<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 1997
--------------
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.
- --------------------------------------------------------------------------------
(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
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(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 May 1, 1997 there were 9,031,856 shares
outstanding of the issuer's Common Stock, $.01 par value.
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HOWTEK, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 3
Statements of Operations for the three
month periods ended March 31, 1997 and
1996 (unaudited) 4
Statement of Changes in Stockholders' Equity
for the three month period ended March 31, 1997
(unaudited) 5
Statements of Cash Flows for the three month periods
ended March 31, 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 9-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
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HOWTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 251,126 $ 235,143
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $516,122 in 1997 and $537,748 in 1996 1,929,170 3,469,275
Inventory 6,709,087 5,762,657
Prepaid and other 328,261 230,815
------------ -----------
Total current assets 9,217,644 9,697,890
------------ -----------
Property and equipment:
Equipment 10,974,322 10,873,192
Leasehold improvements 373,785 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ -----------
11,539,721 11,436,341
Less accumulated depreciation and amortization 9,686,389 9,391,369
Net property and equipment 1,853,332 2,044,972
Other assets:
Software development costs, net 914,491 941,989
Debt issuance costs, net 93,308 98,398
Patents, net 10,571 12,218
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Total other assets 1,018,370 1,052,605
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Total assets $ 12,089,346 $12,795,467
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,197,104 $ 1,969,342
Accrued interest 827,791 689,434
Accrued expenses 336,577 343,677
------------ -----------
Total current liabilities 3,361,472 3,002,453
Loan payable to principal stockholders 3,478,604 3,478,604
Convertible subordinated debentures 2,181,000 2,181,000
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Total liabilities 9,021,076 8,662,057
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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 (41,689,135) (40,623,995)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ -----------
Stockholders' equity 3,068,270 4,133,410
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Total liabilities and stockholders' equity $ 12,089,346 $12,795,467
============ ===========
</TABLE>
See accompanying notes to financial statements.
3
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HOWTEK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
MARCH 31, 1997 MARCH 31, 1996
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(unaudited) (unaudited)
<S> <C> <C>
Sales $ 1,430,100 $ 2,023,157
Cost of Sales 1,209,030 2,295,836
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Gross Margin 221,070 (272,679)
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Operating expenses:
Engineering and product development 343,699 545,289
General and administrative 494,756 623,721
Marketing and sales 344,935 759,596
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Total operating expenses 1,183,390 1,928,606
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Income (loss) from operations (962,320) (2,201,285)
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Interest expense - net 102,820 140,109
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Income (loss) before tax provision (1,065,140) (2,341,394)
Provision for income taxes -- --
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Net income (loss) $(1,065,140) $(2,341,394)
=========== ===========
Net income (loss) per share $ (0.12) $ (0.29)
Weighted average number of shares used in
computing earnings per share 9,031,856 7,963,199
See accompanying notes to financial statements.
</TABLE>
4
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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 loss -- -- -- (1,065,140) -- (1,065,140)
--------- ------- ----------- ------------ --------- -----------
Balance at March 31, 1997 9,099,732 $90,997 $45,616,672 $(41,689,135) $(950,264) $ 3,068,270
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
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HOWTEK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
MARCH 31, 1997 MARCH 31, 1996
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(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,065,140) $(2,341,394)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 295,020 378,937
Amortization 141,736 155,609
(Increase) decrease:
Accounts receivable 1,540,105 1,567,101
Inventory (946,430) (435,946)
Other current assets (97,446) (48,480)
Increase (decrease):
Accounts payable 227,762 229,561
Accrued expenses 131,257 222,019
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Total adjustments 1,292,004 2,068,801
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Net cash provided by (used for)
operating activities 226,864 (272,593)
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Cash flows from investing activities:
Patents, software development and other (107,501) (49,651)
Additions to property and equipment (103,380) (147,487)
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Net cash used for investing activities (210,881) (197,138)
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Cash flows from financing activities:
Issuance of common stock for cash -- 48,787
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Net cash provided by financing activities -- 48,787
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Increase (decrease) in cash and equivalents 15,983 (420,944)
Cash and equivalents, beginning of period 235,143 574,647
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Cash and equivalents, end of period $ 251,126 $ 153,703
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Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
=========== ===========
</TABLE>
See accompanying partying notes to financial statements.
6
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HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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
As previously reported in the Company's 1996 Annual Report 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. TECO Information Systems Co., Ltd., Relisys (a TECO
subsidiary) and Herman Hsu. The Company claimed, inter alia, breach of
contract, misappropriation of trade secrets, and breach of exclusive
dealing. See Subsequent Events in Note (4) of Notes to Financial
Statements.
(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.
