<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, 1997
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 21, 1997 there were 9,053,706
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 September 30, 1997
(unaudited) and December 31, 1996 3
Statements of Operations for the three
month periods ended September 30, 1997 and
1996 (unaudited) and for the nine month
periods ended September 30, 1997 and 1996
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the nine month period ended September 30, 1997
(unaudited) 5
Statements of Cash Flows for the nine month periods
ended September 30, 1997 and 1996 (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 6 Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE> 3
HOWTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 253,702 $ 235,143
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $1,247,731 in 1997 and $500,000 in 1996 1,783,484 3,469,275
Inventory 4,411,044 5,762,657
Prepaid and other 245,058 230,815
------------ ------------
Total current assets 6,693,288 9,697,890
------------ ------------
Property and equipment:
Equipment 9,529,303 10,873,192
Leasehold improvements 373,785 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ ------------
10,094,702 11,436,341
Less accumulated depreciation and amortization 8,656,315 9,391,369
------------ ------------
Net property and equipment 1,438,387 2,044,972
------------ ------------
Other assets:
Software development costs, net 682,950 941,989
Debt issuance costs, net 83,129 98,398
Patents, net 7,277 12,218
------------ ------------
Total other assets 773,356 1,052,605
------------ ------------
Total assets $ 8,905,031 $ 12,795,467
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,427,453 $ 1,969,342
Accrued interest - 689,434
Accrued expenses 608,802 343,677
------------ ------------
Total current liabilities 2,036,255 3,002,453
Loan payable to principal stockholder (note 3) - 3,478,604
Convertible subordinated debentures 2,181,000 2,181,000
------------ ------------
Total liabilities 4,217,255 8,662,057
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value: authorized
25,000,000 shares; issued 9,121,582 in 1997
and 9,099,732 shares in 1996; outstanding
9,053,706 in 1997 and 9,031,856 shares in 1996 91,215 90,997
Additional paid-in capital 45,654,014 45,616,672
Accumulated deficit (40,107,189) (40,623,995)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 4,687,776 4,133,410
------------ ------------
Total liabilities and stockholders' equity $ 8,905,031 $ 12,795,467
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HOWTEK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 2,371,615 $ 2,850,507 $ 5,817,022 $ 8,160,530
Cost of Sales 1,784,195 2,283,530 4,374,347 7,041,302
----------- ----------- ----------- -----------
Gross Margin 587,420 566,977 1,442,675 1,119,228
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 361,298 703,039 1,055,016 1,919,237
General and administrative 372,158 664,753 1,310,019 1,863,375
Marketing and sales 410,752 787,324 1,228,875 2,185,911
Unusual charges (note 4) - - 2,996,971 -
----------- ----------- ----------- -----------
Total operating expenses 1,144,208 2,155,116 6,590,881 5,968,523
----------- ----------- ----------- -----------
Loss from operations (556,788) (1,588,139) (5,148,206) (4,849,295)
----------- ----------- ----------- -----------
Interest expense - net 46,642 161,601 214,988 465,331
Income from legal settlement (note 2) - - (6,000,000) -
----------- ----------- ----------- -----------
Income (loss) before tax provision (603,430) (1,749,740) 636,806 (5,314,626)
Provision for income taxes - - 120,000 -
----------- ----------- ----------- -----------
Net income (loss) $ (603,430) $(1,749,740) $ 516,806 $(5,314,626)
=========== =========== =========== ===========
Net income (loss) per share $ (0.07) $ (0.22) $ 0.06 $ (0.67)
Weighted average number of shares used
in computing earnings per share 9,033,994 7,965,903 9,032,576 7,964,777
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HOWTEK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<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, 1996 9,099,732 $90,997 $45,616,672 $(40,623,995) $(950,264) $4,133,410
January through September, 1997
Issuance of common stock
pursuant to incentive stock
option plan (unaudited) 21,850 218 37,342 37,560
Net income (unaudited) - - - 516,806 - 516,806
--------- ------- ----------- ------------ --------- ----------
Balance at September 30, 1997 9,121,582 $91,215 $45,654,014 $(40,107,189) $(950,264) $4,687,776
========= ======= =========== ============ ========= ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HOWTEK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 516,806 $(5,314,626)
----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 787,044 1,167,648
Amortization 288,595 467,568
Asset writedown and reserve increases (note 4) 2,996,971 -
(Increase) decrease:
Accounts receivable 935,791 3,445,507
Inventory (398,387) 1,142,913
Other current assets (14,243) (107,014)
Increase (decrease):
Accounts payable (1,209,468) (1,359,144)
Accrued expenses 243,270 269,347
----------- -----------
Total adjustments 3,629,573 5,026,825
----------- -----------
Net cash provided by (used for)
operating activities 4,146,379 (287,801)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (281,706) (245,622)
Additions to property and equipment (405,070) (544,929)
----------- -----------
Net cash used for investing activities (686,776) (790,551)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 37,560 61,162
Proceeds (repayment) of loan from principal
stockholder (note 3) (3,478,604) 1,000,000
----------- -----------
Net cash provided by financing activities (3,441,044) 1,061,162
----------- -----------
Increase (decrease) in cash and equivalents 18,559 (17,190)
Cash and equivalents, beginning of period 235,143 574,647
----------- -----------
Cash and equivalents, end of period $ 253,702 $ 557,457
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 885,326 $ 98,145
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
(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 Annual
Report on Form 10-K for the year ended December 31, 1996 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 April 24, 1997, the Company announced that the lawsuit brought by
the Company on June 7, 1994, in the United States District Court, District
of New Hampshire, against TECO Electric and Machinery Co. Ltd., TECO
Information Systems Co., Ltd., Relisys (a TECO subsidiary) and Herman Hsu
had been settled. All existing agreements between the companies have been
terminated. The Company has released the TECO companies, Relisys and Mr.
