<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, 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 July 7, 1997 there were 9,031,856 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, 1997
(unaudited) and December 31, 1996 3
Statements of Operations for the three month
periods ended June 30, 1997 and 1996 (unaudited)
and for the six month periods ended June 30, 1997
and 1996 (unaudited) 4
Statement of Changes in Stockholders' Equity
for the six month period ended June 30, 1997
(unaudited) 5
Statements of Cash Flows for the six month periods
ended June 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 1 Legal Proceedings 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE> 3
HOWTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 375,695 $ 235,143
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $1,260,584 in 1997 and $368,077 in 1996 1,539,399 3,469,275
Inventory 4,704,831 5,762,657
Prepaid and other 283,212 230,815
----------- -----------
Total current assets 6,903,137 9,697,890
----------- -----------
Property and equipment:
Equipment 9,454,853 10,873,192
Leasehold improvements 373,785 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
----------- -----------
10,020,252 11,436,341
Less accumulated depreciation and amortization 8,404,341 9,391,369
----------- -----------
Net property and equipment 1,615,911 2,044,972
----------- -----------
Other assets:
Software development costs, net 663,553 941,989
Debt issuance costs, net 88,219 98,398
Patents, net 8,924 12,218
----------- -----------
Total other assets 760,696 1,052,605
----------- -----------
Total assets $ 9,279,744 $12,795,467
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,329,022 $ 1,969,342
Accrued interest -- 689,434
Accrued expenses 516,076 343,677
----------- -----------
Total current liabilities 1,845,098 3,002,453
Loan payable to principal stockholder (note 3) -- 3,478,604
Convertible subordinated debentures 2,181,000 2,181,000
----------- -----------
Total liabilities 4,026,098 8,662,057
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 9,099,732 in 1997
and 9,099,732 shares in 1996; outstanding
9,031,856 in 1997 and 9,031,856 shares in 1996 90,997 90,997
Additional paid-in capital 45,616,672 45,616,672
Accumulated deficit (39,503,759) (40,623,995)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
----------- -----------
Stockholders' equity 5,253,646 4,133,410
----------- -----------
Total liabilities and stockholders' equity $ 9,279,744 $12,795,467
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HOWTEK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 2,015,307 $ 3,286,867 $ 3,445,407 $ 5,310,024
Cost of Sales 1,381,122 2,461,936 2,590,152 4,757,773
----------- ----------- ----------- -----------
Gross Margin 634,185 824,931 855,255 552,251
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 350,019 670,909 693,718 1,216,198
General and administrative 443,105 574,901 937,861 1,198,622
Marketing and sales 473,188 638,992 818,123 1,398,587
Unusual charges (note 4) 2,996,971 -- 2,996,971 --
----------- ----------- ----------- -----------
Total operating expenses 4,263,283 1,884,802 5,446,673 3,813,407
----------- ----------- ----------- -----------
Income (loss) from operations (3,629,098) (1,059,871) (4,591,418) (3,261,156)
----------- ----------- ----------- -----------
Interest expense - net 65,526 163,621 168,346 303,730
Income from legal settlement (note 2) (6,000,000) -- (6,000,000) --
----------- ----------- ----------- -----------
Income (loss) before tax provision 2,305,376 (1,223,492) 1,240,236 (3,564,886)
Provision for income taxes 120,000 -- 120,000 --
----------- ----------- ----------- -----------
Net income (loss) $ 2,185,376 $(1,223,492) $ 1,120,236 $(3,564,886)
=========== =========== =========== ===========
Net income (loss) per share $ 0.24 $ (0.15) $ 0.12 $ (0.45)
Weighted average number of shares used
in computing earnings per share 9,031,856 7,965,218 9,031,856 7,964,209
</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
Net income -- -- -- 1,120,236 -- 1,120,236
--------- ------- ----------- ------------ --------- ----------
Balance at June 30, 1997 9,099,732 $90,997 $45,616,672 $(39,503,759) $(950,264) $5,253,646
========= ======= =========== ============ ========= ==========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HOWTEK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,120,236 $(3,564,886)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 535,071 764,895
Amortization 212,858 311,218
Asset writedown and reserve increases (note 4) 2,996,971 --
(Increase) decrease:
Accounts receivable 1,179,876 2,524,937
Inventory (692,174) 556,736
Other current assets (52,397) (111,168)
Increase (decrease):
Accounts payable (1,307,899) (1,335,220)
Accrued expenses 150,544 8,864
----------- -----------
Total adjustments 3,022,850 2,720,262
----------- -----------
Net cash provided by (used for)
operating activities 4,143,086 (844,624)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (193,310) (132,390)
Additions to property and equipment (330,620) (364,061)
----------- -----------
Net cash used for investing activities (523,930) (496,451)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash -- 48,787
Proceeds (repayment) of loan from principal
stockholder (note 3) (3,478,604) 1,000,000
----------- -----------
Net cash provided by financing activities (3,478,604) 1,048,787
----------- -----------
Increase (decrease) in cash and equivalents 140,552 (292,288)
Cash and equivalents, beginning of period $ 235,143 $ 574,647
----------- -----------
Cash and equivalents, end of period $ 375,695 $ 282,359
=========== ===========
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
JUNE 30, 1997
(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
JUNE 30, 1997
(3) LOAN PAYABLE TO RELATED PARTY (continued)
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 June 30, 1996 the Company owed Mr. Howard $3,578,604 under the
Loan Agreement. As of June 30, 1997 no moneys 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 June 30, 1997 were $2,015,307, a decrease
of $1,271,560 or 39% from the comparable period in 1996. Sales for the six
months ended June 30, 1997 were $3,445,407, a decrease of $1,864,617 or 35% 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 June 30, 1997 was
31%, an increase of 6% from the comparable period in 1996. Gross margin for the
six months ended June 30, 1997 was 25%, an increase of 15% for the same period
in 1996. The improvement in gross margin is primarily due to an increase in
customer service revenues and medical imaging revenues at higher gross margins
than other product lines. 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
June 30, 1997 were $320,890 or 48% lower than the comparable period in 1996.
