<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, 1996
------------------
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 October 25, 1996 there were 8,212,909 shares
outstanding of the issuer's Common Stock, $.01 par value.
<PAGE> 2
HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Statements of Operations for the three month
periods ended September 30, 1996 and 1995
(unaudited) and for the nine month periods
ended September 30, 1996 and 1995 (unaudited) 4
Statement of Changes in Stockholders' Equity for
the nine month period ended September 30, 1996
(unaudited) 5
Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995 (unaudited) 6
Notes to Financial Statements (unaudited) 7-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE> 3
HOWTEK, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 557,457 $ 574,647
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $500,000 in 1996 and $82,552 in 1995 3,028,637 6,474,144
Inventory 5,697,910 6,840,823
Prepaid and other 354,604 247,590
------------ ------------
Total current assets 9,638,608 14,137,204
------------ ------------
Property and equipment:
Equipment 10,826,225 10,281,296
Leasehold improvements 371,535 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ ------------
11,389,374 10,844,445
Less accumulated depreciation and amortization 8,982,884 7,815,236
------------ ------------
Net property and equipment 2,406,490 3,029,209
------------ ------------
Other assets:
Software development costs, net 989,529 1,191,265
Debt issuance costs, net 103,487 118,756
Patents, net 13,865 18,806
------------ ------------
Total other assets 1,106,881 1,328,827
------------ ------------
Total assets $ 13,151,979 $ 18,495,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,353,272 $ 3,712,416
Accrued expenses 760,099 490,752
------------ ------------
Total current liabilities 3,113,371 4,203,168
Loan payable to principal stockholder 3,578,604 3,578,604
Loan payable to related party (note 4) 1,000,000 --
Convertible subordinated debentures 2,181,000 2,181,000
------------ ------------
Total liabilities 9,872,975 9,962,772
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 8,037,594 in 1996
and 8,013,394 shares in 1995; outstanding
7,969,718 in 1996 and 7,945,518 shares in 1995 80,376 80,225
Additional paid-in capital 44,027,293 43,966,282
Accumulated deficit (39,878,401) (34,563,775)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 3,279,004 8,532,468
------------ ------------
Total liabilities and stockholders' equity $ 13,151,979 $ 18,495,240
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HOWTEK, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 2,850,507 $ 4,303,024 $ 8,160,530 $15,511,674
Cost of Sales 2,283,530 2,939,590 7,041,302 9,943,290
----------- ----------- ----------- -----------
Gross Margin 566,977 1,363,434 1,119,228 5,568,384
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 703,039 787,636 1,919,237 2,231,997
General and administrative 664,753 685,002 1,863,375 1,763,429
Marketing and sales 787,324 935,200 2,185,911 2,441,244
Restructuring charge (note 3) -- -- -- 2,662,632
----------- ----------- ----------- -----------
Total operating expenses 2,155,116 2,407,838 5,968,523 9,099,302
----------- ----------- ----------- -----------
Loss from operations (1,588,139) (1,044,404) (4,849,295) (3,530,918)
----------- ----------- ----------- -----------
Interest expense - net 161,601 117,165 465,331 298,994
----------- ----------- ----------- -----------
Loss before tax provision (1,749,740) (1,161,569) (5,314,626) (3,829,912)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,749,740) $(1,161,569) $(5,314,626) $(3,829,912)
=========== =========== =========== ===========
Net loss per share $ (0.22) $ (0.15) $ (0.67) $ (0.48)
Weighted average number of shares used
in computing earnings per share 7,965,903 7,941,415 7,964,777 7,929,706
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HOWTEK, INC.
