UNITED STATES 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, 2000
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
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
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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 3, 2000 there were 13,370,326 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 March 31, 2000
(unaudited) and December 31, 1999 3
Statements of Operations for the three
month periods ended March 31, 2000 and
1999 (unaudited) 4
Statements of Cash Flows for the three month periods
ended March 31, 2000 and 1999 (unaudited) 5
Notes to Financial Statements (unaudited) 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
2
HOWTEK, INC.
Balance Sheets
March 31, 2000 December 31, 1999
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Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 120,203 $ 263,073
Trade accounts receivable net of allowance
for doubtful accounts of $143,000 in 2000
and $151,000 in 1999 1,406,842 1,400,987
Inventory 2,393,770 2,649,460
Prepaid and other 258,891 144,390
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Total current assets 4,179,706 4,457,910
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Property and equipment:
Equipment 2,751,977 2,735,545
Leasehold improvements 33,321 33,321
Motor vehicles 6,050 6,050
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2,791,348 2,774,916
Less accumulated depreciation and amortization 2,139,970 2,058,734
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Net property and equipment 651,378 716,182
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Other assets:
Software development costs, net 431,504 472,427
Debt issuance costs, net 32,234 37,323
Patents, net 11,640 12,767
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Total other assets 475,378 522,517
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Total assets $ 5,306,462 $ 5,696,609
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,067,261 $ 1,176,480
Dividend payable 12,209 -
Accrued expenses 384,122 342,860
Loans payable to related party 500,000 500,000
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Total current liabilities 1,963,592 2,019,340
Loans payable to related party 800,000 640,000
Convertible subordinated debentures 117,000 117,000
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Total liabilities 2,880,592 2,776,340
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Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,338,202 in 2000
and 13,330,542 shares in 1999; outstanding
13,270,326 in 2000 and 13,262,666 shares in 1999 133,381 133,305
Convertible preferred stock, $.01 par value: authorized
1,000,000 shares in 1999; issued and outstanding
6,900 in 2000 and 1999, with the aggregated liquidation
value of $690,000 plus 7% annual dividend 69 69
Additional paid-in capital 52,632,366 52,562,377
Accumulated deficit (49,389,682) (48,825,218)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
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Stockholders' equity 2,425,870 2,920,269
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Total liabilities and stockholders' equity $ 5,306,462 $ 5,696,609
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See accompanying notes to financial statements.
3
HOWTEK, INC.
Statements of Operations
Three Months Three Months
March 31, 2000 March 31, 1999
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(unaudited) (unaudited)
Sales $ 1,517,518 $ 1,561,133
Cost of Sales 1,164,961 1,304,357
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Gross Margin 352,557 256,776
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Operating expenses:
Engineering and product development 209,903 250,433
General and administrative 289,250 554,306
Marketing and sales 383,655 454,891
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Total operating expenses 882,808 1,259,630
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Loss from operations (530,251) (1,002,854)
Interest expense - net 34,213 1,694,594
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Net loss $ (564,464) $ (2,697,448)
Preferred dividend 12,209 -
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Net loss available to common shareholders $ (576,673) $ (2,697,448)
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Net loss per share
Basic and diluted $ (0.04) $ (0.23)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 13,266,484 11,657,384
See accompanying notes to financial statements.
4
HOWTEK, INC.
Statements of Cash Flows
Three Months Three Months
March 31, 2000 March 31, 1999
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(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (564,464) $ (2,697,448)
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Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 81,236 100,719
Amortization 75,216 75,293
Interest relative to conversion of Convertible
Subordinated Debentures - 1,671,158
Compensation expense related to issue of
Stock Subscription Warrants 27,000 -
Changes in operating assets and liabilities:
Accounts receivable (5,855) 146,336
Inventory 255,690 106,749
Other current assets (114,501) 15,517
Accounts payable (63,576) 400,737
Accrued expenses 41,262 63,913
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Total adjustments 296,472 2,580,422
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Net cash used for operating activities (267,992) (117,026)
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Cash flows from investing activities:
Patents, software development and other (28,077) (28,364)
Additions to property and equipment (16,432) (30,340)
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Net cash used for investing activities (44,509) (58,704)
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Cash flows from financing activities:
Issuance of common stock for cash 9,631 -
Proceeds of loan payable to principal stockholders 160,000 215,000
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Net cash provided by financing activities 169,631 215,000
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Increase (decrease) in cash and equivalents (142,870) 39,270
Cash and equivalents, beginning of period 263,073 182,724
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Cash and equivalents, end of period $ 120,203 $ 221,994
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Supplemental disclosure of cash flow information:
Interest paid $ - $ -
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See accompanying notes to financial statements.
