-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0UJIAQTtS5ZRU+zTvgIH0+etzyHXSz8Bk20TvrVIAEbwmYFJKN0G0GytGv73QP5 /isuisTRcWJrYU194d3J0w== 0000891554-00-000920.txt : 20000403 0000891554-00-000920.hdr.sgml : 20000403 ACCESSION NUMBER: 0000891554-00-000920 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESSTEK INC /DE/ CENTRAL INDEX KEY: 0000846876 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 020415170 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17541 FILM NUMBER: 591412 BUSINESS ADDRESS: STREET 1: 8 COMMERCIAL STREET CITY: HUDSON STATE: NH ZIP: 03051-3907 BUSINESS PHONE: 6035957000 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 1, 2000 OR __ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______________ to _______________. 0-17541 (Commission File No.) PRESSTEK, INC. (Exact name of registrant as specified in its charter) Delaware 02-0415170 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 9 Commercial Street, Hudson, New Hampshire 03051-3907 (Address of principal executive offices including zip code) Registrant's telephone number, including area code: (603) 595-7000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of March 10, 2000, was approximately $665,000,000. As of March 10, 2000, there were 32,575,188 shares of the registrant's common stock outstanding. Documents Incorporated by Reference: Parts of the definitive Proxy Statement for the Registrant's Annual Meeting of Stockholders to be held on June 19, 2000 are incorporated by reference into Part III of this Form 10-K. PART I Item 1. Business. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain statements contained in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the risks of uncertainty of patent protection, the risks of uncertainty of strategic alliances, the impact of third-party suppliers, manufacturing constraints or difficulties, market acceptance of and demand for the Company's products and resulting revenues, development of technology and manufacturing capabilities, impact of competitive products and pricing, litigation and other risks detailed in this report and the Company's other filings with the Securities and Exchange Commission. The words "looking forward," "believe," "demonstrate," "intend," "expect," "estimate," "anticipate," "likely" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Set forth below is a glossary of certain terms used in this report: A2 (4-up) a printing term referring to a standard paper size capable of printing four 8.5" x 11" pages on a sheet of paper A3 (2-up) a printing term referring to a standard paper size capable of printing two 8.5" x 11" pages on a sheet of paper Ablation a controlled detachment/vaporization caused by a thermal event. This process is used during the imaging of the Company's PEARL(R)consumables Computer-to-plate (CTP), a general term referring to the exposure of (direct-to-plate) lithographic plate material from a digital database, off-press Dampening solution Traditional lithographic printing chemical bath used to coat the non-image areas of a printing plate Direct Imaging (DI(R)) Digital imaging systems that allow image information technologies carriers (film and plates) to be imaged from a digital database, on- and off-press Dots per inch (dpi) a measurement of the resolving power or the addressability of an imaging device Effluents waste materials that flow from photographic processing equipment, which are often toxic in nature GTO-DI the first generation of direct imaging, waterless presses available in two, four and five printing station configurations, a joint effort between Heidelberg and Presstek Halftone a printing reproduction process which converts the image into dots of various sizes and equal spacing between centers Heidelberg Heidelberger Druckmaschinen AG, the world's largest printing press manufacturer, headquartered in Heidelberg, Germany 2 Hydrophobic/ used in lithographic printing to describe Hydrophilic whether a material will reject water (hydrophobic) or will be water receptive (hydrophilic) Infrared lying outside of the visible spectrum beyond its red-end characterized by longer wavelengths; used in the Company's thermal imaging process Large Format a printing term referring to printing layouts that include four or more pages on a single sheet of paper Lithographic printing from a single plane surface under the principle that image area carries ink and the nonimage area does not, and that ink and water do not mix Off-press Making a printing plate from either an analog or digital source independently of the press on which it will be used Oleophilic/ used in printing to describe whether a Oleophobic material will be ink receptive (oleophilic) or reject ink (oleophobic) On-demand a manufacturing philosophy when applied to printing provides faster service, shorter run lengths and less inventory On-press the use of Presstek's direct imaging technologies to make a plate directly from a digital file on the press PEARL(R) the name associated with Presstek's current laser imaging technologies and related products and consumables PEARL imaging systems the Presstek components required to convert a conventional printing press into a direct imaging press, including laser diode arrays, computers, electronics PEARLsetter(TM)/Dimension400(TM) the Company's product line of computer-to- PEARLhdp(TM) plate, off-press plate making and digital proofing equipment Photosensitive silver halide emulsions exposed by a reaction to light requiring a subsequent chemical development and stabilization process Plate making the process of applying a printable image to a printing plate Prepress Graphic arts operations and methodologies that occur prior to the printing process; typically these include photography, scanning, image assembly, color correction, exposure of image carriers (film and/or plate), proofing Proofer/proof a machine that creates an image that is a simulation of what will be printed, or the simulated image itself. Quickmaster DI the second generation of direct imaging, waterless presses, highly automated with roll-fed PEARL plate material, a joint development effort between Heidelberg and Presstek Semiconductor laser diode a high-powered, infrared imaging technology employed in the PEARL imaging system Short-run markets/printing a graphic arts classification used to denote an emerging trend for lower print quantities 3 Thermally-based a method of digitally exposing a material via the heat generated from a laser beam Vapor deposition process a technology to accurately, uniformly coat substrates in a controlled environment Waterless a lithographic printing method that uses dry offset printing plates and inks so that it does not require a dampening system "YAG" laser one of the more commonly used laser sources for direct-to-plate imaging systems General Presstek, Inc. (the "Company" or "Presstek"), incorporated in Delaware, was founded in September 1987 as a development company to find a new way to produce color offset printing. This new printing method would take full advantage of computer based, electronic prepress processes which were rapidly becoming available and expedite the design, image manipulation, page assembly and related aspects used to produce high quality color pages in a totally digital manner. At that time, digitally created pages could not be easily converted to finished, four or more color offset printed pages. The process used involved costly and time consuming methods including the use of specialized photosensitive film recording systems and related plate exposure devices along with the need to chemically process these photosensitive analog films and plates. These photographically based methods generated waste effluents that were difficult to dispose of in an environmentally sound manner. The Company's objective was to eliminate these non-digital processes and develop a new system that would allow digitally formatted file data to be used to image a plate directly on the printing press. This would reduce cost, eliminate the time it normally takes to make films and plates, and improve the quality of the finished printed offset page. The Company's development work ultimately led to the commercialization of its proprietary PEARL(R) based direct imaging technology. This direct imaging technology, which uses high powered semiconductor laser diodes and thermal ablation printing plate materials, is currently being used in a variety of both on-press and off-press applications. The Company has also recently developed its next-generation DI(R) technology, the ProFire(TM) integrated imaging system. With ProFire, the Company has developed a highly advanced laser imaging technology combining all the components of a thermal imager in one compact package. The Company believes that both PEARL and DI represent a technological breakthrough for the worldwide printing and publishing industry, since they can be used for both on-press and off-press applications. This capability provides a number of new applications for direct imaging systems and proprietary thermal based digital media and consumable printing plates. The Company's past investments in its proprietary digital imaging technologies have resulted in more than 160 patents issued or allowed and 160 applications pending throughout the world. The Company believes these patents, together with its twelve years of experience in developing digital imaging systems place the Company in a significant position in the markets it has chosen to serve. To further strengthen its patent portfolio, the Company acquired R/H Consulting, Inc. ("R/H") in 1999 and Heath Custom Press, Inc. ("Heath") in 1998. See "Patents and Proprietary Rights". The Company discontinued the operations of its Delta V Technologies, Inc. ("Delta V") subsidiary at the end of fiscal 1999 to allow the Company to further focus its efforts on the core business of digital imaging and plate manufacturing. Located in Tucson, Arizona, Delta V was engaged in the development, manufacture and sale of vacuum deposition coating equipment for vacuum coating applications. As a result of the divestiture of Delta V, the Company incurred a $8.5 million loss on disposal of discontinued operations for fiscal 1999. This included actual closing costs and operating losses incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision of $1.6 million for anticipated closing costs, $6.1 million related to the write off of goodwill and other intangible assets, and a reduction in other asset values of $1.6 million. These costs were partially offset by proceeds of $3.0 million received from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing of its intellectual property relating to vacuum-deposited polymer multilayer technology. 4 Strategy, Background, and Important Relationships The Company's business strategy is based in part on alliances and relationships with major companies in the graphic arts industry and other markets. This strategy includes licensing the intellectual property; specialized product development based on the Company's proprietary technologies; and the manufacture of imaging systems for inclusion in other manufacturers' products. The manufacture of the Company's own end user and private label products, as well as the manufacture of proprietary thermal plate materials for use in Presstek's and other manufacturers' imaging hardware and printing presses, is also an important aspect of the business strategy. This strategy led to the development of an important and long-term relationship with Heidelberger Druckmaschinen AG ("Heidelberg"), the world's largest manufacturer of printing presses and printing equipment, based in Germany. This relationship was formalized with the signing of a Master Agreement and a Technology License Agreement in January 1991. The Master Agreement and Technology License Agreement are sometimes collectively referred to hereafter as the "Heidelberg Agreements." The Heidelberg Agreements The Heidelberg Agreements and amendments govern the Company's relationship with Heidelberg and relate to the integration of the PEARL Direct Imaging technology into various presses manufactured by Heidelberg. The manufacture of components, at specified rates, for such presses and the commercialization of such presses are also covered. The Heidelberg Agreements expire in December 2011 subject to certain early termination and extension provisions. Under these agreements, Heidelberg agreed to pay royalties to the Company based on the net sales prices of various specified types of Heidelberg presses on which the Company's PEARL Direct Imaging technology would be used. Pursuant to the Heidelberg Agreements, Heidelberg has been provided with certain exclusive rights for use of the PEARL Direct Imaging technology for the Quickmaster DI format size. The Master Agreement has also been modified to provide Heidelberg with a fixed royalty rate for the Company's PEARL Direct Imaging systems used in the Quickmaster DI. In fiscal 1998 and 1999 the Company materially reduced production levels of direct imaging systems used in the Quickmaster DI press, based on requirements from Heidelberg. The Company received orders in fiscal 1999 from Heidelberg in connection with its direct imaging systems used in the Quickmaster DI. Based on the delivery schedule for these orders, the Company resumed production with initial low level shipments of its direct imaging systems late in the third quarter of fiscal 1999. The Company expects to continue shipments through the end of fiscal 2000. Additionally, the Company believes production levels through the end of fiscal 2000 will increase in line with the actual rate of Quickmaster DI's made by Heidelberg. Other Business Relationships In addition to its association with Heidelberg, the Company has also developed and expanded business relationships with other companies in the industry. Certain of these relationships involve proposed new products that the Company believes may be available late in fiscal 2000. There can be no assurance, however that these products will be commercially successful or produce significant revenues for the Company. Adamovske Strojirny a.s. ("Adast"), a Czech Republic company, which uses the Company's direct imaging technology on a larger format (19" x 26") multicolor offset press, has announced, together with the Company, a highly automated, two-page direct imaging printing press. This press will use the Company's internal automated plate cylinder design and PEARLdry Plus plates. Imation Corp. ("Imation") and the Company have jointly developed a new method for the production of true halftone "dot for dot" color proofs using Presstek's computer-to-plate imaging system, the PEARLhdp(TM), specially modified for this application. Imation is also now marketing the PEARLhdp and providing all sales support and service worldwide. 5 Fuji Photo Film Ltd., ("Fuji"), one of the world's leading suppliers to the graphic communications industry, announced with the Company in 1997, the signing of a long-range Development and Sales Agreement which will involve the use of the Company's proprietary intellectual property, and the sale of Presstek's off-press CTP imagers and PEARLgold(TM) plates in Japan. The Company has entered into an agreement with Sakurai's Graphic Systems of Japan ("Sakurai") to provide the newest version of its DI technology for Sakurai's larger format multicolor offset press. When used in DI mode, this press will also use the Company's PEARLgold plate media. Presstek and Akiyama Printing Machinery Manufacturing Corp., of Japan ("Akiyama"), have also jointly announced a development program to create a DI version of Akiyama's J Print press for the book printing market. The new J Print press will incorporate the Company's direct imaging and digital plate media technologies. Scitex Corporation Limited ("Scitex"), a leading supplier of electronic pre-press products and systems, along with KBA-Planeta AG, a major supplier of medium and large format sheet-fed offset printing presses, established a joint venture to develop, produce and market a new digital offset press. This new press, the 74 Karat uses the Company's direct imaging and related intellectual property under license from Presstek, and Presstek's patented thermal ablation printing plates. Nilpeter A/S ("Nilpeter"), of Denmark is marketing an offset label press that utilizes the Company's digital imaging technology and printing plates. Alcoa Packaging Equipment, a division of the Aluminum Company of America, ("Alcoa"), has publicly shown a new method of printing halftone images on beverage cans that is based on Presstek's digital imaging technology and thermal ablation printing plates. The Company also signed a non-binding agreement with Xerox Corporation ("Xerox"), to form a strategic alliance. The potential alliance, if consummated, is expected to result in the interface of the Xerox DigiPath(TM) workflows with the Company's digitally based products. There can be no assurance however, that a formal strategic alliance with Xerox will be achieved. The Company is pursuing other business relationships that it believes should result in broader use of the Company's digital imaging and printing plate technologies in existing, as well as, new applications. There can be no assurance, however, that the Company, any Company product or any products incorporating the Company's technology will be able to compete successfully in the market. The Company has also established a worldwide distribution network through which it markets, sells and supports its computer-to-plate and PEARL thermal plate products. This network currently encompasses 34 dealers located worldwide and includes the largest graphic arts dealer in the United States, the Pitman Company, which sells its products through multiple branch locations. In addition, Fuji Graphic Systems Canada is the Company's exclusive dealer for its products in Canada. The Company's PEARL and DI Digital Imaging Systems and Their Manufacture The Company's PEARL digital imaging system is composed of a series of solid state semiconductor laser diodes held in a fixed array that can range in size, depending on the application, from as few as 8 diodes to as many as 32 or more diodes. Each diode is under computer control and can be turned off and on at high speeds, usually measured in microseconds. When the diode is turned on it creates a miniature, precise, micron-measured beam of high powered, infrared laser light. The beam is focused on a specific area on the surface of the thermal printing plate causing this area of the plate to instantaneously heat up, creating an ablation effect and producing a microscopic hole. This hole on the surface of the printing plate is ink receptive. The area surrounding the hole that has not been exposed to the laser beam is not, thus an image can be created by controlling the placement of each laser beam. This laser-based imaging concept is used on both the Company's computer-to-press and computer-to-plate systems. The Company's most recent laser imaging technology, ProFire, integrates the lasers, laser drivers, digital electronics, and motion control into a single package design that can be adapted to many