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, 2001
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
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 4, 2001 there were 13,625,789 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, 2001
(unaudited) and December 31, 2000 3
Statements of Operations for the three
month periods ended March 31, 2001 and
2000 (unaudited) 4
Statements of Cash Flows for the three month periods
ended March 31, 2001 and 2000 (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, 2001 December 31, 2000
-------------- -----------------
Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 1,201,870 $ 1,444,771
Trade accounts receivable, net of allowance
for doubtful accounts of $271,000 in 2001
and $256,000 in 2000 1,349,409 1,082,783
Inventory 2,694,878 2,443,150
Prepaid and other 52,878 111,312
-------------- -----------------
Total current assets 5,299,035 5,082,016
-------------- -----------------
Property and equipment:
Equipment 2,878,171 2,843,818
Leasehold improvements 41,721 36,821
Motor vehicles -- 6,050
-------------- -----------------
2,919,892 2,886,689
Less accumulated depreciation and amortization 2,451,945 2,398,553
-------------- -----------------
Net property and equipment 467,947 488,136
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Other assets:
Software development costs, net 326,525 350,550
Debt issuance costs, net 12,724 16,965
Patents, net 7,135 8,261
-------------- -----------------
Total other assets 346,384 375,776
-------------- -----------------
Total assets $ 6,113,366 $ 5,945,928
============= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,685,917 $ 1,096,174
Accrued expenses 549,679 430,699
Loans payable to related party 500,000 500,000
Convertible subordinated debentures 117,000 117,000
-------------- -----------------
Total current liabilities 2,852,596 2,143,873
Loans payable to related party 900,000 900,000
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Total liabilities 3,752,596 3,043,873
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Stockholders' equity:
Convertible preferred stock, $.01 par value:
authorized 1,000,000 shares; issued and outstanding
9,550, with the aggregated liquidation value
of $2,215,000 plus 7% annual dividend 96 96
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,693,665 in 2001
and 13,588,126 shares in 2000; outstanding
13,625,789 in 2001 and 13,520,250 shares in 2000 136,936 135,881
Additional paid-in capital 55,462,742 55,365,491
Accumulated deficit (52,288,740) (51,649,149)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
-------------- -----------------
Total stockholders' equity 2,360,770 2,902,055
-------------- -----------------
Total liabilities and stockholders' equity $ 6,113,366 $ 5,945,928
============= =================
See accompanying notes to financial statements
3
HOWTEK, INC.
Statements of Operations
Three Months Three Months
March 31, 2001 March 31, 2000
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(unaudited) (unaudited)
Sales $ 1,513,604 $ 1,517,518
Cost of sales 1,121,463 1,164,961
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Gross margin 392,141 352,557
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Operating expenses:
Engineering and product development 163,976 209,903
General and administrative 306,311 289,250
Marketing and sales 538,065 383,655
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Total operating expenses 1,008,352 882,808
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Loss from operations (616,211) (530,251)
Interest expense - net 23,380 34,213
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Net loss (639,591) (564,464)
Preferred dividend 38,762 12,209
------------ ------------
Net loss available to common stockholders $ (678,353) $ (576,673)
============ ============
Net loss per share
Basic and diluted $ (0.05) $ (0.04)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 13,564,355 13,266,484
See accompanying notes to financial statements
4
HOWTEK, INC.
Statements of Cash Flows
Three Months Three Months
March 31, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (639,591) $(564,464)
----------- ---------
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation 53,392 81,236
Amortization 62,367 75,216
Compensation expense related to issue of
stock subscription warrants -- 27,000
Changes in operating assets and liabilities:
Accounts receivable (266,626) (5,855)
Inventory (251,728) 255,690
Other current assets 58,434 (114,501)
Accounts payable 589,743 (63,576)
Accrued expenses 80,218 41,262
----------- ---------
Total adjustments 325,800 296,472
----------- ---------
Net cash used for operating activities (313,791) (267,992)
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Cash flows from investing activities:
Additions to patents, software development and other (32,975) (28,077)
Additions to property and equipment (33,203) (16,432)
----------- ---------
Net cash used for investing activities (66,178) (44,509)
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Cash flows from financing activities:
Issuance of common stock for cash 137,068 9,631
Proceeds of loan payable to principal stockholders -- 160,000
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Net cash provided by financing activities 137,068 169,631
----------- ---------
Decrease in cash and equivalents (242,901) (142,870)
Cash and equivalents, beginning of period 1,444,771 263,073
----------- ---------
Cash and equivalents, end of period $ 1,201,870 $ 120,203
=========== =========
Supplemental disclosure of cash flow information:
Interest paid $ -- $ --
=========== =========
See accompanying notes to financial statements
5
HOWTEK, INC.
Notes to Financial Statements
March 31, 2001
(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, 2000 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, 2001, $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 March 31, 2001, the Company owed $500,000 pursuant to
the Notes.
6
HOWTEK, INC.
Notes to Financial Statements
March 31, 2001
(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, 2001, 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, 2001 compared to Quarter Ended March 31, 2000
Sales. Sales for the three months ended March 31, 2001 were $1,513,604, compared
with sales of $1,517,518 for the quarter ended March 31, 2000. The Company
continues to emphasize its medical business opportunities. Sales of the
Company's medical imaging products increased 49%, from $363,773 in the quarter
ended March 31, 2000 to $540,905 in the quarter ended March 31, 2001. The
Company's medical distribution channels have continued to increase, offering
access to more prospects in more application areas. The Company expects that its
investment in supporting its customers in the area of computer assisted
diagnosis of breast cancer, and other medical conditions, will produce
increasing sales through future periods.
