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 September 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 November 9, 2001 there were 14,568,900
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 September 30, 2001
(unaudited) and December 31, 2000 3
Statements of Operations for the three month periods ended
September 30, 2001 and 2000 and for the nine month periods
ended September 30, 2001 and 2000 (unaudited) 4
Statements of Cash Flows for the nine month periods
ended September 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 4 Submission of Matters to a Vote of Security Holders 12-13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
2
HOWTEK, INC.
Balance Sheets
September 30, 2001 December 31, 2000
-------------------- --------------------
Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 257,040 $ 1,444,771
Trade accounts receivable, net of allowance
for doubtful accounts of $225,000 in 2001
and $256,000 in 2000 1,018,038 1,082,783
Inventory 2,932,462 2,443,150
Prepaid and other 48,580 111,312
------------ ------------
Total current assets 4,256,120 5,082,016
------------ ------------
Property and equipment:
Equipment 2,920,288 2,843,818
Leasehold improvements 41,721 36,821
Motor vehicles -- 6,050
------------ ------------
2,962,009 2,886,689
Less accumulated depreciation and amortization 2,575,956 2,398,553
------------ ------------
Net property and equipment 386,053 488,136
------------ ------------
Other assets:
Software development costs, net 281,425 350,550
Debt issuance costs, net 4,241 16,965
Patents, net 4,882 8,261
------------ ------------
Total other assets 290,548 375,776
------------ ------------
Total assets $ 4,932,721 $ 5,945,928
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,357,460 $ 1,096,174
Accrued expenses 558,081 430,699
Loans payable to related party 500,000 500,000
Convertible subordinated debentures 117,000 117,000
Current maturities of note payable 64,497 --
------------ ------------
Total current liabilities 2,597,038 2,143,873
Loans payable to related party 195,693 900,000
Note payable 128,995 --
------------ ------------
Total liabilities 2,921,726 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 14,636,776 in 2001
and 13,588,126 shares in 2000; outstanding
14,568,900 in 2001 and 13,520,250 shares in 2000 146,367 135,881
Additional paid-in capital 56,449,684 55,365,491
Accumulated deficit (53,634,888) (51,649,149)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 2,010,995 2,902,055
------------ ------------
Total liabilities and stockholders' equity $ 4,932,721 $ 5,945,928
============ ============
See accompanying notes to financial statements.
3
HOWTEK, INC.
Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
(unaudited) (unaudited)
Sales $ 1,139,025 $ 2,760,773 $ 3,584,789 $ 6,235,929
Cost of Sales 836,677 1,977,544 2,743,673 4,503,017
------------ ------------ ------------ ------------
Gross Margin 302,348 783,229 841,116 1,732,912
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 199,736 198,544 562,600 559,207
General and administrative 282,070 283,288 876,209 839,334
Marketing and sales 346,150 437,294 1,312,033 1,219,215
------------ ------------ ------------ ------------
Total operating expenses 827,956 919,126 2,750,842 2,617,756
------------ ------------ ------------ ------------
Loss from operations (525,608) (135,897) (1,909,726) (884,844)
Interest expense - net 22,597 39,730 76,013 112,748
------------ ------------ ------------ ------------
Net loss (548,205) (175,627) (1,985,739) (997,592)
Preferred dividend 39,624 14,579 117,580 41,195
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (587,829) $ (190,206) $ (2,103,319) $ (1,038,787)
============ ============ ============ ============
Net loss per common share
Basic and diluted $ (0.04) $ (0.01) $ (0.15) $ (0.08)
Weighted average number of shares used
in computing earnings per share
Basic and diluted 14,017,592 13,398,039 13,739,375 13,336,384
See accompanying notes to financial statements.
4
HOWTEK, INC.