computer-to- 6 plate devices or direct imaging presses. ProFire has three major components: the FirePower(TM) laser diode system, made up of unique four-beam laser diodes and laser drivers, the integrated motion system that controls the placement of the laser diodes, and the FireStation(TM) digital controller and data server. This highly modular system allows the Company to expand the number of diodes mounted on a fixed array, increasing speed and overall imaging performance. Due to its compact size, the integrated imaging module fits universally within the side rails of most printing presses. The drop-in module is also more easily incorporated into computer-to-plate products for off-press imaging. The manufacturing of these imaging systems has recently moved to the Company's 55 Executive Drive facility located in Hudson, New Hampshire. The Company uses a number of outside vendors who supply many of the imaging system's components and assemblies. These assemblies and components are manufactured and assembled by the Company into completed systems - either computer-to-press, direct imaging systems such as the Quickmaster DI systems, or PEARLsetter(TM) computer-to-plate imaging systems. Both of these systems use semiconductor laser diode devices built to the Company's specifications and currently supplied by one source pursuant to a supply agreement. The Company believes however, that there are several sources available to manufacture the laser diodes to its specifications, if required in the future. The Company's PEARL Digital Media and Plates and Their Manufacture The Company continues to develop its proprietary thermally-based consumable plate products that are imaged by both its own direct imaging systems as well as high-energy laser-based, computer-to-plate and direct-to-press systems offered by companies such as Scitex, Creo and others. The Company's PEARL digital media and plates are available in waterless form, such as PEARLdry(TM) Plus for the Quickmaster DI, PEARLgold for presses equipped with dampening systems, or Anthem(TM), the Company's recently announced thermal plate for computer-to-plate imaging. All of these plates are based on the Company's proprietary thermal ablation imaging technology, which means they respond to heat and not to light. Presstek's plates are able to convert the laser light into heat because of a special metalized layer that is sensitive to the wave length of the laser light source. The Company's plate materials have a wide infrared spectral sensitivity range (800 to 1200 nanometers) and can be used with a variety of both "YAG" and semiconductor diode laser imaging systems. The Company's latest plate technology, Anthem, is the first in an anticipated family of plates for wet offset lithography. Anthem is a grained anodized aluminum plate based on Presstek's patented imaging technology and combines ablative imaging and chemically-free cleaning with run lengths of up to 100,000 impressions. The Anthem plate runs with a wide range of fountain chemistry and inks and can be imaged on many thermal computer-to-plate systems. Anthem's market includes a broad base of installed conventional wet offset presses, currently the largest segment of the printing industry. The Company believes this wet offset plate product has broad market potential due to the large number of wet offset printing presses installed on a worldwide basis. There can be no assurance, however that printers currently equipped with conventional wet offset presses will purchase computer-to-plate systems that use Anthem plates. PEARLgold is a first generation plate for wet, lithographic offset printing specifically targeted to the short-run, color market. It requires no post imaging cleaning or chemical processing. PEARLgold is an ablation based printing plate using a metalized infrared absorbing material with an additional metalized layer placed over the infrared absorber. This additional metal layer is a hydrophilic material and ink will not adhere to it (ink, which is oil based, and water do not mix) but ink will adhere to those areas of the plate that have been ablated away by the laser beam thus forming a printable image. The market opportunity for the first generation PEARLgold plate is limited to short-run (25,000 impressions or less) applications and may require modifications of press conditions to accommodate the characteristics of this unique, no-process plate technology. The Company is continuing to develop this plate and believes that future generations of PEARLgold will be suitable for use in markets requiring longer run lengths. Although, the Company believes it can compete successfully in this newly developing market, there can be no assurances that it can do so. The PEARLdry Plus is a second generation plate based on the Company's PEARLdry technology. The PEARLdry Plus plate uses a specially formulated silicone material that is coated over the metalized infrared 7 absorbing layer. The silicone layer is oleophobic and when the imaging laser causes the ablation process to occur, the resulting hole created by the laser in the silicone becomes ink receptive. Presstek's PEARLdry Plus plates are used in the Quickmaster DI, the GTO-DI, the Adast 705C DI, the Scitex/KBA 74 Karat, the Alcoa can decorating imaging system and the Kammann CD Imaging system. Other direct-to-plate systems also are able to image the Company's PEARLdry Plus plate that can then be used on a conventional waterless press. The Company's PEARL digital plate products are manufactured at the Company's facility located at 55 Executive Drive in Hudson, New Hampshire. This building now includes the Company's thin film vacuum sputtering coater, plate converting and finishing equipment, and the new atmospheric coater which the Company expects will be operational in the first half of 2000. The Company's new Anthem thermal plate is currently manufactured by one source under an existing supply agreement. The Company may still need to enter into manufacturing agreements with third parties as it more vertically integrates the manufacturing of its PEARL digital plate products, and believes there currently are several sources available to manufacture these consumable products. The PEARLsetter Product Line The PEARLsetter is a computer-to-plate imaging device that can image both the Company's wet and dry thermal offset plates in both an A3 (2-up) and A2 (4-up) format size. The product can produce completely imaged printing plates, ready to be mounted on a printing press, within 4 to 8 minutes, depending on the resolution (number of dots per inch) chosen by the user. If the PEARLsetter is imaging PEARLgold plates, these plates can be mounted immediately on the press with no further cleaning or processing. In the case of PEARLdry plates, the user must first wipe the ablated debris from the imaging process off the surface of the plate. Anthem plates require a simple water wash after imaging to prepare the plate for mounting on the press. The Company has recently announced the first in a series of new thermal computer-to-plate devices, the Dimension400(TM). The Dimension400 utilizes Presstek's next-generation direct imaging technology. The Dimension400 will image most thermal plates including the Company's own Anthem thermal plate. In addition to making printing plates, a specially modified PEARLsetter product referred to as the PEARLhdp (halftone digital proofer), which uses proofing materials supplied by Imation is also being manufactured by the Company. This halftone proofing system offers the user the ability to make proofs that replicate the dot structure used for imaging plates. Imation is currently marketing this product. The Company has entered into distribution agreements with 34 graphic arts dealers to sell, support and service its products in various countries around the world. The Company has also entered into Original Equipment Manufacturer ("OEM") arrangements or reseller relationships with respect to the PEARLsetter product line and/or its PEARL based consumable products with companies such as Sakurai Machinery Company and Fuji Photo Film Co. Ltd. These agreements permit the OEM resellers to sell the PEARL based products under their own label. The Company continues to develop and commercialize its PEARL and DI based computer-to-plate and Imation proofing systems. However, there can be no assurance that the Company will be able to successfully complete or commercialize these or other products, or enter into any additional arrangements which will result in the further commercialization of its PEARLsetter based product line. Market acceptance for any products incorporating the Company's various technologies and proprietary know-how will require substantial marketing efforts and the expenditure of significant sums, either by the Company, and/or its strategic and OEM partners. There can be no assurance that any existing or new products will achieve market acceptance or be commercially viable. Patents, Trademarks and Proprietary Rights As of March 10, 2000, the Company and its subsidiaries hold eighty-seven U.S. patents, (including three design patents), of which the Company has elected to maintain sixty-seven in force. The Company has also been issued fifty-four foreign patents, and has received notice of allowance, for twenty-one additional 8 patents consisting of six U.S. and fifteen foreign. The Company has applied for and is pursuing its applications for twenty-four additional U.S. patents and one hundred thirty-nine foreign patents. The Company also holds two registered trademarks, PEARL and DI. The Company anticipates that it will apply for additional patents, trademarks, and copyrights, as deemed appropriate. There can be no assurance as to the issuance of any such patents or the breadth or degree of protection which the Company's patents or copyrights may afford the Company. There is rapid technological development in the computer and image reproduction industries, resulting in extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its technology has been independently developed, and that the products it markets and proposes to market will not infringe on the patents, or violate other proprietary rights of others, it is possible that such infringement of existing or future patents, or violation of proprietary rights may occur. In such event the Company may be required to modify its design or obtain a license. No assurance can be given that the Company will be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a material adverse effect on the Company. Furthermore, there can be no assurance that the Company will have the financial or other resources necessary to successfully defend a patent infringement or proprietary rights violation action. Moreover, the Company may be unable, for financial or other reasons, to enforce its rights under any of its patents. The Company intends to rely on proprietary know-how and to employ various methods to protect its source code, concepts, ideas and documentation of its proprietary software, which methods may include copyrights. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such know-how or obtain access to the Company's know-how or software codes, concepts, ideas and documentation. Furthermore, although the Company has and expects to have confidentiality agreements with its employees and appropriate vendors, there can be no assurance that such arrangements will adequately protect the Company's trade secrets. Competition The Company believes that its imaging, thermal plate and other intellectual property, its proprietary technologies, its thermal plate manufacturing facilities, along with its strategic alliances and worldwide distribution network, provide the Company with a competitive advantage. However, the Company is also aware of a number of other companies that address markets in which Presstek products are used, and are competitive to the Company's proprietary direct imaging, thermal plate technologies and related capabilities. In the area of direct imaging and the short-run, on-demand market, potential competitive companies use electrophotographic technology, sometimes referred to as xerography, as the basis of their product lines. These companies include, among others, Canon Inc., Indigo N.V., Xeikon N.V., and Xerox Corporation. Agfa Gevaert N.V, IBM, and Scitex are marketing product versions manufactured by these companies. These electrophotographic imaging systems use either wet or dry toners to create one to four color images on paper and typically offer resolutions of between 400 and 800 dots per inch. The Company is aware that most of the major entities in the graphic arts industry have developed and/or are developing and marketing off-press computer-to-plate imaging systems. To date, these devices, for the most part, utilize printing plates that require a post imaging photochemical developing step and/or other post processing steps such as heat treatment. Potential competitors in this area include, among others, Agfa Gevaert N.V., Creo Products Inc., DaiNippon Screen Mfg, Ltd., Heidelberger Druckmaschinen AG, Krause GmbH, Scitex Corporation Ltd., combinations of these companies, and other smaller or lesser known companies. The Company's PEARLsetter computer-to-plate, off-press plate imaging system is, in the Company's opinion, a further technological advancement because it eliminates the need for post chemical processing. The Company believes however, that some of the graphic arts companies mentioned above are likely to be working on similar plate concepts that would eliminate the need for post image chemical processing. The Company also anticipates competition from printing plate manufacturing companies that manufacture, or have the potential to manufacture, digital thermal plates. Such companies include Agfa Gevaert N.V., Kodak Polychrome Graphics LLC, Fuji Photo Film Co., Ltd., and others. Products incorporating the Company's technologies can also be expected to face competition from conventional methods of printing and creating printing plates. While these methods are considered by the 9 Company to be more costly, less efficient and are not as environmentally conscious as those being implemented by the Company, they do offer their users the ability to continue to employ their existing means of print and plate production. Companies offering these more traditional means and methods are also refining these technologies to make them more acceptable to the market. Most of the companies marketing competitive products or with the potential to do so are well established, have substantially greater financial and other resources than the Company, and have established records in the development, sale and service of products. There can be no assurance that the Company, any Company product or any products incorporating the Company's technology will be able to compete successfully in the future. Research and Development Research and product development expenses were $17.7 million, $15.4 million and $10.7 million in fiscal 1999, 1998 and 1997 respectively, related to the Company's continued development of products incorporating its PEARL and DI technologies. Backlog As of March 10, 2000, the Company and its subsidiaries had a backlog of products and royalties under contract aggregating approximately $19.3 million compared to a backlog of approximately $21.6 million as of March 11, 1999. Substantially all backlog of products as of March 10, 2000 is expected to ship in 2000. Employees As of March 10, 2000, the Company and its subsidiaries had two hundred fifty-five employees. One hundred twenty-five are engaged primarily in engineering, research and development, service and marketing; ninety-four are engaged primarily in manufacturing, manufacturing engineering and quality control; and thirty six are engaged primarily in corporate management, administration and finance. The Company considers its relationship with its employees to be good. Item 2. Properties. The Company is located in three facilities in Hudson, New Hampshire. The Company leases approximately 36,000 square feet of property at 9 Commercial Street. The Company's corporate offices and marketing operations occupy 18,000 square feet, 6,000 square feet are being utilized as general warehouse space, and the Company is subleasing 12,000 square feet of this facility. The lease specifies a base monthly rent of $15,281, adjusted annually, plus a pro rata share of real estate taxes, utilities, and certain other expenses. The lease expires on June 30, 2000, subject to an option to renew for an additional three years and the Company's right of first refusal to purchase the property. The Company expects to relocate these operations to its corporate headquarters at 55 Executive Drive, Hudson, NH. The Company also leases approximately 50,000 square feet of property at 18 Hampshire Drive. This facility houses the consumables and equipment research and development groups. The lease of these premises, which expires in May 2001, provides for rent at the rate of $16,667 per month, adjusted annually, plus a pro rata share of real estate taxes, utilities, and certain other expenses. The Company is currently negotiating to extend the lease for two additional years. The Company leases certain other property in Hudson, New Hampshire which is not considered to be material. The Company's equipment and consumable product manufacturing operations are located in a 100,000 square foot facility at 55 Executive Drive, which the Company owns. The Company began construction of the second phase of this facility in February 2000. This additional facility will include the Company's corporate offices, sales and marketing facilities, as well as additional manufacturing facilities for its manufacture of its digital media and consumable products. 