In addition, the Company is anticipating late second quarter or early third
quarter release of its new FilmFunnel(TM) system, which couples Howtek
digitizers with media-burning and portable MyLivingRecord(TM) image viewing
solutions. The Company believes that these products will offer film libraries,
radiology departments and individuals a cost-effective approach to the
duplication, distribution and personal retention of medical images. Beta testing
of this system is expected to begin in May, and the Company has already received
its first order. FilmFunnel systems are expected to contribute higher per sale
revenues and margins than current digitizer sales, while MyLivingRecord media
component increases the potential for recurring, consumables revenue. The
Company has also begun to research application of its FilmFunnel system to
Equine and related veterinary markets with positive initial responses. The
Company expects to conduct trial marketing in this area during the second and
third quarter of this year. The Company also expects that sales and margins in
its medical business will continue to increase through the year.
8
Increases in medical product sales and contributions from the Company's new
FotoFunnel product line offset reduced prepress sales during the quarter ended
March 31, 2001. Sales of the Company's prepress and graphic arts products
decreased 57%, from $819,141 in the first quarter of 2000 to $351,274 for the
comparable period in 2001. The Company's new FotoFunnel batch photographic print
scanner, introduced during 2000, contributed sales of $392,072 in the first
quarter of 2001 compared to sales of $12,500 during the comparable period in
2000.
The Company expects its new FotoFunnel product line to be the fastest growing
part of its business in 2001. Taking advantage of its growing experience in the
retail market, the Company expects to release a new, point-of-sale system during
the second quarter of this year that will allow the retailer to unload memory
media from digital cameras and burn these digital images to Howtek's Share the
Smiles(TM) CD, which includes a portable consumer picture viewer. The Company
expects to release this product in software only and in Digital Camera Docking
Station configuration for a complete, self-contained flash memory to CD burning
station. Each station will be fully upgradeable to the FotoFunnel photo print
station. The Company also expects this new product to contribute to Howtek's
Share the Smiles media sales.
The Company's primary OEM channel for FotoFunnel distribution has until recently
been focused, with disappointing results, on Internet-driven systems. Howtek
recently announced a worldwide distribution agreement with Noritsu Koki, Co.,
Ltd. Through its subsidiaries, Noritsu will support localization, marketing and
integration of Howtek scanners for use with Noritsu Quick Service System photo
paper processors to provide a simple, cost-effective photo processing and
digital imaging solution to individual photo labs, professional studios and mass
market chains. Noritsu, which announced the first 45-minute color film
processing and printing system in 1979, currently sells, services and supports
its products in over 180 countries.
Gross Margins. Gross margins for the three month period ended March 31, 2001
increased to 26% from 23% in the comparable period in 2000. 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, increased sale of higher margin medical digitizers into the market for
computer assisted diagnosis of breast cancer, and increased sales of FotoFunnel
products through channels that have higher margins than the Company's original
OEM channel.
Engineering and Product Development. Engineering and product development costs
for the three month period ended March 31, 2001 decreased 22% from $209,903 in
2000 to $163,976 in 2001. The decrease in engineering and product development
costs resulted primarily from reductions in manpower. The Company expects to
continue to increase its utilization of outside and contract engineering
resources as it deems appropriate. The Company expects engineering and product
development costs to increase in absolute terms in 2001, while declining as a
percentage of overall sales.
General and Administrative. General and administrative expenses in the three
month period ended March 31, 2001 increased slightly from $289,250 in 2000 to
$306,311 in 2001. The Company expects general and administrative expenses to
remain relatively constant during the balance of 2001, as a percentage of sales.
9
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended March 31, 2001 increased 40% from $383,655 in 2000 to $538,065 in
2001. This increase results primarily from increases in personnel, advertising,
trade show and promotional expenses related to medical and FotoFunnel products.
The Company expects marketing and sales expenses to increase in 2001 compared to
2000.
Interest Expense. Net interest expense for the three month period ended March
31, 2001 decreased to $23,380 from $34,213 in 2000. This decrease is due
primarily to the increase in interest income related to higher cash balances
which were a result of the funds raised from the sale of securities in the
fourth quarter of 2000.
As a result of the foregoing, the Company recorded a net loss of $639,591 or
$0.05 per share for the three month period ended March 31, 2001 on sales of
$1,513,604 compared to a net loss of $564,464 or $0.04 per share from the same
period in 2000 on sales of $1,517,518.
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 March 31,
2001.
At March 31, 2001 the Company had current assets of $5,299,035, current
liabilities of $2,852,596 and working capital of $2,446,439. The ratio of
current assets to current liabilities was 1.9:1
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, 2001, 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,
2001, the Company owed $310,000 pursuant to the Promissory Notes.
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
None
(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.
-----------------------------------
(Company)
Date: May 10, 2001 By: /s/ W. Scott Parr
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W. Scott Parr
President, Chief Executive Officer,
Director
Date: May 10, 2001 By: /s/ Annette L. Heroux
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Annette L. Heroux
Vice President Finance,
Chief Financial Officer