Hsu from all covenants not to compete and from any claims relating to the
scanner technology involved in the case. TECO, in turn, made a one-time
payment of $6,000,000 to the Company on April 23, 1997, and has released
the Company from any obligation to manufacture scanner products through
TECO. Neither party admitted to any breach of contract or other
wrong-doing in connection with the settlement of this lawsuit.
(3) LOAN PAYABLE TO RELATED PARTY
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Company, under which
Mr. Howard has agreed to advance funds, or to provide guarantees of
advances made by third parties in an amount up to $8,000,000. Such
outstanding advances are collateralized by substantially all of the assets
of the Company and bear interest at prime interest rate plus 2% (10.25% on
December 31, 1996). The Convertible Note entitles Mr. Howard to convert
outstanding advances into shares of the Company's common stock at any time
based on the outstanding closing market price of the Company's common
stock at the time each advance is made.
7
<PAGE> 8
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(unaudited)
(3) LOAN PAYABLE TO RELATED PARTY (continued)
As of December 31, 1996 the Company owed Mr. Howard $3,478,604 under
the Loan Agreement. On April 25, 1997, the Company repaid the balance due,
including interest, on the Revolving Note and Security Agreement held by
Mr. Robert Howard in the amount of $3,775,555. As of September 30, 1997 no
monies were owed and the Company had $8,000,000 available for future
borrowings under the Loan Agreement.
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 matured 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
was secured by substantially all of the assets of the Company and allowed
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 were subject
to certain registration rights.
On April 25, 1997, the Company repaid the balance due, including
interest, on the Note held by Dr. Lawrence Howard in the amount of
$490,229 and the Note was discharged.
(4) UNUSUAL CHARGES
An unusual charge was recorded in the second quarter of 1997
consisting of the following: (i) an inventory reserve of $1,750,000
resulting from management's decision in the second quarter of 1997 to
discontinue support of certain products which had reached end of life;
(ii) a bad debt reserve of $750,000 prompted by the bankruptcy filing of a
major European distributor in the second quarter of 1997; (iii) a
write-off of test equipment for non-current products of $224,610; and (iv)
a write-off of software development for non-current products in the amount
of $272,361.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements which are not historical facts contained in this Item 2 are
forward looking statements that involve a number of risks and uncertainties,
including but not limited to, the risks of uncertainty of patent protection, the
impact of supply and manufacturing constraints or difficulties, possible
technological obsolescence of the Company's products, increased competition, and
other risks detailed in the Company's Securities and Exchange Commission
filings.
RESULTS OF OPERATIONS
Sales for the three months ended September 30, 1997 were $2,371,615, a
decrease of $478,892 or 17% from the comparable period in 1996. Sales for the
nine months ended September 30, 1997 were $5,817,022, a decrease of $2,343,508
or 29% from the comparable period in 1996. The Company attributes the decrease
in sales to the continuing weakness in the digital scanner segment of the
graphic arts market and lower than expected sales of its medical imaging
product.
The Company's gross margin for the three months ended September 30, 1997
was 25%, an increase of 5% from the comparable period in 1996. Gross margin for
the nine months ended September 30, 1997 was 25%, an increase of 11% from the
same period in 1996. The improvement in gross margin is primarily due to a
change in product mix as well as a reduction in unfavorable manufacturing costs.
The Company anticipates that gross margins will continue to improve over the
remainder of the year.