10 The Company owns a 70,000 square foot facility in Tucson, Arizona, which is currently available for sale. This facility previously housed the manufacturing operations of Delta V. The Company discontinued the operations of Delta V in fiscal 1999. The Company's properties at 55 Executive Drive in Hudson, New Hampshire and Tucson, Arizona with an aggregate cost of $17.0 million are secured by a ten-year mortgage term loan in the principal amount of $6.9 million. Item 3. Legal Proceedings. As previously disclosed, seven federal class action lawsuits were filed against the Company and others, all of which have been consolidated before the United States District Court, District of New Hampshire, under the common caption Bill Berke, et al. V. Presstek, Inc., et al. The plaintiffs have jointly filed and served a Second Consolidated Amended Class Action Complaint naming the Company, certain of its present or former officers and directors ("the Berke Officer and Director Defendants"), and other parties as defendants. The plaintiffs allege, among other things, that the Company and/or the Berke Officer and Director Defendants violated Section 10(b) ("Sect. 10(b)") of the Securities Exchange Act of 1934, (the "Exchange Act") and Rule 10b-5 ("Rule 10b-5") promulgated thereunder, and violated New Hampshire law; and that the Berke Officer and Director Defendants violated Section 20(a) ("Sect. 20(a)") Section 20A of the Exchange Act. The Complaint alleges, among other things, that the Company and/or the Berke Officer and Director Defendants issued false and misleading reports, failed to disclose material facts including a misstatement of earnings in the Company's financial statements for the first quarter ended March 30, 1996, misstated or failed to fully disclose the Company's supply contracts with, payments received from, sales made by, backlog of orders received from, and delays in production by the Company's principal customer, the alleged circulation of, and alleged failure to correct certain research reports concerning the Company that contained alleged misrepresentations regarding allegedly inflated financial projections and the alleged failure to properly disclose the scope of an investigation by the Securities and Exchange Commission ("SEC"). Certain of the Berke Officer and Director Defendants are alleged to have sold the Company's common stock at artificially inflated prices while in possession of material non-public information concerning the Company. The plaintiffs seek unspecified compensatory and punitive damages, attorney and expert fees and other costs and expenses incurred by the plaintiffs in connection with the action. On March 30, 1999 the United States District Court for the District of New Hampshire issued orders dismissing several of the claims brought against the Company and others in the Berke lawsuit. As previously disclosed, on July 16, 1996, Richard Strauss commenced a derivative suit on behalf of the Company in the Court of Chancery of the State of Delaware, New Castle County, against certain officers and directors of the Company ("the Strauss Officer and Director Defendants"). The plaintiff alleges that the Strauss Officer and Director Defendants breached their fiduciary duties to the Company and its public stockholders and wasted corporate assets, by making allegedly false and misleading statements of fact or concealing material facts concerning the viability of the Company's "key" patent and its proprietary interest in its PEARL technology, causing the Company to fail to properly disclose the scope of an investigation by the SEC, and causing the Company to misstate its financial results for the first quarter of 1996. The plaintiff also alleges that certain of the Strauss Officer and Director Defendants sold securities of the Company at inflated prices while they were in possession of material non-public information concerning the Company. The plaintiff alleges that the actions of the Officer and Director Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in other lawsuits being commenced against the Company which will require the Company to expend resources to defend. The plaintiff seeks to recover, on behalf of the Company, unspecified damages allegedly sustained by the Company as a result of the defendants' alleged breaches of fiduciary duty, disgorgement of any profits derived from their sale of the Company's common stock, as well as other relief. This action had been stayed pending the outcome of the Berke action. 11 As previously disclosed, on March 14, 1997, James P. Cassidy commenced a derivative suit on behalf of the Company in the United States District Court for the District of New Hampshire against, among others, certain of the Company's officers and directors (the "Cassidy Officer and Director Defendants"). The plaintiff alleges that the Cassidy Officer and Director Defendants breached their fiduciary duty to the Company and its public stockholders and wasted corporate assets by making false and misleading statements of fact or concealing material facts concerning the scope and viability of the Company's "key" patents and its proprietary interest in its PEARL technology, and causing the Company to issue false and misleading reports or failure to disclose material facts including a misstatement of earnings in the Company's financial statements for the year ended December 30, 1995, and for the first quarter ended March 30, 1996. The plaintiff also alleges that certain of the Cassidy Officer and Director Defendants sold securities of the Company at inflated prices while they were in possession of material non-public information concerning the Company. The plaintiff also alleges that the actions of the Cassidy Officer and Director Defendants resulted in breaches of Sect. 10(b) and Rule 10b-5 which resulted in other lawsuits being commenced against the Company which will require the Company to expend resources to defend, and also constituted gross negligence and breaches of their contractual obligations to the Company. The plaintiff seeks to recover on behalf of the Company unspecified damages allegedly sustained by the Company as a result of the Defendants' actions as alleged, disgorgement of any profits from the sale of the Company's common stock, as well as other relief against the defendants. As previously disclosed, on June 16, 1997, Seena Stevens Silverman commenced a purported class action in the United States District Court for the District of New Hampshire against the Company and certain of its present and/or former officers and directors (the "Silverman Officer and Director Defendants"), and other parties. The plaintiff purports to bring this action on behalf of a class of persons who sold put options in the common stock of the Company between November 7, 1995 and June 20, 1996. The complaint alleges, among other things, that the Company and/or the Silverman Officer and Director Defendants violated Sect. 10(b) and Rule 10b-5, and violated New Hampshire law; and that the Silverman Officer and Director Defendants violated Sect. 20(a). The plaintiff alleges that the defendants defrauded the putative class members by manipulating the price and supply of the Company's common stock, issuing false and misleading statements regarding the nature of the Company's proprietary PEARL technology, failing to disclose the true depth and target of an investigation by the SEC, and making misleading statements regarding the Company's claims to its PEARL technology and its contract with the Company's principal customer. The plaintiff also alleges that certain of the Silverman Officer and Director Defendants sold securities of the Company at inflated prices while they were in possession of material non-public information concerning the Company. The plaintiff seeks to recover unspecified compensatory and punitive damages on behalf of the putative class, as well other relief. The Company has recently entered into an agreement with the plaintiffs to settle the class action lawsuit, and has executed a memorandum of understanding with respect to settlement of the derivative law suits. Under the terms of the class action settlement, $22.0 million, in the form of shares of the Company's common stock, will be paid to the class, with the number of shares to be issued determined by a formula valuing the stock at different time periods. The Company has reserved the right to pay the settlement in cash at the time the settlement becomes effective. In the memorandum of understanding in the derivative litigation, the Company has agreed to certain therapeutic improvements to its internal policies, some of which have already been instituted, including Company policies on insider trading, the functioning and membership of its audit committee, and policies pertaining to corporate communications. The settlement of both the class action and derivative actions require final approval of the United States District Court. The Company has recorded a charge of $23.2 million in the fourth quarter of fiscal 1999 related to the settlement. See Note 14 of notes to the financial statements. In August 1999 Creo Products, Inc., ("Creo"), filed an action in the United States District Court for the District of Delaware against the Company asserting that Creo has a "reasonable apprehension that it will be sued by Presstek for infringement" of two of the Company's patents and seeking a declaration that Creo's products "do not and will not infringe any valid and enforceable claims" of the patents in question. In September 1999, the Company filed a counterclaim against Creo for patent infringement. The Company claims that Creo has infringed two direct imaging patents owned by the Company which were recently the subject of re-examination by the U. S. Patent and Trademark Office. Presstek intends to vigorously enforce its patent rights. In February, 2000 a complaint was filed by PPG, Inc. against Delta V in the United States District Court for the Western District of Pennsylvania alleging that Delta V sold to the plaintiff that certain vacuum coating equipment, did not meet certain product specifications. In its complaint, which has not yet been served on Delta V, the plaintiff is seeking damages in excess of $5.0 million. The Company intends to vigorously defend this action. Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock has traded in the over-the-counter market on the NASDAQ National Market System under the symbol PRST since July 18, 1990, and, prior thereto, from May 11, 1990, to July 17, 1990, traded on the NASDAQ System. From the Company's initial public offering until May 11, 1990, the principal redemption date of the Warrants, the Company's Units, common stock and Warrants were traded on the NASDAQ System. The following table sets forth, for the periods indicated, the high and low sales prices of the Company's common stock as reported by NASDAQ. Fiscal Year Ended January 1, 2000 High Low - --------------- ---- --- First Quarter $11 7/16 $ 6 13/16 Second Quarter 9 7/8 6 1/2 Third Quarter 7 15/16 5 Fourth Quarter 19 7/8 5 15/16 Fiscal Year Ended January 2, 1999 - --------------- First Quarter $30 1/4 $15 Second Quarter 18 5/8 10 15/16 Third Quarter 13 13/16 7 1/4 Fourth Quarter 10 5 1/4 On March 10, 2000 there were 1,308 holders of record of the Company's common stock. Dividend Policy To date, the Company has not paid any cash dividends on its common stock. The payment of cash dividends, if any in the future, is within the discretion of the Company's Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition and other relevant factors. The Board of Directors does not intend to declare any cash dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's business operations. Issuance of Unregistered Securities During the quarter ended January 1, 2000, the Company issued to certain employees, options to purchase 4,000 shares of its common stock pursuant to the Company's 1991 Stock Option Plan. These options were granted at prices ranging from $7.31 to $15.88 per share with expiration dates ranging between October 4, and December 13, 2009. The foregoing options were issued pursuant to the exemption from registration provided by Section 2(a)(3) and/or Section 4(2) of the Securities Act of 1933 (the "Act"). On November 19, 1999 the Company issued 142,855 unregistered shares of common stock for the acquisition of R/H Consulting, Inc. in a private transaction exempt under 4(2) of the Act and Regulation D thereunder. 13 Item 6. Selected Financial Data The following selected financial data of the Company has been derived from the financial statements of the Company appearing elsewhere herein (except for the statement of operations data for the years ended December 28, 1996 and December 30, 1995 and the balance sheet data at January 3, 1998, December 28, 1996 and December 30, 1995, which is not included in such financial statements). All references to common shares and earnings (loss) per share data have been restated retroactively to reflect the fiscal 1997 and fiscal 1995 two-for-one stock splits, effected in the form of stock dividends.
Statements of Operations JAN 1, JAN 2, JAN 3, DEC 28, DEC 30, For the Fiscal Years Ended 2000 1999 1998 1996 1995 -------- -------- -------- -------- -------- (In thousands, except per share data) Revenues: $ 54,964 $ 74,165 $ 89,793 $ 46,678 $ 27,611 Costs and Expenses: Costs of products sold 33,326 46,606 43,854 20,409 14,924 Engineering and product development 17,671 15,413 10,656 8,894 6,155 Sales and marketing 5,934 5,620 4,302 2,588 1,727 General and administrative 6,006 8,845 5,162 3,736 2,050 Provision for settlement of shareholder litigation(1) 23,200 -- -- -- -- -------- -------- -------- -------- -------- Total costs and expenses 86,137 76,484 63,974 35,627 24,856 -------- -------- -------- -------- -------- Other Income (Expense): Dividend and interest, net 501 623 374 782 327 Other, net 38 109 (244) (228) (2) -------- -------- -------- -------- -------- Other income, net 539 732 130 554 325 -------- -------- -------- -------- -------- Income (Loss) From Continuing Operations (30,634) (1,587) 25,949 11,605 3,080 Provision for Income Taxes(2) -- -- 9,460 3,984 220 -------- -------- -------- -------- -------- Income (Loss) From Continuing Operations (30,634) (1,587) 16,489 7,621 2,860 Discontinued Operations:(3) Loss from discontinued operations (448) (1,094) (2,117) (500) -- Loss on disposal of discontinued operations (8,534) -- -- -- -- -------- -------- -------- -------- -------- Loss From Discontinued Operations (8,982) (1,094) (2,117) (500) -- -------- -------- -------- -------- -------- Net Income (Loss) $(39,616) $ (2,681) $ 14,372 $ 7,121 $ 2,860 ======== ======== ======== ======== ======== Earnings (Loss) Per Share - Basic: From continuing operations $ (0.95) $ (0.05) $ 0.53 $ 0.26 $ 0.10 ======== ======== ======== ======== ======== From discontinued operations $ (0.28) $ (0.03) $ (0.07) $ (0.02) $ -- ======== ======== ======== ======== ======== Earnings (Loss) Per Share - Basic $ (1.23) $ (0.08) $ 0.46 $ 0.24 $ 0.10 ======== ======== ======== ======== ======== Earnings (Loss) Per Share - Diluted: From continuing operations $ (0.95) $ (0.05) $ 0.50 $ 0.23 $ 0.09 ======== ======== ======== ======== ======== From discontinued operations $ (0.28) $ (0.03) $ (0.06) $ (0.02) $ -- ======== ======== ======== ======== ======== Earnings (Loss) Per Share - Diluted $ (1.23) $ (0.08) $ 0.44 $ 0.21 $ 0.09 ======== ======== ======== ======== ======== Weighted Average Common Shares Outstanding - Basic 32,336 31,986 31,300 29,858 29,124 ======== ======== ======== ======== ======== Weighted Average Common Shares Outstanding - Diluted 32,336 31,986 32,695 33,163 31,710 ======== ======== ======== ======== ========
14 Item 6. Selected Financial Data - Continued: Balance Sheet Data
- ------------------------------------------------------------------------------------------------------------------------------------ JAN 1, JAN 2, JAN 3, DEC 28, DEC 30, As of 2000 1999 1998 1996 1995 -------- -------- -------- -------- -------- (In thousands) Working Capital $ 25,373 $ 37,080 $ 32,962 $ 29,179 $ 16,837 Total Assets 94,633 106,670 99,655 66,618 26,669 Short-Term Debt 1,024 522 4,800 -- -- Long-Term Debt 8,830 5,922 -- -- -- Other Long-Term Liabilities 22,950 -- -- -- -- Stockholders' Equity 49,855 87,453 85,990 57,443 22,726 Cash Dividends -- -- -- -- --
1. Provision for the proposed settlements with the plaintiffs in the class actions and related derivative suits filed in 1996. See Note 14 of notes to the financial statements. 2. Tax expense in fiscal 1997 and 1996 represented charges in lieu of income taxes, although no tax was payable as a result of stock compensation deductions. Accordingly, no tax benefit was recorded in fiscal 1999. See Note 5 of notes to the financial statements. 3. Includes the operations of Delta V Technologies, Inc., which were divested in fiscal 1999. See Note 3 of notes to the financial statements. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Background Presstek, Inc. (The "Company" or "Presstek"), incorporated in Delaware, was founded in September 1987 as a development company. It was established to find a new way to produce color offset printing. Heidelberger Druckmaschinen AG ("Heidelberg"), the world's largest printing press manufacturer, and the Company established a relationship that was formalized in 1991. In 1993 the Company completed the development of its high resolution, semiconductor based laser diode imaging and thermal plate technology referred to as PEARL(R). PEARL's thermal laser imaging technology enables its customers to image various types of Presstek printing plates either off-press or on-press which may then be used to produce high-quality, full color lithographic printed materials for the printing and graphic arts industries. These printed materials typically can be produced at a lower cost than traditional competitive methods. The PEARL-based GTO-DI was introduced in late 1993, and in May of 1995, Heidelberg introduced the Quickmaster DI. The Quickmaster DI design is centered around Presstek's digital imaging and plate technology, and includes the Company's patented automatic plate changing cylinder. The unique design feeds plates from inside the cylinder, eliminating the need to manually change plates between jobs. The Company began shipment of its PEARL-based Quickmaster direct imaging systems to Heidelberg in the second quarter of 1995. The Company estimates that as of the end of 1999, there are more than 1,100 PEARL-equipped GTO-DI and Quickmaster DI presses installed utilizing the Company's proprietary consumable printing plates. The Company is also engaged in the development of additional PEARL and DI(R) products that incorporate its patented, proprietary, digital imaging system and process free thermal ablation printing plate technologies for computer-to-plate and direct-to-press applications. During fiscal 1996, the Company began shipments of its PEARL platesetter, referred to as the PEARLsetter. The PEARLsetter is a computer-to-plate imaging system that images both the Company's wet and dry offset plates. Also in 1996, the Company began shipments of its direct imaging system for a larger format Adast (19" x 26") multicolor press, the Adast 705C DI series of presses. In fiscal 1998 the Company began shipments of its PEARLhdp laser imaging system. The PEARLhdp, jointly developed with Imation Corp., is a digital halftone, proofing device. It can produce true halftone "dot for dot" color press proofs using the Company's computer-to-plate imaging system specially modified for this unique application. The Company has entered into a comprehensive agreement whereby Imation Corp. has been granted exclusive rights for sales, marketing and distribution of the PEARLhdp proofing system. The Company also has agreements with a number of other companies including Scitex Corporation LTD., Nilpeter A/S, Werner Kammann Maschinenfabrik GmbH, Alcoa Packaging Equipment, Sakurai Graphic Systems Corp., Fuji Photo Film Co., Ltd. and Akiyama Printing Machinery Manufacturing Corporation. These agreements typically are for the use of the Company's direct imaging systems, technology licenses, and/or thermal plate materials. They include a variety of "direct-to" offset printing applications ranging from high quality label production and printing on aluminum cans to the production of normal four-color printing. During the third quarter of fiscal 1999 the Company determined to sell or otherwise discontinue the operations of its Delta V Technologies, Inc., ("Delta V") subsidiary to allow the Company to further focus its efforts on the core business of digital imaging and plate manufacturing. Located in Tucson, Arizona, Delta V was engaged in the development, manufacture, and sale of vacuum deposition coating equipment for vacuum coating applications. The Company discontinued the operations of Delta V as of the end of fiscal 1999. As a result of the divestiture of Delta V, the Company incurred a $8.5 million loss on disposal of discontinued operations for the fiscal year ended January 1, 2000. This included actual closing costs and operating losses incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision for anticipated closing costs of $1.6 million, $6.1 million related to the write off of goodwill and other intangibles assets, and a reduction in other asset values of $1.6 million. These costs were partially offset by proceeds of $3.0 million received from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing of the Company's intellectual property relating to vacuum-deposited polymer multilayer technology. Delta V is reported separately as a discontinued operation, and prior periods have been restated in the Company's financial statements, related footnotes and the management's discussion and analysis to conform to this presentation. 