|
|
332 |
|
|
|
260 |
|
|
|
332 |
|
|
|
211 |
|
|
|
$ |
17,879 |
|
|
$ |
13,398 |
|
|
$ |
17,804 |
|
|
$ |
12,595 |
|
The
Company recorded amortization expense for its identifiable intangible assets of
$0.3 million and $0.6 million in the third quarters of fiscal 2008 and fiscal
2007, respectively, and $0.8 million and $1.8 million in the first nine months
of fiscal 2008 and fiscal 2007, respectively. Estimated future
amortization expense for the Company’s identifiable intangible assets in service
at September 27, 2008, is as follows (in thousands):
Remainder
of fiscal 2008
|
|
$ |
283 |
|
Fiscal
2009
|
|
$ |
1,033 |
|
Fiscal
2010
|
|
$ |
904 |
|
Fiscal
2011
|
|
$ |
677 |
|
Fiscal
2012
|
|
$ |
403 |
|
Fiscal
2013
|
|
$ |
384 |
|
Thereafter
|
|
$ |
317 |
|
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
The
carrying amount of goodwill recorded by the Company’s Presstek reporting unit
was $19.9 million at September 27, 2008 and December 29, 2007.
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is tested annually, as of the first business 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 goodwill 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 a reporting unit’s
goodwill, as determined by the Company at any measurement date, fall below the
carrying value of the respective reporting unit’s net assets, an expense for
impairment will be recorded in the period. For the third quarter ending
September 27, 2008, there was no impairment recorded. There can be no
assurance that goodwill will not become impaired in future periods.
8. FINANCING
ARRANGEMENTS
The
components of the Company’s outstanding borrowings at September 27, 2008 and
December 29, 2007 are as follows (in thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Term
loan
|
|
$ |
4,074 |
|
|
$ |
15,500 |
|
Line
of credit
|
|
|
11,890 |
|
|
|
20,000 |
|
Capital
lease obligation
|
|
|
6 |
|
|
|
35 |
|
|
|
|
15,970 |
|
|
|
35,535 |
|
Less
current portion
|
|
|
(15,136 |
) |
|
|
(27,035 |
) |
Long-term
debt
|
|
$ |
834 |
|
|
$ |
8,500 |
|
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
September 27, 2008 and December 29, 2007, the Company had outstanding balances
on the Revolver of $11.9 million and $20.0 million, respectively, with interest
rates of 4.9% and 7.5%, respectively. At September 27, 2008, there
were $1.3 million of outstanding letters of credit, thereby reducing the amount
available under the Revolver to $31.8 million at that date.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Prior to
an amendment to the Facilities in the third quarter of 2008, principal payments
on the Term Loan were payable in consecutive quarterly installments of $1.75
million, with a final settlement of all remaining principal and unpaid interest
on November 4, 2009. In the third quarter of fiscal 2008, the Company
used the net proceeds of the sale of its Arizona property to pay down the
principal balance of the term loan and entered into an amendment to the
Facilities dated July 29, 2008 which amended the payment schedule of the Term
Loan to reduce the required quarterly installments of principal to $810,000,
with no installment due in the third quarter of fiscal 2008 and a final
installment of all remaining principal (approximately $834,000) due on November
4, 2009. At September 27, 2008 and December 29, 2007, outstanding
balances under the Term Loan were $4.1 million and $15.5 million, respectively,
with interest rates of 5.0% and 7.5%, respectively.
The
weighted average interest rate on the Company’s short-term borrowings was 4.9%
at September 27, 2008.
Under the
terms of the Revolver and the Term Loan, the Company is 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 the Company defines as earnings
before interest, taxes, depreciation, amortization, and restructuring and other
charges) and minimum fixed charge coverage covenants. At September
27, 2008, the Company was in compliance with all covenants.
On
November 23, 2005, the Company acquired equipment of $110,000 qualifying for
capital lease treatment. 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 repayment commitments are as follows (in
thousands):
Remainder
of 2008
|
|
$ |
10,706 |
|
2009
|
|
$ |
5,264 |
|
9. ACCRUED
EXPENSES
The
components of the Company’s accrued expenses are as follows (in
thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Accrued
payroll and employee benefits
|
|
$ |
4,502 |
|
|
$ |
5,478 |
|
Accrued
warranty
|
|
|
2,844 |
|
|
|
3,534 |
|
Accrued
restructuring and other charges
|
|
|
676 |
|
|
|
1,592 |
|
Accrued
royalties
|
|
|
232 |
|
|
|
432 |
|
Accrued
income taxes
|
|
|
1,129 |
|
|
|
569 |
|
Accrued
legal
|
|
|
2,517 |
|
|
|
5,815 |
|
Accrued
professional fees
|
|
|
863 |
|
|
|
2,545 |
|
Other
|
|
|
2,737 |
|
|
|
3,247 |
|
|
|
$ |
15,500 |
|
|
$ |
23,212 |
|
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
10. ACCRUED
WARRANTY
Product
warranty activity in the first nine months of fiscal 2008 is as follows (in
thousands):
Balance
at December 29, 2007
|
|
$ |
3,534 |
|
Accruals
for warranties
|
|
|
350 |
|
Utilization
of accrual for warranty costs
|
|
|
(1,040 |
) |
Balance
at September 27, 2008
|
|
$ |
2,844 |
|
11. DEFERRED
REVENUE
The
components of deferred revenue are as follows (in thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Deferred
service revenue
|
|
$ |
5,973 |
|
|
$ |
6,718 |
|
Deferred
product revenue
|
|
|
929 |
|
|
|
382 |
|
|
|
$ |
6,902 |
|
|
$ |
7,100 |
|
12. RESTRUCTURING
AND OTHER CHARGES
In the
first nine months of fiscal 2008, the Company recognized $1.6 million in
restructuring and other charges related to severance and separation costs under
the consolidation efforts of the Business Improvement Plan (“BIP”) that was
introduced in the third quarter of fiscal 2007 and certain asset impairment
charges.
In the
third quarter of fiscal 2008, the Company announced its plans to transfer
certain of its corporate functions from the Hudson, NH facility to the
Greenwich, CT facility. As such, the Company will accrue for
severance and any retention bonuses related to this plan ratably over the
requisite service period. The Company recorded expense of approximately $70,000
in the third quarter of fiscal 2008 related to this event, and expects to incur
additional expenses through the second quarter of 2009.
The
activity for the first nine months of fiscal 2008 related to the Company’s
restructuring accruals is as follows (in thousands):
|
|
Balance
December
29,
2007
|
|
|
Charged
to expense
|
|
|
Utilization
|
|
|
Balance
September
27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
termination and other costs
|
|
$ |
-- |
|
|
$ |
881 |
|
|
$ |
(881 |
) |
|
$ |
-- |
|
Executive
contractual obligations
|
|
|
904 |
|
|
|
223 |
|
|
|
(763 |
) |
|
|
364 |
|
Severance
and fringe benefits
|
|
|
688 |
|
|
|
465 |
|
|
|
(841 |
) |
|
|
312 |
|
|
|
$ |
1,592 |
|
|
$ |
1,569 |
|
|
$ |
(2,485 |
) |
|
$ |
676 |
|
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
13. STOCK-BASED
COMPENSATION
The
Company has equity incentive plans that are administered by the Compensation
Committee of the Board of Directors (the “Committee”). The Committee oversees
and approves which employees receive grants, the number of shares or options
granted and the exercise prices and other terms of the awards.
1998
Stock Option Plan
The 1998
Stock Incentive Plan (the “1998 Incentive Plan”) provides for the award of stock
options, restricted stock, deferred stock, and other stock based awards to
officers, directors, employees, and other key persons (collectively “awards”). A
total of 3,000,000 shares of common stock, subject to anti-dilution adjustments,
have been reserved under this plan. Any future options granted under the 1998
Incentive Plan will become exercisable upon the earlier of a date set by the
Board of Directors or Committee at the time of grant or the close of business on
the day before the tenth anniversary of the stock options’ date of grant. There
were 35,000 options granted under this plan in the first nine months of fiscal
2008. At September 27, 2008, there were 499,325 options outstanding.
The options will expire at various dates as prescribed by the individual option
grants. This plan expired on April 6, 2008 and therefore no options will be
granted under this plan after this date.