5
HOWTEK, INC.
Notes to Financial Statements
March 31, 2000
(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, 1999 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 Board of Directors
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 $3,000,000. 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. At March 31, 2000,
$490,000 was outstanding under the Loan Agreement. The Company had
$2,510,000 available for future borrowings.
The Company has Secured Demand Notes and Security Agreements (the
"Notes") owed to Mr. Robert Howard. Principal of these notes is 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.
The Notes currently bear interest at 12%. Payment of the Notes is
secured by a security interest in certain assets of the Company. As of
March 31, 2000, the Company owed $500,000 pursuant to the Notes.
6
HOWTEK, INC.
Notes to Financial Statements
March 31, 2000
(2) Loan Payable to Related Party (continued)
During 1999 the Company borrowed, $310,000 from Mr. Robert Howard,
pursuant to Convertible Promissory Notes (the "Promissory Notes").
Principal on these Promissory Notes is payable in equal payments based
on the borrowed amount at the end of each quarter starting March 31,
2003 through December 31, 2006. Under the terms of the Promissory Notes
the Company agreed to pay interest at a fixed rate of 7% per annum. At
the Company's option it may pay the interest in either cash or in
restricted shares of the Company's common stock, or in any combination
thereof. Interest paid in shares of the Company's common stock will be
paid at the greater of $1.00 per share or the average per share closing
market price at the time each interest payment is due. The Promissory
Notes entitle the payees to convert outstanding principal due into
shares of the Company's common stock at $1.00 per share, which was the
market price of the Company's stock at the date the Promissory Notes
were issued. As of March 31, 2000, the Company owed $310,000 pursuant
to the Promissory Notes.
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 Howtek'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
Quarter Ended March 31, 2000 compared to Quarter Ended March 31, 1999
Sales. Sales for the three months ended March 31, 2000 were $1,517,518, compared
with sales of $1,561,133 for the quarter ended March 31, 1999. The Company
continues to emphasize its medical business opportunities, and sales of the
Company's medical imaging products increased 23%, from $294,654 in the quarter
ended March 31, 1999 to $363,773 in the quarter ended March 31, 2000. Howtek's
medical product sales are made primarily to the Company's respective
"integration partners" or resellers, who add software and other components to
Howtek's products to provide full medical imaging solutions to their customers.
During 1999, the Company added a series of new integration partners. These
resellers are expected to contribute to increased sales of medical products in
future periods.
Sales of the Company's prepress and graphic arts products, including related
maintenance and repair services decreased 10%, from $1,266,478 in the first
quarter of 1999 to $1,141,245 over the comparable period in 2000. The Company
began limited initial shipment of its new FotoFunnel photographic print scanner
line at the end of the first quarter of 2000, with sales of $12,500 during this
period. The Company anticipates an increase in shipments of the FotoFunnel print
scanner in the second quarter of 2000.
Gross Margins. Gross margins for the three month period ended March 31, 2000
increased to 23% from 16% in the comparable period in 1999. Gross margins
improved as a result of reduced production overhead and indirect production
expenses, associated with the Company's continuing overhead and expense control
measures and with the Company's increased outsourcing of production and assembly
services.
8
Engineering and Product Development. Engineering and product development costs
for the three month period ended March 31, 2000 decreased 16% from $250,433 in
1999 to $209,903 in 2000. The decrease results primarily from planned reductions
in manpower. The Company expects to continue to increase its utilization of
outside and contract engineering resources as it deems appropriate. In general,
the Company seeks to shift its engineering and development priorities, and the
allocation of its engineering and development resources, to its medical and
photo-finishing business opportunities.