Statements of Cash Flows
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ -------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(1,985,739) $ (997,592)
----------- -----------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 177,403 250,143
Amortization 187,103 225,648
Compensation expense related to issue of
Stock Subscription Warrants -- 27,000
Changes in operating assets and liabilities:
Accounts receivable 64,745 (886,690)
Inventory (489,312) (393,245)
Other current assets 62,732 (35,876)
Accounts payable 261,286 1,219,628
Accrued expenses 165,496 226,645
----------- -----------
Total adjustments 429,453 633,253
----------- -----------
Net cash used for operating activities (1,556,286) (364,339)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (101,875) (75,640)
Additions to property and equipment (75,320) (81,690)
----------- -----------
Net cash used for investing activities (177,195) (157,330)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 152,258 65,974
Issuance of preferred stock for cash -- 200,000
Proceeds of loan from related parties 200,000 260,000
Proceed of note payable 128,995 --
----------- -----------
Net cash provided by financing activities 481,253 525,974
----------- -----------
Increase (decrease) in cash and equivalents (1,252,228) 4,305
Cash and equivalents, beginning of period 1,444,771 263,073
----------- -----------
Cash and equivalents, end of period $ 192,543 $ 267,378
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 5,265 $ 5,265
=========== ===========
During the nine months ended September 30, 2000, $25,000 of accrued expenses
were converted to preferred stock of the Company.
During the nine months ended September 30, 2001, $1,060,000 of loans and
interest 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
September 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. During the third quarter of 2001 the Company borrowed
$200,000 pursuant to the Loan Agreement.
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"). In September 2001, Mr. Howard converted
$84,307 principal and accrued interest on the Convertible Note into 198,441
shares of restricted common stock of the Company. At September 30, 2001,
$195,693 was outstanding under the Loan Agreement. The Company had
$2,804,307 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
6
HOWTEK, INC.
Notes to Financial Statements
September 30, 2001
(2) Loan Payable to Related Party (continued)
currently bear interest at 12%. Payment of the Notes is secured by a
security interest in certain assets of the Company. As of September 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.
In September 2001, Mr. Howard converted the outstanding balance, including
interest, on the Promissory Notes into 361,474 shares of restricted common
stock of the Company.
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, ability to maintain the listing of the
Company's common stock on the Nasdaq stock market, 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 September 30, 2001 compared to Quarter Ended September 30, 2000
and Nine Months Ended September 30, 2001 compared to Nine Months Ended September
30, 2000
Sales. Sales for the three months ended September 30, 2001 were $1,139,025,
compared with sales of $2,760,773 for the quarter ended September 30, 2000.
Sales for the nine months ended September 30, 2001 were $3,584,789, compared
with sales of $6,235,929 for the comparable period in 2000. As expected, sales
of the Company's prepress and graphic arts products, including related
maintenance and repair services, decreased by $329,877, from $665,484 in the
third quarter of 2000 to $335,607 in the comparable period in 2001, and
decreased by $1,840,669, from $3,003,899 to $1,163,230 for the nine months ended
September 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 $647,132 in the quarter ended September 30, 2000 to $590,231 in the quarter
ended September 30, 2001. Medical sales increased to $1,644,100 for the nine
months ended September 30, 2001 from $1,638,763 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 softening in the telemedicine and
Picture Archiving and Communication System (PACS) segments of the medical
marketplace, as customer purchases are being deferred or 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 telemedicine and large-scale PACS markets. The
increases in resellers are expected to contribute to increased sales of medical
products in future periods.
8
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
benefits anticipated for Howtek.
Howtek has also introduced its new FilmFunnel(TM) and ImageFunnel(TM) systems
for commercial sale. These systems couple Howtek digitizers with image view and
media-burning capabilities and includes Howtek's 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. These
markets, which are new to the Company, are expected by the Company to be
comparatively resistant to an increasingly adverse economic environment.
