SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 ____ ____ ____
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)
Registrant's telephone number, including area code: (603) 882-5200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
Common Stock, $.01 par value
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 as
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price for the registrant's Common Stock on
March 1, 2002 was $33,544,562.
As of March 1, 2002, the registrant had 15,297,661 shares of Common Stock
outstanding.
2
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this report on Form 10-K 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.
PART I
Item 1. Business.
General
Howtek, Incorporated, ("Howtek" or the "Company"), located in Hudson, New
Hampshire, was founded in 1984. Howtek develops, manufactures, and markets
digitizing systems, or "scanners", which convert printed, photographic and other
"hard copy" images to digital form for use in the medical, photo finishing, and
graphic arts industries. The Company introduced the first "desktop" scanner in
1986, smaller, easier to use and less costly than alternative scanners at that
time, helping to make possible the shift to decentralized corporate electronic
publishing. Howtek followed with a series of award winning, industry leading
products, continuing to improve the quality of digital imaging, and reducing the
price and complexity of scanning systems.
Facing diminishing returns in its traditional graphic arts business, Howtek, in
the last several years, has heavily invested in technology and product
development in the fields of medical and photographic imaging and digitization.
After two years of work supporting development-stage OEM customers in the new
field of Computer Assisted Detection (CAD) of breast cancer, Food & Drug
Administration (FDA) approvals for sales in the United States of CAD systems
incorporating Howtek digitizers were received by two key Howtek OEM customers
during the first quarter of 2002. The Company believes such FDA approvals,
coupled with newly implemented medical cost reimbursement coverage for
procedures utilizing such CAD systems, may contribute to sales growth in this
area.
The Company's FotoFunnel(TM) photographic scanner solution was introduced by one
key OEM customer in 2000, as part of an Internet-driven photo finishing
solution. During 2001, as a result of a general reassessment of the role of the
Internet in photo finishing, large retail accounts, in general, elected not to
purchase such systems. In response, the Company has repositioned its FotoFunnel
product line, offering its photographic products to retail photo finishers as an
inexpensive way to offer photo images on compact disk (CD) to retail photo
customers. Sales of FotoFunnel are expected to increase during 2002 from 2001
levels.
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In support of its shift in focus to medical and photo processing markets, the
Company has in recent years (1) updated product lines, introducing
industry-leading products in medical and photo processing/Internet markets, (2)
migrated from in-house manufacturer to outsourcing to more effectively utilize
outside engineering, development, and manufacturing resources, (3) substantially
reduced personnel and overhead, and (4) implemented an OEM and large scale
systems integrator marketing and sales strategy for primary digitizer markets.
See Note 7 of Notes to Financial Statements for certain revenue information by
product line and information regarding export sales.
Medical Business
Howtek MultiRAD(TM) digitizers are used in medical imaging to convert
radiographic films to digital records for computer analysis, diagnosis,
transmission or storage.
Market
It has been over a hundred years since the X-ray was invented. In 1999, 270
million X-ray exams were performed in the United States, making X-ray the most
prevalent diagnostic tool in medicine.(1) Medical imaging technologies and
applications now extend beyond radiology, and play a role in all branches of
medicine.
The overall healthcare market is growing at a rapid pace. According to Imaging
Economics the medical imaging market is growing even more quickly.(2) United
States healthcare expenditures are expected to increase from $1.2 trillion in
1999 to $2.2 trillion in 2008. Approximately six percent of the total healthcare
budget in 1999 was spent on diagnostic imaging, with that percentage expected to
increase to 15% by 2008. While medical imaging grows in significance, a shortage
of physicians that can read diagnostic images has already started and the
shortage is expected to grow through 2020.
Howtek's MultiRAD X-ray and radiographic film digitizers play a significant role
in three distinct medical applications: computer-assisted detection of breast
cancer, Teleradiology/Picture Archiving & Communication (PACS), and patient
record duplication and management.
Computer Assisted Detection is used to provide physicians with support in
detecting breast cancer at an early stage. There is a tremendous need for
devices that facilitate the early detection of breast cancer and other forms of
cancer. For most cancers, the earlier treatment is rendered, the greater the
likelihood of successfully managing the cancer. Some studies show that if breast
cancer is detected while still localized and before metastasis spread, the
five-year survival rate is 96.8% or better. If the cancer spreads regionally
before treatment, the survival rate drops to around 75.9%. If there is distant
metastasis, the survival rate drops to around 20.6%.
1 Diagnostic Imaging, July 2000
2 Imaging Economics, "The Big Picture" Lightfoote, November/December 2000
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A primary method of detecting breast cancer is through mammography screening.
Mammography is a radiographic examination of a breast. The American Cancer
Society recommends that women undergo annual mammogram examinations beginning at
age 40. Approximately 5 million additional women in the United States will be
entering the mammography testing 40-and-over age category within the next 5
years. A problem in this process, that the Company's OEM customers seek to
address, is that in routine screening of mammography films an estimated 10% of
identifiable breast cancers are missed as a result of radiologist oversight. In
the United States, reimbursement for a secondary reading of mammography films
using CAD systems began in January 2002, effectively creating the domestic
market in which the Company's OEM CAD customers compete.
There are approximately 20,000 mammography centers located throughout the world.
Approximately 10,000 of these centers are located in the United States. The
Company believes that economic, marketing and legal factors will drive
mammography centers to adopt CAD technology, and that newly implemented
reimbursement programs will help to support acquisitions of such systems. The
Company believes that the potential market for digitizers employed in computer
aided detection of breast cancer is significant.
Teleradiology is the practice of transmitting images for analysis, consultation
or diagnostic interpretation to another location. The Company's digitizers are
used in this process to convert radiographic film to digital form, for
transmission, communication or storage. Use of teleradiology is increasingly
influenced by the economics of managed care, which mandates ever-growing
sensitivity to costs and has strongly encouraged the decentralization of patient
care, with specialized services available in fewer locations, on a consultative,
remote basis. In the past, radiologists were located in a medical facility close
to the patient where they performed examinations and interacted face-to-face
with the local clinician and the patient. As reimbursement for radiological
interpretations have declined and utilization has increased, radiologists are
under pressure to increase the number of interpretations and compete for
business over much larger geographic areas. The evolution toward managed
regional healthcare systems, coupled with increasing radiologist specialization
has resulted in a growing demand for equipment and systems capable of acquiring
medical images remotely, at increasingly distributed points of primary patient
contact, and transmitting those images for review and analysis centrally. Using
teleradiology, information on a patient can be brought to the radiologist faster
and at significantly lower cost than the method of transporting the patient from
the point-of-care facility to the diagnostic facility.