General and Administrative. General and administrative expenses in the three
month period ended March 31, 2000 decreased 48% from $554,306 in 1999 to
$289,250 in 2000. During the first quarter of 1999 the Company established
reserves in the amount $186,662 to permit the Company to take back its
discontinued HiDemand 400 graphic arts scanner products to encourage resellers
and customers to acquire its Scanview line of products and a non-recurring
expense of $21,142 associated with the write off of tooling and inventories
associated with the discontinued HiDemand 400 product. Giving effect to the
HiDemand 400 reserve and write down, the general and administrative expenses for
the first quarter ended March 31, 1999 decreased by 17% from $346,502 compared
to $289,250 for the comparable period in 2000. The decrease is due primarily to
reductions in personnel expenses and to a continued effort to reduce overall
expenses. The Company expects general and administrative expenses to remain
relatively constant during the balance of 2000, as a percentage of sales.
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended March 31, 2000 decreased 16% from $454,891 in 1999 to $383,655 in
2000. This decrease is due primarily to the reduction in compensation and
promotional expenses. In 1999 the Company changed its sales compensation
structure to provide compensation on the basis of gross margins rather than net
sales. Promotional expenses decreased in the graphic arts area, where there is
an increasing reliance on direct mail and telemarketing to support its sales
efforts. Medical sales expenses increased and new expenses were incurred
relating to the FotoFunnel business. The Company expects marketing and sales
expenses to increase in 2000.
Interest Expense. Net interest expense for the three month period ended March
31, 2000 decreased to $34,213 from $1,694,594 in 1999. During the first quarter
of 1999 the Company recorded interest expense of $1,671,158 relative to the
conversion of Convertible Subordinated Debentures as required by Statement of
Financial Accounting Standards No. 84, "Induced Conversions of Convertible
Debt". This charge was wholly offset by a corresponding increase to additional
paid-in capital by $1,671,158. The charge and corresponding benefit relate to
the conversion to equity during the first quarter of 1999 of $1,764,000 of the
Company's previously outstanding 9% Convertible Subordinated Debentures, due
2001 (the "9% Debenture"). In December 1998, the Company provided for a
temporary reduction in the conversion price of the 9% Debenture to encourage
conversion to common stock, and thereby reduce cash interest expenses, and
sinking fund payments associated with the 9% Debenture.
As a result of the foregoing, the Company recorded a net loss of $564,464 or
$0.04 per share for the three month period ended March 31, 2000 on sales of
$1,517,518 compared to a net loss of $2,697,448 or $0.23 per share from the same
period in 1999 on sales of $1,561,133.
9
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its requirements depends
primarily on operating cash flow and the availability of a $3,000,000 credit
line under a Convertible Note and Revolving Loan and Security Agreement with its
Chairman, Mr. Robert Howard, of which $2,510,000 was available at March 31,
2000.
At March 31, 2000 the Company had current assets of $4,179,706, current
liabilities of $1,963,592 and working capital of $2,216,114. The ratio of
current assets to current liabilities was 2.1:1
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these Notes is 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. The Notes currently bear interest at 12%. Payment of the Notes
is secured by a security interest in certain assets of the Company. As of March
31, 2000, the Company owed $500,000 pursuant to the Notes.
During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). Principal on these
Promissory Notes is payable in equal payments based on the borrowed amount at
the end of each quarter starting March 31, 2003 through December 31, 2006. Under
the terms of the Promissory Notes the Company agreed to pay interest at a fixed
rate of 7% per annum. At the Company's option it may pay the interest in either
cash or in restricted shares of the Company's common stock, or in any
combination thereof. Interest paid in shares of the Company's common stock will
be paid at the greater of $1.00 per share or the average per share closing
market price at the time each interest payment is due. The Promissory Notes
entitle the payees to convert outstanding principal due into shares of the
Company's common stock at $1.00 per share, which was the market price of the
Company's stock at the date the Promissory Notes were issued. As of March 31,
2000, the Company owed $310,000 pursuant to the Promissory Notes.
Subsequent Events
In April 2000, the Company borrowed an additional $100,000 from Mr. Robert
Howard under the Convertible Note and Revolving Loan and Security Agreement. A
total of $2,410,000 was available for borrowing by the Company at April 30,
2000.
Additionally, in April 2000 the Company sold, in private transactions, 2,250
shares if its 7% Series A Convertible Preferred Stock, par value $.01 per share,
for gross proceeds of $225,000.
10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II OTHER INFORMATION
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
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.
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(Company)
Date: May 12, 2000 By: /s/ W. Scott Parr
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W. Scott Parr
President, Chief Executive Officer,
Director
Date: May 12, 2000 By: /s/ Annette L. Heroux
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Annette L. Heroux
Vice President Finance,
Chief Financial Officer
12