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 March 31, 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 of incorporation or organization) Identification No.) 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 May 7, 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 March 31, 1996 (unaudited) and December 31, 1995 3 Statements of Operations for the three month periods ended March 31, 1996 and 1995 (unaudited) 4 Statement of Changes in Stockholders' Equity for the three month period ended March 31, 1996 (unaudited) 5 Statements of Cash Flows for the three month periods ended March 31, 1996 and 1995 (unaudited) 6 Notes to Financial Statements (unaudited) 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 -9 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 10 Signatures 11 2
3 HOWTEK, INC <TABLE> BALANCE SHEETS <CAPTION> MARCH 31, 1996 DECEMBER 31, 1995 -------------- ----------------- ASSETS (unaudited) <S> <C> <C> Current assets: Cash and equivalents $ 153,703 $ 574,647 Accounts receivable: Trade-net of allowance for doubtful accounts of $307,920 in 1996 and $290,710 in 1995 4,907,043 6,474,144 Inventory 7,276,769 6,840,823 Prepaid and other 296,070 247,590 ------------ ------------ Total current assets 12,633,585 14,137,204 ------------ ------------ Property and equipment: Equipment 10,428,783 10,281,296 Leasehold improvements 371,535 371,535 Furniture and fixtures 185,564 185,564 Motor vehicles 6,050 6,050 ------------ ------------ 10,991,932 10,844,445 Less accumulated depreciation and amortization 8,194,173 7,815,236 ------------ ------------ Net property and equipment 2,797,759 3,029,209 ------------ ------------ Other assets: Software development costs, net 1,092,044 1,191,265 Debt issuance costs, net 113,666 118,756 Patents, net 17,159 18,806 ------------ ------------ Total other assets 1,222,869 1,328,827 ------------ ------------ Total assets $ 16,654,213 $ 18,495,240 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,941,977 $ 3,712,416 Accrued expenses 712,771 490,752 ------------ ------------ Total current liabilities 4,654,748 4,203,168 Loan payable to principal stockholder 3,578,604 3,578,604 Convertible subordinated debentures 2,181,000 2,181,000 ------------ ------------ Total liabilities 10,414,352 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 8,022,594 shares in 1995; outstanding 7,965,218 in 1996 and 7,954,718 shares in 1995 80,331 80,225 Additional paid-in capital 44,014,963 43,966,282 Accumulated deficit (36,905,169) (34,563,775) Treasury stock at cost (67,876 shares) (950,264) (950,264) ------------ ------------ Stockholders' equity 6,239,861 8,532,468 ------------ ------------ Total liabilities and stockholders' equity $ 16,654,213 $ 18,495,240 ============ ============ </TABLE> See accompanying notes to financial statements 3
4 HOWTEK, INC. <TABLE> STATEMENTS OF OPERATIONS <CAPTION> THREE MONTHS THREE MONTHS MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- (unaudited) <S> <C> <C> Sales $ 2,023,157 $ 5,851,750 Cost of Sales 2,295,836 3,623,628 ----------- ----------- Gross Margin (272,679) 2,228,122 ----------- ----------- Operating expenses: Engineering and product development 545,289 775,744 General and administrative 623,721 507,805 Marketing and sales 759,596 696,582 ----------- ----------- Total operating expenses 1,928,606 1,980,131 ----------- ----------- Income (loss) from operations (2,201,285) 247,991 ----------- ----------- Interest expense - net 140,109 82,058 ----------- ----------- Income (loss) before tax provision (2,341,394) 165,933 Provision for income taxes -- 13,275 ----------- ----------- Net income (loss) $(2,341,394) $ 152,658 =========== =========== Net income (loss) per share $ (0.29) $ 0.02 Weighted average number of shares used in computing earnings per share 7,963,199 7,973,393 </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 March, 1996 Issuance of common stock pursuant to incentive stock option plan. 10,500 106 48,681 48,787 Net loss - - - (2,341,394) - (2,341,394) --------- ------- ----------- ------------ --------- ----------- Balance at March 31, 1996 8,033,094 $80,331 $44,014,963 $(36,905,169) $(950,264) $ 6,239,861 ========= ======= =========== ============ ========= =========== </TABLE> See accompanying notes to financial statements. 5