In addition, the digitization and transmission of medical images has enabled the
formation of large-scale image storage and management networks known as Picture
Archiving and Communication Systems, or PACS. PACS combine teleradiology, local
area networks (LAN) and medical information systems to facilitate management and
storage of medical images and integration of those images into patient
management and hospital information systems. These systems also enable virtually
instantaneous recall and viewing of medical images, and permit the viewing of
several images simultaneously. PACS can significantly reduce the cost of
providing efficient radiology services, in part by reducing the incidence of
lost and misplaced medical films. In a manual system, it is estimated that
approximately 10% of all medical films are lost
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and an additional 10% to 15% are misplaced or misfiled, creating the need to
take expensive duplicate images, delaying the delivery of quality medical care
and resulting in increased medical costs and liability exposure.
According to the Technology Marketing Group (TMG of Des Plaines, IL) hospitals
spent nearly $600 million on PACS in 1999. PACS are typically located within the
campus of the healthcare facility and are connected by the LAN. Growth in the
PACS market is expected to increase 7 to 10 percent per year for the next five
years.(3)
Patient Record Duplication and Management is an increasing concern. All medical
institutions are inundated with medical images, most of them on film, and the
storage problem is increasing. In 1999, 270 million radiological studies were
performed with an average of 4 films per study, creating an estimated 1.08
billion films. Of these films, none are thrown away. Not even institutions with
digital PACS are spared; the PAC only stores information on active patients.
Even in these so-called "filmless" hospitals, long-term storage is provided
through the film library, which manually stores films. This can create a major
problem and cost when images need to be duplicated or distributed for medical
review by multiple practitioners or when copies of images are required for a
variety of other purposes, including personal copies of patient records and
litigation.
The typical method of making images available for physician review has been to
duplicate films for distribution, upon request, with the patient charged as much
as $8 for each film in the radiological study to create a duplicate of that
study. Typically, to duplicate a radiological study, the patient record is
pulled from the film library. Duplicates are made individually by hand tying up
a technologist for 4-6 minutes per film. Alternatively, films are sent out to a
third party service bureau for duplication. The duplicates are placed in a new
film jacket and the originals returned to the film library. The $8 fee barely
covers the cost of handling and manually duplicating each individual film.
A duplicated film has a higher contrast, similar to duplicate copies made on a
plain paper photocopier. The duplicate is created photographically from an
X-ray, losing gray content. Duplicate films tend to look black and white; shades
of gray are often lost. The American College of Radiology and the FDA do not
allow the use of duplicate films for primary reading of mammograms. Therefore,
in order to read an image consulting physicians will often be required to make
an appointment with the film library to review a particular set of films. The
Company believes that degradation in image quality of duplicated X-rays often
acts as an impediment to receipt of second opinions from healthcare providers.
Historically, the specialized format of medical image files has created an
obstacle to digitally duplicating a film or file for distribution on CD or DVD
media. Radiological images are typically stored and viewed in what is called a
"DICOM" format, a specialized file structure including patient and image
information in addition to full image data. DICOM has been adopted and is well
accepted within the radiology field, but is not generally supported outside
3 Medical Imaging, September 2000
6
this specialty. Use of DICOM images is often limited by the fact that many
general physicians, surgeons, therapists, and others in the medical community do
not have the specialized DICOM viewing stations that can cost from $30,000 to
$120,000 or more. Therefore, the Company believes that use of the DICOM format
can create a serious impediment to interconnectivity throughout the healthcare
enterprise.
In order to address the needs of the medical community that cannot afford a
conventional DICOM station, Howtek introduced a new line of ImageFunnel(TM)
products, which incorporate the Company's digitizers, to assist in providing an
alternative, cost-effective method for duplication, distribution and storage of
DICOM medical images. The Company's ImageFunnel products are currently under
consideration by a variety of potential purchasers. The United States market for
such solutions, if adopted, could include up to 6,000 hospitals and an
additional 7,000 clinics and large medical practices. No assurance can be given
that the Company will be able to successfully market its line of ImageFunnel
products.
MultiRAD(TM) Technology and Products
Historically, radiographic film digitizers that utilize a laser light source to
illuminate a film, and a photo multiplier tube to sense and measure the amount
of light penetrating different regions of the film, captured the highest quality
digital images. While these "first-generation" laser digitizers offer excellent
image quality, they are expensive to acquire, comparatively delicate, and in
many cases expensive to maintain. A "second-generation" of digitizers, using a
fluorescent light source for image illumination and a charge-coupled device
(CCD) sensor for image capture, offers reduced cost at the expense of reduced
image quality.
MultiRAD(TM) Individually Calibrated Red LED Illumination Technology
Howtek believes that its competitive advantage in the medical digitizer market
is based on its introduction of a "third generation" film digitizer that
utilizes high energy, narrow-band red light, generated by an array of
individually controlled, solid state, light emitting diodes (LEDs), to improve
illumination of films and increase resulting image quality. This individually
calibrated Red LED illumination technology avoids problems and disadvantages
associated with use of common fluorescent light for film illumination, without
the acquisition and maintenance costs commonly associated with film digitizers
using laser illumination technology. As a result, the Company believes its
MultiRADscanners are less expensive than existing competitive products with
comparable capabilities, and are superior in performance to scanners previously
available at comparable prices.
In Howtek's proprietary radiological film digitization system, 56 individual,
high-output LEDs transmit light through the radiological film, using a very high
quality lens and imaging system to focus transmitted light on a sensitive 8000
element CCD detector. Generated light is nearly monochromatic at a wavelength of
approximately 670 nanometers (nm). This red wavelength is matched to the peak
sensitivity of the CCD camera, contributing to high signal strength, which
results in improved dynamic range and image quality. This patent-pending solid
state Red LED illumination system is thought by the Company to offer the
following advantages over fluorescent illumination methods used by Howtek's
competitors, contributing to improved image quality and to operator
productivity:
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o Near-Monochromatic Illumination
o Higher and Flatter Illumination Profile
o Adjustment to Lens Shape
o Temporal Stability
o Warm-up Characteristics
o Adjustable Illumination Width
MultiRAD(TM) Radiographic Film Digitizer Products. The MultiRAD product line,
used to digitize radiographic film in Telemedicine, image archiving and Computer
Assisted Diagnosis applications, among others, currently includes:
o The MultiRAD 860, a high-resolution film digitizer that the Company
believes is uniquely positioned to serve an increasing market for
computer-assisted mammography. The MultiRAD 860 list price is $19,995.
o The MultiRAD 460, with a list price of $16,995, offers lower
resolution image capture applicable in Teleradiology and archiving
applications.
ImageFunnel(TM) Products. Howtek's ImageFunnel products, which in most cases
include a MultiRAD digitizer, are used to retrieve a patient's image-based
medical records from a variety of sources, including film, and write them to a
patent-pending compact disk (CD) which includes a portable DICOM format file
viewer. ImageFunnel solutions can be used to duplicate, distribute and store
patient image records by medical film libraries and service bureaus, offering an
alternative to lower-quality hard copies of image records. Howtek offers
ImageFunnel solutions complete including compact workstations, applications
software and CD burner. DVD support is anticipated.