2003
Stock Option Plan
The 2003
Stock Option and Incentive Plan (the “2003 Plan”) provides for the award of
stock options, stock issuances and other equity interests in the Company to
employees, officers, directors (including those directors who are not an
employee or officer of the Company, such directors being referred to as
“non-employee directors”), consultants and advisors of the Company and its
subsidiaries. The 2003 Plan provides for an automatic annual grant of 7,500
stock options to all active Non-Employee Directors and an option to purchase
25,000 shares is granted to newly elected non-employee directors, all of which
vest over a one year period. Additional grants may be awarded at the discretion
of the Board of Directors or Committee, and on April 7, 2005, effective for
fiscal 2005 forward, the Company’s Board of Directors approved an additional
annual grant of 7,500 options to re-elected non-employee directors. A total of
2,000,000 shares of common stock, subject to anti-dilution adjustments, have
been reserved under the 2003 Plan. For the three and nine months ended September
27, 2008, 150,000 options were issued under the 2003 Plan. There were 185,000
and 688,333 options issued under the 2003 Plan for the three and nine months
ended September 29, 2007, respectively. At September 27, 2008, there
were 1,906,400 options outstanding under this plan.
2008
Omnibus Incentive Plan
The 2008
Omnibus Incentive Plan (the “2008 Plan”), approved by the stockholders of the
Company on June 11, 2008, provides for the award of stock options, stock
issuances and other equity interests in the Company to employees, officers,
directors (including non-employee directors), consultants and advisors of the
Company and its subsidiaries. A total of 3,000,000 shares of common
stock, subject to anti-dilution adjustments, have been reserved for under this
plan. Awards granted under this plan may have varying vesting and
termination provisions and can have no longer than a ten year contractual life.
For the three and nine months ended September 27, 2008, there were 743,609
options granted under this plan.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Employee
Stock Purchase Plan
The
Company’s Employee Stock Purchase Plan (“ESPP”) is designed to provide eligible
employees of the Company and its participating U.S. subsidiaries an opportunity
to purchase common stock of the Company through accumulated payroll deductions.
The purchase price of the stock is equal to 85% of the fair market value of a
share of common stock on the first day or last day of each three-month offering
period, whichever is lower. All employees of the Company or participating
subsidiaries who customarily work at least 20 hours per week and do not own five
percent or more of the Company’s common stock are eligible to participate in the
ESPP. A total of 950,000 shares of the Company’s common stock, subject to
adjustment, have been reserved for issuance under this plan. The Company issued
18,103 shares and 53,267 shares of common stock under its ESPP for the three and
nine months ended September 27, 2008, respectively. The Company
issued 16,792 and 49,743 shares of common stock under its ESPP for the three and
nine months ended September 29, 2007, respectively.
Restricted
Stock and Non-plan Stock Options
In the
second quarter of fiscal 2007, the Company granted 300,000 shares of restricted
stock and 1,000,000 stock options to its President and Chief Executive Officer
(“CEO”) under a non-plan, non-qualified stock option agreement. The award of
restricted stock vested on May 10, 2007, the effective date of the CEO’s
employment agreement with the Company, but is subject to the holding period
provisions as defined in Rule 144 of the U.S. Securities and Exchange Commission
(“Rule 144”). The stock options granted under the stock option agreement provide
for vesting of 200,000 options on May 10, 2007, 200,000 options to vest over the
period May 10, 2007 to January 1, 2008, and the remaining 600,000 options to
vest at a rate of 200,000 per annum over the period January 1, 2009 to January
1, 2011, subject to service conditions only.
Stock-Based
Compensation
Stock-based
compensation associated with stock option grants to all officers, directors, and
employees is included as a component of “General and administrative expense” in
the Company’s Consolidated Statements of Operations.
Stock
based compensation expense for the three and nine months ended September 27,
2008 and September 29, 2007 is as follows (in thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
Stock option plan
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Plan
|
|
$ |
181 |
|
|
$ |
-- |
|
|
$ |
181 |
|
|
$ |
-- |
|
2003
Plan
|
|
|
116 |
|
|
|
420 |
|
|
|
555 |
|
|
|
1,061 |
|
1998
Plan
|
|
|
42 |
|
|
|
-- |
|
|
|
132 |
|
|
|
-- |
|
ESPP
|
|
|
30 |
|
|
|
16 |
|
|
|
66 |
|
|
|
60 |
|
Restricted
Stock
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,500 |
|
Non-plan,
non-qualified
|
|
|
129 |
|
|
|
213 |
|
|
|
387 |
|
|
|
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
498 |
|
|
$ |
649 |
|
|
$ |
1,321 |
|
|
$ |
3,447 |
|
As of
September 27, 2008, there was $4.1 million of unrecognized compensation expense
related to stock option grants. The weighted average period over which the
remaining unrecognized compensation expense will be recognized is 2.7
years.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 28,
2008
(Unaudited)
Valuation
Assumptions
ESPP
The fair
value of the rights to purchase shares of common stock 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
|
|
|
Nine
months ended
|
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
0.7 |
% |
|
|
3.8 |
% |
|
|
1.3 |
% |
|
|
4.4 |
% |
Volatility
|
|
|
64.2 |
% |
|
|
57.9 |
% |
|
|
56.6 |
% |
|
|
50.5 |
% |
Expected
life (in years)
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.25 |
|
|
|
0.25 |
|
Dividend
yield
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Based on
the above assumptions, the weighted average fair values of each stock purchase
right under the Company’s ESPP for the third quarter and first nine months of
2008 was $1.03 and $1.00, respectively. The fair values of each stock
purchase right under the Company’s ESPP for the third quarter and first nine
months of fiscal 2007 was $1.27 and $1.41, respectively.
Plan
Options
The fair
value of the options to purchase common stock granted in the third quarter and
first nine months of fiscal 2008 and fiscal 2007 under the 2003 Plan and the
1998 Plan was estimated on the respective grant dates using the Black-Scholes
valuation model with the following assumptions:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
September
27, 2008
|
|
|
September
29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.3 |
% |
|
|
4.2 |
% |
|
|
3.3 |
% |
|
|
4.5 |
% |
Volatility
|
|
|
49.4 |
% |
|
|
60.97 |
% |
|
|
49.4 |
% |
|
|
60.97 |
% |
Expected
life (in years)
|
|
|
5.7 |
|
|
|
5.6 |
|
|
|
5.7 |
|
|
|
5.6 |
|
Dividend
yield
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Based on
the above assumptions, the weighted average fair value of each option to
purchase a share of the Company’s common stock granted in the third quarter and
first nine months of fiscal 2008 under the 2003 Plan and 1998 Plan was $2.54 and
$2.57, respectively. The weighted average fair value of each option
to purchase a share of the Company’s common stock granted in the third quarter
and first nine months of fiscal 2007 under the 2003 Plan was $4.22 and $3.77,
respectively.
Restricted
Stock Award
There
were no restricted stock grants in the first nine months of 2008.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
Non-Plan
Stock Options
There
were no non-plan options granted in the first nine months of fiscal
2008.
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.
Stock
Option Activity
Stock
option activity for the nine months ended September 27, 2008 is summarized as
follows:
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average remaining contractual life
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 29, 2007
|
|
|
3,816,567 |
|
|
$ |
8.26 |
|
|
|
Granted
|
|
|
928,609 |
|
|
$ |
5.45 |
|
|
|
Exercised
|
|
|
(2,500 |
) |
|
$ |
4.79 |
|
|
|
Canceled/expired
|
|
|
(397,400 |
) |
|
$ |
12.30 |
|
|
|
Outstanding
at September 27, 2008
|
|
|
4,345,276 |
|
|
$ |
7.29 |
|
6.9
years
|
$0.5
million
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 27, 2008
|
|
|
2,407,670 |
|
|
$ |
8.46 |
|
5.6
years
|
$0.2
million
|
During
the nine months ended September 27, 2008, the total intrinsic value of stock
options exercised was approximately $3,500. There were no options
exercised during the third quarter of fiscal 2008.
During
the three and nine months ended September 29, 2007, the total intrinsic value of
stock options exercised was approximately $15,000 and $0.8 million,
respectively.
14. INTEREST
AND OTHER INCOME (EXPENSE)
The
components of Interest and other income (expense), net, are as follows (in
thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
16 |
|
|
$ |
19 |
|
|
$ |
95 |
|
|
$ |
55 |
|
Interest
expense
|
|
|
(165 |
) |
|
|
(507 |
) |
|
|
(810 |
) |
|
|
(1,587 |
) |
Other
income (expense), net
|
|
|
(210 |
) |
|
|
203 |
|
|
|
69 |
|
|
|
(78 |
) |
|
|
$ |
(359 |
) |
|
$ |
(285 |
) |
|
$ |
(646 |
) |
|
$ |
(1,610 |
) |
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
The
amounts reported as “Other income (expense), net”, include gains on foreign
currency transactions for the three and nine months ended September 27, 2008 of
$0.3 million and $0.2 million, respectively, and gains on foreign currency
transactions of $0.3 million and $29,000 for the three and nine months ended
September 29, 2007, respectively.
15. INCOME
TAXES
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.