Engineering and product development costs for the three month period ended
September 30, 1997 decreased $341,741, or 49% from the comparable period in
1996. Engineering and product development costs for the nine month period ended
September 30, 1997 decreased $864,221, or 45% from the comparable periods in
1996. The decrease results mostly from a reduction in staffing levels and
spending as a result of the steps taken by the Company to control costs during
the fourth quarter of 1996. The Company anticipates that engineering and product
development costs will increase slightly over the remainder of 1997.
General and administrative expenses for the three month period ended
September 30, 1997 decreased $292,595, or 44% from the comparable period of
1996. General and administrative expenses for the nine month period ended
September 30, 1997 decreased $553,356, or 30% from the comparable period in
1996. This decrease is attributable to reductions in salaries and reserves for
bad debts. The Company anticipates that general and administrative expenses will
remain constant during the remainder of the year.
9
<PAGE> 10
Marketing and sales expenses for the three month period ended September
30, 1997 decreased $376,572, or 48% from the comparable period in 1996.
Marketing and sales expenses for the nine month period ended September 30, 1997
decreased $957,036, or 44% from the comparable periods in 1996. The decrease
results mostly from a reduction in salaries and spending levels as a result of
the steps taken to control costs during the fourth quarter of 1996. The Company
anticipates that marketing and sales expenses will remain constant for the
balance of 1997.
Net interest expense for the three and nine month periods ended September
30, 1997 was $46,642 and $214,988, respectively, compared to $161,601 and
$465,331, for the comparable periods in 1996. The decrease resulted from the
repayment of the notes payable of $4,265,784 on April 25, 1997. See Note 3 of
Notes to Financial Statements.
The Company recorded a net loss of $603,430 for the three month period
ended September 30, 1997 and a net profit of $516,806 for the nine month period
ended September 30, 1997, as compared to net losses of $1,749,740 and $5,314,626
from the comparable periods in 1996. The loss for the three months ended
September 30, 1997 decreased $1,146,310 or 66% as compared to the corresponding
period in 1996 as a result of the reduction of spending levels. The profit for
the nine months ended September 30, 1997 is also attributable to the reduction
of spending levels and includes the receipt of $6,000,000 from the settlement of
the Teco lawsuit on April 23, 1997 (see Note 2 of Notes to Financial
Statements). In addition, the results for the nine month period ended September
30, 1997 includes unusual charges of $2,996,971, recorded in the second quarter
of 1997.
The unusual charges referenced above consist of the following: (i) an
inventory reserve of $1,750,000 resulting from management's decision in the
second quarter of 1997 to discontinue support of certain products which had
reached end of life; (ii) a bad debt reserve of $750,000 prompted by the
bankruptcy filing of a major European distributor in the second quarter of 1997;
(iii) a write-off of test equipment for non-current products of $224,610; and
(iv) a write-off of software development for non-current products in the amount
of $272,361.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had current assets of $6,693,288,
current liabilities of $2,036,255 and working capital of $4,657,033. The ratio
of current assets to current liabilities was 3.3:1.
Accounts receivable, excluding reserves, decreased by $935,791 during the
first nine months of 1997. This decrease is due primarily to lower revenues in
the first nine months of 1997.
Inventory, excluding reserves, increased by $398,387 during the first nine
months of 1997 due to lower than projected sales volume. The Company anticipates
that inventory will decrease during the remainder of 1997.
10
<PAGE> 11
The Company believes it can adequately fund its working capital and
capital equipment requirements based upon its anticipated level of sales for
1997 and the line of credit available under the Revolving Loan Agreement with
its Chairman of which $8,000,000 was available as of September 30, 1997.
11
<PAGE> 12
PART II OTHER INFORMATION
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 12, 1997 By:
--------------------------------- ----------------------------------
M. Russell Leonard
Executive Vice President,
Chief Operating Officer
Date: November 12, 1997 By:
--------------------------------- ----------------------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10Q at
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 253,702
<SECURITIES> 0
<RECEIVABLES> 3,031,215
<ALLOWANCES> 1,247,731
<INVENTORY> 4,411,044
<CURRENT-ASSETS> 6,693,288
<PP&E> 10,094,702
<DEPRECIATION> 8,656,315
<TOTAL-ASSETS> 8,905,031
<CURRENT-LIABILITIES> 2,036,255
<BONDS> 2,181,000
0
0
<COMMON> 91,215
<OTHER-SE> 4,596,561
<TOTAL-LIABILITY-AND-EQUITY> 8,905,031
<SALES> 5,817,022
<TOTAL-REVENUES> 5,817,022
<CGS> 4,374,347
<TOTAL-COSTS> 4,374,347
<OTHER-EXPENSES> 1,055,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,988
<INCOME-PRETAX> 636,806
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 516,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516,806
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
