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, 2001
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 3, 2001 there were 14,003,662 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, 2001
(unaudited) and December 31, 2000 3
Statements of Operations for the three month periods ended
June 30, 2001 and 2000 and for the six month periods ended
June 30, 2001 and 2000 (unaudited) 4
Statements of Cash Flows for the six month periods
ended June 30, 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 8-11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
PART II OTHER INFORMATION
Item 2. Sale of 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, 2001 December 31, 2000
------------- -----------------
Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 718,744 $ 1,444,771
Trade accounts receivable, net of allowance
for doubtful accounts of $247,000 in 2001
and $256,000 in 2000 666,738 1,082,783
Inventory 3,010,350 2,443,150
Prepaid and other 54,197 111,312
------------ ------------
Total current assets 4,450,029 5,082,016
------------ ------------
Property and equipment:
Equipment 2,900,470 2,843,818
Leasehold improvements 41,721 36,821
Motor vehicles -- 6,050
------------ ------------
2,942,191 2,886,689
Less accumulated depreciation and amortization 2,513,000 2,398,553
------------ ------------
Net property and equipment 429,191 488,136
------------ ------------
Other assets:
Software development costs, net 319,525 350,550
Debt issuance costs, net 8,483 16,965
Patents, net 6,008 8,261
------------ ------------
Total other assets 334,016 375,776
------------ ------------
Total assets $ 5,213,236 $ 5,945,928
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,553,261 $ 1,096,174
Accrued expenses 611,082 430,699
Loans payable to related party 500,000 500,000
Convertible subordinated debentures 117,000 117,000
------------ ------------
Total current liabilities 2,781,343 2,143,873
Loans payable to related party 390,000 900,000
------------ ------------
Total liabilities 3,171,343 3,043,873
------------ ------------
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 14,070,372 in 2001
and 13,588,126 shares in 2000; outstanding
14,002,496 in 2001 and 13,520,250 shares in 2000 140,703 135,881
Additional paid-in capital 55,938,041 55,365,491
Accumulated deficit (53,086,683) (51,649,149)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 2,041,893 2,902,055
------------ ------------
Total liabilities and stockholders' equity $ 5,213,236 $ 5,945,928
============ ============
See accompanying notes to financial statements.
3
HOWTEK, INC.
Statements of Operations
Three Months Six Months
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
(unaudited) (unaudited)
Sales $ 932,160 $ 1,957,638 $ 2,445,764 $ 3,475,156
Cost of Sales 785,533 1,360,512 1,906,996 2,525,473
------------ ------------ ------------ ------------
Gross Margin 146,627 597,126 538,768 949,683
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 198,888 150,760 362,864 360,663
General and administrative 287,828 266,796 594,139 556,046
Marketing and sales 427,818 398,266 965,883 781,921
------------ ------------ ------------ ------------
Total operating expenses 914,534 815,822 1,922,886 1,698,630
------------ ------------ ------------ ------------
Loss from operations (767,907) (218,696) (1,384,118) (748,947)
Interest expense - net 30,036 38,805 53,416 73,018
------------ ------------ ------------ ------------
Net loss $ (797,943) $ (257,501) $ (1,437,534) $ (821,965)
Preferred dividend 39,193 14,407 77,956 26,616
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (837,136) $ (271,908) $ (1,515,490) $ (848,581)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.06) $ (0.02) $ (0.11) $ (0.06)
Weighted average number of shares used
in computing earnings per share
Basic and diluted 13,631,198 13,343,952 13,597,861 13,305,218
See accompanying notes to financial statements.
4
HOWTEK, INC.
Statements of Cash Flows
Six Months Six Months
June 30, 2001 June 30, 2000
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(1,437,534) $ (821,965)
----------- -----------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 114,447 164,998
Amortization 124,735 150,432
Compensation expense related to issue of
Stock Subscription Warrants -- 27,000
Changes in operating assets and liabilities:
Accounts receivable 416,045 (520,078)
Inventory (567,200) 91,920
Other current assets 57,115 (26,070)
Accounts payable 457,087 398,073
Accrued expenses 102,427 96,994
----------- -----------
Total adjustments 704,656 383,269
----------- -----------
Net cash used for operating activities (732,878) (438,696)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (82,975) (56,302)
Additions to property and equipment (55,502) (60,569)
----------- -----------
Net cash used for investing activities (138,477) (116,871)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 145,328 9,632
Issuance of preferred stock for cash -- 200,000
Proceeds of loan from related parties -- 260,000
----------- -----------
Net cash provided by financing activities 145,328 469,632
----------- -----------
Decrease in cash and equivalents (726,027) (85,935)
Cash and equivalents, beginning of period 1,444,771 263,073
----------- -----------
Cash and equivalents, end of period $ 718,744 $ 177,138
=========== ===========
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.
