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.
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
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
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
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
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
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
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
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
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
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
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