Sales of the Company's FotoFunnel(TM) photo print scanning system decreased from
$1,448,157 in the quarter ended September 30, 2000 to $213,187 for the quarter
ended September 30, 2001, and decreased $815,809 from $1,593,267 to $777,458 for
the nine months ended September 30, 2000 and 2001, respectively. Almost all
FotoFunnel sales for the third quarter of 2000 were made to one reseller, which
purchased the scanners in connection with an Internet-driven business model that
proved unsuccessful. The Company has since established alternative positioning
and distribution channels for the FotoFunnel product line, including Noritsu
America Corporation, which offers and promotes the FotoFunnel scanner as an
accessory with certain of its minilab and photo-finishing products. The Company
is now participating in FotoFunnel field evaluation and testing programs with a
variety of retail and photo chains and mass merchants which precede purchase
decisions by such buyers
Gross Margins. Gross margins for the three and nine month periods ended
September 30, 2001 decreased to 27% and 23%, respectively, from 28%,
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 intends to pursue further decreases in
overhead and indirect production expenses, 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 and nine month periods ended September 30, 2001 increased slightly
from $198,544 and $559,207 in 2000 to $199,736 and $562,600 in 2001,
respectively. 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 September 30, 2001 decreased slightly from $283,288 in 2000
to $282,070 in 2001. General and administrative expenses for the nine month
period ended September 30, 2001 increased slightly
9
from $839,334 in 2000 to $876,209 in 2001. The Company expects general and
administrative expenses to remain relatively constant in absolute terms during
the balance of 2001, and to decline as a percentage of sales.
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended September 30, 2001 decreased 21% from $437,294 in 2000 to $346,150
in 2001. Marketing and sales expenses for the nine month period ended September
30, 2001 increased 8% from $1,219,215 in 2000 to $1,312,033 for the comparable
period in 2001. During the second and third 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 nine month periods
ended September 30, 2001 decreased to $22,597 and $76,013 in 2001, from $39,730
and $112,748 in 2000. This decrease is due primarily to a decrease in loan
balances and an 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 $548,205 or
$0.04 per share for the three month period ended September 30, 2001 on sales of
$1,139,025 compared to a net loss of $175,627 or $0.01 per share from the same
period in 2000 on sales of $2,760,773. The loss for the nine months ended
September 30, 2001 was $1,985,739 or $0.15 per share on sales of $3,584,789
compared with $997,592 or $0.08 per share on sales of $6,235,929 for the nine
months ended September 30, 2000.
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 $2,804,307 was available at September 30,
2001.
At September 30, 2001 the Company had current assets of $4,256,120, current
liabilities of $2,597,038 and working capital of $1,659,082. 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 September 30, 2001, the Company owed Mr. Howard $500,000 pursuant to the
Notes.
10
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. In September 2001,
Mr. Howard converted the outstanding balance, including interest, on the
Promissory Notes into 361,474 shares of restricted common stock of the Company.
In September 2001, Mr. Howard converted $84,307 principal and accrued interest
on the Convertible Note into 198,441 shares of restricted common stock of the
Company. At September 30, 2001, $195,693 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 September 2001, Mr. Howard converted $84,307 of the Convertible Note and the
outstanding balance, including interest, on the Promissory Notes into 460,659
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 4. Submission of Matters to a Vote of Security Holders
On August 14, 2001, the Company held an Annual Meeting of Stockholders at which
(i) the election of directors, (ii) adoption of the Company's 2001 Stock Option
Plan and (iii) ratification of the appointment of BDO Seidman, LLP as the
Company's independent auditors for the fiscal year ending December 31, 2001. The
results of the vote were as follows:
i. Election of Directors
Robert Howard, W. Scott Parr, Ivan Gati, James Harlan, Kit Howard, Brett
Smith and Harvey Teich were elected to serve as members of the Company's Board
of Directors for the ensuing year and until the election and qualification of
their successors.
The votes cast by stockholders with respect to the election of Directors were as
follows:
Number of
Names of Nominees Number of Votes For Votes Withheld
- ----------------- ------------------- --------------
Robert Howard 11,516,325 32,791
W. Scott Parr 11,506,825 42,291
Ivan Gati 11,527,325 21,791
James Harlan 11,527,325 21,791
Kit Howard 11,523,825 25,291
Brett Smith 11,527,325 21,791
Harvey Teich 11,528,325 20,791
ii. Adoption of 2001 Stock Option Plan
Votes Votes Cast Votes Broker
Cast For Against Abstaining Non-Votes
- -------- ---------- ---------- ---------
5,481,308 185,586 66,225 5,815,997
12
iii. Appointment of Independent Auditors
Votes Votes Cast Votes
Cast For Against Abstaining
- -------- ---------- ----------
11,527,520 11,146 10,450
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.
13
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: November 13, 2001 By:
----------------------------- ----------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: November 13, 2001 By:
----------------------------- ----------------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
14