ImageFunnel Systems are offered in the following configurations, at the prices
listed:
Product Description List Price
-------------------- ------------------------------------ ----------------
ImageFunnel Writes all images both analog and $46,999
digital to CD
-------------------- ------------------------------------ ----------------
DicomFunnel Writes digital images to CD $19,999
-------------------- ------------------------------------ ----------------
FilmFunnel Writes analog images to CD $29,999
-------------------- ------------------------------------ ----------------
Sales & Marketing
The Company reaches the Computer Assisted Detection market through OEMs. Current
OEM customers include CADx Medical Systems, Inc., Integrated Software Solutions,
Inc. (ISSI), Scanis, Inc., and Medizeus, Inc. After more than two years of
support by Howtek, CADx Medical Systems, Inc., and ISSI received FDA approval in
the first quarter of 2002 to market their products, incorporating Howtek's
digitizers, in the United States.
In its other medical markets, Howtek is a leading supplier of digitizers for
medical film images with an established distribution channel including OEM's,
value added resellers and distributors.
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Competition
MultiRAD(TM). Howtek's competition for high quality medical digitizing market
includes the "first generation" LumiScan(TM) digitizer from Lumisys Corporation,
now owned by Kodak. Since 1990, Lumisys digitizers, using a monochromatic laser
illumination source, have been considered the quality standard in medical image
digitizers. In the computer-assisted detection and teleradiology/PACS markets,
Lumisys digitizers enjoyed an overwhelming market share. As described more fully
below, the Company believes that the technology employed by the Lumisys devices
has several inherent weaknesses. Because Lumisys' laser technology requires
manufacturing costs greater than those of Howtek's newer generation technology
products, Lumisys products are expensive to acquire compared to the Howtek
digitizer. Lumisys' technology is also comparatively delicate, and expensive to
maintain. As a result, Lumisys is believed by the Company to have lost market
share to other competitors, including Howtek.
Vidar Corporation, a privately held subsidiary of a Swedish firm, has the
greatest overall market share in medical digitizers, as a result of Vidar's
dominance in the lower quality and most price sensitive segments of the market.
Vidar digitizers might be considered a second generation of medical film
digitizers (with Lumisys laser illuminated digitizers as the first generation).
Vidar devices use a fluorescent light source to illuminate an image, capturing
image information with a charge-coupled device (CCD). Offering a lower cost
alternative to laser illuminated digitizers, (comparable or lower in price than
Howtek's products) the Vidar products offer lower image quality than the Lumisys
or the Howtek products. Vidar's Sierra Film Digitizer, priced under $10,000
reinforces Vidar's position in the low end market entry niche. Although it is
slower and less productive than Vidar's own high end or comparable Lumisys or
Howtek product, the Sierra is expected to attract sales that are based purely on
price.
In general, Howtek uses its proprietary solid state, red-light illumination
system and superior image quality to compete with Lumisys and Vidar. The Company
competes with Lumisys on the basis of comparable (or superior) image quality and
significantly lower price. With Vidar, the Company competes on the basis of
superior image quality. A key comparative measure of a digitizer's ability to
acquire high quality images is the "dynamic range" of the device. Dynamic range
measures the range, from pure white to pure black, within which a digitizer is
able to detect differences in lightness or darkness (density). The ability to
distinguish shades within a primarily dark, or dense area of a radiological film
is particularly significant in many diagnostic and medical imaging applications.
Howtek digitizers have a greater dynamic range and therefore a significantly
greater ability to distinguish meaningful information within seemingly dark
areas of the radiological films, than Vidar devices. This is an increasingly
understood competitive advantage, which Howtek emphasizes.
ImageFunnel(TM). Howtek's ImageFunnel solution competes on the basis of price
and image quality with systems from several other vendors. Agfa Corporation
offers a digital copy solution that takes digital images and stores to CD for a
list price of $65,000. TDK, Inc. has a similar solution price at $60,000.
MedWeb, Inc. has a non-DICOM solution priced at $15,000. In all cases the
medical images are either compressed or the format is changed so that the images
cannot be returned to a DICOM network as active patients. The CD products
offered in these
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systems may contain viewers, but are in most cases not fully compliant DICOM
viewers. Unlike Howtek's ImageFunnel, these products do not create a portable,
totally standard, fully diagnostic DICOM format image distribution and
management system. Because of the nature of the ImageFunnel solution, full
diagnostic quality patient images can be made portable without sacrificing the
subsequent ability to reintroduce the images at any point in the medical
enterprise's digital workflow.
FotoFunnel(TM) Business
Howtek's FotoFunnel solutions permit photo finishers and other retailers to
offer consumer photographic images on CD, in digital form for uploading to the
Internet, or as reprints or photo- products. FotoFunnel solutions represent an
inexpensive approach to offering photographic customers digital products and
services.
Howtek's FotoFunnel scanner, which digitizes new and old photo prints on-site
and within fast photo processing workflows, was initially offered on an
exclusive, OEM basis through a reseller that promoted the product for use in
Internet and e-commerce applications for photo processing. As a result of a
general reassessment of the role of the Internet in photo-finishing, however,
Howtek repositioned the product as an on-site CD and reprint production system,
offering, in Howtek's opinion, an immediate benefit to retailers and consumers.
In July 2001, Howtek added the capability to accept digital camera memory to its
FotoFunnel solutions, allowing retailers that use FotoFunnel the ability to
extend their business to digital camera owners and users.
Market
The Company believes that digital and web-based photo services will
fundamentally change the way consumer photographs are processed, enhanced,
distributed and used. The Company also believes that the promise of a digital
photographic solution that offers users features not available in traditional
photography, drives not just digital camera manufacturers and users, it may also
expand the demands and expectations of users of traditional cameras and films.
Traditional photos are processed at over 35,000 photo lab and photofinisher
locations worldwide. The principal market for Howtek's FotoFunnel system and
scanner are an estimated 18,000 - 25,000 "fast" (same day) or "one-hour" photo
finishers, most of them mass retailers, typically located in high traffic retail
locations. In deciding whether to provide digital photo finishing services,
these retailers must often balance the potential return from digital services
against the costs of acquiring more expensive digital minilabs or upgrading
their traditional photo finishing equipment to digital capabilities. Howtek's
FotoFunnel system allows them to offer CDs and other digital products and
service by scanning old, shoeboxes of valued photos, or scanning prints just
produced from new rolls of film.
Today, many retailers can accept files generated by the FotoFunnel system and
Howtek's new FlashFunnel(TM) product to produce photo enlargements and other
reprints on their existing minilabs. Howtek believes that by treating the
minilab as a computer peripheral, such retailers are able to increase minilab
utilization and returns on the minilab capital investment.
