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, 1998 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 August 10, 1998 there were 10,760,206 shares outstanding of the issuer's Common Stock, $.01 par value.
HOWTEK, INC. INDEX PAGE PART I FINANCIAL INFORMATION Item 1 Financial Statements Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3 Statements of Operations for the three month periods ended June 30, 1998 and 1997 (unaudited) and for the six month periods ended June 30, 1998 and 1997 (unaudited) 4 Statement of Changes in Stockholders' Equity for the six month period ended June 30, 1998 (unaudited) 5 Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 (unaudited) 6 Notes to Financial Statements (unaudited) 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II OTHER INFORMATION Item 1 Legal Proceedings 12 Item 2 Changes in Securities 12 Item 6 Exhibits and Reports on Form 8-K 12 Signatures 13 2
HOWTEK, INC. Balance Sheets <TABLE> <CAPTION> June 30, 1998 December 31, 1997 ------------ ------------ Assets (unaudited) <S> <C> <C> Current assets: Cash and equivalents $ 634,768 $ 235,326 Accounts receivable: Trade-net of allowance for doubtful accounts of $89,806 in 1998 and $70,000 in 1997 961,371 1,475,952 Inventory 3,263,405 3,515,993 Prepaid and other 165,558 105,275 ------------ ------------ Total current assets 5,025,102 5,332,546 ------------ ------------ Property and equipment: Equipment 2,359,239 2,288,687 Leasehold improvements 26,377 -- Motor vehicles 6,050 6,050 ------------ ------------ 2,391,666 2,294,737 Less accumulated depreciation and amortization 1,470,028 1,255,317 ------------ ------------ Net property and equipment 921,638 1,039,420 ------------ ------------ Other assets: Software development costs, net 584,424 593,879 Debt issuance costs, net 67,860 78,040 Patents, net 22,495 27,409 ------------ ------------ Total other assets 674,779 699,328 ------------ ------------ Total assets $ 6,621,519 $ 7,071,294 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 948,997 $ 1,200,871 Accrued interest 16,358 16,903 Accrued expenses 287,724 322,448 ------------ ------------ Total current liabilities 1,253,079 1,540,222 Convertible subordinated debentures 2,181,000 2,181,000 ------------ ------------ Total liabilities 3,434,079 3,721,222 ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock, $ .01 par value: authorized 25,000,000 shares; issued 10,828,082 in 1998 and 9,128,082 shares in 1997; outstanding 10,760,206 in 1998 and 9,060,206 shares in 1997 108,281 91,281 Additional paid-in capital 47,357,588 45,665,122 Accumulated deficit (43,328,165) (41,456,067) Treasury stock at cost (67,876 shares) (950,264) (950,264) ------------ ------------ Stockholders' equity 3,187,440 3,350,072 ------------ ------------ Total liabilities and stockholders' equity $ 6,621,519 $ 7,071,294 ============ ============ </TABLE> See accompanying notes to financial statements. 3
HOWTEK, INC. Statements of Operations <TABLE> <CAPTION> Three Months Six Months June 30, June 30, ----------------------------- ----------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> Sales $ 1,171,625 $ 2,015,307 $ 2,125,882 $ 3,445,407 Cost of Sales 1,017,521 1,381,122 1,893,832 2,590,152 ----------- ----------- ----------- ----------- Gross Margin 154,104 634,185 232,050 855,255 ----------- ----------- ----------- ----------- Operating expenses: Engineering and product development 254,186 350,019 509,365 693,718 General and administrative 327,198 443,105 689,618 937,861 Marketing and sales 336,963 473,188 801,156 818,123 Unusual charges -- 2,996,971 -- 2,996,971 ----------- ----------- ----------- ----------- Total operating expenses 918,347 4,263,283 2,000,139 5,446,673 ----------- ----------- ----------- ----------- Loss from operations (764,243) (3,629,098) (1,768,089) (4,591,418) Interest expense - net 54,673 65,526 104,009 168,346 Income from legal settlement -- (6,000,000) -- (6,000,000) ----------- ----------- ----------- ----------- Income (loss) before tax provision (818,916) 2,305,376 (1,872,098) 1,240,236 Provision for income taxes -- 120,000 -- 120,000 ----------- ----------- ----------- ----------- Net income (loss) $ (818,916) $ 2,185,376 $(1,872,098) $ 1,120,236 =========== =========== =========== =========== Net income (loss) per share Basic $ (0.08) $ 0.24 $ (0.20) $ 0.12 Weighted average number of shares used in computing earnings per share Basic 9,961,305 9,031,856 9,513,245 9,031,856 </TABLE> See accompanying notes to financial statements. 4
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, 1997 9,128,082 $ 91,281 $ 45,665,122 $(41,456,067) $ (950,264) $ 3,350,072 Issuance of common stock 1,700,000 17,000 1,692,466 1,709,466 for cash Net loss -- -- -- (1,872,098) -- (1,872,098) ------------ ------------ ------------ ------------ ------------ ------------ Balance at June 30, 1998 10,828,082 $ 108,281 $ 47,357,588 $(43,328,165) $ (950,264) $ 3,187,440 ============ ============ ============ ============ ============ ============ </TABLE> See accompanying notes to financial statements. 5