The
Company’s tax provision was $1.2 million and a benefit of $2.7 million for the
three months ended September 27, 2008 and September 29, 2007, respectively, on
pre-tax income (loss) from continuing operations of $1.8 million and ($5.4)
million for the respective periods. The Company’s tax provision was
$2.7 million and a benefit of $3.5 million for the nine months ended September
27, 2008 and September 29, 2007, respectively, on pre-tax income (loss) from
continuing operations of $5.2 million and ($11.7) million for the respective
periods. The Company incurred a one-time charge which increased the
tax provision in Q3 2008 and reduced the deferred tax assets by approximately
$0.3 million relating to the change in the blended state tax rate from 9% to
7%.
16. COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) is comprised of net income (loss), and 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 in the Company’s
Consolidated Balance Sheets.
The
primary component of Accumulated other comprehensive income is unrealized gains
or losses on foreign currency translation. The components of
comprehensive income (loss) are as follows (in thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
195 |
|
|
$ |
(3,616 |
) |
|
$ |
980 |
|
|
$ |
(9,424 |
) |
Changes
in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
foreign currency translation gains (losses)
|
|
|
(1,737 |
) |
|
|
594 |
|
|
|
(1,903 |
) |
|
|
865 |
|
Comprehensive
income (loss)
|
|
$ |
(1,542 |
) |
|
$ |
(3,022 |
) |
|
$ |
(923 |
) |
|
$ |
(8,559 |
) |
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
17. 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 two
segments: (i) Presstek and (ii) 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 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.
|
·
|
Lasertel manufactures
and develops high-powered laser diodes and related laser products for
Presstek and for sale to external
customers.
|
The
Lasertel segment has been reclassified as discontinued operations in the third
quarter of fiscal 2008 as the operations are currently held for
sale. As such, the Presstek Segment makes up the entire results of
continuing operations. The Lasertel business will continue to operate
as previously operated, including its marketing and new business/product
development activities. Presstek has no intentions to shut down the
business.
Asset
information for the Company’s segments as of September 27, 2008 and December 29,
2007 is as follows (in thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Presstek
|
|
$ |
152,972 |
|
|
$ |
176,153 |
|
Lasertel
(assets of discontinued operations)
|
|
|
13,725 |
|
|
|
16,674 |
|
|
|
$ |
166,697 |
|
|
$ |
192,827 |
|
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
|
|
|
Nine
months ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
30,671 |
|
|
$ |
37,262 |
|
|
$ |
96,310 |
|
|
$ |
114,449 |
|
United
Kingdom
|
|
|
4,947 |
|
|
|
4,769 |
|
|
|
16,267 |
|
|
|
20,177 |
|
Canada
|
|
|
1,848 |
|
|
|
3,426 |
|
|
|
6,242 |
|
|
|
10,988 |
|
Germany
|
|
|
3,354 |
|
|
|
977 |
|
|
|
6,507 |
|
|
|
4,567 |
|
Japan
|
|
|
801 |
|
|
|
1,068 |
|
|
|
2,133 |
|
|
|
4,663 |
|
All
other
|
|
|
6,913 |
|
|
|
10,160 |
|
|
|
23,475 |
|
|
|
32,846 |
|
|
|
$ |
48,534 |
|
|
$ |
57,662 |
|
|
$ |
150,934 |
|
|
$ |
187,690 |
|
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September
27, 2008
(Unaudited)
The
Company’s long-lived assets by geographic area are as follows (in
thousands):
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
59,539 |
|
|
$ |
65,170 |
|
United
Kingdom
|
|
|
515 |
|
|
|
752 |
|
Canada
|
|
|
123 |
|
|
|
220 |
|
|
|
$ |
60,177 |
|
|
$ |
66,142 |
|
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 and disbursements from this
law firm were $0.6 million and $1.9 million for the third quarter and first nine
months of fiscal 2008, respectively, and $0.2 million and $0.7 million for the
third quarter and first nine months of fiscal 2007, respectively.
19. COMMITMENTS
AND CONTINGENCIES
Commitments &
Contingencies
On
October 30, 2006, a chemical was released from a mixing tank into a holding pool
at our manufacturing plant in South Hadley, Massachusetts. Expenses
associated with and amounts accrued for this incident as of September 27, 2008
are reflected in the financial results of discontinued operations (Note
2). It is possible that costs in excess of amounts accrued may be
incurred.
The
Company has change of control agreements with certain of its senior management
employees that provide them with benefits should their employment with the
Company be terminated other than for cause, as a result of 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 $2.0
million at September 27, 2008.
PRESSTEK,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 28,
2008
(Unaudited)
Litigation
On
October 26, 2006, the Company was served with a complaint naming the Company,
together with certain of its executive officers, as defendants in a purported
securities class action suit filed in the United States District Court for the
District of New Hampshire. The suit claims to be brought on behalf of purchasers
of Presstek’s common stock during the period from July 27, 2006 through
September 29, 2006. The complaint alleges, among other things, that the Company
and the other defendants violated Sections 10(b) and 20(a) of the Exchange Act
and Rule 10b-5 promulgated thereunder based on allegedly false forecasts of
fiscal third quarter and annual 2006 revenues. As relief, the plaintiff seeks an
unspecified amount of monetary damages, but makes no allegation as to losses
incurred by any purported class member other than himself, court costs and
attorneys’ fees. On September 25, 2008 the parties reached a settlement of the
action, subject to confirmatory discovery by plaintiffs and court
approval. The settlement will have no material impact on the
Company’s 2008 operating results.
On
February 4, 2008, the Company received from the U.S. Securities and Exchange
Commission (the "SEC") a formal order of investigation relating to the
previously disclosed SEC inquiry regarding the Company's announcement of
preliminary financial results for the third quarter of 2006. The Company is
cooperating fully with the SEC's investigation.
In
January 2008, the Company was served with an Administrative Complaint filed by
the U.S. Environmental Protection Agency (“EPA”). The EPA sought to assess
penalties against the Company for alleged violations of certain provisions of
the Clean Air Act and the Comprehensive Environmental Response, Compensation and
Liability Act arising from an incident occurring at a facility of the Company
located in South Hadley, Massachusetts on October 30, 2006. On August 14, 2008,
the Company and the EPA settled this litigation and the case was
dismissed.
On June
4, 2008, the Commonwealth of Massachusetts filed a complaint in the Superior
Court of Massachusetts, Hampshire County against the Company and one of its
subsidiaries seeking recovery of response costs related to the October 30, 2006
chemical release in South Hadley, Massachusetts noted above. The
Commonwealth has alleged costs in the amount of approximately $192,000. In
October 2008, the parties agreed to settle this matter.
On
September 10, 2008, a purported shareholder derivative claim against certain
current and former directors and officers of the Company was filed in the United
States District Court for the District of New Hampshire. The
complaint alleges breaches of fiduciary duty by the defendants and seeks
unspecified damages. On September 25, 2008 the parties reached
agreement on a settlement of the claim, subject to receipt of court
approval.
Presstek
is a party to other litigation that it considers routine and incidental to its
business however it does not expect the results of any of these actions to have
a material adverse effect on its business, results of operation or financial
condition.
The
Company has recorded its best estimate of any losses associated with these
matters. None of the settlements noted above will have a material impact on
operating results.
20.
SALE-LEASEBACK TRANSACTION
On July
14, 2008, the Company completed a sale-leaseback transaction of its property
located in Tucson, Arizona (the “Property”). The Company sold the
Property to an independent third party for approximately $8.75 million, or $8.4
million net of expenses incurred in connection with the sale, resulting in a
gain of approximately $4.6 million. Concurrent with the sale, the
Company entered in to an agreement to lease a portion of the property back from
the purchaser for a term of 10 years. The lease, which management
deemed to be an operating lease, has approximately $5.8 million in future
minimum lease payments. The gain associated with the transaction was
deferred at the inception of the arrangement and is expected to be amortized
ratably over the lease term.
Subsequent
to, and independent of, the sale and leaseback of the Property, the Board of
Directors of the Company approved an action for the sale of the Lasertel
business as addressed in Note 2. As such, the operations of Lasertel
have been presented as discontinued operations. Included within the
liabilities of discontinued operations is the aforementioned deferred gain
associated with the Arizona property in which Lasertel conducts its operations.
The related amortization of the gain is included in “Income (loss) from
discontinued operations, net of tax”.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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 below in the section entitled
“Information Regarding Forward-Looking Statements” and in “Part I, Item 1A, Risk
Factors” of our Annual Report on Form 10-K for the year ended December 29, 2007,
as filed with the SEC on April 30, 2008.
