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Presstek Reports challenging Q3 Results: Sales & Net Income Down,

Press release from the issuing company

HUDSON, N.H., Oct. 27 -- Presstek, Inc., a leading manufacturer and marketer of environmentally responsible, high tech, digital imaging solutions for the graphic arts and laser imaging markets, today announced financial results for the third quarter ended October 1, 2005. President and Chief Executive Officer Edward J. Marino said, "The third quarter of 2005 was a challenging one for Presstek. At the same time, we had numerous important accomplishments in the quarter. These accomplishments included strong sales of Presstek-technology DI presses and Dimension CtP systems and the full line of Presstek consumables; new supply agreements with Heidelberg for our Presstek plates; increased quarter-over-quarter sales in Presstek Europe; and the significant upgrading of the digital capabilities of our field sales and service units." Marino continued, "The challenges we experienced related primarily to transitions in our business which we believe position us strongly, but which impacted our third quarter results." "First, we made an important strategic decision to realign our Direct Imaging distribution agreements worldwide -- our agreement with Kodak for North America, and our agreement with KBA for Europe and other geographic markets. We did this to provide improved opportunities for our direct sales force and more flexibility to strengthen our distribution channels. These decisions were the right ones to make and we have already begun to see the positive benefits. The restructuring of the North American agreement required the realignment of inventories with Kodak that resulted in a $2.5 million reduction in revenue in the third quarter." "Second," said Marino, "we shifted our focus and resources very strongly toward our digital business during the quarter. In the process we lost some business, primarily on the analog side. We anticipated a decline in this line of business, but not as much as we experienced. We are confident that it was the right decision to shift resources and focus to the higher margin, more forward-looking digital business. After all, this business is the company's future." "In the short-term, however," said Marino, "we were unable to replace this shortfall in our business as quickly as we would have liked. We estimate that this situation resulted in a reduction primarily in consumable revenue of approximately $1.7 million in the third quarter. Our intention with regard to the loss of this business is not necessarily to attempt to recover it all, but rather to sustain the current level and to grow through continued focus on our digital business." Marino continued, "Also during the quarter, we consolidated engineering and manufacturing operations from the former ABDick facility in Rochester, New York to Presstek's Hudson, New Hampshire facility. In the process, we had to ramp-up engineering and manufacturing in New Hampshire. We also experienced some disruptions in the consolidation process that prevented us from meeting our planned production levels. We estimate that these events impacted third quarter revenue by approximately $1.2 million. We expect that the overall savings from the Rochester consolidation will amount to approximately $2.0 million per year, and we expect to see the full impact of these savings in the fourth quarter of this year." Marino concluded, "During the quarter we faced challenges that required swift and decisive action. We believe that the outcome of these actions, together with the numerous accomplishments achieved during the quarter, put Presstek in a stronger position for the future." Consolidated Results For the third quarter of 2005 the company reported: * Consolidated revenue of $64.7 million for the third quarter of 2005, compared to $69.7 million in the previous quarter; * Consolidated net income of $823,000, or $0.02 per basic and diluted share, compared to second quarter 2005 consolidated net income of $2.3 million, or $0.07 per basic and diluted share; * Consolidated gross margins of 30%, or $19.6 million, compared to 31%, or $21.3 million, in the prior quarter; * Operating expenses of $18.2 million in the third quarter of 2005, compared to $17.8 million in the prior quarter; * Cash and cash equivalents of $5.8 million, compared to $8.7 million in the beginning of the year; * Total debt of $31.3 million, compared to $41.8 million at the beginning of the year; * Debt-net-of-cash of $25.5 million, compared to $33.1 million at the beginning of the year (see below for GAAP reconciliation); and * EBITDA of $4.4 million for the quarter, compared to $15.2 million for the year to date (see below for GAAP reconciliation). Commenting on the consolidated results Marino said, "While these numbers may adequately depict the short-term impact of the decisions made and the actions taken in the third quarter of 2005, they do not reflect the company's future opportunity and potential." Executive Vice President and CFO Moosa E. Moosa