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Current growth in digital cameras and digital photography has created an
opportunity for Howtek. The number of digital cameras purchased has doubled in
each of the past two years. Worldwide, the number of digital cameras accounts
for about 25% of all new purchases. Currently, about 100 billion pictures are
exposed each year on film, and 16 billion with digital camera; the annual growth
rates are 5% for photos on film and 45% for photos using digital camera. During
the third quarter of 2001, Howtek introduced its FlashFunnel(TM) system,
offering photo retailers a flexible and comparatively inexpensive means to
unload digital camera memory and produce CDs, reprints and other photo-products.
Products
FotoFunnel(TM) Scanner. The FotoFunnelis a compact, automatic batch-feeding
scanner designed to quickly digitize photographic prints. FotoFunnel can be used
for both newly developed prints and for older, existing prints. FotoFunnel is
offered at a suggested retail price of $5,495. Standard discounts to resellers
and OEMs range from 20-40%, with higher discounts available for high volume
committed orders.
The scanner will accommodate up to 70 prints in the feed tray and feed most size
prints from 2 inches by 2 inches up to a 5 inch by 7 inch. FotoFunnel employs
CCD technology and cold cathode tube illumination. A simple feed system is used
to guide the prints through a short, straight paper path, eliminating scratches
or other damage to the print. Photo prints are put in an input tray and the scan
process is started. From this point the system takes over, scanning the
photographs at a resolution of up to 600 dpi and with a color depth of up to 36
bits. The system recognizes and skips duplicates. The software calibrates for
the optimum quality (for example lighting) of the photograph automatically.
A unique feature of the FotoFunnel is that photos pass the CCD sensor without
mirrors or the usual glass panel separation. This precludes any possible
reflection or distortion of the picture through dust particles that might adhere
to the glass panel, which (in the worst case) may cause lines on the final
product. Also, by eliminating glass panels, picture sharpness and contrast are
enhanced. The FotoFunnel incorporates a standard SCSI 2-Interface, so that it
can be connected to any PC with SCSI adapter and running Microsoft Windows
95/98/NT/2000/XP.
Once the photos have been scanned, they appear as thumbnail previews on the
computer monitor, and can be manipulated to, among other things, select the
photographs and switch the horizontal/vertical orientation of the image. The
system then automatically compresses the data so that, regardless of the size of
the original photo, up to 80 photographs can be stored on a diskette and many
more can be stored on a CD or can be transmitted over the Internet.
The high speed of scanning, up to four photos per minute, allows the entire
process from development of photos from film, scanning and production of CD or
diskette to be completed within the one-hour processing requirements of many
small photo labs.
FotoFunnel(TM) Software Options. Customers using FotoFunnel have several
software options. The FotoFunnel scanner is available with a TWAIN software
interface, which permits use of the
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scanner with common and specialty software applications supporting the TWAIN
protocol. This is of particular benefit where an OEM or systems integrator has
developed its own software for imaging or photo systems, and seeks to add the
FotoFunnel as a principal or additional source of image capture.
Howtek has also developed a proprietary software application, called
FunnelScan(TM), which permits users to operate the scanner, review and align
images, and save the images to floppy disk, CD or defined Internet sites. The
FunnelScan application automatically de-skews, crops and color corrects images
as they are scanned. The FunnelScan software also permits the user to download
pictures from digital camera memory, and other media and sources, including
flatbed and film scanners.
FlashFunnel(TM) Solutions. Howtek's FlashFunnel product is available in software
or workstation configuration to provide photofinishers and other retailers with
the ability to offer fast, on-site compact disk (CD), digital image file and
reprint production from digital camera memory and from conventional flatbed and
slide scanners. The system can also be upgraded with Howtek's FotoFunnel
production print scanner. The FlashFunnel is available as a very compact turnkey
solution, including a digital camera memory reader and flat panel display, for
under $3,000. It is also available in a software only version, at less than
$1,000.
The software powering the FlashFunnel system is Howtek's FunnelScan software,
which operates across Howtek's Professional Photo Processing family of products.
Using Howtek's software as a "digital hub", a retailer imports images from
digital camera memory, adds scanned images from prints or slides, and assembles
all those images on a simple, easy to use computer desktop. Scanned images are
automatically cropped and straightened as they are imported. On the desktop,
images can be rotated, named or renamed, and then saved to CD or file. The
process is quick, very easy, and requires no specialized training or skills.
CDs can then be created, including copies of every image in high, medium and low
file sizes, allowing higher quality prints and reprints from larger image files,
containing more image data, while offering smaller "thumbnail" files for easy
email and internet use. Each CD also includes two PC based picture viewers, one
that operates from the CD itself and is completely portable, and a second, more
sophisticated viewer and organizer that permits image editing, e-mailing,
creation of computer-based slide shows using images from the CD, and creation of
photo screen savers that can be used or shared.
CDs created using Howtek's software can be configured to show and promote the
retailer's brand, provide links to the retailer's web site, and generally
contribute to consumer relationship management by the photo (or digital photo)
retailer. Howtek is working with current customers to define and create web
links to offer specials and promotions to consumers, and even to provide and
update advertisements and coupons directly to consumer's computers and homes.
A retailer can now add such services within existing one-hour or same day photo
processing workflows, without adding staff or space. By keeping CD and reprint
production on site, the
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photo retailer can increase utilization of these services, without giving up
profit margins on digital services or underlying roll film development to third
party, overnight film photo finishing services.
Sales & Marketing
The Company's primary FotoFunnel resellers are photo finishing equipment
manufacturers already relied on by photo retailers to provide and support photo
finishing equipment and systems. In particular, the FotoFunnel solution has been
selected for resale by Noritsu America Corporation, which offers the FotoFunnel
scanner as a component of its new "Digital Print Station", which can serve as a
digital front end for certain of Noritsu's minilabs and is offered by Noritsu,
domestically and internationally, with new equipment and as an upgrade to
existing installations.
Complementing the equipment manufacturer channel, Howtek maintains a limited
dealer and distributor network primarily to promote FotoFunnel solutions to
smaller scale individual and independent photo retailers. Internationally, the
Company works through certain of Noritsu Koki Co.'s international subsidiaries
and distributors, and through independent distributors in Holland, Israel,
Finland and Australia.
Competition
FotoFunnel(TM) Scanning Equipment. Competition exists from products that
digitize the strip of photo negatives created when processing new rolls of film,
and from products using generic, flatbed scanners manufactured for general
office use. Today, there are several companies offering negative film scanning
systems including Canon Corporation, Eastman Kodak, Pixel Magic, Inc., and
Pakon, Inc. (Pakon was acquired by Eastman Kodak during 2001). These systems are
fast (they can digitize a roll of film in about 4 minutes), however, they are
more expensive than the Howtek scanner. They also require some operator training
to ensure image quality and proper operation. Management and correction of
colors in the conversion from a photo negative to a positive digital and printed
image can be complicated and is subject to errors. Finally, these systems are
unable to work with existing prints and cannot serve the "shoebox" market of
customers seeking to digitize pictures that were developed previously, where
negatives may not be available. Howtek competes with these systems on the basis
of price and convenience.