Overview
of the Company
The
Company is a provider of high-technology, digital-based printing solutions to
the commercial print segment of the graphics communications
industry. The Company designs, manufactures and distributes
proprietary and non-proprietary solutions aimed at serving the needs of a wide
range of print service providers worldwide. Our proprietary digital
imaging and advanced technology consumables offer superior business solutions
for commercial printing focusing on the growing need for short-run, high quality
color applications. 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, workflow and consumables-based
solutions that economically benefit the user through streamlined operations and
chemistry-free, environmentally responsible solutions. We are also a
leading sales and service channel across a broadly served market in the small to
mid-sized commercial, quick and in-plant printing segments. Our
product offerings cover 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, approximately two-thirds 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 digital 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 (“DI”). Our
advanced DI technology is integrated into a Direct Imaging Press to produce a
waterless, easy to use, high quality printing press that is fully automated and
provides our users with competitive advantages over alternative print
technologies. We believe that our process results in a DI press which, in
combination with our proprietary printing plates and streamlined workflow,
produces a superior print solution. By combining advanced digital
technology with the reliability and economic advantages of offset printing, we
believe our customers are better able to grow their businesses, generate higher
profits and better serve the needs of their customers.
Similar
digital imaging technologies are used in our computer-to-plate (“CTP”)
systems. Our Presstek segment also designs and manufactures CTP
systems that incorporate our technology to image our chemistry-free printing
plates. 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.
We have
executed a major transformation in the way we go to market. In the
past, we had been reliant on OEM partners to deliver our business solutions to
customers. Today, more than 90% of our sales are through our own
distribution channels.
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 two segments: (i) Presstek and (ii)
Lasertel. Segment operating results are based on the current
organizational structure as 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
business solutions using patented digital imaging systems and patented
printing plate technologies. We also provide traditional,
analog systems and related equipment and supplies for the graphic arts and
printing industries.
|
·
|
Lasertel manufactures
and develops high-powered laser diodes and related laser products for
Presstek and for sale to external
customers.
|
On
September 24, 2008, the Board of Directors approved a plan to sell the Lasertel
subsidiary; as such the Company has presented the results of operations of this
subsidiary within discontinued operations.
We
generate revenue through four main sources: (i) the sale of our equipment and
related workflow software, including DI presses and CTP devices, (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.
Strategy
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, as well as
the servicing of customers using our business solutions. Our strategy
centers on increasing the number of our DI and CTP units (together, referred to
as CBEs), which increases 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/or press solutions that use our proprietary
consumables.
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 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.
Since
2007, management has been taking steps to improve the Company’s cost structure
and strengthen its balance sheet in order to enable Presstek to increase
profitability on improved revenue growth when economic conditions in the United
States and elsewhere recover. As discussed further below, our
improved level of profitability and balance sheet improvements to date are, in
large part, the result of our Business Improvement Plan, as well as our review
and strengthening of inventory and accounts receivable.
Business
Improvement Plan
In the
fourth quarter of fiscal 2007, we announced our Business Improvement Plan
(“BIP”). The plan involves virtually every aspect of the business and includes
pricing actions, improved manufacturing efficiencies, increased utilization of
field service resources, right-sizing of operating expenses, and cash flow
improvements driven by working capital reductions and the sale of selected real
estate assets.
For the
nine months ended September 27, 2008, we have incurred approximately $1.1
million of restructuring charges related to this plan. Since the
second quarter of fiscal 2007, headcount has been reduced by 10.7%, leased
facilities have been consolidated, operating expenses, excluding special
charges, have been reduced from 32.3% of revenue in the second quarter of 2007
to 29.5% in the third quarter of 2008, working capital has decreased from $56.1
million at June 30, 2007 to $48.2 million at September 27, 2008, short term debt
decreased by approximately $12.9 million from $28.0 million at June 30, 2007 to
$15.1 million at September 27, 2008 and in the third quarter of fiscal 2008, the
Company completed the sale of real estate property located in Tucson, Arizona,
of which the proceeds were used to pay down debt. The sale of this
property included a sale-leaseback of a portion of the facility for the Lasertel
operations. The amortization of the gain associated with this
transaction will be recognized beginning in the third quarter of fiscal 2008
within discontinued operations.
Internal
Review
Beginning
in the third quarter of 2007, we commenced a self-initiated internal review of
certain practices and procedures surrounding inventory, accounts receivable and
commercial receivable terms. We conducted a worldwide review of
accounts receivable; conducted a worldwide physical inventory to assess the
existence and valuation of inventory; and reviewed revenue practices surrounding
the commercial terms granted in certain transactions, resulting in an enhanced
revenue recognition policy. The culmination of these actions resulted
in increased professional fees during the latter part of fiscal 2007 and a
negative impact to revenue in the fourth quarter of fiscal 2007 and the first
quarter of fiscal 2008 largely due to the disruption in our European operations
related to the business reviews, as well as tightened commercial receivable
terms.
General
We
operate and report 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 thirty-nine week periods ended September 27,
2008 (the “third quarter and first nine months of fiscal 2008” or “the nine
months ended September 27, 2008”) and September 29, 2007 (the “third quarter and
first nine of fiscal 2007” or “the nine months ended September 29,
2007”).
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.
RESULTS
OF OPERATIONS
Results
of operations in dollars and as a percentage of revenue were as follows (in
thousands of dollars):
|
Three
months ended
|
Nine
months ended
|
|
September
27, 2008
|
September
29, 2007
|
September
27, 2008
|
September
29, 2007
|
|
|
%
of
revenue
|
|
%
of
revenue
|
|
%
of
revenue
|
|
%
of
revenue
|
Revenue
|
|
|
|
|
|
|
|
|
Product
|
40,288
|
83.0
|
$
48,174
|
83.5
|
124,764
|
82.7
|
$
158,414
|
84.4
|
Service
and parts
|
8,246
|
17.0
|
9,488
|
16.5
|
26,170
|
17.3
|
29,276
|
15.6
|
Total
revenue
|
48,534
|
100.0
|
57,662
|
100.0
|
150,934
|
100.0
|
187,690
|
100.0
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
Cost
of product
|
25,589
|
52.7
|
34,457
|
59.8
|
78,659
|
52.1
|
112,696
|
60.0
|
Cost
of service and parts
|
6,096
|
12.6
|
8,097
|
14.0
|
19,561
|
13.0
|
24,568
|
13.1
|
Total
cost of revenue
|
31,685
|
65.3
|
42,554
|
73.8
|
98,220
|
65.1
|
137,264
|
73.1
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
16,849
|
34.7
|
15,108
|
26.2
|
52,714
|
34.9
|
50,426
|
26.9
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Research
and development
|
1,059
|
2.2
|
1,212
|
2.1
|
3,697
|
2.5
|
3,789
|
2.0
|
Sales,
marketing and customer support
|
7,088
|
14.6
|
9,315
|
16.2
|
22,411
|
14.9
|
29,810
|
15.9
|
General
and administrative
|
5,932
|
12.2
|
8,796
|
15.2
|
18,321
|
12.1
|
23,603
|
12.6
|
Amortization
of intangible assets
|
258
|
0.5
|
517
|
0.9
|
823
|
0.5
|
1,819
|
1.0
|
Restructuring
and other charges
|
374
|
0.8
|
399
|
0.7
|
1,569
|
1.0
|
1,527
|
0.8
|
Total
operating expenses
|
14,711
|
30.3
|
20,239
|
35.1
|
46,821
|
31.0
|
60,548
|
32.3
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
2,138
|
4.4
|
(5,131)
|
(8.9)
|
5,893
|
3.9
|
(10,122)
|
(5.4)
|
|
|
|
|
|
|
|
|
|
Interest
and other expense, net
|
(359)
|
(0.7)
|
(285)
|
(0.5)
|
(646)
|
(0.4)
|
(1,610)
|
(0.9)
|
Income
(loss) from continuing
operations before income
taxes
|
1,779
|
3.7
|
(5,416)
|
(9.4)
|
5,247
|
3.5
|
(11,732)
|
(6.3)
|
Provision
(benefit) for income taxes
|
1,153
|
2.4
|
(2,732)
|
(4.7)
|
2,731
|
1.8
|
(3,541)
|
(1.9)
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
626
|
1.3
|
(2,684)
|
(4.7)
|
2,516
|
1.7
|
(8,191)
|
(4.4)
|
Income
(loss) from discontinued operations, net of tax
|
(431)
|
(0.9)
|
(932)
|
(1.6)
|
(1,536)
|
(1.0)
|
(1,233)
|
(0.6)
|
Net
income (loss)
|
195
|
0.4
|
$(3,616)
|
(6.3)
|
980
|
0.7
|
$(9,424)
|
(5.0)
|
Three and nine months ended
September 27, 2008 compared to three and nine months ended September 29,
2007
Revenue
Consolidated
revenues were $48.5 million and $150.9 million in the third quarter and first
nine months of 2008, respectively, compared to $57.7 million and $187.7 million
in the comparable prior year periods. The decline in sales was driven
by several factors, including the continued decline in analog products, economic
weakness in the United States and the impact of business reviews conducted in
the company’s European operations in the fourth quarter of 2007 which had an
adverse effect on sales in the first quarter of 2008. Overall, sales
of Presstek’s “growth” portfolio of products, defined as 34DI and 52DI digital
offset solutions, the Presstek family of chemistry free CTP solutions, decreased
$1.2 million, or 4.5%, and $14.8 million, or 16.4%, in the third quarter and
first nine months of 2008 compared to the same prior year periods.