16 In November 1999 the Company acquired 100% of the stock of R/H Consulting, Inc. ("R/H"). R/H was principally engaged in the research and development of laser imageable printing plates. R/H was purchased for $500,000 and 142,855 shares of the Company's common stock. The excess purchase price over book value of net assets acquired of $1.9 million has been allocated to the patents acquired. The acquisition was accounted for as a purchase and accordingly the results of R/H's operations subsequent to November 1999 (which are immaterial) have been included in the financial statements for fiscal 1999. The results of R/H's operations for 1999 and 1998 would not have had a material impact on the Company's results of operations for the comparable periods. In October 1998, the Company sold, for their book value, certain assets of Heath Custom Press, Inc. ("Heath"), which had been purchased in January 1998 for 94,865 unregistered shares of the Company's common stock. Heath was engaged in the design and manufacture of custom printing presses. The Company operates and reports on a 52/53, week fiscal year, ending on the Saturday closest to December 31. Accordingly, the financial statements include the 52 week period ended January 1, 2000 ("fiscal 1999"), the 52 week period ended January 2, 1999 ("fiscal 1998"), and the 53 week period ended January 3, 1998 ("fiscal 1997"). As a result of the divestiture of Delta V, the Company determined that it operates in one reportable segment, the development and manufacture of digital imaging and printing plate technologies for the printing and graphic arts industry. Results of Operations Fiscal 1999 versus Fiscal 1998 Revenues Revenues for fiscal 1999 and 1998 of $55.0 million and $74.2 million, respectively, consisted of product sales, royalties, fees and other reimbursements. Revenues for fiscal 1999 decreased $19.2 million or 26% as compared to fiscal 1998. Product sales for fiscal 1999 were $47.9 million as compared to $60.8 million in fiscal 1998, a decrease of $12.9 million or 21%. The decrease was due primarily to a decrease of shipments to Heidelberg for direct imaging systems used in the Quickmaster DI, and a decrease in sales of custom printing press products. These decreases were partially offset by an increase in sales of the Company's proprietary digital media and consumable products. The revenues generated from the sale of the Company's PEARLdry(TM) and other consumable products were $37.1 million for fiscal 1999, an increase of $8.8 million or 31%, as compared to $28.3 million in fiscal 1998. These consumable product revenues included $17.2 million and $11.4 million for fiscal 1999 and 1998, respectively, sold under the Company's agreements with Heidelberg and its distributors. Royalties and fees from licensees for fiscal 1999 of $7.0 million decreased $6.3 million or 47% as compared to royalties and fees of $13.3 million for fiscal 1998. Royalties decreased $7.0 million or 91% comparing fiscal 1999 to fiscal 1998 offset by an increase in engineering fees primarily from Fuji Photo Film Co., Ltd., of $634,000 or 11% in fiscal 1999. The decrease is primarily the result of the reduction in shipments of direct imaging systems to Heidelberg for use in the Quickmaster DI. Revenues generated under the Company's agreements with Heidelberg and its distributors were $21.6 million in fiscal 1999, a decrease of $20.5 million or 49% from fiscal 1998 revenues of $42.1 million. Revenues from Heidelberg represented 39% and 57% of total revenues for the fiscal years 1999 and 1998, respectively. In fiscal 1998 and 1999, the Company materially reduced production levels of direct imaging systems used in the Quickmaster DI press, based on requirements from Heidelberg. The Company received orders in fiscal 1999 from Heidelberg in connection with its direct imaging systems used in the Quickmaster DI. Based on the delivery schedule for these orders, the Company resumed production with initial low level shipments of its direct imaging systems late in the third quarter of fiscal 1999. The Company expects to continue shipments through the end of fiscal 2000. Additionally, the Company believes production levels through the end of fiscal 2000 will increase in line with the actual rate of Quickmaster DI's made by Heidelberg. 17 The Company believes that revenues will increase in fiscal 2000 as compared to fiscal 1999, primarily due to the increased requirements for the direct imaging systems used in the Quickmaster DI, and related increases for the Company's proprietary consumables sold for the Quickmaster DI and other equipment. There can be no assurance, however that the Company will achieve these anticipated revenue increases. Cost of Products Sold Cost of products sold consists of the costs of material, labor and overhead as well as future warranty costs associated with product sales. Cost of products sold for fiscal 1999 were $33.3 million, a decrease of $13.3 million or 29% as compared to fiscal 1998. The gross margin increase to 30% in fiscal 1999 from 23% in fiscal 1998 is primarily the result of economies related to increased manufacturing volumes of proprietary digital media and consumable products, a reduction in allowances provided as a result of product requirement changes and inventory obsolescence, offset by inefficiencies related to reduced manufacturing volumes of direct imaging systems sold to Heidelberg for use in its Quickmaster DI. The Company anticipates that the gross margin on product sales will continue to improve in fiscal 2000, as the Company increases production volumes for its direct imaging systems sold to Heidelberg and implements process improvements for its digital media and consumable products. There can be no assurance however that the actual gross margins will not be lower than anticipated. Research and Product Development Research and product development expenses consist primarily of payroll and related expenses for personnel, parts and supplies, and contracted services required to conduct the Company's equipment and consumable product development efforts. Research and product development expenses were $17.7 million or 32% of revenues for fiscal 1999 as compared to $15.4 million or 21% of fiscal 1998 revenues. The increase resulted principally from increased expenditures for labor and professional services related to the Company's continued development of products incorporating its PEARL and DI technologies. Included in these development efforts were significant expenditures for the Company's digital plate media and consumable products, as well as expenditures for its next-generation ProFire(TM) integrated imaging system and other product development efforts. These increased expenditures were also a result of increased engineering programs related to the development contract with Fuji Photo Film Co., Ltd. The Company expects these increased development expenditures to continue through fiscal 2000, as it prepares for the introduction of its next-generation integrated imaging system, expands its offerings of proprietary consumable printing plates, and pursues the development of additional products for the DRUPA 2000 international printing-media trade show. There can be no assurance however, that these expenses will not be greater than anticipated. Sales and Marketing Sales and marketing expenses consist primarily of payroll and related expenses for personnel, advertising and promotional expenses, and travel costs. Sales and marketing expenses were $5.9 million or 11% of revenues for fiscal 1999 compared to $5.6 million or 8% of fiscal 1998 revenues. The increase resulted primarily from increased expenditures for labor and professional services, and other related costs associated with the Company's attendance at trade shows and the continued expansion of its worldwide sales, distribution and customer support network. It is expected that these expenditures will continue to increase through fiscal 2000 as the Company continues to expand its direct sales force and customer support network for its products. The Company also expects a significant increase in expenditures in the second quarter of fiscal 2000, as a result of its planned attendance at Drupa 2000 in May. There can be no assurance, however, that these expenditures will not be greater than currently anticipated. General and Administrative General and administrative expenses consist primarily of payroll and related expenses for personnel, and contracted professional services. General and administrative expenses for fiscal 1999 were $6.0 million or 11% of revenues compared to $8.8 million or 12% of fiscal 1998 revenues. The decrease of $2.8 million related primarily to decreases in expenditures for contracted professional services required to conduct the finance, information systems, and administrative functions of the Company, as well as, the reduction in the 18 provision for uncollectable accounts. The Company recorded a charge of $2.2 million for certain disputed and uncollectable accounts in fiscal 1998. The Company anticipates that general and administrative costs for fiscal 2000 will increase over current levels, however, there can be no assurance that these expenses will not be greater than anticipated. Provision For the Settlement of Shareholder Litigation The Company has recorded a charge of $23.2 million in fiscal 1999 related to the proposed settlement with the plaintiffs in the class actions which were filed in 1996 in the United States District Court for the District of New Hampshire on behalf of the Company's shareholders, and with the plaintiffs in the related derivative suits. The charge includes the $22.9 million settlement, and related administrative costs in the amount of $250,000. Other Income and Expense Other income was $539,000 or 1% of revenues for fiscal 1999 compared to $732,000 or 1% of revenues for fiscal 1998. The decrease of $193,000 is primarily the result of a decrease in average cash balances available for investment, as well as interest expense incurred on the Company's lease line of credit with Keybank National Association. Provision for Income Taxes The Company did not record provisions for federal or state income taxes or charges in lieu of federal or state income taxes for fiscal 1999 and 1998, as a result of the net operating losses incurred prior to tax deductions related to stock compensation in both periods. Loss from Continuing Operations As a result of the foregoing, the Company had losses from continuing operations of $30.6 million for fiscal 1999, as compared to losses from continuing operations of $1.6 million for fiscal 1998. Loss from Discontinued Operations The results of operations of Delta V are presented as discontinued operations. For fiscal 1999 the Company incurred a loss from discontinued operations of $448,000, as compared to a loss of $1.1 million for fiscal 1998. In addition, for fiscal 1999 the Company recorded a loss on disposal of its discontinued operations of $8.5 million. This included actual closing costs and operating losses incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision for anticipated closing costs of $1.6 million, $6.1 million related to the write off of goodwill and other intangible assets, and a reduction in other asset values of $1.6 million. These costs were partially offset by proceeds of $3.0 million received from 3M for the licensing of the Company's intellectual property relating to vacuum-deposited polymer multilayer technology. Fiscal 1998 versus Fiscal 1997 Revenues Revenues for fiscal year 1998 of $74.2 million consisting of product sales, royalties, fees and other reimbursements, decreased $15.6 million or 17% as compared to revenues of $89.8 million for fiscal 1997. Net product sales for fiscal 1998 of $60.8 million decreased $10.5 million or 15% as compared to net product sales of $71.3 million in fiscal 1997, primarily as a result of a reduction in sales volume of direct imaging systems to Heidelberg for use in the Quickmaster DI. These reductions were partially offset by the increased sales volume of custom printing presses as a result of the acquisition of Heath in 1998, as well as increased sales volume of the Company's proprietary thermal printing plates. The revenues generated from the sale of the Company's PEARLdry and other consumable products were $28.3 million for the fiscal year 1998, an increase of $10.8 million or 62% over fiscal 1997 due to increased sales volume. 19 Royalties and fees from licensees for fiscal 1998 of $13.3 million decreased $5.2 million or 28% as compared to royalties and fees of $18.5 million for fiscal 1997. Royalties decreased $9.5 million or 56% comparing fiscal 1998 to fiscal 1997, as a result of the reduction in sales volume of direct imaging systems to Heidelberg for use in the Quickmaster DI. Engineering fees increased $4.3 million or 302% in fiscal 1998 primarily as a result of engineering and other fees received from Fuji Photo Film Co., Ltd. Included in fiscal 1997 were certain fees related to the Company's agreement to license its on-press imaging patents to Scitex Corporation Ltd. Revenues generated under the Company's agreements with Heidelberg and its distributors were $42.1 million in fiscal 1998, a decrease of $31.6 million or 43% from fiscal 1997 revenues of $73.7 million. Revenues from Heidelberg represented 57% and 82% of total revenues for the fiscal years 1998 and 1997, respectively. Cost of Products Sold Cost of products sold for fiscal 1998 were $46.6 million, an increase of $2.8 million or 6% as compared to fiscal 1997. The gross margin decrease to 23% from 38% in fiscal 1997 was primarily the result of reduced manufacturing volume of the direct imaging systems sold to Heidelberg for use in the QM-DI, as well as increased fixed costs associated with the Hudson, New Hampshire manufacturing operations. Also included in fiscal 1998 was an allowance of $1.3 million provided to a major supplier as a result of a change in requirements and an allowance of $1.6 million for inventory obsolescence as a result of the planned introduction of the Company's next-generation laser technology. Research and Product Development Research and product development expenses were $15.4 million or 21% of revenues for fiscal 1998 as compared to $10.7 million or 12% of fiscal 1997 revenues. The increase resulted principally from increased expenditures for parts and supplies related to the Company's continued development of products incorporating its PEARL technology. Included in these development efforts were significant expenditures for the Company's PEARLgold(TM) and other consumable products as well as expenditures for its next-generation laser diode technology and other product development efforts. These increased expenditures were also a result of increased engineering programs related to the development contract with Fuji Photo Film Co., Ltd. Sales and Marketing Sales and marketing expenses were $5.6 million or 8% of revenues for fiscal 1998 compared to $4.3 million or 5% of fiscal 1997 revenues. The increase resulted primarily from increased expenditures for professional services and other related costs associated with the Company's attendance at trade shows and the continued expansion of its worldwide sales, distribution and technical support network. General and Administrative General and administrative expenses for fiscal 1998 were $8.8 million or 12% of revenues compared to $5.2 million or 6% of fiscal 1997 revenues. The increase of $3.6 million related primarily to increased expenditures for additional personnel required to conduct, the finance, information systems, and administrative functions of the Company. In addition, the Company recorded a charge of $2.2 million for certain disputed and uncollectable accounts. Other Income and Expense Other income was $732,000 or 1% of revenues for fiscal 1998 compared to $130,000 or .1% of revenues for fiscal 1997. The increase of $602,000 can be attributed to increased interest income earned as a result of higher average balances of funds available for investment, the gain from the sale of a parcel of land in Hudson, New Hampshire, as well as the absence of foreign exchange losses incurred on certain receivables from Heidelberg in fiscal 1997. 