Comparatively inexpensive office flatbed scanners, available from a wide range
of manufacturers, can also be used to digitize existing photo prints. Kodak has
offered a flatbed scanner integrated into a retail kiosk to permit one-at-a-time
digitizing and editing of particularly important images with some success. This
service is expensive to the consumer (approximately $8 per image), and the
Company believes that the labor requirements involved in using a standard
flatbed scanner in a conventional photo lab's workflow often makes this an
impractical method. In an effort to address this issue Kodak offers a Fujitsu
office scanner, incorporating an automatic document feed mechanism. Howtek
believes that initial reaction to this Kodak product has been mixed. The
longevity and durability of an office scanner in the rigorous commercial photo
lab environment have yet to be proven. The FotoFunnel competes with such
products on the basis of price, greater image quality, reduced space requirement
and gentle, reliable print feed design.
13
Graphic Arts and Prepress Business
Howtek has reduced its attention to declining prepress graphic arts markets to
concentrate on what it believes are greater business opportunities in its
medical and photographic imaging and digitization markets. This change in focus
has permitted the Company to make significant reductions in those parts of
Howtek's overhead and expense structure previously related to the traditional,
comparatively low margin, graphic arts business.
As a means of providing the Company with a source of continuing, incremental
revenue and gross margin, Howtek continues to offer a limited variety of graphic
arts products through a long standing OEM customer, and through direct web-based
marketing.
Recent Development
The Company recently announced that it has entered into a definitive agreement
with Intelligent Systems Software Inc. ("ISSI"), a privately held company based
in Boca Raton, Florida, pursuant to which ISSI would merge with and into a
subsidiary of Howtek. If the merger is consummated, a total of 8,400,000 shares
of Howtek common stock will be issued in the merger in exchange for all of the
issued and outstanding capital stock of ISSI. In January 2002, ISSI received
approval from the U.S. Food and Drug Administration (FDA) to market and sell
ISSI's new MammoReader(TM) Computer Aided Detection CAD system in the United
States.
Subsequent to completion of the contemplated merger, Howtek's existing film and
photo digitizer operations, including engineering, manufacturing management,
marketing and support, will be conducted through a wholly owned subsidiary
corporation, based at the Company's current headquarters in Hudson, NH. The
Company's objective is to continue to grow its medical business, providing
industry-leading digitizers to ISSI and to other respected customers.
The completion of the merger is subject to the registration of the shares of
Howtek common stock to be issued in the merger under the Securities Act of 1933,
as amended, and other customary conditions, including approval of the merger by
stockholders of both Howtek and ISSI. It is currently expected that the merger
will be consummated by June 30, 2002.
Risk Factors
There are enormous uncertainties and risks associated with the Company's
business strategy. Howtek's future operating results will depend, among other
factors, on its ability to continue to increase sales significantly, on
retaining current key employees and on attracting additional qualified
personnel. Risk factors include, but are not limited to, the Company's history
of significant operating losses, intense competition in all of its product
lines, risk associated with foreign sales, need to obtain additional financing,
technical obsolescence of existing products,
14
ability to protect proprietary information, the timely availability of
sufficient quantities of parts, materials and components which are in some cases
available from sole sources or a limited number of suppliers, and uncertainty
regarding the proposed merger with ISSI.
Government Regulation
Current products in the Company's medical digitizer product line are subject to
regulation by the Food and Drug Administration ("FDA"). The Company has received
FDA 510(k) pre-market clearance, which is required for the sale of its medical
products.
Sources and Availability of Materials
The electronics industry is subject to periodic fluctuations in the production
capacity of integrated circuit manufacturers and other key suppliers. Currently,
the Company believes that there are adequate sources and availability of the
components necessary to manufacture its products.
Patents
The Company has several patents covering its scanner and prepress technology in
the United States and certain foreign countries, which is the basis of its
current business. These patents help the Company maintain a proprietary position
in the scanner market, but because of the pace of innovation in that market it
is difficult to determine the overall importance of these patents to the
Company.
The Company has current patent applications pending, has filed foreign patent
applications based on some of its United States patents and plans to file
additional domestic and foreign applications when it believes such protection
will benefit the Company.
There is no assurance that additional patents will be obtained either in the
United States or in foreign countries or that existing or future patents or
copyrights will provide substantial protection or commercial benefit to the
Company.
There is rapid technological development in the Company's markets with
concurrent extensive patent filings and a rapid rate of issuance of new patents.
Although the Company believes that its technologies have been independently
developed and do not infringe the patents or intellectual property rights of
others, certain components of the Company's products could infringe patents,
either existing or which may be issued in the future, in which event the Company
may be required to modify its designs or obtain a license. No assurance can be
given that the Company will be able to do so in a timely manner or upon
acceptable terms and conditions; and the failure to do either of the foregoing
could have a material adverse effect upon the Company's business.
15
In addition to protecting its technology and products by seeking patent
protection when deemed appropriate, the Company also relies on trade secrets,
proprietary know how and continuing technological innovation to develop and
maintain its competitive position. The Company requires all of its employees to
execute confidentiality agreements. Insofar as the Company relies on
confidentiality agreements, there is no assurance that others will not
independently develop similar technology or that the Company's confidentiality
agreements will not be breached.
All key officers and employees have agreed to assign to the Company certain
technical and other information and patent rights, if any, acquired by them
during their employment with the Company and after any termination of their
employment with the Company (if such information or rights arose out of
information obtained by them during their employment).
Manufacturing
The Company operates an ISO 9001 and FDA-certified manufacturing facility in
Hudson, NH. Currently, the Company's FotoFunnel, medical and drum scanner
products are manufactured by third party contract manufacturing organizations.
The software applications that are sold with the Company's products are either
developed in-house or licensed from third parties.
Research and Development
The Company spent $751,467, $709,595 and $799,960 on research and development
activities during the years ended December, 2001, 2000 and 1999, respectively.
The research and development expenses are primarily attributed to the
development of the Company's FotoFunnel and medical imaging products.
Employees
On March 1, 2002 the Company had 24 full time employees and 1 part time
employee. None of the Company's employees are represented by labor organizations
and the Company is not aware of any activities seeking such organization. The
Company considers its relations with employees to be good.
Backlog
The dollar amount of the Company's backlog, and orders believed to be firm, as
of December 31, 2001 was approximately $157,000 as compared to approximately
$108,000 on the corresponding date in 2000.
16
Environmental Protection
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect
upon the capital expenditures, earnings (losses) and competitive position of the
Company.
Item 2. Properties
The Company's principal executive offices and research and development
laboratory are located at 21 Park Avenue, Hudson, New Hampshire. The facility
consists of approximately 21,000 square feet of manufacturing, research and
development and office space and is leased by the Company from Mr. Robert
Howard, Chairman of the Board of Directors of the Company, pursuant to a lease
which expires September 30, 2002 at an annual rent of $78,500. Additionally, the
Company is required to pay real estate taxes, provide insurance and maintain the
premises. If the Company is required to seek additional or replacement
facilities, it believes there are adequate facilities available at commercially
reasonable rates.
