<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, 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 July 23, 1996 there were 7,965,218 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 June 30, 1996
(unaudited) and December 31, 1995 3
Statements of Operations for the
three month periods ended June 30, 1996 and
1995 (unaudited) and for the six month
periods ended June 30, 1996 and 1995
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the six month period ended June 30, 1996
(unaudited) 5
Statements of Cash Flows for the six month periods
ended June 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 9-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE> 3
HOWTEK, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 282,359 $ 574,647
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $368,077 in 1996 and $99,665 in 1995 3,949,207 6,474,144
Inventory 6,284,087 6,840,823
Prepaid and other 358,758 247,590
------------ ------------
Total current assets 10,874,411 14,137,204
------------ ------------
Property and equipment:
Equipment 10,645,357 10,281,296
Leasehold improvements 371,535 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ ------------
11,208,506 10,844,445
Less accumulated depreciation and amortization 8,580,131 7,815,236
------------ ------------
Net property and equipment 2,628,375 3,029,209
------------ ------------
Other assets:
Software development costs, net 1,025,910 1,191,265
Debt issuance costs, net 108,577 118,756
Patents, net 15,512 18,806
------------ ------------
Total other assets 1,149,999 1,328,827
------------ ------------
Total assets $ 14,652,785 $ 18,495,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,377,196 $ 3,712,416
Accrued expenses 499,616 490,752
------------ ------------
Total current liabilities 2,876,812 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 9,636,416 9,962,772
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 8,033,094 in 1996
and 8,006,394 shares in 1995; outstanding
7,965,218 in 1996 and 7,938,518 shares in 1995 80,331 80,225
Additional paid-in capital 44,014,963 43,966,282
Accumulated deficit (38,128,661) (34,563,775)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 5,016,369 8,532,468
------------ ------------
Total liabilities and stockholders' equity $ 14,652,785 $ 18,495,240
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HOWTEK, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS SIX MONTHS
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 3,286,867 $ 5,356,900 $ 5,310,024 $11,208,650
Cost of Sales 2,461,936 3,380,072 4,757,773 7,003,700
----------- ----------- ----------- -----------
Gross Margin 824,931 1,976,828 552,251 4,204,950
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 670,909 668,617 1,216,198 1,444,361
General and administrative 574,901 570,622 1,198,622 1,078,427
Marketing and sales 638,992 809,462 1,398,587 1,506,044
Restructuring charge (note 3) - 2,662,632 - 2,662,632
----------- ----------- ----------- -----------
Total operating expenses 1,884,802 4,711,333 3,813,407 6,691,464
----------- ----------- ----------- -----------
Income (loss) from operations (1,059,871) (2,734,505) (3,261,156) (2,486,514)
----------- ----------- ----------- -----------
Interest expense - net 163,621 99,771 303,730 181,829
----------- ----------- ----------- -----------
Income (loss) before tax provision (1,223,492) (2,834,276) (3,564,886) (2,668,343)
Provision for income taxes - (13,275) - -
----------- ----------- ----------- -----------
Net income (loss) $(1,223,492) $(2,821,001) $(3,564,886) $(2,668,343)
=========== =========== =========== ===========
Net income (loss) per share $ (0.15) $ (0.36) $ (0.45) $ (0.34)
Weighted average number of shares used
in computing earnings per share 7,965,218 7,928,919 7,964,209 7,923,755
</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 June, 1996
Issuance of common stock
pursuant to incentive stock
option plan. 10,500 106 48,681 48,787
Net loss - - - (3,564,886) - (3,564,886)
--------- ------- ----------- ------------ --------- -----------
Balance at June 30, 1996 8,033,094 $80,331 $44,014,963 $(38,128,661) $(950,264) $ 5,016,369
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HOWTEK, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS SIX MONTHS
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(3,564,886) $(2,668,343)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 764,895 663,574
Amortization 311,218 255,754
Restructuring charge - 2,662,632
(Increase) decrease:
Accounts receivable 2,524,937 (304,444)
Inventory 556,736 (1,116,727)
Other current assets (111,168) (84,087)
Increase (decrease):
Accounts payable (1,335,220) (107,781)
Accrued expenses 8,864 (161,995)
----------- -----------
Total adjustments 2,720,262 1,806,926
----------- -----------
Net cash provided by (used for)
operating activities (844,624) (861,417)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (132,390) (283,975)
Additions to property and equipment (364,061) (925,506)
----------- -----------
Net cash used for investing activities (496,451) (1,209,481)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 48,787 113,075
Proceeds of loan payable to related party (note 4) 1,000,000 -
Proceeds of loan payable to principal stockholder - 1,578,604
----------- -----------
Net cash provided by financing activities 1,048,787 1,691,679
----------- -----------
Increase (decrease) in cash and equivalents (292,288) (379,219)
Cash and equivalents, beginning of period 574,647 649,455
----------- -----------
Cash and equivalents, end of period $ 282,359 $ 270,236
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 98,145 $ 151,191
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 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 & Machinery Co. Ltd. The Company claims, inter alia,
breach of contract, misappropriation of trade secrets and breach of
exclusive dealing. For the most part the discovery phase of the
litigation has been completed. On February 1, 1996, the court issued an
order that once a pending motion for summary judgment by the defendant
TECO had been decided, that the parties should participate in
mediation. The motion for summary judgment was denied on July 12, 1996
and decided in Howtek's favor in all respects. Mediation will now be
scheduled and if mediation is not successful then a trial date will be
set.