6 HOWTEK, INC. <TABLE> STATEMENTS OF CASH FLOWS <CAPTION> THREE MONTHS THREE MONTHS MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- (unaudited) <S> <C> <C> Cash flows from operating activities: Net income (loss) $(2,341,394) $ 152,658 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 378,937 323,512 Amortization 155,609 122,208 (Increase) decrease: Accounts receivable 1,567,101 535,526 Inventory (435,946) (957,365) Other current assets (48,480) (244,430) Increase (decrease): Accounts payable 229,561 (7,605) Accrued expenses 222,019 (97,944) ----------- ----------- Total adjustments 2,068,801 (326,098) ----------- ----------- Net cash provided by (used for) operating activities (272,593) (173,440) ----------- ----------- Cash flows from investing activities: Patents, software development and other (49,651) (140,061) Additions to property and equipment (147,487) (452,194) ----------- ----------- Net cash used for investing activities (197,138) (592,255) ----------- ----------- Cash flows from financing activities: Issuance of common stock for cash 48,787 30,200 Proceed of loan payable to principal stockholder -- 578,604 ----------- ----------- Net cash provided by financing activities 48,787 608,804 ----------- ----------- Increase (decrease) in cash and equivalents (420,944) (156,891) Cash and equivalents, beginning of period 574,647 649,455 ----------- ----------- Cash and equivalents, end of period $ 153,703 $ 492,564 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ -- $ 20,892 =========== =========== </TABLE> See accompanying notes to financial statements. 6
7 HOWTEK, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 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) SUBSEQUENT EVENTS 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. 7
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales for the first quarter of 1996 which ended March 31, 1996 were $2,023,157, a decrease of 65% from 1995's first quarter sales of $5,851,750. The Company attributed the decrease in sales during the three month period ended March 31, 1996, to the continuing weakness in the graphic arts market and lower than expected sales of its medical imaging product, as a result of delayed governmental clearance to market the product, which was received at the end of January, 1996. The Company anticipates that sales will improve over the balance of the year. The Company recorded a net loss of $2,341,394 for the three month period ended March 31, 1996, as compared to a profit of $152,658 over the comparable period in 1995. The Company's gross margin decreased from 38% in the first quarter of 1995 to a loss in the comparable period in 1996. The decrease in the first quarter of 1996, resulted primarily from lower overall sales and an increase in the percentage of OEM sales which are generally made at a higher discount than sales to other customers. Engineering and product development costs in the first three months of 1996 were $545,289 which represents a $230,455 or 30%, decrease over the comparable period in 1995. The decrease results mostly from a reduction in staffing levels. General and administrative expenses in the three month period ended March 31, 1996 were $115,916 or 23% higher than the comparable period in 1995. This increase is attributable to increased legal expenses, primarily incurred in prosecution of the Company's ongoing lawsuit against a former manufacturer of its products, and changes in estimates in providing additional reserves for bad debts. Marketing and sales expenses in the first three months of 1996 increased $63,014 or 9% over the comparable period in 1995. The increase results from increases in promotional efforts for the medical imaging market. The level of expenditures is expected to increase during the remainder of 1996. Net interest expense for the first quarter of 1996 was $140,109 compared to $82,058 for the first quarter of 1995. The increase results from the increase in borrowings under the Revolving Loan Agreement with the Company's Chairman and principal stockholder. 8
9 LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996 the Company had current assets of $12,633,585, current liabilities of $4,654,748 and working capital of $7,978,837. The ratio of current assets to current liabilities was 2.7:1. Accounts receivable decreased by $1,567,101 during the first quarter of 1996. This decrease is due primarily to lower revenues in the first quarter of 1996 as compared to the fourth quarter of 1995. Inventory increased by $435,946 during the first quarter of 1996 as a result of lower than anticipated revenues in the first quarter of 1996. Pursuant to the exercise of employee stock options, the Company received $48,787 during the first quarter of 1996 and $30,200 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 three months of 1996 amounted to $147,487 compared to $452,194 during the comparable period in 1995. The decrease is attributable to the reduction in spending 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 March 31, 1996. 9
10 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10 (i) Convertible Promissory Note between the Company and Dr. Lawrence Howard. 10 (ii) Security Agreement between the Company and Dr. Lawrence Howard. 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 10
11 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: By: /s/ David R. Bothwell -------------------- --------------------- David R. Bothwell President, Chief Executive Officer Date: By: /s/ Robert J. Lungo -------------------- --------------------- Robert J. Lungo Vice President Finance, Chief Financial Officer 11