During the six months ended June 30, 2001, $510,000 of loans payable to related
parties were converted to common stock of the Company
See accompanying notes to financial statements.
5
HOWTEK, INC.
Notes to Financial Statements
June 30, 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 ("Howtek"
or the "Company") 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.
In June 2001, Mr. Howard converted $510,000 of the Convertible Note into
369,903 shares of restricted common stock, par value $.01 per share, of the
Company (the "Common Stock"). At June 30, 2001, $80,000 was outstanding
under the Loan Agreement. The Company had $2,920,000 available for future
borrowings.
The Company has debt evidenced by 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, 2001,
the Company owed Mr. Howard $500,000 pursuant to the Notes.
6
HOWTEK, INC.
Notes to Financial Statements
June 30, 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 June 30, 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 June 30, 2001 compared to Quarter Ended June 30, 2000 and Six
Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Sales. Sales for the three months ended June 30, 2001 were $932,160, compared
with sales of $1,957,638 for the quarter ended June 30, 2000. Sales for the six
months ended June 30, 2001 were $2,445,764, compared with sales of $3,475,156
for the comparable period in 2000. Results for the quarter ended June 30, 2001
reflects the Company's strategic decision to withdraw from declining prepress
and graphic arts markets to concentrate on greater business opportunities in
medical and photographic imaging and digitization markets. As expected, sales of
the Company's prepress and graphic arts products, including related maintenance
and repair services, decreased by $950,173, from $1,197,170 in the second
quarter of 2000 to $246,997 in the comparable period in 2001, and decreased by
$1,510,792, from $2,338,415 to $827,623 for the six months ended June 30, 2000
and 2001, respectively.
The Company continues to emphasize its medical and photographic business
opportunities, while managing the decline in it's traditional graphic arts
business. Sales of the Company's medical imaging products decreased slightly
from $627,858 in the quarter ended June 30, 2000 to $512,964 in the quarter
ended June 30, 2001, due primarily to the timing of expected to be regular,
multiple-unit orders from its medical OEM customers. Medical sales increased to
$1,053,869 for the six months ended June 30, 2001 from $991,631 for the
comparable period in 2000.
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.
The Company believes that there has been a significant softening in the
telemedicine and large-scale Picture Archiving and Communication System (PACS)
segments of the medical marketplace, as customer purchases are being deferred or
8
reconsidered as a result of what is perceived to be an increasing overall
softness in the economy. To address this the Company has increased the number of
resellers offering the Howtek digitizers into the softening telemedicine and
large-scale PACS markets. The increases in resellers are expected to contribute
to increased sales of medical products in future periods.
The Company has made a significant investment in time and resources in
developing and supporting OEM customers using its digitizers in computer
assisted diagnosis of breast cancer systems and applications. Products offered
by two of the Company's OEM customers are in the final stage of review by the
FDA. If approved, sales in the United States can commence, with significant
immediate benefits anticipated for Howtek.
Howtek has also commenced field testing of its new FilmFunnel(TM) and
ImageFunnel(TM) systems, which couple Howtek digitizers with media-burning and
its portable MyLivingRecord(TM) image viewing solutions. The Company expects
that these will offer film libraries, radiology departments and individuals, a
cost-effective approach to the duplication, distribution and personal retention
of medical images. FilmFunnel and ImageFunnel systems are expected to contribute
higher per sales revenues and margins than current digitizer sales, while the
MyLivingRecord media component creates the potential for recurring, consumables
revenues.
Sales of the Company's FotoFunnel(TM) photo print scanning system increased from
$132,610 in the quarter ended June 30, 2000 to $172,199 for the quarter ended
June 30, 2001, and increased $419,161 from $145,110 to $564,271 for the six
months ended June 30, 2000 and 2001, respectively. At the end of the first
quarter of 2001 the Company described its new FotoFunnel product line as having
the potential to be the fastest growing part of its business during 2001, noting
that purchase decisions by large retail accounts, critical to achieving the
Company's growth objectives, had been delayed by changing views of the Internet
as a factor in retail photo finishing. The Company is now seeing such large
accounts resume the purchasing process, and Howtek FotoFunnel products are
currently in use by several large retail accounts to determine or confirm the
applicability of Howtek's products to the customer's photo finishing systems
requirements.