HOWTEK, INC. Statements of Cash Flows <TABLE> <CAPTION> Six Months Six Months June 30, 1998 June 30, 1997 ------------- ------------- (unaudited) (unaudited) <S> <C> <C> Cash flows from operating activities: Net income (loss) $(1,872,098) $ 1,120,236 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 214,711 535,071 Amortization 110,582 212,858 Asset writedown and reserve increases -- 2,996,971 (Increase) decrease: Accounts receivable 514,581 1,179,876 Inventory 252,588 (692,174) Other current assets (60,283) (52,397) Increase (decrease): Accounts payable (251,874) (1,307,899) Accrued expenses (35,269) 150,544 ----------- ----------- Total adjustments 745,036 3,022,850 ----------- ----------- Net cash provided by (used for) operating activities (1,127,062) 4,143,086 ----------- ----------- Cash flows from investing activities: Patents, software development and other (86,033) (193,310) Additions to property and equipment (96,929) (330,620) ----------- ----------- Net cash used for investing activities (182,962) (523,930) ----------- ----------- Cash flows from financing activities: Issuance of common stock for cash 1,709,466 -- Proceeds (repayment) of loan from principal stockholder -- (3,478,604) ----------- ----------- Net cash provided by financing activities 1,709,466 (3,478,604) ----------- ----------- Increase (decrease) in cash and equivalents 399,442 140,552 Cash and equivalents, beginning of period 235,326 235,143 ----------- ----------- Cash and equivalents, end of period $ 634,768 $ 375,695 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 107,611 $ 885,326 =========== =========== </TABLE> See accompanying notes to financial statements. 6
HOWTEK, INC. Notes to Financial Statements June 30, 1998 (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, 1997 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) 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%. 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 June 30, 1998, the Company had $8,000,000 available for future borrowings under the Loan Agreement. During the first five months of 1998, the Company borrowed, (i) $400,000 from Mr. Robert Howard, the Company's Chairman, and (ii) $300,000 from Dr. Lawrence Howard, the son of Mr. Robert Howard, pursuant to Secured Demand Notes and Security Agreements (the "Notes"). Principal on these Notes are due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. In May 1998, the Company consummated an agreement with Mr. Robert Howard and Dr. Lawrence Howard to convert the Notes into shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). The conversions of the Notes were on the same terms as the Company's $1,000,000 private offering of Common Stock to an unaffiliated individual, which was also consummated in May 1998. 7
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: Certain information included in this Item 2. and elsewhere in this Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, possible technological obsolescence of products, competition and other risks detailed in the Company's Securities and Exchange Commission filings. The words "believe", "expect", "anticipate" and "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Results of Operations Current Events In January 1998 the Company commenced a reorganization of its management and business. The Company developed a three-point plan to improve business and financial performance. The Company's three point plan is to (1) reduce breakeven; (2) accelerate the sale of the Company's new MultiRad medical film scanners; and (3) enhance graphic arts scanner products. Through May 1998, $1.7 million in additional capital was obtained by the Company to support its revised operating plan. Since January 1998 the Company has significantly reduced its overhead, while maintaining its investment in product development and engineering. The number of employees has been reduced from 71 in January to 42 in July. Payroll expense has been reduced 37%. Facilities consolidation in May 1998 contributed to a 44% reduction in fixed expenses. Other expenses have been reduced 26% since January. The Company has also begun to outsource functions including training, software support, selected manufacturing, components, accessory manufacture and documentation. The Company has taken steps designed to accelerate medical product sales growth by reducing prices and concentrating on OEM and system integrator sales channels. The Company believes that it is well positioned to take advantage of growth in medical technologies. Progress is also being made in enhancement of the Company's traditional graphic arts product line. The Company's line of drum scanner products will be updated over the next two quarters to offer increased scanning speed and resolution. The Company has also announced plans to acquire one or more flatbed scanner products from other manufacturers, to re-market under the Howtek brand. 8