(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
JUNE 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 June 30, 1996 were $3,286,867, a
decrease of $2,070,033 or 39% from the comparable period in 1995. Sales for the
six months ended June 30, 1996 were $5,310,024, a decrease of $5,898,626 or 53%
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
continue to increase on a quarter to quarter basis over the balance of the year.
The Company recorded a net loss of $1,223,492 for the three month
period ended June 30, 1996, as compared to a net loss of $2,821,001 from the
comparable period in 1995, which included a one time restructuring charge of
$2,662,632. The Company recorded a net loss of $3,564,886 for the six months
ended June 30, 1996, as compared to a net loss of $2,668,343 for the same period
in 1995.
Gross margin for the six month period ended June 30, 1996 decreased to
10% from 38% for the six month period ended June 30, 1995. This decrease results
from substantially lower revenues without a corresponding reduction in
manufacturing costs. Gross margin increased during the three month period ended
June 30, 1996 to 25% from a loss in the three month period ended March 31, 1996.
The increase is due to higher service and accessories revenue at higher gross
margins and a decrease in manufacturing costs resulting from the reorganization
at the beginning of the second quarter.
Engineering and product development costs for the six month period
ended June 30, 1996 were $228,163 or 16% 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 increase
slightly during the remainder of the year due to the development of new products
.
General and administrative expenses in the six month period ended June
30, 1996 were $120,195 or 11% higher than the comparable period in 1995. This
increase is attributable to increased legal expenses, primarily resulting from
the Company's ongoing lawsuit against a former contract manufacturer and changes
in estimates in providing additional reserves for bad debts.
Marketing and sales expenses in the six month period ended June 30,
1996 decreased $107,457 or 7% 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 increase during the remainder of 1996 as a
result of increased advertising and trade show expenses.
9
<PAGE> 10
Net interest expense for the six month period ended June 30, 1996 was
$303,730 compared to $181,829 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.)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company had current assets of $10,874,411,
current liabilities of $2,876,812 and working capital of $7,997,599. The ratio
of current assets to current liabilities was 3.8:1.
Accounts receivable decreased by $2,524,937 during the first six
months of 1996. This decrease is due primarily to lower revenues in the first
six months of 1996.
Inventory decreased by $556,736 during the first six months of 1996 due
to the Company's transition to Demand Flow Technology instituted by the new Vice
President of Manufacturing Operations. We look forward to continuing this trend
in the months to come.
Pursuant to the exercise of employee stock options, the Company
received $48,787 during the first six months of 1996 compared to $113,075 during
the corresponding period in 1995. 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 1996
amounted to $364,061 compared to $925,506 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 June 30, 1996.
10
<PAGE> 11
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 & Machinery Co. Ltd. The Company claims, inter alia,
breach of contract, misappropriation of trade secrets and breach of
exclusive dealing. For the most part the discovery phase of the
litigation has been completed. On February 1, 1996, the court issued an
order that once a pending motion for summary judgment by the defendant
TECO had been decided, that the parties should participate in
mediation. The motion for summary judgment was denied on July 12, 1996
and decided in Howtek's favor in all respects. Mediation will now be
scheduled and if mediation is not successful then a trial date will be
set.
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.
11
<PAGE> 12
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: July 31, 1996 By: /s/ M. Russell Leonard
---------------------------
M. Russell Leonard
Executive Vice President,
Chief Operating Officer
Date: July 31, 1996 By: /s/ Robert J. Lungo
---------------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
12
<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> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 282,359
<SECURITIES> 0
<RECEIVABLES> 4,317,284
<ALLOWANCES> 368,077
<INVENTORY> 6,284,087
<CURRENT-ASSETS> 10,874,411
<PP&E> 11,208,506
<DEPRECIATION> 8,580,131
<TOTAL-ASSETS> 14,652,785
<CURRENT-LIABILITIES> 2,876,812
<BONDS> 2,181,000
<COMMON> 80,331
0
0
<OTHER-SE> 4,936,038
<TOTAL-LIABILITY-AND-EQUITY> 14,652,785
<SALES> 3,286,867
<TOTAL-REVENUES> 3,286,867
<CGS> 2,461,936
<TOTAL-COSTS> 2,461,936
<OTHER-EXPENSES> 1,884,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 163,621
<INCOME-PRETAX> (1,223,492)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,223,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,223,492)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
<FN>
ADDITIONAL CURRENT ASSET PREPAID AND OTHER $358,758
OTHER ASSETS OF $1,149,999
LOAN PAYABLE TO PRINCIPAL STOCKHOLDERS $3,578,604
LOAN PAYABLE TO RELATED PARTY $1,000,000
</FN>
</TABLE>