said, "The financial impact of the $2.5 million reversal of revenue resulting from the realignment of Kodak's and Presstek's inventories of DI presses impacted gross margins by approximately $0.5 million, and increased inventory at quarter end by approximately $2.0 million." Marino said, "The first phase of the integration of ABDick's Niles, Illinois back-office operations is well under way. We have also completed the consolidation of the various parts of our Presstek Europe business. Prior to our acquisition of ABDick, both Presstek and ABDick had their own European- based businesses. In addition, Presstek's DI marketing and distribution in Europe was performed by KBA. Effective July 2005, all European operations were consolidated and are now headquartered at Presstek Europe's UK London office. Also, as mentioned previously, we have now assumed European DI press distribution, and as a result we can now implement a focused DI marketing strategy throughout Europe." Moosa added, "We are pleased with the progress of our European operations. Revenues from the Presstek Europe business were $12.0 million in the third quarter of 2005, approximately $1.0 million more than in the previous quarter." Presstek Segment (including ABDick) As a result of the combination of Presstek's and ABDick's businesses in August, the Presstek reporting segment for the third quarter of 2005 now includes the combined results of Presstek's and ABDick's operations. Presstek will no longer be reporting the ABDick business as a separate segment. In the third quarter of 2005, the Presstek segment reported: * Revenue of $60.2 million, compared to $65.2 million in the prior quarter; * Equipment revenue of $17.0 million in the third quarter of 2005, down from $20.4 million in the previous quarter; * Consumable revenue of $31.7 million, compared to $32.8 million in the prior quarter. Core Presstek consumables, including DI plates and chemistry-free CtP plates, grew 3.5% quarter over quarter. * Gross margins of 32%, compared to 34% in the prior quarter; and * Income from operations of $2.2 million, compared to $5.3 million in the previous quarter. Marino reported, "During the third quarter we experienced two production related delays associated with the Rochester consolidation. The first was related to the manufacturing ramp up of the DPM product line in New Hampshire. In the second, we made the decision to slow production of the Vector TX52 product due to engineering and manufacturing ramp up issues. The Vector delay resulted in much lower Vector shipments than we had originally anticipated. We expect that these issues will be resolved in the fourth quarter of this year, allowing us to ramp production and shipments in the first quarter of next year." Moosa added, "As one would expect, the delay in production ramp up resulted in us holding additional inventory during the quarter. The impact on inventory was approximately $3 million at the end of the quarter." Lasertel Segment Lasertel reported record sales of $1.0 million to external customers in the third quarter of 2005. This compares to $0.7 million in the second quarter of 2005. The increase is due primarily to the sale of new products, including the new stacked-array product for Selex that was announced last quarter. These new products are expected to help establish a significant revenue base for Lasertel going forward. For the fourth quarter of 2005, the company is forecasting sales from external customers to increase. Lasertel's loss from operations for the third quarter of 2005 was $1.3 million, compared to $1.1 million in the prior quarter due to reduced internal sales. Precision Segment Third quarter 2005 external revenue at Precision was $3.3 million, down from $3.8 million in the previous quarter. Precision's efforts to optimize efficiencies at its operations continued to yield positive results during the third quarter of 2005. This was offset, however, by slightly lower production volume in Precision's analog plate line. Precision's income from operations remained solid at $0.4 million. In Summary Marino said, "Our acquisition of ABDick almost one year ago was primarily intended to provide a channel to market for Presstek products. Given ABDick's starting point, transitioning this channel to sell, service and support Presstek-technology digital products was a difficult undertaking. We are pleased to say that we have made substantial progress. Today, we are actively selling, servicing and supporting the full line of Presstek technology products through our recently acquired direct sales and service teams." Marino continued, "The third quarter, however, presented a number of real challenges to our business. We not only met those challenges, but we viewed them as opportunities. We took decisive strategic and tactical actions that, although affecting short-term performance, were designed to benefit the business over the long-term. Presstek's business will be better for having met and addressed these challenges. The operating foundation of this business is strong and we are well positioned for the future."