<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file number 1-9341
HOWTEK, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
-------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(603) 882-5200
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO .
----- ----
As of the close of business on August 11, 1995, there were 8,010,894
shares outstanding of the issuer's Common Stock, $.01 par value.
<PAGE> 2
HOWTEK, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of June 30, 1995
(unaudited) and December 31, 1994 3
Statements of Operations for the three
month periods ended June 30, 1995 and
1994 (unaudited) and for the six month
periods ended June 30, 1995 and 1994
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the six month period ended June 30, 1995
(unaudited) 5
Statements of Cash Flows for the six month periods
ended June 30, 1995 and 1994 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8-9
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE> 3
HOWTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
---------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 270,236 $ 649,455
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $99,665 in 1995 and $16,662 in 1994 8,305,160 8,000,716
Inventory 6,317,107 7,863,012
Prepaid and other 462,342 378,255
---------------- ----------------
Total current assets 15,354,845 16,891,438
---------------- ----------------
Property and equipment:
Engineering and development equipment 10,009,053 9,094,067
Leasehold improvements 376,235 366,835
Furniture and fixtures 185,564 184,444
Motor vehicles 6,050 6,050
---------------- ----------------
10,576,902 9,651,396
Less accumulated depreciation and amortization 7,036,851 6,373,277
---------------- ----------------
Net property and equipment 3,540,051 3,278,119
---------------- ----------------
Other assets:
Software development costs, net 1,285,808 1,244,114
Debt issuance costs, net 128,935 139,114
Patents, net 17,770 21,064
---------------- ----------------
Total other assets 1,432,513 1,404,292
---------------- ----------------
Total assets $ 20,327,409 $ 21,573,849
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,878,549 $ 3,986,330
Accrued expenses 663,203 825,198
---------------- ----------------
Total current liabilities 4,541,752 4,811,528
Loan payable to principal stockholder 2,578,604 1,000,000
Convertible subordinated debentures 2,181,000 2,181,000
---------------- ----------------
Total liabilities 9,301,356 7,992,528
---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 8,006,394 in 1995
and 7,940,594 shares in 1994; outstanding
7,938,518 in 1995 and 7,871,294 shares in 1994 80,064 79,858
Additional paid-in capital 43,873,324 43,760,455
Accumulated deficit (31,977,071) (29,308,728)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
---------------- ----------------
Stockholders' equity 11,026,053 13,581,321
---------------- ----------------
Total liabilities and stockholders' equity $ 20,327,409 $ 21,573,849
================ ================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HOWTEK, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1995 1994 1995 1994
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 5,356,900 $ 6,092,770 $ 11,208,650 $ 10,816,988
Cost of Sales 3,380,072 3,955,318 7,003,700 7,073,436
-------------- -------------- -------------- --------------
Gross Margin 1,976,828 2,137,452 4,204,950 3,743,552
-------------- -------------- -------------- --------------
Operating expenses:
Engineering and product development 668,617 652,925 1,444,361 1,429,323
General and administrative 570,622 530,232 1,078,427 1,002,623
Marketing and sales 809,462 707,978 1,506,044 1,486,347
Restructuring charge (note 3) 2,662,632 - 2,662,632 -
-------------- -------------- -------------- --------------
Total operating expenses 4,711,333 1,891,135 6,691,464 3,918,293
-------------- -------------- -------------- --------------
Income (loss) from operations (2,734,505) 246,317 (2,486,514) (174,741)
-------------- -------------- -------------- --------------
Interest expense - net 99,771 62,722 181,829 122,078
-------------- -------------- -------------- --------------
Income (loss) before tax provision (2,834,276) 183,595 (2,668,343) (296,819)
Provision for income taxes (13,275) - - -
-------------- -------------- -------------- --------------
Net income (loss) $ (2,821,001) $ 183,595 $ (2,668,343) $ (296,819)
============== ============== ============== ==============
Net income (loss) per share $ (0.36) $ 0.02 $ (0.34) $ (0.04)
Weighted average number of shares used in
computing earnings per share 7,928,919 7,871,294 7,923,755 7,871,294
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HOWTEK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Number of Paid-in Accumulated Treasury Stockholders'
Shares Issued Par Value Capital Deficit Stock Equity
------------- --------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,985,794 $79,858 $43,760,455 $(29,308,728) $(950,264) $13,581,321
January through March, 1995
Issuance of common stock
pursuant to incentive stock
option plan. 6,350 63 30,137 30,200
April through June, 1995
Issuance of common stock
pursuant to incentive stock
option plan. 14,250 143 82,732 82,875
Net loss - - - (2,668,343) - (2,668,343)
---------- ------- ----------- ------------ --------- -----------
Balance at June 30, 1995 8,006,394 $80,064 $43,873,324 $(31,977,071) $(950,264) $11,026,053
========== ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HOWTEK, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
JUNE 30, 1995 JUNE 30, 1994
--------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,668,343) $ (296,819)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 663,574 525,493
Amortization 255,754 216,890
Restructuring charge 2,662,632 -
(Increase) decrease:
Accounts receivable (304,444) (1,864,648)
Inventory (1,116,727) (35,237)
Other current assets (84,087) (66,182)
Increase (decrease):
Accounts payable (107,781) 1,322,718
Accrued expenses (161,995) (96,399)
-------------- --------------
Total adjustments 1,806,926 2,635
-------------- --------------
Net cash provided by (used for)
operating activities (861,417) (294,184)
-------------- --------------
Cash flows from investing activities:
Patents, software development and other (283,975) (453,318)
Additions to property and equipment (925,506) (609,022)
-------------- --------------
Net cash used for investing activities (1,209,481) (1,062,340)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock for cash 113,075 -
Proceed of loan payable to principal stockholder 1,578,604 -
-------------- --------------
Net cash provided by financing activities 1,691,679 -
-------------- --------------
Increase (decrease) in cash and equivalents (379,219) (1,356,524)
Cash and equivalents, beginning of period 649,455 1,756,584
-------------- --------------
Cash and equivalents, end of period $ 270,236 $ 400,060
============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 151,191 $ 140,155
============== ==============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
(1) ACCOUNTING POLICIES
In the opinion of management all adjustments and accruals
(consisting only of normal recurring adjustments) which are necessary
for a fair presentation of operating results are reflected in the
accompanying financial statements. Reference should be made to
Howtek, Inc.'s most recent Annual Report on Form 10-K for the year
ended December 31, 1994 for a summary of significant accounting
policies. Interim period amounts are not necessarily indicative of
the results of operations for the full fiscal year.
(2) LEGAL PROCEEDINGS
On June 7, 1994 the Company filed a complaint in the United
States District Court, District of New Hampshire, against TECO
Electric & Machinery Co., Ltd. ("TECO"), several TECO subsidiaries, a
TECO employee, and a number of distributors of TECO products. The
action seeks injunctive and declaratory relief as well as damages
aggregating $17 million based on misappropriation of trade secrets,
civil conspiracy, unfair competition and breach of contract. The
Company claims, inter alia, that TECO breached an exclusive
manufacturing contract it entered into with the Company to manufacture
digital color scanners exclusively for the Company by selling scanners
under its own labels. TECO has answered the complaint and asserted
various counterclaims, including misrepresentation, and is claiming
approximately $800,000 in payment for past due services. In April,
1995, the court denied Howtek's request for a preliminary injunction.
The matter continues in the discovery stage and a trial is tentatively
scheduled for December, 1995.
(3) RESTRUCTURING CHARGE
During the second quarter of 1995 the Company recorded a
restructuring charge of $2,662,632 as a result of management's decision
to exit certain markets in the graphic arts industry. Management
intends to continue its efforts in other graphic arts markets as well
as to enter new markets, including the medical imaging and life
sciences markets. The restructuring charge represents provisions for
losses on inventories related to the markets exited.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the three months ended June 30, 1995 were $5,356,900, a
decrease of $735,870 or 12% over the comparable period in 1994. Sales for the
six months ended June 30, 1995 were $11,208,650, an increase of $391,662 or 4%
over the comparable period in 1994.
The Company attributed the decrease in sales during the three months
ended June 30, 1995 as compared to the corresponding period in 1994 primarily
to lower sales of the Scanmaster 7500. The Company attributed the increase in
sales during the six months ended June 30, 1995 as compared to the
corresponding period in 1994 primarily to sales of the Scanmaster 4500.
The Company recorded a net loss of $2,821,001 for the three month
period ended June 30, 1995, as compared to a profit of $183,594 over the
comparable period in 1994. The Company recorded a net loss of $2,668,343 for
the six months ended June 30, 1995 as compared to a net loss of $296,819 for
the same period in 1994. Of the loss recorded in the three and six month
periods ended June 30, 1995, $2,662,632 is attributed to a restructuring
charge which was recorded in the second quarter of 1995 as a result of
management's decision to exit certain markets in the graphic arts industry.
Management intends to continue its efforts in other graphic arts markets as
well as to enter new markets, including the medical imaging and life sciences
markets. The restructuring charge represents provisions for losses on
inventories related to the markets exited.
The Company's gross margin on product sales was 37% for the second
quarter of 1995 compared to 35% for the same period in 1994. The increase in
gross margin is primarily due to the reduction in product costs attributable to
ongoing cost reduction programs.