Promotion of Howtek products to large retail purchasers increased during the
second quarter 2001, domestically and internationally, through the Company's
growing OEM reseller base, which currently includes Gretag Imaging, Noritsu
Koki, Co., Inc, Noritsu America Corporation, and a leading photo minilab and
consumables manufacturer with which the Company has recently concluded an OEM
agreement. Noritsu America has made the Howtek FotoFunnel a part of its new
Digital Print Station product and is now broadly promoting this product in the
United States. Noritsu is also introducing this product on an international
basis.
Additionally, the Company recently introduced its new FlashFunnel System(TM)
providing photofinishers and other retailers with the ability to offer fast,
on-site Compact Disc (CD), digital image file and reprint production from
digital camera memory and other sources. The FlashFunnel is available as a very
compact turnkey solution, including a digital camera memory reader and flat
panel display or in a software only version. Howtek believes that its new
FlashFunnel is an important product introduction, expanding its retail, large
account and OEM opportunities, in some cases beyond traditional photographic
markets.
9
Gross Margins. Gross margins for the three and six month periods ended June 30,
2001 decreased to 16% and 22%, respectively, from 31% and 27%, respectively, in
the comparable periods in 2000. This decrease results from a reduction in sales
without a corresponding reduction in production overhead and indirect production
expenses. The Company anticipates a decrease in overhead and indirect production
expenses in future quarters, as it continues its cost reduction efforts. The
Company expects margins to improve as a result of anticipated increases in sales
of higher margin medical digitizers and FotoFunnel products over the next
several quarters.
Engineering and Product Development. Engineering and product development costs
for the three month period ended June 30, 2001 increased 32% from $150,760 in
2000 to $198,888 in 2001. Engineering and product development costs for the six
month period ended June 30, 2001 increased slightly from $360,663 in 2000 to
$362,864 in 2001. This increase resulted primarily from an increase in
regulatory expenses associated with product retesting for compliance to a new
European electrical emissions requirement and an increase in outside engineering
resources. 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 and
six month periods ended June 30, 2001 increased slightly from $266,796 and
$556,046 in 2000 to $287,828 and $594,139 in 2001. The Company expects general
and administrative expenses to remain relatively constant during the balance of
2001, as a percentage of sales.
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended June 30, 2001 increased slightly from $398,266 in 2000 to $427,818
in 2001. Marketing and sales expenses for the six month period ended June 30,
2001 increased 24% from $781,921 in 2000 to $965,883 for the comparable period
in 2001. During the second quarter of 2001, the Company significantly reduced
expenses related to its traditional graphic art business. The increase in
marketing and sales expenses resulted primarily from increases in 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 and six month periods ended
June 30, 2001 decreased to $30,036 and $53,416 in 2001, from $38,805 and $73,018
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 $797,943 or
$0.06 per share for the three month period ended June 30, 2001 on sales of
$932,160 compared to a net loss of $257,501 or $0.02 per share from the same
period in 2000 on sales of $1,957,638. The loss for the six months ended June
30, 2001 was $1,437,534 or $0.11 per share on sales of $2,445,764 compared with
$821,965 or $0.06 per share on sales of $3,475,156 for the six months ended June
30, 2000.
10
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 $2,920,000 was available at June 30, 2001.
At June 30, 2001 the Company had current assets of $4,450,029, current
liabilities of $2,781,343 and working capital of $1,668,686. The ratio of
current assets to current liabilities was 1.6:1.
The Company has debt evidenced by 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, 2001, the Company owed Mr. Howard $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,
2001, the Company owed $310,000 pursuant to the Promissory Notes.
In June 2001, Mr. Howard converted $510,000 of the Convertible Note into 369,903
shares of restricted common stock, par value $.01 per share, of the Company (the
"Common Stock"). At June 30, 2001, $80,000 was outstanding under the Loan
Agreement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
11
PART II OTHER INFORMATION
Item 2. Sale of Securities and Use of Proceeds
In June 2001, Mr. Robert Howard converted $510,000 of the Convertible Note into
369,903 shares of restricted common stock of the Company. These 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
None
(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 10, 2001 By: /s/ W. Scott Parr
---------------------- ------------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: August 10, 2001 By: /s/ Annette L. Heroux
---------------------- ------------------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
13