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 June 30, 2000
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.
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(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 July 10, 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 June 30, 2000
(unaudited) and December 31, 1999 3
Statements of Operations for the three month periods ended
June 30, 2000 and 1999 and for the six month periods ended
June 30, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the six month periods
ended June 30, 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 8-11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
HOWTEK, INC.
Balance Sheets
June 30, 2000 December 31, 1999
------------- -----------------
Assets (unaudited)
Current assets:
Cash and equivalents $ 177,138 $ 263,073
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $165,000 in 2000 and $151,000 in 1999 1,921,065 1,400,987
Inventory 2,557,540 2,649,460
Prepaid and other 170,460 144,390
------------ ------------
Total current assets 4,826,203 4,457,910
------------ ------------
Property and equipment:
Equipment 2,796,114 2,735,545
Leasehold improvements 33,321 33,321
Motor vehicles 6,050 6,050
------------ ------------
2,835,485 2,774,916
Less accumulated depreciation and amortization 2,223,732 2,058,734
------------ ------------
Net property and equipment 611,753 716,182
------------ ------------
Other assets:
Software development costs, net 390,729 472,427
Debt issuance costs, net 27,144 37,323
Patents, net 10,514 12,767
------------ ------------
Total other assets 428,387 522,517
------------ ------------
Total assets $ 5,866,343 $ 5,696,609
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,549,553 $ 1,176,480
Dividends payable 26,616 --
Accrued expenses 439,854 342,860
Loan payable to related parties 500,000 500,000
------------ ------------
Total current liabilities 2,516,023 2,019,340
Loan payable to related party 900,000 640,000
Convertible subordinated debentures 117,000 117,000
------------ ------------
Total liabilities 3,533,023 2,776,340
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,438,202 in 2000
and 13,330,542 shares in 1999; outstanding
13,370,326 in 2000 and 13,262,666 shares in 1999 134,381 133,305
Convertible preferred stock, $.01 par value: authorized
1,000,000 shares in 1999; issued and outstanding
8,150 in 2000 and 6,900 in 1999, with the aggregated
liquidation value of $815,000 plus 7% annual dividend 82 69
Additional paid-in capital 52,796,304 52,562,377
Accumulated deficit (49,647,183) (48,825,218)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,333,320 2,920,269
------------ ------------
Total liabilities and stockholders' equity $ 5,866,343 $ 5,696,609
============ ============
See accompanying notes to financial statements.
3
HOWTEK, INC.
Statements of Operations
Three Months Six Months
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
(unaudited) (unaudited)
Sales $ 1,957,638 $ 1,902,608 $ 3,475,156 $ 3,463,741
Cost of Sales 1,360,512 1,416,882 2,525,473 2,721,239
------------ ------------ ------------ ------------
Gross Margin 597,126 485,726 949,683 742,502
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 150,760 177,166 360,663 427,599
General and administrative 266,796 212,238 556,046 766,544
Marketing and sales 398,266 406,411 781,921 861,302
------------ ------------ ------------ ------------
Total operating expenses 815,822 795,815 1,698,630 2,055,445
------------ ------------ ------------ ------------
Loss from operations (218,696) (310,089) (748,947) (1,312,943)
Interest expense - net 38,805 33,619 73,018 1,728,213
------------ ------------ ------------ ------------
Net loss $ (257,501) $ (343,708) $ (821,965) $ (3,041,156)
Preferred dividend 14,407 -- 26,616 --
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (271,908) $ (343,708) $ (848,581) $ (3,041,156)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.02) $ (0.03) $ (0.06) $ (0.25)
Weighted average number of shares used
in computing earnings per share
Basic and diluted 13,343,952 12,826,296 13,305,218 12,245,069
See accompanying notes to financial statements.
4
HOWTEK, INC.
Statements of Cash Flows
Six Months Six Months
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (821,965) $(3,041,156)
----------- -----------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 164,998 203,858
Amortization 150,432 150,587
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 (520,078) (189,718)
Inventory 91,920 76,166
Other current assets (26,070) 3,808
Accounts payable 398,073 367,847
Accrued expenses 96,994 (6,135)
----------- -----------
Total adjustments 383,269 2,277,571
----------- -----------
Net cash used for operating activities (438,696) (763,585)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (56,302) (51,611)
Additions to property and equipment (60,569) (70,768)
----------- -----------
Net cash used for investing activities (116,871) (122,379)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 9,632 89,184
Issuance of preferred stock for cash 200,000 --
Proceeds of loan from related parties 260,000 215,000
Proceeds of loan from unrelated parties -- 660,000
----------- -----------
Net cash provided by financing activities 469,632 964,184
----------- -----------
Increase (decrease) in cash and equivalents (85,935) 78,220
Cash and equivalents, beginning of period 263,073 182,724
----------- -----------
Cash and equivalents, end of period $ 177,138 $ 260,944
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 5,265 $ 5,265
=========== ===========
During the six months ended June 30, 2000, $25,000 of accrued expenses were
converted to preferred stock of the Company.
See accompanying notes to financial statements.
5
HOWTEK, INC.
Notes to Financial Statements
June 30, 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 June 30, 2000, $590,000 was outstanding under the
Loan Agreement. The Company had $2,410,000 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 June 30, 2000, the Company owed $500,000 pursuant to the
Notes.
6
HOWTEK, INC.
Notes to Financial Statements
June 30, 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 June 30, 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. In setting forth pending orders and backlogs, no assurance can be made
that the Company will be able to fill such orders during any particular period,
and no assurance can be made that customers responsible for such orders will not
modify, reduce or reschedule such orders. The Company may not provide any
updates with respect to the fulfillment or non-fulfillment of order backlogs or
any modifications or events which may effect or alter its ability to fill such
orders in any given period, if at all.