20 Provision for Income Taxes For fiscal 1998, the Company did not record a provision for income taxes as a result of the tax loss prior to deductions related to stock compensation for the period. The provision for income taxes for fiscal 1997 represents the tax benefit arising from stock option deductions and the realization of net operating loss carryforwards resulting from compensation deductions for tax purposes. The tax benefit related to such stock option deductions has been recorded as additional paid in capital. Income (Loss) from Continuing Operations As a result of the foregoing, the Company had losses from continuing operations of $1.6 million for fiscal 1998, compared to net income from continuing operations of $16.5 million for fiscal 1997. Loss from Discontinued Operations The results of operations of Delta V are presented as discontinued operations. For fiscal 1998 the Company recorded a loss from discontinued operations of $1.1 million compared to a loss of $2.1 million for fiscal 1997. Liquidity and Capital Resources At January 1, 2000, the Company had cash and cash equivalents of $18.7 million and working capital of $25.4 million as compared to cash and cash equivalents of $19.1 million and working capital of $37.1 million at January 2, 1999. Net cash provided by operating activities of continuing operations was $8.4 million for the fiscal year ended January 1, 2000. The cash flow resulted primarily from reductions in accounts receivable and inventories of $9.7 million, less the loss from continuing operations of $30.6 million, offset by non-cash items of depreciation and amortization of $5.7 million, provisions for uncollectable accounts of $1.8 million, and the provision for the settlement of shareholder litigation of $23.0 million. Cash flow from continuing operations was also affected by the decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $2.0 million. This decrease was primarily the result of a decrease in advance payments related to the Company's development program with Fuji Photo Film Co., Ltd. Net cash used in investing activities of continuing operations was $12.9 million for the fiscal year ended January 1, 2000 and consisted primarily of additions to property, plant and equipment used in the Company's business of $11.8 million. These additions included $6.8 million for additional plate manufacturing equipment that is expected to reduce the cost of manufacturing the Company's proprietary digital media and consumable products and $885,000 for additional equipment that will enhance the Company's development capabilities. Net cash provided by financing activities during the fiscal year ended January 1, 2000 totaled $4.0 million and consisted primarily of the proceeds from Company's lease line of credit of $4.0 million and proceeds from the issuance of common stock of $608,000, offset by payments on the mortgage term loan and the lease line of credit of $630,000. In September 1999, the Company borrowed $4.0 million against a $10.0 million lease line of credit facility from Keybank National Association. Borrowings are secured by equipment valued at $5.2 million. The loan bears a variable rate of interest, currently 7.25%, based upon the prime rate, with a fixed rate conversion provision. Principal and interest on the lease line of credit facility are payable in 84 monthly installments beginning October 31, 1999. The commitment for the balance of $6.0 million available under the lease line of credit is scheduled to expire on April 30, 2000. The Company's credit facilities with Citizens Bank New Hampshire, ("Citizens") include a ten-year mortgage term loan and a revolving line of credit loan. The mortgage term loan in the amount of $6.9 million, is secured by land and buildings with a cost of approximately $17.0 million. The loan bears a fixed rate of interest of 7.12% per year during the first five years and a variable rate of interest at the LIBOR rate plus 2%, (7.82% at January 1, 2000) for the remaining five years. Principal and interest payments during the first five years of the 21 loan will be made in 60 monthly installments of $80,500. During the remaining five years, principal and interest payments will be made on a monthly basis in the amount of one-sixtieth of the outstanding principal amount as of the first day of the second five year period, plus accrued interest through the monthly payment date. All outstanding principal and accrued and unpaid interest is due and payable on February 6, 2008. The revolving line of credit loan, under which the Company may borrow $10.0 million, is secured by substantially all of the Company's assets. Interest on the line of credit is payable at the LIBOR rate plus 1.50% (7.32% at January 1, 2000). The loan agreement terminates on July 31, 2000, at which date, the entire principal and accrued interest is due and payable. The Company currently has $10.0 million available under the line of credit loan agreement. Under the terms of the mortgage term loan, the lease line of credit and the revolving line of credit agreements, the Company is required to meet certain financial covenants on a quarterly and annual basis. At January 1, 2000, the Company was in compliance with all debt covenants. The Company has approved expenditures for fiscal 2000 of $5.0 million for the second phase of its corporate headquarters at 55 Executive Drive. The Company will initially fund the construction through existing funds and cash flow from operations. This additional facility will include the Company's corporate offices, sales and marketing operations, as well as additional manufacturing facilities, and is expected to be completed in October 2000. The Company believes that existing, funds, cash flows from operations, and cash available under its revolving line of credit and lease line of credit should be sufficient to satisfy working capital requirements and capital expenditures for the next twelve months. Effect of Inflation Inflation has not had, and is not expected to have, a material impact upon the Company's operations. Net Operating Loss Carryforwards As of January 1, 2000, the Company had net operating loss carryforwards totaling approximately $38.0 million resulting from stock compensation deductions, for tax purposes, relative to stock option plans and $15.0 million resulting from operating losses. To the extent net operating losses resulting from stock option plan compensation deductions become realizable, the benefit will be credited directly to additional paid in capital. The amount of the net operating loss carryforwards that may be utilized in any future period may be subject to certain limitations, based upon changes in the ownership of the Company's common stock. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 (as amended by SFAS No. 137) is effective for fiscal years beginning after June 15, 2000. The Company does not presently enter into any transactions involving derivative financial instruments and, accordingly, does not anticipate the new standard will have any effect on its financial statements for the foreseeable future. Year 2000 The Company established a program to determine the impact of the Y2K issue on the software and hardware utilized in the Company's internal operations and incorporated in its products manufactured for sale to customers. This assessment included applications and systems software, information technology ("IT") infrastructure, manufacturing and process control technology, products and services, and third party suppliers and customers. As of the date of this report, the Company successfully completed the Y2K transition with no significant impact to its business, results of operations, or financial condition. The total costs associated with becoming Y2K compliant were not material to the Company's financial position or operations. Costs incurred 22 through January 1, 2000 have been incurred as part of normal IT operating costs. The Company will continue to monitor its critical systems and infrastructure throughout the year 2000. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is exposed to market risk from changes in interest rates primarily as a result of its borrowing and investing activities. The Company does not enter into interest rate swap agreements or other speculative or leveraged transactions. The Company currently has no material exposure to interest rate fluctuations on its short-term investments or variable rate debt instruments. Item 8. Financial Statements and Supplementary Data. The financial statements required by Item 8 of Form 10-K appear after Item 14 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable 23 PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item will be set forth under the caption "Election of Directors" and "Executive Officers" in the Proxy Statement for the Annual Meeting of Stockholders to be held on June 19, 2000, to be filed with the Securities and Exchange Commission (the "Proxy Statement"), and is incorporated herein by reference. Item 11. Executive Compensation. The information required by this item will be set forth under the caption "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item will be set forth under the caption "Voting Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by this item will be set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement, and is incorporated herein by reference. 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements Page ---- Report of Independent Certified Public Accountants F-2 Balance Sheets as of January 1, 2000, and January 2, 1999 F-3 Statements of Operations for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-4 Statements of Changes in Stockholders' Equity for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-5 Statements of Cash Flows for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-6 Notes to Financial Statements F-7 (a)(2) Financial Statement Schedules Schedule II-Valuation and Qualifying Accounts and Reserves. FS-1 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits Exhibit Number Description 3(a) Amended and Restated Certificate of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 29, 1996. 3(b) By-laws of the Company.*** 10(a) Confidentiality Agreement between the Company and Heidelberger Druckmaschinen A.G., effective December 7, 1989 as amended, incorporated by reference to Exhibit 10(i) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10(b) Master Agreement effective January 1, 1991, by and between Heidelberger Druckmaschinen Aktiengesellschaft and the Company, incorporated by reference to the Company's Form 8-K, dated January 1, 1991. 25 10(c) Technology License effective January 1, 1991, by and between Heidelberger Druckmaschinen Aktiengesellschaft and the Company, incorporated by reference to the Company's Form 8-K, dated January 1, 1991. 10(d) Memorandum of Performance No. 3 dated April 27, 1993, to the Master Agreement, Technology License, and Supply Agreement between the Company and Heidelberger Druckmaschinen Aktiengesellschaft, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1993. 10(e) Modification to Memorandum of Performance No. 3 dated April 27, 1993, to the Master Agreement, Technology License, and Supply Agreement between the Company and Heidelberger Druckmaschinen Aktiengesellschaft.+ 10(f) Memorandum of Understanding No. 4 dated November 9, 1995, to the Master Agreement and Technology License and Supply Agreement between the Company and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I) 10(g) Lease relating to real property located at 9 Commercial St., Hudson, NH. +++ 10(h) Lease relating to real property located at 18-20 Hampshire Dr., Hudson, New Hampshire. +++ 10(i)(1) Employment Agreement dated March 30, 1999 between the Company and Richard Williams. **** 10(j)(1) 1991 Stock Option Plan. * 10(k)(1) 1994 Stock Option Plan. + 10(l)(1) Non-Employee Director Stock Option Plan. **** 10(m)(1) 1997 Interim Stock Option Plan. ++ 10(n) Memorandum of Understanding No. 5 dated March 7, 1997 between the Company and Heidelberger Druckmaschinen Aktiengesellschaft. ***(I) 10(o) Amendment to Loan Agreement between the Company and Citizens Bank, New Hampshire. **** 10(p) Replacement Revolving Line of Credit Promissory Note in favor of Citizens Bank, New Hampshire. **** 10(q)(1) 1998 Stock Incentive Plan ++++ 10(r)(1) Employment Agreement by and between the Company and Robert W. Hallman. +++++ 10(s)(1) Master Security agreement and related Promissory Note, by and between the Company and Keycorp Leasing, a Division of Key Corporate Capital, Inc., dated September 27, 1999, incorporated by reference to the Company's Form 10-Q for the quarter ended October 1, 1999. 10(t) Amendment to existing loan agreement with Citizens Bank, New Hampshire. 10(u) Amendment to existing loan agreement with Keybank Corporate Capital, Inc. 11 Calculations of earnings per share 21 Subsidiaries of the Company. 23(a) Consent of BDO Seidman, LLP. 27 Financial Data Schedule (for SEC use only) 26 (b) No Form 8-K's were filed during the quarter ended January 1, 2000. (c) See Item 14(a)(3) above. (d) See Item 14(a)(2) above. * Previously filed as an exhibit to the Company's Annual report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated by reference thereto. ** Previously filed as an exhibit to the Company's Form 8-K for the event dated February 15, 1996 and incorporated by reference thereto. *** Previously filed as an exhibit with the Company's Form 10-K for the fiscal year ended December 30, 1995 and incorporated by reference thereto. **** Previously filed as an exhibit with the Company's Form 10-K for the fiscal year ended January 2, 1999. (I) The SEC has granted the Company's request of confidential treatment with respect to a portion of this exhibit. + Previously filed as an exhibit to the Company's Annual report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated by reference thereto. ++ Incorporated by reference to the exhibit filed with the Company's Quarterly report on Form 10-Q for the quarter ended September 27, 1997. +++ Previously filed as an exhibit filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996 and incorporated by reference thereto. ++++ Incorporated by reference to the exhibit to the Company's April 23, 1998 Proxy Statement. +++++ Previously filed as an exhibit filed with the Company's Quarterly report on Form 10-Q for the Quarter ended October 3, 1998 and incorporated by reference thereto. (1) Denotes management employment contracts or compensatory plans. 27 INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants F-2 Balance Sheets as of January 1, 2000 and January 2, 1999 F-3 Statements of Operations for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-4 Statements of Changes in Stockholders' Equity for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-5 Statements of Cash Flows for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 F-6 Notes to Financial Statements F-7 Financial Statement Schedule: Schedule II - Valuation and qualifying accounts and reserves FS-1 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Presstek, Inc. Hudson, New Hampshire We have audited the accompanying balance sheets of Presstek, Inc. as of January 1, 2000 and January 2, 1999, and the related statements of operations, changes in stockholders' equity, and cash flows for the fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998. We have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Presstek, Inc. at January 1, 2000 and January 2, 1999, and the results of its operations and its cash flows for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP New York, New York February 14, 2000, except for note 14, as to which the date is March 24, 2000. F-2 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements PRESSTEK, INC. BALANCE SHEETS (amounts in thousands, except share data)
January 1, January 2, 2000 1999 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,653 $ 19,057 Accounts receivable, net of allowance for losses Of $3,302 and $2,536 in fiscal 1999 and 1998, respectively 11,645 20,626 Inventories 7,214 9,724 Other current assets 859 968 -------- -------- Total current assets 38,371 50,375 -------- -------- PROPERTY, PLANT AND EQUIPMENT, NET 45,695 39,497 -------- -------- OTHER ASSETS: Patent application costs and license rights, net 5,126 3,195 Other 146 176 Net non-current assets of discontinued operations 5,295 13,427 -------- -------- Total other assets 10,567 16,798 -------- -------- TOTAL $ 94,633 $106,670 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt $ 1,024 $ 522 Accounts payable and accrued expenses 8,844 8,893 Accrued salaries and employee benefits 1,269 937 Billings in excess of costs and estimated Earnings on uncompleted contracts 44 1,995 Net current liabilities of discontinued operations 1,817 948 -------- -------- Total current liabilities 12,998 13,295 -------- -------- LONG-TERM DEBT, NET OF CURRENT PORTION 8,830 5,922 -------- -------- OTHER LONG-TERM LIABILITIES 22,950 -- -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized 1,000,000 shares; no shares issues or outstanding -- -- Common stock, $.01 par value; authorized 75,000,000 shares; Issued and outstanding 32,515,651 shares at January 1, 2000; 32,276,263 shares at January 2, 1999 325 323 Additional paid-in capital 69,312 67,296 Retained earnings (deficit) (19,782) 19,834 -------- -------- Total stockholders' equity 49,855 87,453 -------- -------- TOTAL $ 94,633 $106,670 ======== ========
See notes to financial statements F-3 PRESSTEK, INC. STATEMENTS OF OPERATIONS For the Fiscal Years Ended (amounts in thousands, except per share data)
January 1, January 2, January 3, 2000 1999 1998 ---------- ---------- ---------- REVENUES: Product sales $ 47,948 $ 60,833 $ 71,278 Royalties and fees from licensees 7,016 13,332 18,515 -------- -------- -------- Total revenues 54,964 74,165 89,793 -------- -------- -------- COSTS AND EXPENSES: Cost of products sold 33,326 46,606 43,854 Research and product development 17,671 15,413 10,656 Sales and marketing 5,934 5,620 4,302 General and administrative 6,006 8,845 5,162 Provision for settlement of shareholder litigation 23,200 -- -- -------- -------- -------- Total costs and expenses 86,137 76,484 63,974 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS (31,173) (2,319) 25,819 -------- -------- -------- OTHER INCOME (EXPENSE): Dividend and interest, net 501 623 374 Other, net 38 109 (244) -------- -------- -------- Total other income, net 539 732 130 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (30,634) (1,587) 25,949 PROVISION FOR INCOME TAXES -- -- 9,460 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (30,634) (1,587) 16,489 -------- -------- -------- DISCONTINUED OPERATIONS: Loss from discontinued operations (448) (1,094) (2,117) Loss on disposal of discontinued operations (8,534) -- -- -------- -------- -------- LOSS FROM DISCONTINUED OPERATIONS (8,982) (1,094) (2,117) -------- -------- -------- NET INCOME (LOSS) $(39,616) $ (2,681) $ 14,372 ======== ======== ======== EARNINGS (LOSS) PER SHARE - BASIC: FROM CONTINUING OPERATIONS $ (0.95) $ (0.05) $ 0.53 ======== ======== ======== FROM DISCONTINUED OPERATIONS $ (0.28) $ (0.03) $ (0.07) ======== ======== ======== EARNINGS (LOSS) PER SHARE - BASIC $ (1.23) $ (0.08) $ 0.46 ======== ======== ======== EARNINGS (LOSS) PER SHARE - DILUTED: FROM CONTINUING OPERATIONS $ (0.95) $ (0.05) $ 0.50 ======== ======== ======== FROM DISCONTINUED OPERATIONS $ (0.28) $ (0.03) $ (0.06) ======== ======== ======== EARNINGS (LOSS) PER SHARE - DILUTED $ (1.23) $ (0.08) $ 0.44 ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 32,336 31,986 31,300 ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 32,336 31,986 32,695 ======== ======== ========
See notes to financial statements F-4 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Fiscal Years Ended January 1, 2000, January 2, 1999, January 3, 1998 (in thousands, except per share data)