The Company has recently entered into its first OEM agreement with Imacon ApS of Copenhagen, Denmark to market a CCD scanner. The Company is expected to release this product during a fall trade show. In May the Company released a new version of its Trident scanning, color management and color separation software which the Company believes provides a competitive benefit and distinction for the Company's graphic arts scanner products. Among other benefits, the Company's Trident software operates under Windows NT as well as the Macintosh computer environment typically associated with graphic arts users in the United States. Quarter Ended June 30, 1998 compared to Quarter Ended June 30, 1997 Sales for the three months ended June 30, 1998 were $1,171,625, a decrease of $843,682 or 42% from the comparable period in 1997. Sales for the six months ended June 30, 1998 were $2,125,882, a decrease of $1,319,525 or 38% from the comparable period in 1997. The Company attributes the decrease in sales primarily to increased competition for drum scanners from high-end flatbed scanners, the maturing of its Scanmaster 2500 product and the economic crisis in Asia. OEM sales of the Company's graphic arts products were significantly impacted by a reduction in purchases from a major European customer. The Company is currently working with that customer to improve sales. Gross margin for the three and six month periods ended June 30, 1998 decreased to 13% and 11%, respectively, from 31% and 25%, respectively, in the comparable periods in 1997. Gross margins were adversely effected by reductions in sales. Since indirect production costs are comparatively fixed, margins are disproportionately reduced at lower sales volumes. The Company is seeking to reverse this trend by increasing sales, better managing indirect production costs, and emphasizing sales of products with higher gross profit margins. Engineering and product development costs for the three month period ended June 30, 1998 decreased 27% from $350,019 (or 17% of sales) in 1997 to $254,186 (or 22% of sales) in 1998. Engineering and product development costs for the six month period ended June 30, 1998 decreased 27% from $693,718 (or 20% of sales) in 1997 to $509,365 (or 24% of sales). The overall decrease in engineering and product development costs results primarily from planned reductions in manpower and anticipated depreciation expense. General and administrative expenses in the three month period ended June 30, 1998 decreased 26% from $443,105 (or 22% of sales) in 1997 to $327,198 (or 28% of sales) in 1998. General and administrative expenses in the six month period ended June 30, 1998 decrease 26% from $937,861 (or 27% of sales) in 1997 to $689,618 (or 32% of sales) in 1998. The decrease results primarily from the reduction in personnel, salaries, and legal fees in connection with a lawsuit against a former contract manufacturer. 9
Marketing and sales expenses in the three month period ended June 30, 1998 decreased 29% from $473,188 (or 23% of sales) in 1997 to $336,963 (or 29% of sales) in 1998. Marketing and sales expenses in the six month period ended June 30, 1998 decreased slightly from $818,123 (or 24% of sales) to $801,156 (or 38% or sales). The decrease results primarily from a reduction in trade show expenses. The Company made a decision to delay its investments in trade shows until later in the year when it would be prepared to introduce its new product lines to the marketplace. Net interest expense for the three and six month periods ended June 30, 1998 was $54,673 and $104,009, respectively, compared to $65,526 and $168,346, respectively, for the comparable period in 1997. The decrease resulted from the repayment of the notes payable, including interest, of $4,265,784 on April 25, 1997 to Mr. Robert Howard, its Chairman and principal stockholder and Dr. Lawrence Howard, the Chairman's son. In comparing the Company's performance to that for the quarter ended June 30, 1997 a $6,000,000 legal settlement granted to Howtek in April, 1997, coupled with $2,996,971 in unusual charges taken during the second quarter of 1997, makes comparison difficult. After giving effect to extraordinary income and unusual charges, Howtek earned $2,185,376 or $0.24 per share for the quarter ended June 30, 1997 on sales of $2,015,307 compared to net loss of $818,916 or $0.08 per share for the quarter ended June 30, 1998 on sales of $1,171,625. Liquidity and Capital Resources At June 30, 1998 the Company had