Results of Operations
Quarter Ended June 30, 2000 compared to Quarter Ended June 30, 1999 and Six
Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Sales. Sales for the three months ended June 30, 2000 were $1,957,638, compared
with sales of $1,902,608 for the quarter ended June 30, 1999. Sales for the six
months ended June 30, 2000 were $3,475,156, compared with sales of $3,463,741
for the comparable period in 1999. The Company continues to emphasize its
medical business opportunities. Sales of the Company's medical imaging products
increased 50%, from $419,469 in the quarter ended June 30, 1999 to $627,858 in
the quarter ended June 30, 2000, and increased 39%, from $714,124 to $991,631
for the six months ended June 30, 1999 and 2000, respectively. Howtek's medical
product sales are made primarily to the Company's respective "integration
partners" or resellers, which add software and other components to Howtek's
products to provide full medical imaging solutions to their customers. In the
second quarter of 2000, the Company announced that its MultiRAD film digitizers
were selected by Imation (Hong Kong), General Electric Medical Systems and
Konica Medical Imaging, Inc. for integration and marketing as a component of
their respective medical imaging product lines. These resellers are expected to
contribute to increased sales of medical products in future periods.
8
Sales of the Company's prepress and graphic arts products, including related
maintenance and repair services, decreased 19%, from $1,483,139 in the second
quarter of 1999 to $1,197,170 over the comparable period in 2000, and a 15%
decrease, from $2,749,617 to $2,338,415 for the six month periods ended June 30,
1999 and 2000. During the second quarter 2000, the Company began commercial
shipments of its new FotoFunnel(TM) photographic print scanner line from its
third party manufacturing supplier, with FotoFunnel sales of $132,610 recorded
during this period. In addition, during the second quarter of 2000, the Company
sold $286,271 of material and sub-components to the Company's contract
manufacturers at cost. These transactions are not included in the sales figures,
but improve the Company's inventory and cash position.
Gross Margins. Gross margins for the three and six month periods ended June 30,
2000 increased to 31% and 27%, respectively, from 26% and 21%, respectively, in
the comparable periods 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.
Engineering and Product Development. Engineering and product development costs
for the three month period ended June 30, 2000 decreased 15% from $177,166 in
1999 to $150,760 in 2000. Engineering and product development costs for the six
month period ended June 30, 2000 decreased 16% from $427,599 in 1999 to $360,663
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 June 30, 2000 increased 26% from $212,238 in 1999 to $266,796
in 2000. General and administrative expenses in the six month period ended June
30, 2000 decreased 27% from $766,544 in 1999 to $556,046 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 six months ended June 30, 1999
decreased slightly from $558,740 compared to $556,046 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 increase in 2000.
9
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended June 30, 2000 decreased slightly from $406,411 in 1999 to $398,266
in 2000. Marketing and sales expenses for the six month period ended June 30,
2000 decreased 9% from $861,302 in 1999 to $781,921 for the comparable period in
2000. This decrease is due primarily to the reduction in commission and
promotional expenses. In 1999 the Company changed its sales compensation
structure to provide commission 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 June 30,
2000 increased to $38,805 from $33,619 in 1999. Net interest expense for the six
month period decreased to $73,018 from $1,728,213 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 $257,501 or
$0.02 per share for the three month period ended June 30, 2000 on sales of
$1,957,638 compared to a net loss of $343,708 or $0.03 per share from the same
period in 1999 on sales of $1,902,608. The loss for the six months ended June
30, 2000 was $821,965 or $0.06 per share on sales of $3,475,156 compared with
$3,041,156 or $0.25 per share on sales of $3,463,741 for the six months ended
June 30, 1999. Earnings for the six month period ended June 30, 1999 were
reduced by $1,764,000 in non-recurring accounting charges during the first
quarter of 1999, associated with the conversion of the Company's outstanding 9%
Debentures.
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 $2,410,000 was available at June 30, 2000.
At June 30, 2000 the Company had current assets of $4,826,203, current
liabilities of $2,516,023 and working capital of $2,310,180. The ratio of
current assets to current liabilities was 1.9:1.
10
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 June
30, 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 June 30,
2000, the Company owed $310,000 pursuant to the Promissory Notes.
During the second quarter of 2000 the Company sold, in private transactions, a
total of 2,250 shares of its 7% Series A Convertible Preferred Stock ($.01 per
share par value), at $100 per share, consisting of 1,000 shares to an unrelated
party, 1,000 shares to Dr. Lawrence Howard, son of the Company's Chairman, Mr.
Robert Howard, and 250 shares to Mr. W. Scott Parr, the Company's President,
Chief Executive Officer, for gross proceeds of $225,000. These sales were made
pursuant to the exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
11
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the second quarter of 2000 the Company sold, in private transactions, a
total of 2,250 shares of its 7% Series A Convertible Preferred Stock ($.01 per
share par value), at $100 per share, consisting of 1,000 shares to an unrelated
party, 1,000 shares to Dr. Lawrence Howard, son of the Company's Chairman, Mr.
Robert Howard, and 250 shares to Mr. W. Scott Parr, the Company's President,
Chief Executive Officer, for gross proceeds of $225,000. These sales were made
pursuant to the exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
Additionally, in the second quarter holders of the Company's 7% Series A
Convertible Preferred Stock converted 1,000 shares, par value $.01 per shares,
to 100,000 shares of the Company's Common Stock, par value $.01. The 100,000
shares of Common Stock were issued pursuant to the exemption from registration
provided by Section 3(a) (9) of the Securities Act of 1933.
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.
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, 2000 By: /s/ W. Scott Parr
---------------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: August 14, 2000 By: /s/ Annette L. Heroux
---------------------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
13