Presstek’s
equipment revenues were $15.2 million and $43.0 million in the third quarter and
first nine months of 2008, respectively, compared to $18.0 million and $67.5
million in the same prior year periods. Sales of DI presses declined
from $13.1 million and $47.2 million in the third quarter and first nine months
of 2007, respectively, to $12.9 million and $34.5 million in the comparable
current year period. Unfavorable sales of DI presses in the first
nine months of 2008 were due primarily to lower press sales in the United States
resulting from challenging economic conditions, and the impact of business
reviews conducted in the Company’s European operations in the fourth quarter of
fiscal 2007. Total unit sales of DI presses decreased slightly from
38 in the third quarter of 2007 to 37 in the third quarter of 2008, however unit
sales of DI presses in Europe increased from 10 to 16 in the comparable
periods. Sales of 34DI kits to Ryobi declined from $0.1 million and
$1.5 million in the third quarter and first nine months of 2007, respectively,
to zero in 2008 as Ryobi is reducing their inventory of kits used to support
press sales to their own channels. Sales of our remaining growth
portfolio of equipment, Dimension and Vector TX52 platesetters, declined from
$3.0 million and $10.1 million in the third quarter and first nine months of
2007, respectively, to $2.2 million and $7.2 million in the comparable current
year periods, due primarily to deteriorating economic conditions in the United
States. Equipment sales of our “traditional” line of products,
defined as QMDI presses, polyester CTP platesetters, and conventional equipment,
were all lower in the third quarter and first nine months of 2008 compared to
2007 due to the ongoing transition of our customer base from traditional
products to the more modern digital technologies, as well as the impact of the
current economic environment. Revenues from our traditional line of
equipment products declined from $3.2 million and $12.7 million in the third
quarter and first nine months of 2007, respectively, to $1.2 million and $4.8
million in 2008. As a percentage of total gross equipment revenue,
sales of growth portfolio equipment products increased from 83.7% and 82.2% of
revenue in the third quarter and first nine months of 2007, to 92.7% and 89.7%
in the comparable current year period.
Consumables
product revenues declined from $30.2 million and $90.9 million in the third
quarter and first nine months of 2007, respectively, to $25.1 million and $81.8
million in the comparable 2008 periods, due primarily to lower sales of our
traditional products resulting from the continuing migration of our customer
base from analog to digital solutions as well as deteriorating economic
conditions in the United States. Sales of Presstek’s “growth”
portfolio of consumables, defined as 52DI, 34DI, and chemistry-free CTP plates,
declined from $9.6 million to $8.7 million in the third quarter of 2008 due
primarily to lower demand for Anthem plates as printing volumes have been
negatively impacted by slowing economic conditions. For the first
nine months of 2008, sales of Presstek’s “growth” portfolio of consumables
increased slightly from $27.8 million in 2007 to $27.9 million in
2008. Sales of 52DI and 34DI plates increased by $0.1 million, or
2.0%, in the third quarter of 2008, and $1.4 million, or 10.7%, in the first
nine months of 2008, versus the comparable prior year periods. As a
percentage of total consumables revenue, growth portfolio products comprised
34.8% and 34.1% of revenue in the third quarter and first nine months of 2008,
compared to 31.8% and 30.5% in the comparable prior year
periods. Total sales of Presstek’s “traditional” portfolio of
consumable products declined from $20.6 million in the third quarter of 2007 to
$16.3 million in the third quarter of 2008, a decrease of 20.5%, driven
primarily by lower sales of QMDI plates and conventional
consumables. For the first nine months of 2008, sales of Presstek’s
“traditional” portfolio of consumables products declined from $90.9 million to
$81.8 million, a decrease of 10.0%.
Service
and parts revenues were $8.2 million and $26.2 million in the third quarter and
first nine months of fiscal 2008, respectively, reflecting decreases of $1.2
million and $3.1 million compared to the same prior year
periods. Overall, decreases in service and parts revenues are
due primarily to the transition of our customer base from analog to digital
solutions, which, in the short term, is having a negative impact on
sales. However, attachment rates for service contracts on sales of
new DI presses improved from approximately 25% in Q3 of 2007 to more than 70% in
the comparable current year period.
Cost
of Revenue
Cost of
product, consisting of costs of material, labor and overhead, shipping and
handling costs and warranty expenses, was $25.6 million and $78.7 million in the
third quarter and first nine months of fiscal year 2008, respectively, compared
to $34.5 million and $112.7 million in the comparable prior year
periods. The decrease was due primarily to lower sales volume and
lower costs resulting from the positive impact of our BIP. Favorable
results from the BIP include improved efficiencies and yields in our South
Hadley plate manufacturing operation, lower overall freight costs, and
procurement initiatives that have resulted in lower product costs. In
addition, the Company recorded $3.1 million of charges in the third quarter of
fiscal 2007 related primarily to excess and obsolete inventory write-downs which
were not repeated during 2008 due to improved operating
discipline. The company recorded $5.8 million of charges in the first
nine months of fiscal 2007 related primarily to excess and obsolete write-downs,
and warranty charges related to the Vector TX52 product line.
Consolidated
cost of service and parts was $6.1 million and $19.6 million in the third
quarter and first nine months of fiscal year 2008, respectively, compared to
$8.1 million and $24.6 million in the comparable prior year
periods. These amounts represent the costs of spare parts, labor and
overhead associated with the ongoing service of products. The
reduction in overall cost is principally due to the termination of service
personnel in North America, an element of our BIP intended to realign our
service costs with a declining analog revenue base. In addition, the
company recorded $0.3 million and $1.1 million of charges in the third quarter
and first nine months of fiscal 2007, respectively, related to field service
parts inventory. The company has recorded no similar charges in
fiscal 2008 as a result of efforts to tighten internal control policies and
procedures in this area.
Gross
Profit
Gross
profit as a percentage of total revenue was 34.7% and 34.9% in the third quarter
and first nine months of fiscal year 2008, respectively, compared to 26.2% and
26.9% in the comparable prior year periods.
Gross
profit as a percentage of product revenues was 36.5% and 37.0% in the third
quarter and first nine months of 2008, respectively, compared to 28.5% and 28.9%
in the comparable prior year periods. The increase in gross profit
reflects the favorable impact of the company’s higher profit consumables
business representing a greater proportion of total product sales, the favorable
impact of the company’s BIP actions, and the absence of charges related to
excess and obsolete inventory and the Vector TX52 experienced in fiscal
2007.
Gross
profit on service revenues increased from 14.7% and 16.1% in the third quarter
and first nine months of 2007, respectively, to 26.1% and 25.3% in the
comparable current year periods. The increase in profits is due
primarily to the positive impact of the company’s BIP plan which has resulted in
a cost structure more appropriately aligned with the current revenue base, as
well as the absence of charges related to field service parts inventory
experienced in fiscal 2007.
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.
Research
and development expenses were $1.1 million and $3.7 million in the third quarter
and first nine months of fiscal year 2008, respectively, compared to $1.2
million and $3.8 million in the comparable prior year periods.
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.
Sales,
marketing and customer support expenses decreased from $9.3 million and $29.8
million in the third quarter and first nine months of fiscal year 2007,
respectively, to $7.1 million and $22.4 million in the comparable current year
period. The decrease in expense in both periods is due primarily to
lower payroll, facilities, and travel related expenses resulting from the
favorable impact of our BIP program, as well as lower commission expense
resulting from lower sales, offset somewhat by costs associated with the DRUPA
trade show which took place in the second quarter of 2008.
General
and Administrative
General
and administrative expenses are primarily comprised of payroll and related
expenses, including stock compensation, for personnel and contracted
professional services necessary to conduct our general management, finance,
information systems, human resources, legal and administrative
activities.
