<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 September 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
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Commission file number 1-9341
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HOWTEK, INC.
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(Exact name of registrant as specified in its charter)
Delaware 02-0377419
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(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
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(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 November 1, 1995, there were 7,947,018
shares outstanding of the issuer's Common Stock, $.01 par value.
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<TABLE>
HOWTEK, INC.
INDEX
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 1995
(unaudited) and December 31, 1994 3
Statements of Operations for the three
month periods ended September 30, 1995 and
1994 (unaudited) and for the nine month
periods ended September 30, 1995 and 1994
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the nine month period ended September 30, 1995
(unaudited) 5
Statements of Cash Flows for the nine month periods
ended September 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>
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<TABLE>
HOWTEK, INC.
BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 260,569 $ 649,455
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $82,552 in 1995 and $57,738 in 1994 7,505,331 8,000,716
Inventory 6,933,047 7,863,012
Prepaid and other 344,276 378,255
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Total current assets 15,043,223 16,891,438
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Property and equipment:
Engineering and development equipment 10,167,659 9,094,067
Leasehold improvements 371,535 366,835
Furniture and fixtures 185,564 184,444
Motor vehicles 6,050 6,050
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10,730,808 9,651,396
Less accumulated depreciation and amortization 7,395,742 6,373,277
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Net property and equipment 3,335,066 3,278,119
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Other assets:
Software development costs, net 1,269,910 1,244,114
Debt issuance costs, net 123,846 139,114
Patents, net 16,123 21,064
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Total other assets 1,409,879 1,404,292
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Total assets $ 19,788,168 $ 21,573,849
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,786,053 $ 3,986,330
Accrued expenses 837,715 825,198
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Total current liabilities 4,623,768 4,811,528
Loan payable to principal stockholder 3,078,604 1,000,000
Convertible subordinated debentures 2,181,000 2,181,000
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Total liabilities 9,883,372 7,992,528
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Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 8,013,394 in 1995
and 7,980,444 shares in 1994; outstanding
7,945,518 in 1995 and 7,912,568 shares in 1994 80,134 79,858
Additional paid-in capital 43,913,566 43,760,455
Accumulated deficit (33,138,640) (29,308,728)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------------ -----------------
Stockholders' equity 9,904,796 13,581,321
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Total liabilities and stockholders' equity $ 19,788,168 $ 21,573,849
================== =================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
<TABLE>
HOWTEK, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
THREE MONTHS NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1995 1994 1995 1994
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 4,303,024 $ 6,416,661 $ 15,511,674 $ 17,233,650
Cost of Sales 2,939,590 3,965,254 9,943,290 11,038,691
-------------- -------------- -------------- --------------
Gross Margin 1,363,434 2,451,407 5,568,384 6,194,959
-------------- -------------- -------------- --------------
Operating expenses:
Engineering and product development 787,636 758,258 2,231,997 2,187,581
General and administrative 685,002 495,775 1,763,429 1,498,398
Marketing and sales 935,200 709,767 2,441,244 2,196,115
Restructuring charge (note 3) - - 2,662,632 -
-------------- -------------- -------------- --------------
Total operating expenses 2,407,838 1,963,800 9,099,302 5,882,094
-------------- -------------- -------------- --------------
Income (loss) from operations (1,044,404) 487,607 (3,530,918) 312,865
-------------- -------------- -------------- --------------
Interest expense - net 117,165 69,687 298,994 191,764
-------------- -------------- -------------- --------------
Income (loss) before tax provision (1,161,569) 417,920 (3,829,912) 121,101
Provision for income taxes - 9,000 - 9,000
-------------- -------------- -------------- --------------
Net income (loss) $ (1,161,569) $ 408,920 $ (3,829,912) $ 112,101
============== ============== ============== ==============
Net income (loss) per share $ (0.15) $ 0.05 $ (0.48) $ 0.01
Weighted average number of shares used in
computing earnings per share 7,941,415 7,931,086 7,929,706 7,924,879
</TABLE>
See accompanying notes to financial statements.
4
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<TABLE>
HOWTEK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<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
July through September, 1995
Issuance of common stock
pursuant to incentive stock
option plan. 7,000 70 40,242 40,312
Net loss - - - (3,829,912) - (3,829,912)
--------- ------- ----------- ------------ --------- ----------
Balance at September 30, 1995 8,013,394 $80,134 $43,913,566 $(33,138,640) $(950,264) $9,904,796
========= ======= =========== ============ ========= ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
<TABLE>
HOWTEK, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
NINE MONTHS NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
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(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,829,912) $ 112,101
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 1,022,465 817,993
Amortization 389,300 314,733
Donation of treasury stock - 19,936
Restructuring charge 2,662,632 -
(Increase) decrease:
Accounts receivable 495,385 (3,079,466)
Inventory (1,732,667) (299,058)
Other current assets 33,979 (105,244)
Increase (decrease):
Accounts payable (200,277) 2,192,476
Accrued expenses 12,517 94,911
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Total adjustments 2,683,334 (43,719)
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Net cash provided by (used for)
operating activities (1,146,578) 68,382
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Cash flows from investing activities:
Patents, software development and other (394,887) (590,382)
Additions to property and equipment (1,079,412) (935,812)
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Net cash used for investing activities (1,474,299) (1,526,194)
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Cash flows from financing activities:
Issuance of common stock for cash 153,387 184,638
Proceed of loan payable to principal stockholder 2,078,604 -
------------- -------------
Net cash provided by financing activities 2,231,991 184,638
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Increase (decrease) in cash and equivalents (388,886) (1,273,174)
Cash and equivalents, beginning of period 649,455 1,756,584
------------- -------------
Cash and equivalents, end of period $ 260,569 $ 483,410
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 247,198 $ 146,992
============= =============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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
The lawsuit by the Company against TECO Electric & Machinery
Co., Ltd., as previously reported in the Company's 1994 Annual Report
on Form 10-K, and in Quarterly Reports on Form 10-Q for the periods
ending March 31, and June 30, 1995, is in the final stages of
discovery and as yet no date has been set for trial. The Company
originally sought damages in its complaint in the amount of $17
million. However, an expert retained by the Company to testify at the
trial has now concluded that the Company's damages as a result of
TECO's actions and omissions are substantially in excess of the amount
specifically alleged in the complaint. There can be no assurance that
the Company will be successful in the action, or if it is, as to the
amount of damages it may be awarded.