Additional Retained Common Stock Paid-in Earnings Shares Amount Capital (Deficit) ------ ------ ------- --------- BALANCE AT DECEMBER 28, 1996 15,392 $ 154 $ 49,188 $ 8,143 Comprehensive income: Net income for the fiscal year 14,372 Other comprehensive income (loss): Unrealized gain on marketable securities Comprehensive income for the fiscal year Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $2.85 - $35.00 per share 924 10 4,855 Two-for-one stock split effected in the form Of a 100% stock dividend 15,551 155 (155) Tax benefit arising from stock option deductions -- -- 9,269 -- -------- -------- -------- -------- BALANCE AT JANUARY 3, 1998 31,867 319 63,157 22,515 Comprehensive loss: Net loss for the fiscal year (2,681) Other comprehensive loss: Unrealized gain on marketable securities Comprehensive loss for the fiscal year Issuance of unregistered shares of common stock relative to the acquisition of Heath Custom Press, Inc. at $25.38 per share 94 1 2,406 Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $2.85 - $10.94 per share 315 3 1,733 -- -------- -------- -------- -------- BALANCE AT JANUARY 2, 1999 32,276 323 67,296 19,834 Comprehensive loss: Net loss for the fiscal year (39,616) Other comprehensive loss: Comprehensive loss for the fiscal year Issuance of unregistered shares of common stock relative to the acquisition of R/H Consulting, Inc. at $9.875 per share 143 1 1,409 Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $3.55 - $13.75 per share 97 1 607 -- -------- -------- -------- -------- BALANCE AT JANUARY 1, 2000 32,516 $ 325 $ 69,312 $(19,782) ======== ======== ======== ======== Accumulated Other Total Comprehensive Stockholders' Income (Loss) Equity ------------- ------ BALANCE AT DECEMBER 28, 1996 $ (43) $ 57,442 Comprehensive income: Net income for the fiscal year 14,372 Other comprehensive income (loss): Unrealized gain on marketable securities 42 42 -------- Comprehensive income for the fiscal year 14,414 -------- Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $2.85 - $35.00 per share 4,865 Two-for-one stock split effected in the form Of a 100% stock dividend -- Tax benefit arising from stock option deductions -- 9,269 -------- -------- BALANCE AT JANUARY 3, 1998 (1) 85,990 Comprehensive loss: Net loss for the fiscal year (2,681) Other comprehensive loss: Unrealized gain on marketable securities 1 1 -------- Comprehensive loss for the fiscal year (2,680) -------- Issuance of unregistered shares of common stock relative to the acquisition of Heath Custom Press, Inc. at $25.38 per share 2,407 Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $2.85 - $10.94 per share -- 1,736 -------- -------- BALANCE AT JANUARY 2, 1999 (0) 87,453 Comprehensive loss: Net loss for the fiscal year (39,616) Other comprehensive loss -- -------- Comprehensive loss for the fiscal year (39,616) -------- Issuance of unregistered shares of common stock relative to the acquisition of R/H Consulting, Inc. at $9.875 per share 1,410 Issuance of common stock relative to the exercise of incentive and non-qualified stock options at $3.55 - $13.75 per share -- 608 -------- -------- BALANCE AT JANUARY 1, 2000 $ (0) $ 49,855 ======== ========
See notes to financial statements F-5 PRESSTEK, INC. STATEMENTS OF CASH FLOWS For the Fiscal Years Ended (in thousands)
January 1, January 2, January 3, 2000 1999 1998 -------- -------- -------- CASH FLOWS - OPERATING ACTIVITIES: Income (loss) from continuing operations $(30,634) $ (1,587) $ 16,489 Adjustments to reconcile income (loss) from continuing operations To net cash provided by operating activities of continuing operations: Tax benefit arising from stock option deductions -- -- 9,269 Depreciation 5,113 3,502 1,803 Amortization 569 547 456 Provision for warranty and other costs 290 679 1,113 Provision for losses on accounts receivable 1,790 4,655 1,053 Provision for shareholder litigation settlement 22,950 -- -- Other, net 41 38 34 Changes in operating assets and liabilities, net of effects from acquisitions: Decrease (increase) in accounts receivable 7,191 1,392 (11,232) Decrease (increase) in inventories 2,510 4,093 (2,569) Decrease in costs and estimated earnings in excess of billings on uncompleted contracts -- 899 182 Decrease (increase) in other current assets 109 (538) (47) Increase (decrease) in accounts payable and accrued expenses 100 (702) (1,607) Increase in accrued salaries and employee benefits 332 117 56 Billings in excess of costs and estimated earnings on uncompleted contracts (1,951) 1,995 -- -------- -------- -------- Net cash provided by operating activities of continuing operations 8,410 15,090 15,000 Net cash provided by (used in) operating activities of discontinued operations (7,196) 744 (864) -------- -------- -------- Net cash provided by operating activities 1,214 15,834 14,136 -------- -------- -------- CASH FLOWS - INVESTING ACTIVITIES: Investment in subsidiary, net of cash acquired (494) -- -- Purchases of property, plant and equipment (11,812) (6,410) (22,758) Proceeds from sale of land and equipment 459 442 538 Proceeds from sale of certain net assets of Heath Custom Press, Inc. -- 732 -- Increase in other assets (1,005) (584) (365) Sales and maturities of marketable securities -- 1,000 5,452 -------- -------- -------- Net cash used in investing activities of continuing operations (12,852) (4,820) (17,133) Net cash provided by (used in) investing activities of discontinued operations 7,215 85 (5,152) -------- -------- -------- Net cash used in investing activities (5,637) (4,735) (22,285) -------- -------- -------- CASH FLOWS - FINANCING ACTIVITIES: Net proceeds from sale of common stock 608 1,736 4,865 Proceeds from mortgage term loan -- 6,900 -- Repayments of mortgage term loan (518) (456) -- Proceeds from lease line of credit 4,041 -- -- Repayments of lease line of credit (112) -- -- Proceeds from (net payments of) revolving line of credit -- (4,800) 4,800 Payment of Heath Custom Press, Inc.'s revolving line of credit -- (600) -- -------- -------- -------- Net cash provided by financing activities 4,019 2,780 9,665 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (404) 13,879 1,516 CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 19,057 4,939 3,423 Cash acquired from Heath Custom Press, Inc. -- 239 -- -------- -------- -------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 18,653 $ 19,057 $ 4,939 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 114 $ 225 $ 171 ======== ======== ======== Income taxes $ -- $ 250 $ 90 ======== ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITY: Common stock issued and net assets acquired relating To the acquisition of RH Consulting, Inc. $ 1,410 $ -- $ -- ======== ======== ======== Common stock issued and net assets acquired relating To the acquisition of Heath Custom Press, Inc. $ -- $ 2,407 $ -- ======== ======== ========
See notes to financial statements F-6 PRESSTEK, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Presstek, Inc.("Presstek", or "the Company") is a leading developer of non-photographic, digital imaging and printing plate technologies for the printing and graphic arts industries. Presstek's products and applications incorporate PEARL(R) and DI(R) digital imaging technologies and utilize PEARL consumables for computer-to-plate and direct-to-press applications. The Company's patented DI and PEARL thermal laser diode family of products enables its customers to produce high quality, full-color lithographic printed materials more quickly and cost efficiently. In November 1999 the Company acquired 100% of the stock of R/H Consulting, Inc. ("R/H"). R/H was principally engaged in the research and development of laser imageable printing plates. See Note 2 of notes to the financial statements. In January 1998, the Company acquired 100% of the stock of Heath Custom Press, Inc. ("Heath"). In October 1998 the Company sold certain assets of Heath, which was engaged in the design and manufacture of custom printing presses. See Note 2 of notes to the financial statements. The divestiture of Delta V Technologies, Inc. ("Delta V") was recorded in the quarter ended October 2, 1999, and the financial statements for all periods reflect Delta V as a discontinued operation. All of the following notes, unless otherwise indicated, refer to the continuing operations of Presstek. See Note 3 of notes to the financial statements. As a result of the divestiture of Delta V, the Company determined that it operates in one reportable business segment, the development and manufacture of digital imaging and printing plate technologies for the printing and graphic arts industries. Principles of Consolidation - The financial statements for the fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998, include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. Fiscal Year - The Company operates and reports on a 52/53, week fiscal year ending on the Saturday closest to December 31. Accordingly, the financial statements include the 52 week period ended January 1, 2000 ("fiscal 1999"), the 52 week period ended January 2, 1999 ("fiscal 1998"), and the 53 week period ended January 3, 1998 ("fiscal 1997'). Use of Estimates - The Company prepares its financial statements in conformity with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Many of the Company's estimates and assumptions used in the financial statements relate to the Company's products, which are subject to rapid technological change. It is reasonably possible that changes may occur in the near term that would affect management's estimates with respect to the carrying values of inventories, property plant and equipment, patents, and software development costs. Reclassification - Certain prior fiscal years' accounts have been reclassified for comparative purposes to conform to the presentation in the current fiscal year. Revenue Recognition - The Company records revenues on product sales and related royalties at the time of shipment. Certain fees and other reimbursements are recognized as revenue when the related services have been performed or the revenues otherwise earned. Revenues from fixed-price and modified fixed-price development contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date compared to the estimated total of direct costs for each contract. As contracts can extend over one or more accounting periods, F-7 revisions in costs and earnings estimated during the course of the work are reflected during the accounting period in which the facts that required such revisions become known. Product Warranties - The Company warrants its products against defects in material and workmanship for a period of one year. Anticipated future warranty costs are accrued by a charge to expense as products are shipped and the related revenue recognized. At January 1, 2000 and January 2, 1999, accrued expenses included accrued warranty costs of $1.0 million and $930,000. Research and Development Costs - Research and development costs are expensed as incurred for financial reporting purposes. Such costs aggregated $17.7 million, $15.4 million, and $10.7 million, for fiscal 1999, 1998 and 1997, respectively. Comprehensive Income - The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" in the first quarter of fiscal 1998. SFAS No 130 sets standards for the reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is comprised of net income and all changes in stockholders' equity except those due to investments by owners and distributions to owners, which for the Company includes unrealized gains (losses) on marketable securities. The Company has elected to disclose comprehensive income in its Statement of Changes in Stockholders' Equity. Basic and Diluted Earnings (Loss) per Share - Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average numbers of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed giving effect to all diluted potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options. For fiscal 1999 and 1998, potentially dilutive securities that related to shares issuable upon the exercise of stock options granted by the Company were excluded, as their effect was antidilutive. See Note 4 of notes to the financial statements. Cash Equivalents, and Marketable Securities - For purposes of reporting cash flows, the Company considers all savings deposits, certificates of deposit, money market funds and deposits purchased, and short term investments with a maturity of three months or less to be cash equivalents. Marketable securities are classified as available for sale and are stated at fair market value. All unrealized gains and losses, if any, are recorded as a separate component of stockholders' equity. At January 1, 2000 and January 2, 1999 cash and cash equivalents consisted of cash balances on deposit and money market funds, and high-quality debt securities and commercial paper with a maturity of three months or less. Fair Value of Financial Instruments - The carrying values of cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments. The carrying amounts of the Company's bank borrowings under its lease line of credit agreement approximates fair value because the interest rates are based on floating rates identified by reference to market rates. The fair value of the Company's other long-term debt is estimated based on quoted market prices. At January 1, 2000, the fair value of the Company's long term debt approximated carrying value. Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consists primarily of cash equivalents and accounts receivable. The Company invests in high-quality money market instruments, securities of the U.S government, and high-quality corporate issues. Account receivables are generally unsecured and are derived from the Company's customers located around the world. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Concentration of credit risk with respect to account receivables results from a significant portion of the Company's receivables concentrated with two major customers. See Note 10 of notes to the financial statements. F-8 Inventories - Inventories are valued at the lower of cost or market value, with cost determined using the first-in, first-out method. At January 1, 2000 and January 2, 1999, inventories consisted of the following: 1999 1998 (In thousands) Raw materials $1,915 $7,156 Work in process 3,055 690 Finished goods 2,244 1,878 ------ ------ Total $7,214 $9,724 ====== ====== Property, Plant and Equipment - Property, plant and equipment are stated at cost and are depreciated using a straight-line method for both financial reporting and for tax purposes over their estimated useful lives (ranging from 3 to 30 years). Leasehold improvements are amortized over the life of the lease for financial reporting purposes. Patent Application Costs and License Rights - Patent application costs represent the expense of preparing and filing applications to patent the Company's proprietary technologies, in addition to certain patent and license rights obtained in the Company's acquisitions. Such costs are amortized over a period ranging from five to seven years, beginning on the date the patents or rights are issued or acquired. Amortization expense for fiscal 1999, 1998 and 1997, was $516,000, $453,000, and $145,000, respectively. Software Development Costs - Software development costs for products and certain product enhancements are capitalized subsequent to the establishment of their technological feasibility (as defined in Statement of Financial Accounting Standards No. 86) based upon the existence of working models of the products which are ready for initial customer testing. Costs incurred prior to such technological feasibility or subsequent to a product's general release to customers are expensed as incurred. During fiscal 1999, 1998 and 1997, the Company did not incur material costs subject to capitalization. Through fiscal 1996, the Company incurred and capitalized $895,000 million of costs subject to capitalization. Amortization of these costs commenced in fiscal 1995 when the related product was released to customers. Amortization expense reported for the fiscal years 1999, 1998, and 1997, were $40,000, $80,000, and $311,000, respectively. Amortization expense is based upon the ratio that current gross revenues bear to total estimated gross revenues, which was an amount greater than amortization on a straight-line method over the estimated economic life of the product from three to five years. As of January 1, 2000, all software development costs have been fully amortized. Long Lived Assets - Long-lived assets, such as intangible assets and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. As a result of the divestiture of Delta V, the Company recorded a charge of $6.1 million related to the write down of goodwill and other intangibles. No other write downs were necessary for fiscal 1999, 1998 and 1997. Stock-Based Compensation - The Company accounts for stock options granted to employees under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as permitted by Statement of Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for Stock-Based Compensation. APB 25 provides for compensation cost to be recognized over the vesting period of the options based on the difference, if any, between the fair market value of the Company's stock and the option price on the grant date. SFAS 123 requires companies that follow APB 25 to provide pro forma disclosure of the effect of applying the optional fair value method. See Note 8 of notes to the financial statements. Effect of New Accounting Pronouncements - In June 1998 the Financial Accounting Standards Board, issued Statement of Financial Accounting Standards No. 133; "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 (as amended by SFAS No. 137) requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company does not presently enter into any transactions involving derivative financial instruments and, F-9 accordingly, does not anticipate the new standard will have any effect on its financial statements for the foreseeable future. 2. BUSINESS ACQUISITIONS In November 1999 the Company acquired 100% of the stock of R/H Consulting, Inc. ("R/H"). R/H was principally engaged in the research and development of laser imageable printing plates. R/H was purchased for $500,000 and 142,855 shares of the Company's common stock. The excess purchase price over book value of net assets acquired of $1.9 million has been allocated to the patents acquired. The acquisition was accounted for as a purchase and, accordingly, the results of R/H's operations subsequent to November 1999 (which are immaterial) have been included in the financial statements for fiscal 1999. The results of R/H's operations for 1999 and 1998 would not have had a material impact on the Company's results of operations for the comparable periods. In January 1998, the Company acquired 100% of the stock of Heath. Heath was engaged in the design and manufacture of custom printing presses. Heath was purchased for 94,865 unregistered shares of the Company's common stock. The purchase price of $2.4 million has been allocated to assets acquired and liabilities assumed based on the fair market value at the date of acquisition as follows: current assets, $2.2 million; patents, $1.8 million; long-term assets, $.2 million; other liabilities, $1.8 million. The acquisition was accounted for as a purchase and, accordingly, the results of Heath's operations have been included in the Company's financial statements for the fiscal year 1999 and 1998. The results of Heath's operations would not have had a material impact on the Company's results of operations for fiscal 1997. In October 1998, the Company sold certain assets of Heath for $1.0 million, which approximated book value. The Company retained all rights to Heath's patents. 3. DISCONTINUED OPERATIONS During the third quarter of fiscal 1999 the Company determined to sell or otherwise discontinue the operations of its Delta V subsidiary to allow the Company to further focus its efforts on the core business of digital imaging and plate manufacturing. Located in Tucson, Arizona, Delta V was engaged in the development, manufacture, and sale of vacuum deposition coating equipment for vacuum coating applications. The Company discontinued the operations of Delta V at the end of fiscal 1999. As a result of the divestiture of Delta V, the Company incurred a $8.5 million loss on disposal of discontinued operations for fiscal year ended January 1, 2000. This included actual closing costs and operating losses incurred in the fourth quarter of fiscal 1999 of $2.2 million, a provision for anticipated closing costs of $1.6 million, $6.1 million related to the write off of goodwill and other intangibles assets, and a reduction in other asset values of $1.6 million. These costs were partially offset by proceeds of $3.0 million received from Minnesota Mining and Manufacturing Co. ("3M"), for the licensing of the Company's intellectual property relating to vacuum-deposited polymer mulitayer technology. Delta V is reported separately as a discontinued operation, and prior periods have been restated in the financial statements and related footnotes. Revenues and income from discontinued operations for fiscal 1999, 1998 and 1997 were as follows: 1999 1998 1997 ------- ------- ------- (amounts in thousands) Revenues $ 7,248 $10,221 $ 1,769 Costs and expenses 8,365 11,479 3,979 ------- ------- ------- Loss from operations (1,117) (1,258) (2,210) Other income 669 164 93 ------- ------- ------- Net loss from discontinued operations $ (448) $(1,094) $(2,117) ======= ======= ======= F-10 Net assets of discontinued operations at January 1, 2000 and January 2, 1999 were as follows:
1999 1998 ---- ---- (amounts in thousands) Cash $ 222 $ 224 Accounts receivable 700 12 Other current assets 1 968 Accrual for anticipated closing costs (1,626) -- Other current liabilities (1,114) (2,152) -------- ------- Net current liabilities of discontinued operations $ (1,817) $ (948) ======== ======= Land and buildings $ 5,295 $ 5,491 Equipment -- 1,405 Goodwill -- 5,996 Other -- 535 -------- ------- Net non-current assets of discontinued operations $ 5,295 $13,427 ======== =======
4. EARNINGS (LOSS) PER SHARE The following represents the calculation of basic and diluted earnings (loss) per share for fiscal 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- (amounts in thousands, except per share data) Income (loss) from continuing operations $(30,634) $(1,587) $16,489 Loss from discontinued operations (8,982) (1,094) (2,117) -------- ------- ------- Net income (loss) $(39,616) $(2,681) $14,372 ======== ======= ======= Weighted average common shares 32,336 31,986 31,300 Outstanding - Basic Effect of assumed conversion of stock options -- -- 1,395 -------- ------- ------- Weighted average common shares Outstanding - Diluted 32,336 31,986 32,695 ======== ======= ======= Earnings (loss) per share - Basic: From continuing operations $ (0.95) $ (0.05) $ 0.53 ======== ======= ======= From discontinued operations $ (0.28) $ (0.03) $ (0.07) ======== ======= ======= Earnings (loss) per share - Basic $ (1.23) $ (0.08) $ 0.46 ======== ======= ======= Earnings (loss) per share - Diluted: From continuing operations $ (0.95) $ (0.05) $ 0.50 ======== ======= ======= From discontinued operations $ (0.28) $ (0.03) $ (0.06) ======== ======= ======= Earnings (loss) per share - Diluted $ (1.23) $ (0.08) $ 0.44 ======== ======= =======
On May 30, 1997, the Company's Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend during the third quarter of fiscal 1997. The split resulted in the issuance of 15,549,862 shares of common stock. All references to average number of shares outstanding and prices per share have been restated retroactively to reflect the split. All stock options outstanding are excluded from the fiscal 1999 and 1998 calculation of diluted loss per share, as their effect would be anti-dilutive. Options to purchase 1,111,000 shares of common stock at exercise prices ranging from $26.56 to $49.38 per share were outstanding during a portion of fiscal 1997. These options were not included in the computation of diluted earnings per share as the exercise prices of the options were greater than the average market price of the common shares. These options, which expire between January 2, 2001 and December 22, 2003, were all outstanding at the end of fiscal 1997. F-11 5. INCOME TAXES The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The primary objectives of accounting for income taxes are to (a) recognize the amount of tax payable for the current fiscal year (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company's financial statements or tax returns. The components of the provision for income taxes for fiscal 1999, 1998 and 1997 were as follows: 1999 1997 1998 -------- -------- -------- (In thousands) Current tax expense - State $ -- $ -- $ 191 Charge in lieu of income taxes: Federal -- -- 7,740 State -- -- 1,529 -------- -------- -------- Total provision $ -- $ -- $ 9,460 ======== ======== ======== The Company did not record a provision for United States federal or state income taxes or a charge in lieu of federal or state income taxes due to the tax losses in fiscal 1999 and 1998, prior to the deductions related to stock compensation. The charge in lieu of income taxes included in the fiscal 1997 provision for income taxes represents the tax benefit arising from stock option deductions in that year and the realization of net operating loss carryforwards resulting from such deductions for tax purposes. The tax benefit related to such stock option deductions has been recorded as additional paid in capital. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax assets and liabilities consisted of the following at January 1, 2000, and January 2, 1999: 1999 1998 -------- -------- (In thousands) Deferred tax assets: Net operating loss carryforwards $ 18,500 $ 13,300 Tax credits 3,600 2,200 Warranty provisions, litigation and otheraccruals 11,400 3,000 -------- -------- Gross deferred tax assets 33,500 18,500 -------- -------- Deferred tax liabilities: Amortizable and depreciable assets 400 650 Accumulated depreciation and amortization 5,100 5,000 -------- -------- Gross deferred tax liabilities 5,500 5,650 -------- -------- 28,000 12,850 Less valuation allowance (27,950) (12,800) -------- -------- Deferred tax asset - net $ 50 $ 50 ======== ======== The $50,000 deferred tax asset was included in other current assets at January 1, 2000 and January 2, 1999. The valuation allowance increased $15.2 million and $1.1 million in fiscal 1999 and 1998, respectively. F-12 The difference between income taxes at the United States federal income tax rate and the effective income tax rate was as follows for fiscal 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- Computed at federal statutory rate (34)% (34)% 35% State tax, net of federal benefit -% -% 4% Increase in valuation allowance 34% 34% 1% --- --- --- Effective rate, net 0% 0% 40% === === === As of January 1, 2000, the Company had net operating loss carryforwards totaling approximately $53.0 million of which $38.0 million resulted from compensation deductions for tax purposes relative to stock option plans and $15.0 million resulted from operating losses. To the extent net operating losses resulting from stock option plan compensation deductions become realizable, the benefit will be credited directly to additional paid in capital. The amount of the net operating loss carryforwards that may be utilized to offset future taxable income, when earned, may be subject to certain limitations, based upon changes in the ownership of the Company's common stock. The following is a breakdown of the net operating losses and their expiration dates: Amount of Remaining Net Operating Expiration date Loss Carryforwards --------------- ------------------ (in thousands) 2005 $ 2,240 2006 5,020 2008 50 2009 500 2010 9,570 2011 14,850 2012 4,410 2013 1,080 2014 15,230 In addition, the Company has available tax credit carryforwards (adjusted to reflect provisions of the Tax Reform Act of 1986) of approximately $3.6 million which are available to offset future income tax liabilities when incurred. 6. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, at cost consisted of the following at January 1, 2000 and January 2,1999: 1999 1998 -------- -------- (in thousands) Land and improvements $ 1,115 $ 1,489 Buildings and leasehold improvements 15,611 14,304 Production equipment and other 34,452 31,291 Construction in progress 8,341 1,167 -------- -------- 59,519 48,251 Less accumulated depreciation (13,824) (8,754) -------- -------- $ 45,695 $ 39,497 ======== ======== The Company's construction in progress includes $6.8 million for additional plate manufacturing equipment that is expected to reduce the cost of manufacturing the Company's proprietary digital media and consumable products, $885,000 for additional equipment that will enhance the Company's development capabilities, and other test equipment of $656,000. The Company anticipates completion of its current equipment construction in progress in the first half of 2000, with an estimated cost to complete of approximately $1.7 million. F-13 7. LONG-TERM DEBT Long-term debt consisted of the following at January 1, 2000 and January 2, 1999: 1999 1998 ---- ---- (in thousands) Mortgage term loan $ 5,925 $ 6,444 Lease line of credit 3,929 - ------- ------- 9,854 6,444 Less current portion (1,024) (522) ------- ------- $ 8,830 $ 5,922 ======= ======= In September 1999, the Company borrowed $4.0 million against a $10.0 million lease line of credit facility from Keybank National Association. Borrowings are secured by equipment valued at $5.2 million. The loan bears a variable rate of interest based upon the prime rate, currently 7.25%, with a fixed rate conversion provision. Principle and interest on the lease line of credit facility are payable in 84 monthly installments beginning October 31, 1999. The commitment for the balance of $6.0 million available under the lease line of credit is scheduled to expire on April 30, 2000. The Company's credit facilities with Citizens Bank New Hampshire ("Citizens"), include a ten-year mortgage term loan and a revolving line of credit loan. The mortgage term loan in the amount of $6.9 million, is secured by land and buildings with a cost of approximately $17.0 million. The loan bears a fixed rate of interest of 7.12% per year during the first five years and a variable rate of interest at the LIBOR rate plus 2%, (7.82% at January 1, 2000) for the remaining five years. Principal and interest payments during the first five years of the loan will be made in 60 monthly installments of $80,500. During the remaining five years, principal and interest payments shall be made on a monthly basis in the amount of one-sixtieth of the outstanding principal amount as of the first day of the second five year period, plus accrued interest through the monthly payment date. All outstanding principal and accrued and unpaid interest is due and payable on February 6, 2008. The revolving line of credit loan, under which the Company may borrow $10.0 million, is secured by substantially all of the Company's assets. Interest on the line of credit is payable at the LIBOR rate plus 1.50% (7.32% at January 1, 2000). The loan agreement terminates on July 31, 2000, at which date, the entire principal and accrued interest is due and payable. The Company currently has $10.0 million available under the line of credit loan agreement. As of January 1, 2000, aggregate debt maturities for Long-Term Debt were as follows: (in thousands) 2000 $1,024 2001 1,107 2002 1,190 2003 1,278 2004 1,373 Under the terms of the mortgage term loan, the lease line of credit and the revolving line of credit agreements, the Company is required to meet certain financial covenants on a quarterly and annual basis. At January 1, 2000, the Company was in compliance with all debt covenants. 8. STOCKHOLDERS' EQUITY References herein to shares, options, warrants and the prices per share have been restated for all stock splits, effected in the form of stock dividends. Preferred Stock - The Company's certificate of incorporation empowers the Board of Directors, without stockholder approval, to issue up to 1,000,000 shares of $.01 par value preferred stock, with dividend, liquidation, conversion, and voting or other rights to be determined upon issuance by the Board of Directors. F-14 Restricted Stock Purchase Plan - On August 22, 1988 the Company adopted a Restricted Stock Purchase Plan ("the Purchase Plan"). The Purchase Plan originally authorizing the sale of up to 125,000 shares of common stock to its employees at a price to be determined by the Board of Directors, but in no event to be less than $.01 per share or greater than 110% of the then fair market value. This plan expired August 21, 1998. Stock Option Plans - As of January 1, 2000 the Company had four stock option plans in effect. The 1991 Stock Option Plan (the "1991 Plan"), the 1994 Stock Option Plan (the "1994 Plan"), the 1997 Interim Stock Option Plan (the "1997 Plan") and the 1998 Stock Incentive Plan (the "1998 Plan"). The 1988 Stock Option Plan (the "1988 Plan") expired on August 21, 1998. No future grants will be issued under this plan, however 18,743 shares remain outstanding and will expire according to the specified expiration terms under the individual grants. The 1991 Plan and the 1994 Plan provide for the award of options, to key employees and other persons, to purchase up to 2,500,000 shares of the Company's common stock. Options granted under these plans may be either Incentive Stock Options ("ISOs") or Nonqualified Options ("NQOs"). Generally, ISOs may only be granted to employees of the Company, at an exercise price of not less than fair market value of the stock at the date of grant. NQOs may be granted to any person, at any exercise price not less than par value, within the discretion of the Board of Directors or a committee appointed by the Board of Directors ("Committee"). The 1997 Plan provides for the award of options to key employees and other persons, to purchase up to 250,000 shares of the Company's common stock. Only NQOs may be granted under this plan. Under the 1997, 1994 and 1991 Plans, any options granted will generally become exercisable in increments over a period not to exceed ten years from the date of grant, to be determined by the Board of Directors or Committee. These options generally will expire not more than ten years from the date of grant. The 1998 Plan provides for the award (collectively "awards") of stock options, restricted stock, deferred stock, and other stock based awards to officers, directors, employees, and other key persons. A total of 3,000,000 shares of common stock, subject to anti-dilution adjustments have been reserved for this plan. Options under the 1998 Plan become exercisable upon the earlier of a date set by the Board of Directors or Committee at the time of grant or the close of business on the day before the tenth anniversary of the stock options' date of grant. Options become exercisable the day before the fifth anniversary of the date of grant in the case of an ISO. Director Stock Option Plan - The Company's Non-employee Director Stock Option Plan (the "Director Plan") allows only non-employee directors of the Company (other than Robert Howard or Dr. Lawrence Howard) to receive grants under the Director Plan. The Director Plan provides that eligible directors automatically receive a grant of options to purchase 5,000 shares of common stock at fair market value upon first becoming a director and, thereafter, an annual grant, in January of each year, of options to purchase 2,500 shares at fair market value. Options granted under this plan become 100% exercisable after one year and terminate five years from date of grant. F-15 The following table summarizes information about stock options outstanding at January 1, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Outstanding Weighted-Average Exercisable as Range of as of Remaining Weighted-Average of Weighted-Average Exercise Prices 1/1/00 Contractual Years Exercise Price 1/1/00 Exercise Price --------------- ------ ----------------- -------------- ------ -------------- $2.85 - $ 7.19 563,850 9.4 $6.84 1,300 $ 4.85 $7.20 - $ 7.89 867,338 5.5 $7.72 706,338 $ 7.76 $7.90 - $13.74 618,915 6.2 $9.72 403,415 $ 9.99 $13.75 887,200 8.2 $13.75 491,025 $ 13.75 $13.76 - $22.00 146,500 6.2 $14.36 57,000 $ 14.67 --------- --------- 3,083,803 7.1 $10.01 1,659,078 $ 10.31 ========= =========
Information concerning all stock option activity under the 1988, 1991, 1994, 1997, 1998 and the Director Plans for the fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998 is summarized as follows:
Weighted Option Option Price Average Price Shares Per Share Per Share --------- ------------ ------------- Outstanding at December 28, 1996 3,593,332 $ 2.85 - $49.62 $12.92 Granted 604,600 $ 22.00 - $49.38 $29.70 Exercised (1,082,002) $ 2.85 - $35.00 $ 4.50 Cancelled/Expired (83,250) $ 7.90 - $44.75 $35.91 --------- Outstanding at January 3, 1998 3,032,680 $ 2.85 - $49.62 $18.64 Granted 1,503,000 $ 7.19 - $25.00 $13.40 Exercised (314,844) $ 2.85 - $10.94 $ 5.51 Cancelled/Expired (1,719,800) $ 4.85 - $49.63 $26.96 --------- Outstanding at January 2, 1999 2,501,036 $ 3.55 - $44.75 $11.43 Granted 817,000 $ 5.88 - $15.88 $ 7.16 Exercised (96,533) $ 3.55 - $13.75 $ 6.30 Cancelled/Expired (137,700) $ 5.50 - $44.75 $21.48 --------- Outstanding at January 1, 2000 3,083,803 $ 4.85 - $16.81 $10.01 =========