As of March 31, 1997 and 1996, the Company owed Mr. Howard $3,078,604
and $3,578,604, respectively, pursuant to the Loan Agreement, which is due
for repayment on January 4, 1999. As of March 31, 1997, the Company had
$4,921,396 available for future borrowings under the Loan Agreement. See
Note (4) of Notes to Financial Statements.
7
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HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(3) LOAN PAYABLE TO RELATED PARTY (continued)
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.
As of March 31, 1997 and 1996, the Company owed Dr. Lawrence Howard
$400,000 and $0, respectively, pursuant to the Note referenced above.
(4) SUBSEQUENT EVENTS
On April 24, 1997, the Company announced that the lawsuit brought by
the Company 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.
On April 25, 1997, the Company repaid the balance due, including
interest, on the Note held by Dr. Lawrence Howard referenced in Note (3) of
Notes to Financial Statements in the amount of $490,229.
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.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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"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, increased competition, and other risks detailed in
the Company's Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 1997 were $1,430,100, a decrease
of $593,057 or 29% from the comparable period in 1996. The Company attributes
the poor performance to continuing weakness in the digital scanner segment of
the graphic arts market and lower than expected sales of its medical imaging
product.
Gross margin for the three month period ended March 31, 1997 increased to
15% from a loss in the comparable period in 1996. This increase resulted from a
reduction in product manufacturing costs.
Engineering and product development costs for the three month period ended
March 31, 1997 were $201,590 or 37% lower than the comparable period 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. The Company
anticipates that engineering and product development costs will increase
slightly over the remainder of 1997.
General and administrative expenses in the three month period ended March
31, 1997 were $128,965 or 21% lower than the comparable period in 1996. This
decrease is attributable to reductions in salaries and reserves for bad debts.
Marketing and sales expenses in the three month period ended March 31, 1997
decreased $414,661 or 55% from the comparable period in 1996. The decrease
results mostly from a reduction in salaries, advertising, promotional and trade
show expenses. The level of expenditures is expected to increase during the
remainder of 1997 due to the Company's participation in trade shows.
Net interest expense for the three month period ended March 31, 1997 was
$102,820 compared to $140,109 for the comparable period in 1996. The decrease
resulted from interest charged to a major European customer for past due
accounts receivables.
9
<PAGE> 10
The Company recorded a net loss of $1,065,140 for the three month period
ended March 31, 1997, as compared to a net loss of $2,341,394 from the
comparable period in 1996. This decrease resulted from a reduction in operating
expenses and product manufacturing costs.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had current assets of $9,217,644, current
liabilities of $3,361,472 and working capital of $5,856,172. The ratio of
current assets to current liabilities was 2.7:1.
Accounts receivable decreased by $1,540,105 during the first three months
of 1997. This decrease is due primarily to lower revenues in the first three
months of 1997.
Inventory increased by $946,430 during the first three 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 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 referenced in Note (3) of Notes to
Financial Statements in the amount of $490,229.
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 $4,921,396 and $8,000,000 was available as of March 31, 1997
and April 30, 1997, respectively. In addition, on April 23, 1997 the Company
received $6,000,000 pursuant to the settlement of a lawsuit (see Item 1. Legal
Proceedings).
10
<PAGE> 11
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Company's 1996 Annual Report 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. TECO
Information Systems Co., Ltd., Relisys (a TECO subsidiary) and Herman Hsu. The
Company claimed, inter alia, breach of contract, misappropriation of trade
secrets, and breach of exclusive dealing. On April 24, 1997, the Company
announced that the lawsuit 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.
11
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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: May 13, 1997 By: /s/ M. Russell Leonard
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M. Russell Leonard
Executive Vice President,
Chief Operating Officer
Date: May 13, 1997 By: /s/ Robert J. Lunqo
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Robert J. Lungo
Vice President Finance,
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10Q at
March 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 251,126
<SECURITIES> 0
<RECEIVABLES> 2,445,292
<ALLOWANCES> 516,122
<INVENTORY> 6,709,087
<CURRENT-ASSETS> 9,217,644
<PP&E> 11,539,721
<DEPRECIATION> 9,686,389
<TOTAL-ASSETS> 12,089,346
<CURRENT-LIABILITIES> 3,361,472
<BONDS> 2,181,000
0
0
<COMMON> 90,997
<OTHER-SE> 2,977,273
<TOTAL-LIABILITY-AND-EQUITY> 12,089,346
<SALES> 1,430,100
<TOTAL-REVENUES> 1,430,100
<CGS> 1,209,030
<TOTAL-COSTS> 1,209,030
<OTHER-EXPENSES> 343,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,820
<INCOME-PRETAX> (1,065,140)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,065,140)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,065,140)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