General
and administrative expenses were $5.9 million and $18.3 million in the third
quarter and first nine months of 2008, respectively, compared to $8.8 million
and $23.6 million in the comparable prior year periods. Approximately
$0.2 million and $2.1 million of the decreased expense in the third quarter
and first nine months, respectively, was due to lower restricted
stock and stock based compensation costs related to option grants to officers,
directors, and employees. In addition, approximately $2.7 million and
$4.0 million of the decrease in the third quarter and first nine months,
respectively, were due to lower legal fees and litigation accruals, lower
accounting fees, and lower bad debt expense. These reductions were offset
slightly by higher costs related to increased incentive plan accruals as well as
the rebuilding of our finance organization necessary to remediate previously
disclosed material weaknesses.
Amortization
of Intangible Assets
Amortization
expense of $0.3 million and $0.8 million in the third quarter and first nine
months of fiscal 2008 declined $0.3 million and $1.0 million from the comparable
prior year periods.
These
expenses relates to intangible assets recorded in connection with the Company’s
2004 ABDick acquisition, patents and other purchased intangible
assets.
Restructuring
and Other Charges
In the
third quarter of 2008, the company recognized $0.4 million of restructuring
costs associated with severance benefits relating the remaining BIP
initiatives.
Interest
and Other Expense, Net
Consolidated
net interest and other expense, comprised primarily of foreign exchange gains or
losses, increased slightly from $0.3 million in the third quarter of 2007 to
$0.4 million in 2008, and decreased from $1.6 million in the first nine months
of 2007 to $0.6 million in the comparable current year period. Net
interest expense of $0.1 million and $0.7 million in the third quarter and first
nine months of 2008, respectively, reflected a decrease of $0.3 million and $0.8
million from the comparable prior year period due to lower interest rates as
well as lower balances on our revolving credit facility and fixed term
loan.
Provision
for Income Taxes
Our tax
expense was $1.2 million and $2.7 million for the third quarter and first nine
months of 2008, respectively, on pre-tax income from continuing operations of
$1.8 million and $5.2 million for the respective periods. The
estimated annual effective tax rate excluding discrete items is expected to be
approximately 48.6%. The Company incurred a one-time charge which increased the
tax provision in Q3 2008 and reduced the deferred tax assets by approximately
$0.3 million relating to the change in the blended state tax rate from 9% to
7%.
Discontinued
Operations
Precision
During
December 2006, the Company terminated production in South Hadley, Massachusetts
of Precision-branded analog plates used in newspaper applications.
Results
of operations of the discontinued analog newspaper business of Precision consist
of the following (in thousands, except per-share data):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
Revenue
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
195 |
|
Income
(loss) before income taxes
|
|
|
31 |
|
|
|
16 |
|
|
|
137 |
|
|
|
(132 |
) |
Provision
(benefit) from income taxes
|
|
|
-- |
|
|
|
6 |
|
|
|
43 |
|
|
|
(54 |
) |
Income
(loss) from discontinued operations
|
|
$ |
31 |
|
|
$ |
10 |
|
|
$ |
94 |
|
|
$ |
(78 |
) |
Earnings
(loss) per share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Assets
and liabilities of the Precision analog newspapers business of discontinued
operations consist of the following (in thousands):
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
$ |
2 |
|
|
$ |
15 |
|
Total
current assets
|
|
$ |
2 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
189 |
|
|
$ |
189 |
|
Accrued
expenses
|
|
|
71 |
|
|
|
699 |
|
Total
current liabilities
|
|
$ |
260 |
|
|
$ |
888 |
|
|
|
|
|
|
|
|
|
|
Lasertel
On
September 24, 2008, the Board of Directors approved a plan to sell the Lasertel
subsidiary as the Lasertel business is not a core focus for the Presstek
graphics business. Although Lasertel is a supplier of diodes for the Company, it
has grown its presence in the external market, and management believes that
Lasertel would be in a better position to realize its full potential in
conjunction with other companies or investors who can focus resources on the
external market. The disposal of this asset group is currently
anticipated to be an asset sale and to occur within a one year
period. As such, the Company has presented the results of operations
of this subsidiary within discontinued operations, classified the assets as
“Assets of discontinued operations” and liabilities as “Liabilities of
discontinued operations”. The Lasertel business will continue to operate as it
previously operated, including its marketing and new business/product
development activities. Presstek has no intentions to shut down the
business.
Results
of operations of the discontinued business of Lasertel consist of the following
(in thousands, except per-share data):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
|
September
27 , 2008
|
|
|
September
29 , 2007
|
|
Revenues
from external customers
|
|
$ |
2,535 |
|
|
$ |
1,950 |
|
|
$ |
6,833 |
|
|
$ |
5,825 |
|
Loss
before income taxes
|
|
|
(733 |
) |
|
|
(1,534 |
) |
|
|
(2,636 |
) |
|
|
(1,881 |
) |
Benefit
from income taxes
|
|
|
(271 |
) |
|
|
(592 |
) |
|
|
(1,006 |
) |
|
|
(726 |
) |
Loss
from discontinued operations
|
|
$ |
(462 |
) |
|
$ |
(942 |
) |
|
$ |
(1,630 |
) |
|
$ |
(1,155 |
) |
Loss
per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
Assets
and liabilities of the discontinued business of Lasertel consist of the
following (in thousands):
|
|
September
27, 2008
|
|
|
December
29, 2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
-- |
|
|
$ |
691 |
|
Receivables,
net
|
|
|
2,826 |
|
|
|
1,785 |
|
Inventories
|
|
|
4,766 |
|
|
|
4,074 |
|
Other
current assets
|
|
|
542 |
|
|
|
72 |
|
Property,
plant & equipment, net
|
|
|
4,692 |
|
|
|
8,974 |
|
Intangible
assets, net
|
|
|
899 |
|
|
|
1,078 |
|
Total
assets
|
|
$ |
13,725 |
|
|
$ |
16,674 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
733 |
|
|
$ |
1,291 |
|
Accrued
expenses
|
|
|
518 |
|
|
|
501 |
|
Deferred
revenue
|
|
|
-- |
|
|
|
96 |
|
Deferred
gain
|
|
|
4,484 |
|
|
|
-- |
|
Total
Liabilities
|
|
$ |
5,735 |
|
|
$ |
$$1,888 |
|
Liquidity
and Capital Resources
Financial Condition (Sources
and Uses of Cash)
We
finance our operating and capital investment requirements primarily through cash
flows from operations and borrowings. At September 27, 2008, we had
$2.6 million of cash and $48.2 million of working capital, consisting of $15.1
million of short term debt, compared to $7.4 million of cash and $50.9 million
of working capital, consisting of $28.0 million of short term debt at September
29, 2007.
Continuing
Operations
Our
operating activities provided $7.7 million of cash in the nine months ended
September 27, 2008. 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 impacted by a decrease in inventory levels of
$1.4 million, an increase of $0.2 million in other current assets, a decrease of
$0.2 million in deferred revenue, a decrease of $2.6 million in accounts payable
and a decrease of $9.0 million in accrued expenses, which was partially offset
by an decrease in accounts receivable of $6.1 million. The decrease
in inventory levels was due primarily to the improved inventory management in
the first nine months of fiscal 2008. The decrease in other current
assets was primarily due to increased prepaid accounts under insurance
policies. The decrease in accrued expenses and accounts payable was
due mainly to the timing of purchases and payments to suppliers, coupled with
the settlement of certain litigation matters. Deferred revenues
decreased due to the recognition of service revenues over the service
period. Offsetting this was a decrease in accounts receivable related
to the increased collection efforts combined with lower sales
volume.
We used
$1.1 million of net cash for investing activities in the first nine months of
fiscal 2008 primarily comprised of additions to property, plant and
equipment. Our additions to property, plant and equipment relate
primarily to production equipment and investments in our infrastructure,
including costs related to the implementation of a new service management
system.
Our
financing activities used $19.3 million of cash, comprised primarily of $8.1
million of cash payments on our current line of credit and $11.5 million of
repayments on our term loan.
Discontinued
Operations
Operating
activities of discontinued operations used $3.1 million in cash in the first
nine months of fiscal 2008. Cash used in operating activities came from net
loss, after adjustments for non-cash depreciation, amortization, provisions for
warranty costs and accounts receivable allowances. In addition,
cash used in operating activities consisted of $0.7 million relating to the
increase in accounts receivable, $0.7 million relating to the increase in
inventory, $0.5 million decrease in other current assets, $0.6 million decrease
in accounts payable and a $0.1 million decrease in both deferred revenue and
accrued expenses.
Investing
activities of discontinued operations provided $7.8 million made up of $8.4
million of net cash proceeds provided through the sale of property and $0.6 of
cash used for additions of fixed assets.
Liquidity
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. At September 27, 2008, we had $1.3 million outstanding
under letters of credit, thereby reducing the amount available under the
Revolver to $31.8 million. At September 27, 2008, the interest rate
on the outstanding balance of the Revolver was 4.9%. Prior to an
amendment to the Facilities in the third quarter of 2008, principal payments on
the Term Loan were payable in consecutive quarterly installments of $1.75
million, with a final settlement of all remaining principal and unpaid interest
on November 4, 2009. In the third quarter of fiscal 2008, the Company
used the net proceeds of the sale of its Arizona property to pay down the
principal balance of the term loan and entered into an amendment to the
Facilities dated July 29, 2008 which amended the payment schedule of the Term
Loan to reduce the required quarterly installments of principal to $810,000,
with no installment due in September of 2008 and a final installment of all
remaining principal (approximately $834,000) due 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 September 27,
2008, the effective interest rate on the Term Loan was 5.0%.
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 other charges/(credits),
and minimum fixed charge coverage covenants. At September 27, 2008,
we were in compliance with all covenants.
On
November 23, 2005, we purchased equipment under a capital lease arrangement
qualifying under Statement of Financial Accounting Standards (“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 at least 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.
The sale
of any equity or debt securities may result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we
are unable to obtain any required additional financing, we may be required to
reduce the scope of our planned research, development and commercialization
activities, which would reduce our use of cash but could harm our long-term
financial condition and operating results. Additional equity
financing may be dilutive to the holders of our common stock and debt financing,
if available, may involve significant cash payment obligations and covenants
that restrict our ability to operate our business.
Commitments and
Contingencies
The
Company has change of control agreements with certain of its senior management
employees that provide them with benefits should their employment with the
Company be terminated other than for cause, as a result of 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 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 $2.0 million at
September 27, 2008.
Effect
of Inflation
Inflation
has not had a material impact on our financial conditions or results of
operations, although this risk is discussed under Item 1A of our Form 10-K for
the year ended December 29, 2007, filed with the SEC on April 30,
2008.
Information
Regarding Forward-Looking Statements
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:
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our
expectations of our financial and operating performance in 2008 and
beyond;
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the
adequacy of internal cash and working capital for our
operations;
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manufacturing
constraints and difficulties;
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the
introduction of competitive products into the
marketplace;
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management’s
plans and goals for our subsidiaries;
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the
ability of the Company and its divisions to generate positive cash flows
in the near-term, or to otherwise be profitable;
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our
ability to produce commercially competitive products;
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the
strength of our various strategic partnerships, both on manufacturing and
distribution;
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our
ability to secure other strategic alliances and
relationships;
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our
expectations regarding the Company’s strategy for growth, including
statements regarding the Company’s expectations for continued product mix
improvement;
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our
expectations regarding the balance, independence and control of our
business;
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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;
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the
commercialization and marketing of our technology;
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our
expectations regarding performance of existing, planned and recently
introduced products;
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the
adequacy of our intellectual property protections and our ability to
protect and enforce our intellectual property rights;
and
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the
expected effect of adopting recently issued accounting standards, among
others.
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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:
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market
acceptance of and demand for our products and resulting
revenues;
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our
ability to meet our stated financial objectives;
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our
dependency on our strategic partners, both on manufacturing and
distribution;
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the
introduction of competitive products into the
marketplace;
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shortages
of critical or sole-source component supplies;
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the
availability and quality of Lasertel’s laser diodes;
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the
performance and market acceptance of our recently-introduced products, and
our ability to invest in new product development;
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manufacturing
constraints or difficulties (as well as manufacturing difficulties
experienced by our sub-manufacturing partners and their capacity
constraints); and
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the
impact of general market factors in the print industry generally and the
economy as a whole, including the potential effects of
inflation.
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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.
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; income taxes; the valuation of goodwill, intangible
assets, long-lived assets and deferred tax assets; stock-based compensation 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 29, 2007,
which was filed with the SEC on April 30, 2008. There were no
significant changes to the Company’s critical accounting policies in the nine
months ended September 27, 2008.
Recent
Accounting Pronouncements
As of
December 30, 2007, the company has adopted SFAS No. 157 Fair Value Measurements
("SFAS 157"). SFAS 157 provides guidance for using fair value to
measure assets and liabilities. The Financial Accounting Standards Board
has subsequently issued FASB Staff Position No FAS 157-2, which grants a
one-year delay for FAS 157 on the fair value measurement for nonfinancial assets
and nonfinancial liabilities for fiscal years beginning after November 15, 2008.
At this time, we have adopted the FAS 157 as it relates to our financial assets
and liabilities only. The adoption of SFAS 157 did not have a material impact on
our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which permits entities to
choose to measure, on an item-by-item basis, specified financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are required to be reported in
earnings at each reporting date. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The provisions of this statement are required
to be applied prospectively. The Company adopted SFAS 159 in the first quarter
of 2008. The adoption of SFAS 159 did not have a material impact on our
consolidated financial statements.
In
June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities ("EITF 07-3"). EITF 07-3 requires that
nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the
related services are performed. EITF 07-3 is effective, on a prospective basis,
for fiscal years beginning after December 15, 2007 and was adopted by the
Company in the first quarter of fiscal 2008. The adoption of EITF 07-3 did not
have a material impact on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective as of
the beginning of an entity's fiscal year that begins after December 15,
2008, and will be adopted by the Company in the first quarter of fiscal 2009.
The Company will apply SFAS 141R prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
In
December 2007, the FASB issued Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160), which is effective for
fiscal years beginning after December 15, 2008. This statement requires all
entities to report non-controlling (minority) interests in subsidiaries in the
same manner– as equity in the consolidated financial statements. This eliminates
the diversity that currently exists in accounting for transactions between an
entity and non-controlling interests by requiring that they be treated as equity
transactions. The Company will be required to adopt the provisions of
SFAS 160 in the first quarter of 2009 and is currently evaluating the
impact of such adoption on its Consolidated Financial Statements.
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 September 27, 2008,
we were not involved in any unconsolidated SPE transactions.
Item
4. Controls and Procedures
This
report includes the certifications of our Chief Executive Officer and Chief
Financial Officer required by Rule 13a-14 under the Securities Exchange Act of
1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 4 includes
information concerning the controls and procedures and evaluations thereof
referred to in those certifications.
Evaluation of Disclosure
Controls and Procedures
The
Company carried out, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief
Financial Officer, an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures, as defined in
Exchange Act Rule 13a-15(e), as amended (the “Exchange Act”), as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based on their
evaluation, the Company’s Chief Executive Officer and its Chief Financial
Officer concluded that, as of September 27, 2008, the Company’s disclosure
controls and procedures were not effective because of
the continuation of material weaknesses described below.
Notwithstanding the existence of the material weaknesses described below,
management has concluded that the consolidated interim financial information
included in this Form 10-Q fairly present, in all material respects, the
Company’s financial position, results of operations and cash flows for the
periods and dates presented.
Management
has undertaken procedures and other steps, including the completion of an
internal review of the Company’s financial accounts related to its European
operations, to mitigate the material weaknesses in internal control over
financial reporting described below, along with additional procedures designed
to ensure the reliability of our financial reporting.
In
Management’s Report on Internal Control over Financial Reporting, included in
Item 9A of the Company’s Annual Report on Form 10-K for the year ended December
29, 2007, filed with the U.S. Securities and Exchange Commission (“SEC”) on
April 30, 2008, management of the Company concluded that there were control
deficiencies that constituted material weaknesses, as described below and which
were not as of September 27, 2008 fully remediated.
Significant
or Non-Routine Transactions
The
Company did not maintain a sufficient complement of personnel with the
appropriate level of accounting knowledge, experience, and training in the
application of U.S. generally accepted accounting principles (“U.S. GAAP”) to
analyze, review, and monitor accounting for transactions that are significant or
non-routine. In addition, the Company did not prepare adequate contemporaneous
documentation that would provide a sufficient basis for an effective evaluation
and review of the accounting for transactions that are significant or
non-routine. This deficiency resulted in errors in the preliminary December 29,
2007 consolidated financial statements and a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements
would not be prevented or detected.
Revenue
Recognition
Internal
control applicable to equipment revenue recognition was not adequate to ensure
that sufficient documentation regarding terms and conditions of equipment
contracts and agreements were maintained to permit proper evaluation relative to
revenue recognition of such contracts and agreements in accordance with U.S.
GAAP. In addition, review controls over accounting for equipment revenue
transactions were not operating effectively to identify accounting errors, and
monitoring controls designed to ensure that an appropriate review was properly
performed were not operating effectively. These deficiencies resulted in a
reasonable possibility that a material misstatement of our annual or interim
financial statements would not be prevented or detected on a timely
basis.
Account
Reconciliations and Journal Entries
Account
reconciliations and journal entries were not consistently reviewed and approved
with appropriate supporting documentation in order to ensure completeness and
accuracy. In addition, monitoring controls designed to ensure that account
reconciliations were properly performed were not operating effectively. These
deficiencies resulted in a reasonable possibility that a material misstatement
of our annual or interim financial statements would not be prevented or detected
on a timely basis.