<TABLE>
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, 1995 8,022,594 $80,225 $43,966,282 $(34,563,775) $(950,264) $ 8,532,468
January through September, 1996
Issuance of common stock
pursuant to incentive stock
option plan 15,000 151 61,011 61,162
Net loss -- -- -- (5,314,626) -- (5,314,626)
--------- ------- ----------- ------------ --------- -----------
Balance at September 30, 1996 8,037,594 $80,376 $44,027,293 $(39,878,401) $(950,264) $ 3,279,004
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HOWTEK, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS NINE MONTHS
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(5,314,626) $(3,829,912)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 1,167,648 1,022,465
Amortization 467,568 389,300
Restructuring charge -- 2,662,632
(Increase) decrease:
Accounts receivable 3,445,507 495,385
Inventory 1,142,913 (1,732,667)
Other current assets (107,014) 33,979
Increase (decrease):
Accounts payable (1,359,144) (200,277)
Accrued expenses 269,347 12,517
----------- -----------
Total adjustments 5,026,825 2,683,334
----------- -----------
Net cash provided by (used for)
operating activities (287,801) (1,146,578)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (245,622) (394,887)
Additions to property and equipment (544,929) (1,079,412)
----------- -----------
Net cash used for investing activities (790,551) (1,474,299)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 61,162 153,387
Proceeds of loan payable to related party (note 4) 1,000,000 --
Proceeds of loan payable to principal stockholder -- 2,078,604
----------- -----------
Net cash provided by financing activities 1,061,162 2,231,991
----------- -----------
Increase (decrease) in cash and equivalents (17,190) (388,886)
Cash and equivalents, beginning of period 574,647 649,455
----------- -----------
Cash and equivalents, end of period $ 557,457 $ 260,569
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 98,145 $ 247,198
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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, 1995 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
As previously reported in the Company's 1994 and 1995 Annual Reports
on Form 10-K, on June 7, 1994, the Company filed a complaint in the United
States District Court, District of New Hampshire, against TECO Electric and
Machinery Co. Ltd. The Company claims, inter alia, breach of contract,
misappropriation of trade secrets, and breach of exclusive dealing. On July
12, 1996, the court denied TECO's motion for partial summary judgment on
all counts. On September 24, 1996, the parties participated in a court
ordered mediation which was officiated by the magistrate in the case. There
was no resolution of the dispute. The matter has been scheduled for a jury
trial on April 1, 1997.
(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
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(4) LOAN PAYABLE TO RELATED PARTY
On April 4, 1996, the Company borrowed $1,000,000 from Dr. Lawrence
Howard, son of the Company's Chairman, Robert Howard, pursuant to a
Convertible Promissory Note (The "Note"). The Note matures on January 4,
1998 or, at the option of the holder upon the earlier closing of a public
offering of the Company's securities yielding at least $2 million in net
proceeds. Under the terms of the Note the Company agreed to pay interest
monthly at the rate of Citibank's, prime rate plus two percent. The Note is
secured by substantially all of the assets of the Company and allows the
holder the right to convert all or a portion of the principal amount plus
accrued interest into the Company's Common Stock at a conversion price of
$3.00 per share. The shares issuable upon conversion are subject to certain
registration rights.
8
<PAGE> 9
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, 1996 were $2,850,507, a
decrease of $1,452,517 or 34% from the comparable period in 1995. Sales for the
nine months ended September 30, 1996 were $8,160,530, a decrease of $7,351,144
or 47% from the comparable period in 1995. The Company attributes the decrease
in sales to the continuing weakness in the graphic arts market and lower than
expected sales of its medical imaging product. The Company anticipates that
revenues will increase in the fourth quarter of 1996.
Gross margin for the nine month period ended September 30, 1996 decreased
to 14% from 36% for the nine month period ended September 30, 1995. This
decrease results from substantially lower revenues without a corresponding
reduction in manufacturing costs.
Engineering and product development costs for the nine month period ended
September 30, 1996 were $312,760 or 14% lower than the comparable period in
1995. The decrease results mostly from a reduction in staffing levels. The
Company anticipates that engineering and product development costs will decrease
during the remainder of the year due to reductions in personnel and product
development costs.
General and administrative expenses in the nine month period ended
September 30, 1996 were $99,946 or 6% higher than the comparable period in 1995.
This increase is attributable to changes in estimates in providing additional
reserves for bad debts.
Marketing and sales expenses in the nine month period ended September 30,
1996 decreased $255,333 or 10% from the comparable period in 1995. The decrease
results mostly from the reduction in commissions and promotional costs. The
level of expenditures is expected to decrease during the remainder of 1996 as a
result of steps taken by the Company to reduce spending.
Net interest expense for the nine month period ended September 30, 1996 was
$465,331 compared to $298,994 for the comparable period in 1995. The increase is
due to the increase in borrowings from the Company's Chairman and principal
stockholder, and his son. (See Note 4 of Notes to Financial Statements.)
The Company recorded a net loss of $1,749,740 for the three month period
ended September 30, 1996, as compared to a net loss of $1,161,569 from the
comparable period in 1995. The Company recorded a net loss of $5,314,626 for the
nine months ended September 30, 1996, as compared to a net loss of $3,829,912
for the same period in 1995, which included a one time restructuring charge of
$2,662,632.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996 the Company had current assets of $9,638,608, current
liabilities of $3,113,371 and working capital of $6,525,237. The ratio of
current assets to current liabilities was 3.1:1.