(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 September 30, 1995 were $4,303,024, a
decrease of $2,113,637 or 33% over the comparable period in 1994. Sales for
the nine months ended September 30, 1995 were $15,511,674, a decrease of
$1,721,976 or 10% over the comparable period in 1994.
The Company attributed the decrease in sales during the three and nine
month periods ended September 30, 1995 as compared to the corresponding periods
in 1994 primarily to lower sales of the Scanmaster 7500.
The Company recorded a net loss of $1,161,569 for the three month
period ended September 30, 1995, as compared to a profit of $408,920 over the
comparable period in 1994. The Company recorded a net loss of $3,829,912 for
the nine months ended September 30, 1995, as compared to a profit of $121,101
for the same period in 1994. Of the loss recorded in the nine month period
ended September 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.
The Company's gross margin on product sales was 32% for the third
quarter of 1995 compared to 38% for the same period in 1994. The decrease in
gross margin is primarily due to lower sales of the Scanmaster 7500.
Engineering and product development costs for the three and nine month
periods ended September 30, 1995 were unchanged compared to the comparable
periods of 1994.
General and administrative expenses in the three and nine month
periods ended September 30, 1995 were $189,227 and $265,031 or 38% and 18%
higher than the comparable periods in 1994. This increase is mainly
attributable to increased legal expenses.
Marketing and sales expenses in the three and nine month periods ended
September 30, 1995 increased $225,433 and $245,129 or 32% and 11% over the
comparable periods in 1994. The increase results from increases in salaries,
advertising, promotional and trade show expenses. The level of expenditures is
expected to decrease slightly during the fourth quarter of 1995.
8
<PAGE> 9
Net interest expense for the third quarter of 1995 was $117,165
compared to $69,687 for the third quarter of 1994. The increase results from
the increase in the Revolving Loan Agreement with its Chairman and principal
stockholder.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995 the Company had current assets of $15,043,223,
current liabilities of $4,623,768 and working capital of $10,419,455. The
ratio of current assets to current liabilities was 3.2:1.
Accounts receivable decreased by $495,385 during the first nine months
of 1995. This decrease is due primarily to higher revenues in the fourth
quarter of 1994 as compared to the third quarter of 1995 and is mainly
attributable to fluctuation in Scanmaster 7500 revenues.
Inventory increased by $1,732,667 during the first nine months of 1995
in order to meet anticipated demand for the Scanmaster DX, Pro-G and 2500
product lines, as well as anticipated demand for the Scanmaster 4500 and
Scanmaster 7500 product lines.
Pursuant to the exercise of employee stock options, the Company
received $40,312 during the third quarter of 1995 and $184,637 during the
corresponding period in 1994. 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 nine months of 1995
amounted to $1,079,412 compared to $935,812 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 lower levels 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 $4,921,396 was available as of September 30, 1995.
9
<PAGE> 10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The lawsuit by the Company against TECO Electric & Machinery Co.,
Ltd., as previously reported in the Company's 1994 Annual Report on Form 10-K,
and in Quarterly Reports on Form 10-Q for the periods ending March 31, and June
30, 1995, is in the final stages of discovery and as yet no date has been set
for trial. The Company originally sought damages in its complaint in the
amount of $17 million. However, an expert retained by the Company to testify
at the trial has now concluded that the Company's damages as a result of TECO's
actions and omissions are substantially in excess of the amount specifically
alleged in the complaint. There can be no assurance that the Company will be
successful in the action, or if it is, as to the amount of damages it may be
awarded.
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: November , 1995 By: /s/ M. Russell Leonard
---------------------------
M. Russell Leonard
Executive Vice President
Chief Operating Officer
Date: November , 1995 By: /s/ Robert J. Lungo
---=-----------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF HOWTEK, INC. FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 260,569
<SECURITIES> 0
<RECEIVABLES> 7,587,883
<ALLOWANCES> 82,552
<INVENTORY> 6,933,047
<CURRENT-ASSETS> 15,043,223<F1>
<PP&E> 10,730,808
<DEPRECIATION> 7,395,742
<TOTAL-ASSETS> 19,788,168
<CURRENT-LIABILITIES> 4,623,768
<BONDS> 5,259,604
<COMMON> 80,134
0
0
<OTHER-SE> 9,824,662
<TOTAL-LIABILITY-AND-EQUITY> 19,788,168
<SALES> 4,303,024
<TOTAL-REVENUES> 4,303,024
<CGS> 2,939,590
<TOTAL-COSTS> 2,939,590
<OTHER-EXPENSES> 2,407,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,165
<INCOME-PRETAX> (1,161,569)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,161,569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,161,569)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
<FN>
<F1>ADDITIONAL CURRENT ASSET PREPAID AND OTHER $344,276
OTHER ASSETS OF $1,409,879
</FN>
</TABLE>