Item 3. Legal Proceedings.
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "HOWT". The following table sets forth the range of high and low sale
prices for each quarterly period during 2001 and 2000.
Fiscal year ended High Low
---- ---
December 31, 2001
First Quarter $3.375 $2.500
Second Quarter 3.000 1.860
Third Quarter 2.150 .700
Fourth Quarter 1.900 .930
Fiscal year ended
December 31, 2000
First Quarter $4.125 $1.875
Second Quarter 2.563 .625
Third Quarter 3.063 1.188
Fourth Quarter 4.281 1.750
As of March 1, 2002 there were 291 holders of record of the Company's Common
Stock.
The Company has not paid any cash dividends on its Common Stock to date, and the
Company does not contemplate payment of cash dividends in the foreseeable
future. Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition, and other factors considered relevant to the
Company's Board of Directors. There are no non-statutory restrictions on the
Company's present or future ability to pay dividends. The Company currently has
two outstanding Series of Preferred Stock that has dividend rights that are
senior to holders of Common Stock.
18
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Sales $ 4,835,297 $ 7,793,517 $ 6,663,230 $ 5,323,601 $ 7,874,813
Gross margin 898,891 1,900,027 1,594,124 1,223,135 1,663,317
Unusual charges -- -- -- -- (3,394,406)
Total operating expenses (3,439,557) (3,595,661) (3,789,306) (4,096,944) (8,236,477)
Loss from operations (2,540,666) (1,695,634) (2,195,182) (2,873,809) (6,573,160)
Interest expense - net (80,105) (132,014) (1,801,646) (498,514) (258,912)
Income from legal settlement -- -- -- -- 6,000,000
Net loss (2,620,771) (1,827,648) (3,996,828) (3,372,323) (832,072)
Net loss available to common shareholders (2,775,821) (2,896,520) (3,996,828) (3,372,323) (832,072)
Net loss per share (0.20) (0.22) (0.32) (0.33) (0.09)
Year Ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----- ----- ----- ----- -----
Total current assets $ 3,586,602 $ 5,082,016 $ 4,457,910 $ 4,798,576 $ 5,332,546
Total assets 4,161,125 5,945,928 5,696,609 6,351,421 7,071,294
Total current liabilities 2,003,807 2,143,873 2,019,340 2,198,995 1,540,222
Loans payable to related parties, including
current portion 500,000 1,400,000 1,140,000 765,000 --
Note payable, including current portion 178,870 -- -- -- --
Convertible Subordinated Debentures,
including current portion 10,000 117,000 117,000 1,881,000 2,181,000
Stockholders' equity 2,039,557 2,902,055 2,920,269 2,271,426 3,350,072
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Overview
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Many of the Company's
estimates and assumptions used in the preparation of the financial statements
relate to the Company's products, which are subject to rapid technological
change. It is reasonably possible that changes may occur in the near term that
would affect management's estimates with respect to inventories, equipment and
software development costs. (See Notes to Financial Statements, Note 1 - Summary
of Significant Accounting Policies.)
Howtek, develops, manufactures, and markets digitizing systems, or "scanners",
which convert printed, photographic and other "hard copy" images to digital form
for use in the medical, photo finishing, and graphic arts industries. The
Company introduced the first "desktop" scanner in 1986, smaller, easier to use
and less costly than alternative scanners at that time, helping to make possible
the shift to decentralized corporate electronic publishing. Howtek followed with
a series of award winning, industry leading products, continuing to improve the
quality of digital imaging, and reducing the price and complexity of scanning
systems.
Facing diminishing returns in its traditional graphic arts business, Howtek, in
the last several years, has heavily invested in technology and product
development in the fields of medical and photographic imaging and digitization.
After two years of work supporting development-stage OEM customers in the new
field of Computer Assisted Detection (CAD) of breast cancer, FDA approvals for
sales in the United States of CAD systems incorporating Howtek digitizers were
received by two key Howtek OEM customers during the first quarter of 2002. The
Company believes such FDA approvals, coupled with newly implemented medical cost
reimbursement coverage for procedures utilizing such CAD systems, may contribute
to sales growth in this area.
The Company's FotoFunnel photographic scanner solution was introduced by one key
OEM in 2000, as part of an Internet-driven photo finishing solution. During
2001, as a result of a general reassessment of the role of the Internet in photo
finishing, large retail accounts, in general, elected not to purchase such
systems. In response, the Company repositioned its FotoFunnel product line,
offering its photographic products to retail photo finishers as an inexpensive
way to offer photo images on compact disk (CD) to retail photo customers. Sales
of FotoFunnel are expected to increase during 2002.
Howtek has reduced its attention to declining prepress graphic arts markets to
concentrate on greater business opportunities in its medical and photographic
imaging and digitization markets.
20
This process has permitted the Company to make significant reductions in those
parts of Howtek's overhead and expense structure previously related to the
traditional, comparatively low margin, graphic arts business.
In support of its shift in focus to medical and photo processing markets, the
Company has (1) updated product lines, introducing industry-leading products in
medical and photo processing/Internet markets, (2) migrated from in-house
manufacturer to outsourcing to more effectively utilize outside engineering,
development, and manufacturing resources, (3) substantially reduced personnel
and overhead, and (4) implemented an OEM and large scale systems integrator
marketing and sales strategy for primary digitizer markets.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Sales. Sales for the year ended December 31, 2001 were $4,835,297, compared with
sales of $7,793,517 for the year ended December 31, 2000. As expected, as a
result of the Company's shift in the focus of its business, sales of the
Company's prepress and graphic arts products, including related maintenance and
repair services, decreased by $1,788,047, from $3,319,407 in 2000 to $1,531,360
in 2001.
The Company continues to emphasize its medical and photographic business
opportunities, while managing the decline in its traditional graphic arts
business. Sales of the Company's medical imaging products increased from
$2,256,312 (29% of sales) for the year ended December 31, 2000 to $2,315,738
(48% of sales) for the year ended December 31, 2001. 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
Communications Systems (PACS) segments of the medical market place, as customer
purchases are being deferred or reconsidered as a result of what is perceived to
be an overall softness in the economy. To address this softening 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 increase 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. The FDA recently
approved for sales in the United States, CAD systems incorporating Howtek
digitizers offered by two of the Company's OEM customers.