current assets of $5,025,102, current liabilities of $1,253,079 and working capital of $3,772,023. The ratio of current assets to current liabilities was 4:1. Accounts receivable decreased by $514,581 during the first six months of 1998. This decrease is due primarily to the effect of aggressive collections and reduced sales in the first six months of 1998. During the first five months of 1998, the Company borrowed, (i) $400,000 from Mr. Robert Howard, the Company's Chairman, and (ii) $300,000 from Dr. Lawrence Howard, the son of Mr. Robert Howard, pursuant to Secured Demand Notes and Security Agreements (The "Notes"). Principal on these Notes are due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. In May 1998, the Company consummated an agreement with Mr. Robert Howard and Dr. Lawrence Howard to convert the Notes into shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). Also, in May 1998, the Company consummated a private offering of 1,000,000 shares of Common Stock, to an unaffiliated individual, for gross proceeds of $1,000,000. 10
The Company believes it can adequately fund its working capital and capital equipment requirements based upon its anticipated level of sales for 1998 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, 1998. Effective February 23, 1998, the Nasdaq Stock Market adopted New Listing and Continued Listing requirements for companies listed on the Nasdaq National Market and Nasdaq SmallCap Market. As a result of these new requirements the Company applied for modification in its Nasdaq listing, to the Nasdaq SmallCap Market. On July 16, 1998 the Company transferred from the Nasdaq National Market System to the Nasdaq SmallCap Market. Impact of the Year 2000 Many currently installed computer systems and software programs were designed to use only a two-digit date field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Until the date fields are updated, the systems and programs could fail or give erroneous results when referencing dates following December 31, 1999. Such failure or errors could occur prior to the actual change in century. The Company relies on computer applications to manage and monitor its accounting and administrative functions. Failure of the Company's software could have a material, adverse impact on the its business, financial condition and results of operations and on its ability to achieve sufficient cash flow to service its indebtedness. The Company is currently assessing alternative manufacturing and financial control systems, and expects to correct and revise the system prior to it becoming an issue. The Company's products are not date aware and do not present a year 2000 problem to its customers. 11
PART II OTHER INFORMATION Item 2. Changes in Securities (c) During the quarter ended June 30,1998 the Company issued 400,000 and 300,000 shares of restricted Common Stock, respectively, to Mr. Robert Howard, the Chairman of the Board, and Dr. Lawrence Howard, the son of the Chairman of the Board, in connection with the conversion of indebtedness of $400,000 and $300,000, respectively. The Company also sold 1,000,000 shares of restricted Common Stock to an individual investor for $1,000,000. The shares issued to Mr. Robert Howard and Dr. Lawrence Howard were issued in reliance upon the exemption from registration provided by Section 3 (a) (9) of the Securities Act of 1933 (the "Act"). The 1,000,000 shares issued to the individual investor were issued in reliance upon the private offering exemption from registration provided by Section 4 (2) of the Act. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Secured Demand Note and Security Agreement between the Company and Mr. Robert Howard dated April 15, 1998. 10.2 Secured Demand Note and Security Agreement between the Company and Lawrence A. Howard dated April 28, 1998. 10.3 Secured Demand Note and Security Agreement between the Company and Mr. Robert Howard dated May 11, 1998. 27 Financial Data Schedule (b) On June 16, 1998 the Company filed a Report on Form 8-K under Item 5 Other Events, with the Securities and Exchange Commission. The Report disclosed the agreement with Mr. Robert Howard, the Chairman of the Board, and Dr. Lawrence Howard, the son of the Chairman of the Board, to convert Company indebtedness of $400,000 and $300,000, respectively, into shares of restricted Common Stock, par value $.01 per share. The Report also disclosed the private offering of 1,000,000 share of Common Stock for gross proceeds of $1,000,000. 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: August 14, 1998 By: /s/ W. Scott Parr ---------------------------------- W. Scott Parr President, Chief Executive Officer, Director Date: August 14, 1998 By: /s/ Robert J. Lungo ---------------------------------- Robert J. Lungo Vice President Finance, Chief Financial Officer 13