Accounts receivable decreased by $3,445,507 during the first nine months of
1996. This decrease is due primarily to lower revenues in the first nine months
of 1996.
Inventory decreased by $1,142,913 during the first nine months of 1996 due
to the Company's transition to demand flow technology and lower sales. The
Company anticipates that inventory will continue to decrease in the fourth
quarter of 1996.
Pursuant to the exercise of employee stock options, the Company received
$61,162 during the first nine months of 1996 compared to $153,387 during the
corresponding period in 1995. The exercise of stock options depends upon the
market price of the Company's stock. 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 1996 amounted
to $544,929 compared to $1,079,412 during the comparable period in 1995. The
decrease is attributable to the reduction in purchases related to equipment used
in the development of new products. The Company anticipates continuing the same
level of capital spending for the balance of the year.
On April 4, 1996, the Company borrowed $1,000,000 from Dr. Lawrence Howard,
son of the Company's Chairman, Robert Howard, pursuant to a Convertible
Promissory Note (the "Note"). The Note matures on January 4, 1998 or, at the
option of the holder upon the earlier closing of a public offering of the
Company's securities yielding at least $2 million in net proceeds. Under the
terms of the Note the Company agreed to pay interest monthly at the rate of
Citibank's, prime rate plus two percent. The Note is secured by substantially
all of the assets of the Company and allows the holder the right to convert all
or a portion of the principal amount plus accrued interest into the Company's
Common Stock at a conversion price of $3.00 per share. The shares issuable upon
conversion are subject to certain registration rights.
The Company believes it can adequately fund its working capital and capital
equipment requirements based upon its anticipated level of sales for 1996 and
the line of credit available under the Revolving Loan Agreement with its
Chairman of which $4,421,396 was available as of September 30, 1996.
10
<PAGE> 11
SUBSEQUENT EVENT
- ----------------
Pursuant to the authorization of the Company's board of directors, on
October 15, 1996, the Company's Chairman and principal stockholder, Robert
Howard purchased an additional 243,191 shares of the Company's common stock from
the Company in a private placement. The purchase price for the shares was $2.056
per share representing a discount of 30% from the market price at the time of
the sale. Unless registered for resale under the Securities Act of 1933 (the
"Act"), under current law, the stock must be held for at least two years before
it can be publicly sold pursuant to Rule 144 promulgated under the Act.
11
<PAGE> 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's 1994 and 1995 Annual
Reports on Form 10-K, on June 7, 1994, the Company filed a complaint in
the United States District Court, District of New Hampshire, against TECO
Electric and Machinery Co. Ltd. The Company claims, inter alia, breach of
contract, misappropriation of trade secrets, and breach of exclusive
dealing. On July 12, 1996, the court denied TECO's motion for partial
summary judgment on all counts. On September 24, 1996, the parties
participated in a court ordered mediation which was officiated by the
magistrate in the case. There was no resolution of the dispute. The
matter has been scheduled for a jury trial on April 1, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
12
<PAGE> 13
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 8, 1996 By: /s/ M. Russell Leonard
---------------- --------------------------------
M. Russell Leonard
Executive Vice President,
Chief Operating Officer
Date: November 8, 1996 By: /s/ Robert J. Lungo
---------------- --------------------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 557,457
<SECURITIES> 0
<RECEIVABLES> 3,528,637
<ALLOWANCES> 500,000
<INVENTORY> 5,697,910
<CURRENT-ASSETS> 9,638,608
<PP&E> 11,389,374
<DEPRECIATION> 8,982,884
<TOTAL-ASSETS> 13,151,979
<CURRENT-LIABILITIES> 3,113,371
<BONDS> 2,181,000
<COMMON> 80,376
0
0
<OTHER-SE> 3,198,628
<TOTAL-LIABILITY-AND-EQUITY> 13,151,979
<SALES> 2,850,507
<TOTAL-REVENUES> 2,850,507
<CGS> 2,283,530
<TOTAL-COSTS> 2,283,530
<OTHER-EXPENSES> 2,155,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,601
<INCOME-PRETAX> (1,749,740)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,749,740)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,749,740)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> 0
<FN>
ADDITIONAL CURRENT ASSET PREPAID AND OTHER $354,604
OTHER ASSETS OF $1,106,881
LOAN PAYABLE TO PRINCIPAL STOCKHOLDERS $3,578,604
LOAN PAYABLE TO RELATED PARTY $1,000,000
</FN>
</TABLE>