In 2001 the Company 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
systems 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
21
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 FotoFunnelphoto print scanning system decreased from
$2,217,798 (28% of sales) for the year ended December 31, 2000 to $988,199 (20%
of sales) for the year ended December 31, 2001. Almost all FotoFunnel sales in
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 Margin. Gross margin for the year ended December 31, 2001 decreased to 19%
from 24% in 2000. This decrease is due to the Company's decision to increase its
inventory reserve by $300,000 associated with its prepress and graphic arts
product lines. Before the increase in reserve gross margins improved to 25% in
2001 from 24% in 2000, as a result of reduced production overhead and indirect
production expenses, associated with the Company's continuing overhead and
expense control measures, increased sales 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 year ended December 31, 2001 increased slightly from $709,595 in 2000 to
$751,467 in 2001. The Company expects to continue its utilization of outside and
contract engineering resources as appropriate.
General and Administrative. General and administrative expenses decreased 4%
from $1,165,392 in 2000 to $1,124,710 in 2001. This change results primarily
from a decrease in expense associated with the redesign of the Company's Web
site incurred in 2000.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2001 decreased 9% from $1,720,674 in 2000 to $1,563,380 in 2001. During the
second and third quarter of 2001, the Company significantly reduced expenses
related to its traditional graphic art business, while increasing medical and
FotoFunnel sales expenses.
Interest Expense. Net interest for the year ended December 31, 2001 decreased
39%, from $132,014 in 2000 to $80,105 in 2001. This decrease is due primarily to
a decrease in loan balances and interest rates.
22
As a result of the foregoing, the Company recorded a net loss of $2,620,771 or
$0.20 per share for the year ended December 31, 2001 on sales of $4,835,297
compared to a net loss of $1,827,648 or $0.22 per share in 2000 on sales of
$7,793,517.
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
Sales. Sales for the year ended December 31, 2000 were $7,793,517, an increase
of $1,130,287 or 17% from sales during the year ended December 31, 1999 of
$6,663,230. Sales of the Company's medical imaging products increased 50% from
$1,508,197 (23% of sales) for the year ended December 31, 1999 to $2,256,312
(29% of sales) for the year ended December 31, 2000. Sales through system
integrators and resellers, including General Electric Medical Systems and Konica
Medical Imaging, Inc., contributed to increased sales in 2000. The Company's
medical product sales also benefited from demand by key OEM customers involved
in computer-assisted detection of breast cancer. These customers marketed
systems including Howtek digitizers outside the United States while seeking FDA
approval to sell domestically. A key objective over the coming quarters was to
add additional, qualified OEM and systems integration resellers.
In 2000 the Company began commercial shipments of its FotoFunnel(TM)
photographic print scanner line from its third party manufacturing supplier.
FotoFunnel sales were $2,217,798 (28% of sales), with virtually all sales made
to Telepix Imaging, Inc., a member of the Gretag Imaging Group. During the third
quarter the Company reduced production of its FotoFunnel print scanner to
implement new design features, and deliver enhanced scanner units. Several
engineering design and manufacturing changes which offered increase scanning
speed, improved customer workflow and generally enhanced scanner performance
were achieved during the third quarter.
Sales of the Company's prepress and graphic arts products, including related
maintenance and repair services, decreased 36% from $5,155,033 (77% of sales) in
1999 to $3,319,407 (43% of sales) in 2000. This decline reflected increased
competition in the market for the Company's graphic arts scanners, and a
decision by the Company not to renew a distribution agreement under which it
could redistribute flatbed scanners manufactured by Scanview, A/S. This
reduction in sales was acute during the fourth calendar quarter of 2000, as the
Company reduced and focused its prepress and graphic arts sales channels,
eliminating a number of previous dealers and distributors.
Gross Margin. Gross margin for the year ended December 31, 2000 remained steady
from 1999, at 24% of sales, in spite of a decision by the Company to increase
inventory reserves associated with its prepress and graphic arts product lines
from $200,175 to $361,931.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2000 decreased 11% from $799,960 in 1999 to
$709,595 in 2000. The overall decrease in engineering and product development
costs resulted primarily from reductions in manpower.
23
General and Administrative. General and administrative expense decreased 9% from
$1,286,895 in 1999 to $1,165,392 in 2000. During the first quarter of 1999 the
Company established reserves of $186,662 to permit the Company to take back
discontinued HiDemand(TM) 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 for the year ended December 31, 1999,
the general and administrative expenses increased 8%, from $1,079,091 in 1999
compared to $1,165,392 for the comparable period in 2000. The increase was due
primarily to the expense incurred to redesign the Company's Web site.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2000 increased slightly from $1,702,451 in 1999 to $1,720,674 in 2000. The
change resulted from decreases in advertising and promotional expenses in the
graphic arts area, where there was an increasing reliance on direct mail and
telemarketing to support its sales efforts, while medical sales expenses
increased and new expenses were incurred relating to the FotoFunnel business.
Interest Expense. Net interest expense for the year ended December 31, 2000
decreased to $132,014 from $1,801,646 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 $1,827,648 or
$0.22 per share for the year ended December 31, 2000 on sales of $7,793,517
compared to a net loss of $3,996,828 or $0.32 per share for the same period in
1999 on sales of $6,663,230.
During the year ended December 31, 2000 the Company issued 1,400 shares of 7%
Series B Convertible Redeemable Preferred Stock with a conversion price below
the Company's Common Stock quoted value and as a result accreted dividends of
$996,283 were recorded and included in the net loss per share calculation.
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
24
$3,000,000 was available at December 31, 2001. The Company believes that these
sources are sufficient to satisfy its cash requirements for the foreseeable
future. (See Item 13 - "Certain Relationships and Related Transactions".)
Working capital decreased $1,355,348 from $2,938,143 at December 31, 2000 to
$1,582,795 at December 31, 2001. The ratio of current assets to current
liabilities at December 31, 2001 and 2000 was 1.8 and 2.4, respectively.
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these notes are 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. A total of
$500,000 is outstanding pursuant to the Notes.
During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). Under the terms of the
Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per
annum. The Promissory Notes entitled the payee 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
Proposed Merger with ISSI
The Company recently announced that it has entered into a definitive agreement
with ISSI, a privately held company based in Boca Raton, Florida, pursuant to
which ISSI would merge with and into a subsidiary of Howtek. If the merger is
consummated a total of 8,400,000 shares of Howtek common stock will be issued in
the merger in exchange for all of the issued and outstanding capital stock of
ISSI. In January 2002, ISSI received approval from the U.S. Food and Drug
Administration (FDA) to market and sell ISSI's new MammoReader(TM) Computer
Aided Detection CAD system in the United States.
Subsequent to completion of the contemplated merger, Howtek's existing film and
photo digitizer operations, including engineering, manufacturing management,
marketing and support, will be conducted through a wholly owned subsidiary
corporation, based at the Company's current headquarters in Hudson, NH. The
Company's objective is to continue to grow its medical business, providing
industry-leading digitizers to ISSI and to other respected customers.
The completion of the merger is subject to the registration of the shares of
Howtek common stock to be issued in the merger under the Securities Act of 1933,
as amended, and other customary conditions, including approval of the merger by
stockholders of both Howtek and ISSI. It is currently expected that the merger
will be consummated by June 30, 2002.