Engineering and product development costs for the six month period ended June
30, 1997 were $522,480 or 43% lower than 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 June
30, 1997 were $131,796, or 23% lower than the comparable period of 1996. General
and administrative expenses for the six month period ended June 30, 1997 were
$260,761, or 22% lower than 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 June 30,
1997 decreased $165,804, or 26% from the comparable period in 1996. Marketing
and sales expenses for the six month period ended June 30, 1997 decreased
$580,464, or 42% 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 increase slightly during the
remainder of 1997.
Net interest expense for the three and six month periods ended June 30,
1997 was $65,526 and $168,346, respectively, compared to $163,621 and $303,730,
for the comparable periods in 1996. The decrease resulted from the payment of
the notes payable of $4,265,784 on April 25, 1997. See Note 3 of Notes to
Financial Statements.
The Company recorded net profits of $2,185,376 and $1,120,236 for the
three and six month periods ended June 30, 1997, as compared to net losses of
$1,223,492 and $3,564,886 from the comparable periods in 1996. This increase
resulted from the settlement of the Teco lawsuit of $6,000,000 on April 23, 1997
(see Note 2 of Notes to Financial Statements) combined with 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 June 30, 1997 the Company had current assets of $6,903,137, current
liabilities of $1,845,098 and working capital of $5,058,039. The ratio of
current assets to current liabilities was 3.7:1.
Accounts receivable decreased by $1,179,876 during the first six months of
1997. This decrease is due primarily to lower revenues in the first six months
of 1997.
Inventory increased by $692,174 during the first six months of 1997 due to
lower than projected sales volume. The Company anticipates that inventory will
decrease during the remainder of 1997.
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
10
<PAGE> 11
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 remaining outstanding balance
due, including interest, on the Note held by Dr. Lawrence Howard in the amount
of $490,229. See Note (3) of Notes to Financial Statements.
On April 25, 1997, the Company repaid the balance due, including interest,
on the Revolving Note and Security Agreement held by Mr. Robert Howard,
referenced in Note (3) of Notes to Financial Statements, in the amount of
$3,775,555.
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 June 30, 1997.
11
<PAGE> 12
PART II OTHER INFORMATION
ITEM 1. 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.
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: July 31, 1997 By: /s/ M. RUSSELL LEONARD
---------------------------- -----------------------------
M. Russell Leonard
Executive Vice President,
Chief Operating Officer
Date: July 31, 1997 By: /s/ ROBERT J. LUNGO
---------------------------- -----------------------------
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 10-Q AT
JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 375,695
<SECURITIES> 0
<RECEIVABLES> 2,799,983
<ALLOWANCES> 1,260,584
<INVENTORY> 4,704,831
<CURRENT-ASSETS> 6,903,137
<PP&E> 10,020,252
<DEPRECIATION> 8,404,341
<TOTAL-ASSETS> 9,279,744
<CURRENT-LIABILITIES> 1,845,098
<BONDS> 2,181,000
0
0
<COMMON> 90,997
<OTHER-SE> 5,162,649
<TOTAL-LIABILITY-AND-EQUITY> 9,279,744
<SALES> 3,445,407
<TOTAL-REVENUES> 3,445,407
<CGS> 2,590,152
<TOTAL-COSTS> 2,590,152
<OTHER-EXPENSES> 693,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168,346
<INCOME-PRETAX> 1,240,236
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 1,120,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,120,236
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