Inventory
Calculations
that are performed to determine the inventory adjustments necessary relative to
excess and obsolete inventory and the capitalization of manufacturing variances
were not reviewed for completeness and accuracy at a sufficient level of
precision by someone independent of the preparer and the Company did not have
adequate controls to ensure the mathematical accuracy of spreadsheets that were
used to perform such calculations. These deficiencies resulted in material
errors in the Company’s preliminary December 29, 2007 consolidated financial
statements that were corrected prior to issuance.
Because
of the material weaknesses described above, management concluded that its
internal control over financial reporting was not effective as of December 29,
2007.
Remediation Plan for
Material Weaknesses in Internal Control over Financial
Reporting
Our
management continues to engage in substantial efforts to remediate the material
weaknesses noted above. The following remedial actions are intended both to
address the identified material weaknesses and to enhance our overall internal
control over financial reporting.
Effective
April 3, 2007, the Audit Committee of the Board of Directors established a
Financial Reporting Task Force, which was re-initiated in the second quarter of
fiscal 2008, to develop and implement a corrective action plan to ensure full
remediation of the material weaknesses. This Task Force, which reports directly
to the Audit Committee, is led by the Chief Financial Officer.
Significant
or Non-Routine Transactions
The
following remedial actions were implemented through December 29,
2007:
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On
February 28, 2007, the Company announced the appointment of a new Chief
Financial Officer.
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During
March, 2007, a new Financial Reporting Manager was appointed to manage all
SEC-related activities including accounting guidance and periodic
reporting.
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In
the first quarter of 2007, the Company undertook a review to ensure that
the finance, accounting and tax functions are staffed in accordance with
the required competencies. Since that time, the Finance organization has
been strengthened by the addition of personnel, (including revenue
analysts, tax manager, senior accountants, and a Director of Accounting)
to address complex accounting and financial reporting requirements and has
substantially filled its hiring
objectives.
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On
May 23, 2007, the Company appointed a Director of Internal Audit. The
Director of Internal Audit reports directly to the Audit Committee and has
responsibility for directing the internal audit function and leading
Sarbanes-Oxley compliance monitoring
activities.
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The
following remedial actions have been initiated and will continue to be
implemented after September 27, 2008:
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Beginning
in the third quarter of fiscal 2007, additional training has been provided
to finance, accounting and tax professionals regarding new and evolving
areas in U.S. GAAP.
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During
the fourth quarter of fiscal 2007, the Company implemented a process
designed to ensure the timely documentation, review, and approval of
complex accounting transactions by qualified accounting
personnel.
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Beginning
in the third quarter of fiscal 2007, the Company requires that analysis of
all significant or non-routine transactions must be documented, reviewed,
and approved by senior financial
management.
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During
the first quarter of fiscal 2008, the Company expanded the staffing of
their internal audit department. In addition, during the second quarter of
fiscal 2008, the Director of Internal Audit took the position of
VP-Corporate Controller and the Company hired a new European Finance
Director. The Company is continuing to evaluate their staffing
requirements.
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During
the third quarter of fiscal 2008, the Company expanded the staffing of
their finance department through the addition of an Assistant
Controller.
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Revenue
Recognition
The
following remedial actions were initiated during the fourth quarter of fiscal
2007 and will continue to be implemented after September 27, 2008:
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Supported
by the services of subject matter experts and consultants, the Company’s
revenue recognition policy was strengthened to
include:
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Enhanced
documentation requirements to support revenue transactions and their
related accounting treatment;
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Tightening
of necessary approvals on any departures from standard terms and
conditions on sales and service agreements to include senior financial and
legal management;
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Clarification
of revenue recognition treatment on distributor equipment
transactions.
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Additional
training regarding revenue recognition practices was provided to all sales
personnel worldwide. Special training to communicate and strengthen
understanding of the revised revenue recognition policy will be conducted
in fiscal 2008.
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Internal
controls, as they relate to our European operation, have been strengthened
and reinforced through additional training and supervision, the addition
of a full-time European revenue analyst, changes to credit practices, and
other control measures. In addition, certain personnel changes and
realignment of work responsibilities will be
implemented.
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Revenue
recognition processes have been restructured to increase sales and
accounting personnel participation earlier in the process and improve
delivery of key information on equipment transaction terms and
conditions.
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Review
and monitoring controls at Corporate-Finance on equipment transactions
involving foreign operations have been enhanced, including periodic
confirmation of key terms with
customers.
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Account
Reconciliations and Journal Entries
The
following remedial actions were initiated during the fourth quarter of fiscal
2007 and will continue to be implemented after September 27, 2008:
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Additional
training of Company personnel has been performed and will continue to be
performed to ensure that key account reconciliations are performed,
documented, reviewed and approved as part of the monthly financial closing
process.
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Review
and monitoring controls over key account reconciliations has been and will
continue to be enhanced to include detailed reviews of monthly
reconciliations and supporting documentation by Senior Corporate Finance
personnel.
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Management
review controls have been and will continue to be enhanced to ensure that
all journal entries are reviewed and approved with appropriate supporting
documentation.
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Inventory
The
following remedial actions were initiated in the first quarter of fiscal 2008
and will continue to be implemented after September 27, 2008:
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An
independent review, by appropriate management personnel, is performed and
documented in a detailed manner to determine that these complex
calculations are performed
accurately.
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Enhanced
the spreadsheet controls over the mathematical accuracy of spreadsheets
for these inventory account
calculations.
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Changes in Internal Control
over Financial Reporting
Other
than the foregoing measures to remediate the material weaknesses described
above, certain of which were not fully implemented as of September 27, 2008,
there was no change in the Company's internal control over financial reporting
during the quarter ended September 27, 2008, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART
II OTHER INFORMATION
Item
1. Legal Proceedings
Litigation
On
October 26, 2006, the Company was served with a complaint naming the Company,
together with certain of its executive officers, as defendants in a purported
securities class action suit filed in the United States District Court for the
District of New Hampshire. The suit claims to be brought on behalf of purchasers
of Presstek’s common stock during the period from July 27, 2006 through
September 29, 2006. The complaint alleges, among other things, that the Company
and the other defendants violated Sections 10(b) and 20(a) of the Exchange Act
and Rule 10b-5 promulgated thereunder based on allegedly false forecasts of
fiscal third quarter and annual 2006 revenues. As relief, the plaintiff seeks an
unspecified amount of monetary damages, but makes no allegation as to losses
incurred by any purported class member other than himself, court costs and
attorneys’ fees. On September 25, 2008 the parties reached a settlement of the
action, subject to confirmatory discovery by plaintiffs and court
approval.
In
January 2008, the Company was served with an Administrative Complaint filed by
the U.S. Environmental Protection Agency (“EPA”). The EPA sought to assess
penalties against the Company for alleged violations of certain provisions of
the Clean Air Act and the Comprehensive Environmental Response, Compensation and
Liability Act arising from an incident occurring at a facility of the Company
located in South Hadley, Massachusetts on October 30, 2006. On August 14, 2008,
the Company and the EPA settled this litigation and the case was
dismissed.
On June
4, 2008, the Commonwealth of Massachusetts filed a complaint in the Superior
Court of Massachusetts, Hampshire County against the Company and one of its
subsidiaries seeking recovery of response costs related to the October 30, 2006
chemical release in South Hadley, Massachusetts noted above. The
Commonwealth has alleged costs in the amount of approximately $192,000. In
October 2008, the parties agreed to settle this matter.
On
September 10, 2008, a purported shareholder derivative claim against certain
current and former directors and officers of the Company was filed in the United
States District Court for the District of New Hampshire. The
complaint alleges breaches of fiduciary duty by the defendants and seeks
unspecified damages. On September 25, 2008, the parties reached a
settlement of the claim, subject to receipt of court approval.
Except as
noted with respect to the proceedings noted above, during the nine months ended
September 27, 2008, there have been no material changes to legal proceedings
from those considered in our Annual Report on From 10-K for the year ended
December 29, 2007, filed with the U.S. Securities and Exchange Commission
(“SEC”) on April 30, 2008.
Item
6. Exhibits
Exhibit
No.
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Description
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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.
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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.
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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.
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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.
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PRESSTEK,
INC.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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PRESSTEK,
INC.
(Registrant)
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Date: November
6, 2008
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/s/ Jeffrey A. Cook
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Jeffrey
A. Cook
Executive
Vice President and Chief Financial Officer
(Duly
Authorized Officer and Principal Financial Officer)
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PRESSTEK,
INC.
EXHIBIT
INDEX
Exhibit
No.
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Description
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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.
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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.
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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.
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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.
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