Engineering and product development costs for the three and six month
periods ended June 30, 1995 were unchanged compared to the comparable periods
of 1994. The Company expects that engineering and product development costs
will remain constant during the remainder of the year.
General and administrative expenses in the three and six month periods
ended June 30, 1995 were $40,390 and $75,804 or 8% higher than the comparable
periods in 1994. This increase is mainly attributable to increased legal
expenses applicable to legal proceedings against a contract manufacturer.
Marketing and sales expenses in the three and six month period ended
June 30, 1995 increased $101,484 and $19,697 or 14% and 1% over the comparable
periods in 1994. The increase results primarily from increased promotional and
trade show expenses.
Net interest expense for the second quarter of 1995 was $99,771
compared to $62,722 for the second quarter of 1994. The increase resulted from
the increase in the Revolving Loan Agreement with its Chairman and principal
stockholder.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995 the Company had current assets of $15,354,845,
current liabilities of $4,541,752 and working capital of $10,813,093. The
ratio of current assets to current liabilities was 3.4:1.
Accounts receivable increased by $304,444 during the first six months
of 1995. This increase can be attributed mainly to a slowness in the European
marketplace related to Drupa, 1995, a major European trade show which takes
place every five years.
Inventory increased by $1,116,727 during the first six months of 1995
in order to meet anticipated demand for the introduction of the new Scanmaster
DX, Pro-G and 2500 product lines, as well as anticipated demand for the
Scanmaster 4500 product line.
Pursuant to the exercise of employee stock options, the Company
received $82,875 during the second quarter of 1995 compared to the second
quarter of 1994 during which there were no stock options exercised. The
exercise of stock options depends upon the market price of the Company's stock
and the option exercise price for individual employees and its effect on future
liquidity cannot be anticipated.
Capital spending for equipment for the first six months of 1995
amounted to $925,506 compared to $609,022 during the comparable period in 1994.
The increase is attributable to production of the Scanmaster 4500, DX, Pro-G
and 2500 product lines. The Company anticipates continuing the same level of
capital spending for the balance of the year.
The Company believes it can adequately fund its working capital and
capital equipment requirements based upon its anticipated level of sales for
1995 and the line of credit available under the Revolving Loan Agreement with
its Chairman of which $5,421,396 was available as of June 30, 1995.
9
<PAGE> 10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 7, 1994 the Company filed a complaint in the United States
District Court, District of New Hampshire, against TECO Electric & Machinery
Co., Ltd. ("TECO"), several TECO subsidiaries, a TECO employee, and a number of
distributors of TECO products. The action seeks injunctive and declaratory
relief as well as damages aggregating $17 million based on misappropriation of
trade secrets, civil conspiracy, unfair competition and breach of contract.
The Company claims, inter alia, that TECO breached an exclusive manufacturing
contract it entered into with the Company to manufacture digital color scanners
exclusively for the Company by selling scanners under its own labels. TECO has
answered the complaint and asserted various counterclaims, including
misrepresentation, and is claiming approximately $800,000 in payment for past
due services. In April, 1995, the court denied Howtek's request for a
preliminary injunction. The matter continues in the discovery stage and a
trial is tentatively scheduled for December, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
10
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Howtek, Inc.
------------------------
Company)
Date: August 11, 1995
----------------- By: /s/ M. Russell Leonard
-----------------------------------
M. Russell Leonard
Executive Vice President
Chief Operating Officer
Date: August 11, 1995
----------------- By: /s/ Robert J. Lungo
-----------------------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 270,236
<SECURITIES> 0
<RECEIVABLES> 8,404,825
<ALLOWANCES> 99,665
<INVENTORY> 6,317,107
<CURRENT-ASSETS> 15,354,845
<PP&E> 10,576,902
<DEPRECIATION> 7,036,851
<TOTAL-ASSETS> 20,327,409
<CURRENT-LIABILITIES> 4,541,752
<BONDS> 4,759,604
<COMMON> 80,064
0
0
<OTHER-SE> 10,945,989
<TOTAL-LIABILITY-AND-EQUITY> 20,327,409
<SALES> 5,356,900
<TOTAL-REVENUES> 5,356,900
<CGS> 3,380,072
<TOTAL-COSTS> 3,380,072
<OTHER-EXPENSES> 4,711,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,771
<INCOME-PRETAX> (2,834,276)
<INCOME-TAX> 13,275
<INCOME-CONTINUING> (2,821,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,821,001)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> 0
<FN>
Additional current asset prepaid and other at $462,342.
Other assets of $1,432,513.
</TABLE>