The incentive and nonqualified stock options summarized in the previous table were granted under various vesting schedules ranging from immediate to five years, with termination dates ranging from five to ten years from dates of grant and may be subject to earlier termination as provided in the plans. F-16 In April 1998, the Company repriced grants previously issued between April 10, 1995 and March 30, 1998 under its 1988, 1991, 1994, 1997 and Non-Employee Director Stock Option Plans. A total of 1,127,000 options with exercise prices ranging from $18.00 to $49.63 per share were repriced to $13.75 or $14.75 per share. These options are reflected in the previous table as options granted and cancelled for fiscal 1998. In September 1999, the Company extended the expiration dates to ten years for all eligible stock options originally granted with expiration dates of six years. As the market value on the date of extension was less than the exercise price of the options, no compensation expense was recorded. The grants were treated as newly issued for purposes of the pro forma disclosure of net loss and loss per share indicated in the table below. The proceeds to the Company from stock options exercised during fiscal years 1999, 1998 and 1997, totaled $608,000, $1.7 million, and $4.9 million, respectively. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", requires the Company to provide pro forma disclosure of net income and earnings per share as if the optional fair value method had been applied to determine compensation costs for the Company's Stock Option plans. The Company has used the Black-Scholes option-pricing model to estimate the fair value of $9.25, $7.22, and $13.21, respectively, for each stock option issued in fiscal 1999, 1998, and 1997 using he following weighted average assumptions: a risk-free interest rate of 6.13%, 5.11%, and 5.62%; an expected option life of 6.68 years, 4.09 years, and 4.65 years; expected volatility of 79.6%, 72.92%, and 65.84%; and no dividends paid. Accordingly, the Company's net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated in the following table: 1999 1998 1997 -------- ------- ------- (In thousands, except per share data) Net income (loss) As reported $(39,616) $(2,681) $14,372 Pro forma $(60,981) $(9,036) $ 8,772 Earnings (loss) per share - Basic As reported $ (1.23) $ (.08) $ .46 Pro forma $ (1.89) $ (.28) $ .28 Earnings (loss) per share - Diluted As reported $ (1.23) $ (.08) $ .44 Pro forma $ (1.89) $ (.28) $ .27 The above pro forma's net income (loss) and net income (loss) per share do not recognize the related tax benefits in fiscal 1997 of $2.0 million, as these deferred tax assets would be fully offset by a valuation allowance. There was no related tax benefit for fiscal 1999 or 1998. In November 1999, the Company issued 142,855 shares of its common stock at $9.875 to acquire the net assets of R/H for an aggregate cost of $1.4 million, plus $500,000 paid to certain of its officers. 9. RELATED PARTIES During fiscal 1999, 1998, and 1997, the Company recorded sales of equipment and consumables to Pitman Company ("Pitman") of $15.5 million, $13.7 million and $7.6 million, respectively. At January 1, 2000 and January 2, 1999, the Company had accounts receivable from Pitman of $2.4 million and $3.8 million, F-17 respectively. John Dreyer, who has been a director of the Company since February 1996, is Pitman's President and Chief Executive Officer. On February 28, 1998, the Company made a loan to Robert E. Verrando in the amount of $200,000 at an interest rate of 8% per annum, with the principal and accrued interest payable on demand. At January 1, 2000 and January 2, 1999, $185,000 and $213,000, respectively was due to the Company. Mr. Verrando was the President and Chief Operating Officer of the Company from February 1996 to January 1999 when he retired from these positions. He was appointed Secretary of the Company in September 1998. He also remains a director on the Company's Board of Directors, and a consultant to the Company. The Company paid Robert Howard, the Company's Chairman Emeritus for consulting services provided to the Company. In each of the fiscal years 1999 and 1998 the Company paid $133,000, and in fiscal 1997 the Company paid $145,000. The Company had a payable to Mr. Howard of $12,000 for consulting services at January 1, 2000 and January 2, 1999. In fiscal 1998 and 1997 the Company subleased certain of its office facilities as a tenant-at-will from Mr. Howard. Payments totaled $38,000 for fiscal 1998 and $36,000 for fiscal 1997. 10. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION The geographic information included in the following table for fiscal 1999, 1998 and 1997 attributes revenues to the geographic locations based on the location of the Company's customer. 1999 1998 1997 ------- ------- ------- (in thousands) Geographic Revenues: United States $20,636 $23,243 $ 9,679 Germany 14,100 40,824 70,726 Japan 8,106 4,912 1,438 All Other 12,122 5,186 7,950 ------- ------- ------- $54,964 $74,165 $89,793 ======= ======= ======= Revenues generated under the Company's agreements with Heidelberg and its distributors totaled $21.6 million, $42.1 million, and $73.7 million for fiscal 1999, 1998, and 1997, respectively. Accounts receivable from Heidelberg totaled $6.5 million and $12.4 million, respectively, at January 1, 2000, and January 2, 1999. Revenues generated under the Company's agreements with Pitman totaled $15.5 million, $13.7 million and $7.6 million for fiscal 1999, 1998 and 1997, respectively. Accounts receivable from Pitman totaled $2.4 million and $3.8 million, respectively, at January 1, 2000 and January 2, 1999. No other customer represented more than ten percent of the Company's revenues in fiscal 1999, 1998, and 1997. 11. COMMITMENTS AND CONTINGENCIES The Company leases a number of its facilities under non-cancelable operating leases, many of which contain renewal options. The agreements generally require minimum monthly rents, adjusted annually, plus a pro rata share of real estate taxes and certain other expenses. Total rental expenses as a result of these agreements were $449,000 $513,000, and $542,000 for fiscal 1999, 1998, and 1997, respectively. As of January 1, 2000, future minimum lease payments under these agreements were as follows: 2000 $300,000 2001 93,000 2002 4,000 -------- Total $397,000 ======== The Company has employment agreements with two key executive officers. The agreements provide for minimum salary levels, subject to periodic review by the Company's Board of Directors. The employment agreements also contain certain change in control provisions, as defined, which entitle each executive to receive up to three times his five-year average annual compensation. The Company's maximum contingent liability under such agreements as of January 1, 2000 would be $1.3 million. F-18 12. HEIDELBERG AGREEMENTS In January 1991, the Company entered into a Master Agreement and a Technology License Agreement (collectively referred to as the "Heidelberg Agreements") with Heidelberg. The Heidelberg Agreements and amendments govern the Company's relationship with Heidelberg and relate to the integration of the PEARL Direct Imaging technology into various presses manufactured by Heidelberg. The manufacture of components, at specified rates, for such presses and the commercialization of such presses are also covered. The Heidelberg Agreements expire in December 2011 subject to certain early termination and extension provisions. Under these agreements, Heidelberg agreed to pay royalties to the Company based on the net sales prices of various specified types of Heidelberg presses on which the Company's PEARL Direct Imaging technology would be used. Pursuant to the Heidelberg Agreements, Heidelberg has been provided with certain exclusive rights for use of the PEARL Direct Imaging technology for the Quickmaster DI format size. The Master Agreement has also been modified to provide Heidelberg with a fixed royalty rate for the Company's PEARL Direct Imaging systems used in the Quickmaster DI. In fiscal 1998 and 1999, the Company materially reduced production levels of direct imaging systems used in the Quickmaster DI press, based on requirements from Heidelberg. The Company received orders in fiscal 1999 from Heidelberg in connection with its direct imaging systems used in the Quickmaster DI. Based on the delivery schedule for these orders, the Company resumed production with initial low level shipments of its direct imaging systems late in the third quarter of fiscal 1999. The Company expects to continue shipments through the end of fiscal 2000. Additionally, the Company believes production levels through the end of fiscal 2000 will increase in line with the actual rate of Quickmaster DI's made by Heidelberg. 13. OTHER INFORMATION Since June 28, 1996, several class action lawsuits have been filed against the Company and certain other defendants, including, but not limited to, certain of the Company's officers and directors. These actions have been consolidated in the United States District Court, District of New Hampshire, under the common caption "Bill Berke, et al. V. Presstek, Inc., et al. ("Berke"), and a single consolidated amended complaint has been filed by lead counsel for the plaintiffs. In addition, two actions have been filed derivatively, on behalf of the Company, one in the Chancery Court of the State of Delaware and the other in the United States District Court, District of New Hampshire. The lawsuits each contain a variety of allegations including, among other things, that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, violations of Section 20(a) and 20(A) of the Exchange Act, common law fraud and deceit, negligent misrepresentation and waste of corporate assets. The allegations include claims that the Company issued false and misleading financial statements, and failed to properly disclose (a) adverse information concerning the Company's patents; (b) the nature and extent of the investigation by the Securities and Exchange Commission with respect to activities by certain unnamed persons and entities in connection with the securities of the Company (c) the backlog of orders from, supply contracts with, and orders received by its principal customer. The Company's officer and director defendants are alleged to have sold the Company's common stock while in possession of material non-public information. The plaintiffs generally are seeking to recover unspecified damages and reimbursement of their costs and expenses incurred in connection with the action. Moreover, the plaintiff in the derivative action in Delaware is also seeking a return to the Company of all salaries and the value of other remuneration paid to the defendants by the Company during the time they were in breach of their fiduciary duties and an accounting of and/or constructive trust on the proceeds of defendants' trading activities in the common stock. On March 30, 1999 the United States District Court for the District of New Hampshire issued orders dismissing several of the claims brought against the Company and others in the Berke lawsuit. The Company has entered into an agreement with the plaintiffs to settle the class action lawsuit, and has executed a memorandum of understanding with respect to settlement of the derivative law suits. Under F-19 the terms of the class action settlement, $22.0 million, in the form of shares of the Company's common stock, will be paid to the class, with the number of shares to be issued determined by a formula valuing the stock at different time periods. The Company has reserved the right to pay the settlement in cash at the time the settlement becomes effective. In the memorandum of understanding in the derivative litigation, the Company has agreed to certain therapeutic improvements to its internal policies, some of which have already been instituted, including Company policies on insider trading, the functioning and membership of its audit committee, and the policies pertaining to corporate communications. The settlement of both the class action and derivative actions require final approval of the United States District Court. The Company has recorded a charge of $23.2 million in the fourth quarter of fiscal 1999 related to the settlement. See Note 14 of notes to financial statements. In August 1999 Creo Products, Inc., ("Creo"), filed an action in the United States District Court for the District of Delaware against the Company asserting that Creo has a "reasonable apprehension that it will be sued by Presstek for infringement" of two of the Company's patents and seeking a declaration that Creo's products "do not and will not infringe any valid and enforceable claims" of the patents in question. In September 1999, the Company filed a counterclaim against Creo for patent infringement. The Company claims that Creo has infringed two direct imaging patents owned by the Company which were recently the subject of re-examination by the U.S. Patent and Trademark Office. The Company intends to vigorously enforce its patent rights. The Company is involved in other litigation arising out of the ordinary course of business. Management believes that these matters will not have a material adverse effect on the accompanying financial statements. 14. FOURTH QUARTER ADJUSTMENTS On March 24, 2000, subject to approval by the court, the Company reached a settlement with the plaintiffs in the class actions, filed in 1996 on behalf of the Company's shareholders against the Company and certain other defendants, including but not limited to certain of the Company's officers and directors. These actions were consolidated in the United States District Court, District of New Hampshire. The Company has also reached a settlement with the plaintiffs in the related derivative suits filed on behalf of the Company in the Chancery Court of the State of Delaware and in the United States District Court, District of New Hampshire. Under the terms of the settlement, the Company will issue common stock in the amount of $22.9 million. The Company has recorded a charge of $23.2 million in the fourth quarter of fiscal 1999 related to the settlement, which includes the $22.9 million settlement and related administrative costs in the amount of $250,000. F-20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRESSTEK, INC. Dated: March 31, 2000 By: /S/ Robert W. Hallman ---------------------------- Robert W. Hallman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Richard A. Williams Chairman of the Board, and March 31, 2000 - ------------------------ Chief Scientific Officer Richard A. Williams /s/ Robert W. Hallman Chief Executive Officer, March 31, 2000 - ------------------------ President, and Director Robert W. Hallman (Principal Executive Officer) /s/ Robert Howard Director March 31, 2000 - ------------------------ Robert Howard /s/ Dr. Lawrence Howard Director March 31, 2000 - ------------------------ Dr. Lawrence Howard /s/ Robert E. Verrando Director March 31, 2000 - ------------------------ Robert E. Verrando /s/ Harold N. Sparks Director March 31, 2000 - ------------------------ Harold N. Sparks /s/ John W. Dreyer Director March 31, 2000 - ------------------------ John W. Dreyer - ------------------------ /s/ John B. Evans Director March 31, 2000 - ------------------------ John B. Evan /s/ Edward J. Marino Director March 31, 2000 - ------------------------ Edward J. Marino /s/ Daniel S. Ebenstein Director March 31, 2000 - ------------------------ Daniel S. Ebenstein /s/ Neil Rossen Chief Financial Officer March 31, 2000 - ------------------------ (Principal Financial and Neil Rossen Accounting Officer)
28 PRESSTEK, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Charges Balance at Charged to Charged to Add Balance at Fiscal Beginning of Costs and Other Account (Deduct) End of Year Description Fiscal Year Expenses Describe Describe Fiscal Year ---- ----------- ----------- -------- -------- -------- ----------- 1997 Allowance for losses on accounts receivable $ 184 $1,074 $ -- $ (317) (1) $ 941 ====== ====== ====== ======= ====== Warranty reserve 486 1,114 -- (717) (2) 883 ====== ====== ====== ======= ====== 1998 Allowance for losses on accounts receivable $ 941 $5,006 $ 169(3) $(3,580) (1) $2,536 ====== ====== ====== ======= ====== Warranty reserve 883 679 -- (632) (2) 930 ====== ====== ====== ======= ====== 1999 Allowance for losses on accounts receivable $2,536 $2,240 $ -- $(1,474) (1) $3,302 ====== ====== ====== ======= ====== Warranty reserve 930 290 -- (263) (2) 957 ====== ====== ====== ======= ======
(1) Allowance for losses (2) Warranty expenditures (3) Heath Custom Press, Inc. Acquisition FS -1 EX-10.(T) 2 AMENDMENT TO EXISTING LOAN AGREEMENT 875 Elm Street Manchester, NH 03101 (603) 634-6000 March 22, 2000 Mr. Neil Rossen, CFO Presstek, Inc. 9 Commercial Street Hudson, NH 03051-3907 Dear Neil: I am writing to communicate that Citizens Bank has approved the following changes to the existing Loan Agreement. Effective December 31, 1999, the definition of `Tangible Capital Base" will be modified. The new definition shall read: "Tangible Capital Base" means total shareholders' equity less intangible assets less subordinated debt plus any non-cash liability recorded as a result of the Shareholder Class Action Lawsuit, all as determined in accordance with generally accepted accounting principles from Borrower's financial statements delivered to the bank in accordance with the covenants of the Borrower in the Loan Agreement. I will coordinate the preparation of legal documents and call you next week for an appropriate time to close this modification. Please don't hesitate to call should you have any questions. Regards, /s/ John Mercier John Mercier Vice-President EX-10.(U) 3 AMENDMENT TO LOAN AGREEMENT WITH KEYBANK KeyBank One Canal Plaza Portland, ME 04101-4035 March 28, 2000 Neil Rossen, CFO Presstek, Inc. 9 Commercial Street Tel: (800) 452-8762 Hudson, NH 03051-3907 Dear Neil: Please be advised that KeyBank National Association has approved the following changes to the financial covenant definitions in our Loan Agreement effective 12/31/1999: "Tangible Capital Base" means Tangible Net Worth plus Subordinated Debt plus any non-cash liability recorded as a result of the Shareholder Class Action Suit, all as determined in accordance with GAAP. "Debt" means all of the Lessee's liabilities less any non-cash liability recorded as a result of the Shareholder Class Action Suit, all as determined in accordance with GAAP. A condition of approval is that the Borrower shall notify the Bank of any election to settle the Shareholder Class Action Suit in cash. Such settlement in cash shall require Bank approval. We will be forwarding documentation for your review and signature to document these changes. Please call if you have any questions. Sincerely, /s/ Noel B. Graydon Noel B. Graydon Senior Vice President EX-23 4 CONSENT - INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Presstek, Inc. Hudson, New Hampshire We hereby consent to the incorporation by reference in the respective Registration Statements on Forms S-8 (Nos. 33-80466, 33-61215, 33-39337, and 333-76905) and on Forms S-3 (Nos. 333-2299 and 33-48342) of Presstek, Inc. and in the Prospectuses constituting part of such Registration Statements of our report dated February 14, 2000 (except for note 14, as to which the date is March 24, 2000 ) relating to the financial statements and schedule of Presstek, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended January 1, 2000 We also consent to the references to us under the caption "Experts" in the Prospectuses. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP New York, New York March 30, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from form 10K at January 1, 2000. and is qualified in its entirety by reference to such financial statements 12-MOS JAN-01-2000 JAN-01-2000 18,653,000 0 14,947,000 3,302,000 7,214,000 38,371,000 59,519,000 13,824,000 94,633,000 12,998,000 8,830,000 0 0 325,000 49,530,000 94,633,000 47,948,000 54,964,000 33,326,000 33,326,000 17,671,000 0 (501,000) (30,634,000) 0 (30,634,000) (8,982,000) 0 0 (39,616,000) (1.23) (1.23)
EX-27.2 6 RESTATED FINANACIAL DATA SCHEDULE
5 12-MOS JAN-02-1999 JAN-02-1999 19,057,000 0 23,162,000 2,536,000 9,724,000 50,375,000 48,251,000 8,754,000 106,670,000 13,295,000 5,922,000 0 0 323,000 87,130,000 106,670,000 60,833,000 74,165,000 46,606,000 46,606,000 15,413,000 0 (623,000) (1,587,000) 0 (1,587,000) (1,094,000) 0 0 (2,681,000) (0.08) (0.08)
EX-27.3 7 RESTATED FINANCIAL DATA SCHEDULE
5 12-MOS JAN-03-1998 JAN-03-1998 4,939,000 1,008,000 27,132,000 941,000 13,160,000 46,627,000 42,788,000 5,864,000 99,655,000 13,665,000 0 0 0 319,000 85,671,000 99,655,000 71,278,000 89,793,000 43,854,000 43,854,000 10,656,000 0 0 25,949,000 9,460,000 16,489,000 (2,117,000) 0 0 14,372,000 0.46 0.44
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