25
Effect of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires companies to use the purchase
method of accounting for all business combinations initiated after June 30,
2001, and establishes specific criteria for the recognition of intangible assets
separately from goodwill. SFAS 142 addresses the accounting for acquired
goodwill and intangible assets. Goodwill and indefinite-lived intangible assets
will no longer be amortized and will be tested for impairment at least annually.
The provisions of SFAS 142 will be effective for the Company in fiscal year
2002. Goodwill and intangible assets acquired after June 30, 2001, will be
subject immediately to the non-amortization and amortization provisions of this
statement.
Historically, the Company has not had goodwill or acquired other intangible
assets. Accordingly, the Company does not expect adoption of these new standards
to affect its financial statements as they relate to previous transactions.
However, these new standards will affect the accounting for any business
combinations initiated after June 30, 2001, including the proposed merger with
ISSI.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS144"),
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes SFAS 121 "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" and APB Opinion No.
30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions for the Disposal of a Segment of a Business". SFAS 144
becomes effective for the fiscal years beginning after December 15, 2001. The
Company expects to adopt SFAS 144 in the first quarter of fiscal 2002 and is
currently reviewing the effects of adopting SFAS 144 on its financial position
and results of operations.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
See Financial Statements and Schedule attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
26
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
Director
Name Age Position Since
- ---- --- -------- ------
Robert Howard 78 Chairman of the Board, and Director 1984
W. Scott Parr 50 President, Chief Executive Officer
and Director 1998
Ivan Gati 54 Director 1989
James Harlan 50 Director 2000
Kit Howard 58 Director 1999
Brett Smith 32 Director 2000
Harvey Teich 82 Director 1988
All persons listed above are currently serving a term of office as directors
which continues until the next annual meeting of stockholders.
Robert Howard, the founder and Chairman of the Board of Directors of the
Company, was the inventor of the first impact dot matrix printer. Mr. Howard was
Chief Executive Officer of the Company from its establishment in 1984 until
December of 1993. He was the founder, and from 1969 to April 1980 he served as
President and Chairman of the Board, of Centronics Data Computer Corp.
("Centronics"), a manufacturer of a variety of computer printers. He resigned
from Centronics' Board of Directors in 1983. From April 1980 until 1983, Mr.
Howard was principally engaged in the management of his investments. Commencing
in mid-1982, Mr. Howard, doing business as R.H. Research, developed the ink jet
technology upon which the Company was initially based. Mr. Howard contributed
this technology, without compensation, to the Company. Mr. Howard was Chairman
of the Board of Presstek, Inc. ("Presstek"), a public company which has
developed proprietary imaging and consumables technologies for the printing and
graphic arts industries from June 1988 to September 1998 and served as Chairman
Emeritus of the Board from September 1998 to December 2000. In February 1994 Mr.
Howard entered into a settlement agreement in the form of a consent decree with
the Securities and Exchange Commission (the "Commission") in connection with the
Commission's investigation covering trading in the Company's Common Stock by an
acquaintance of Mr. Howard and a business associate of such acquaintance. Mr.
Howard, without admitting or denying the Commission's allegations of securities
laws violations, agreed to pay a fine and to the entry of a permanent injunction
against future violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934. In addition, in December of 1997, in connection with the
Commission's investigation into trading in the securities of Presstek, Mr.
Howard, without admitting or denying the Commission's allegations of securities
laws violations, agreed to pay a civil penalty of $2,700,000 and to the entry of
a final judgement enjoining him future violations of Section 10(b) and 13(a) and
Rules 10b-5, 12b-20, 13a-1 and 13a-20 of the Securities Exchange Act of 1934.
27
W. Scott Parr joined the Company in January 1998, as President and Chief
Executive Officer. He was appointed to the Company's Board of Directors in
February 1998. Prior to joining Howtek, Mr. Parr served as Divisional Director
and a member of the Board of Directors of SABi International Ventures, Inc. in
1997, where he was responsible for restructuring and upgrading certain US
companies owned by foreign and venture investors. From 1995 to 1997, Mr. Parr
was Chief Executive Officer, General Counsel and Director of Allied Logic
Corporation, a start-up venture specializing in proprietary molding and
manufacturing technologies. From 1990 to 1995 Mr. Parr was General Counsel and a
Director of LaserMaster Technologies, Inc.
Ivan Gati is currently an executive business consultant. Mr. Gati served as
Chairman of Turner Management, Inc., a vertically integrated real estate
investment company from 1983 to 2000. Mr. Gati is also a member of the Board of
Directors of Universal Automation Systems, Inc.
James Harlan has been the Executive Vice President and Chief Financial Officer
of HNG Storage Company, a natural gas storage and electric development company
since 1998. From 1991 to 1997 Mr. Harlan served as General Manager and Chief
Financial Officer of Pacific Resources Group and planning and finance
development work with various Australian manufacturing and distribution
businesses. He also served as operations research and planning analyst for the
White House Office of Energy Policy and Planning from 1977 to 1978, the
Department of Energy from 1978 to 1981, and U.S. Synthetic Fuels Corporation
from 1981 to 1984. He has a PhD in applied economics with an operations research
dissertation from Harvard University and a BS in Chemical Engineering from
Washington University.
Kit Howard holds a Bachelor of Science Degree from New York University. She
worked in the financial community as a stockbroker from 1980 until 1986. Since
then she has assisted Robert Howard, her husband and Chairman of the Company, in
his various business enterprises.
Brett Smith, the son of Mrs. Kit Howard, is currently the Chairman and CEO of
ei3 Corporation, a provider of technology services to manufacturing companies
utilizing advanced frame relay and internet technologies. Prior to ei3 Mr. Smith
was a member of the restructuring team for Delta V Technologies, a subsidiary of
Presstek, Inc., where he served as Director of Business Development from 1996 to
1999. From 1995 to 1996 Mr. Smith worked for the Asia Times newspaper start-up
team in Hong Kong. He began his career as an analyst, from 1992 to 1994, at
Susquehanna Investment Group. Mr. Smith received a BS from Emory University.
Harvey Teich is a retired certified public accountant. On January 1, 1992, the
accounting firm of Merman & Teich, where Mr. Teich had been a principal for the
previous seventeen years, ceased to operate as a partnership. He is a member of
the New York state Society for Certified Public Accountants.
28
Executive Officers and Key Employees
Name Age Position
- ---- --- --------
W. Scott Parr(1) 50 President, Chief Executive Officer, Director
Richard F. Lehman(2) 64 Vice President, Engineering
Annette L. Heroux(1) 45 Chief Financial Officer
Joseph E. Manseau(2) 45 Vice President, Sales and Marketing
Maurice R. Auger(2) 53 Vice President, Medical Sales
- ------------------------------
1. Officer appointed by the Board of Directors.
2. Key employees
Richard F. Lehman joined the Company in July 1990, as Director of Scanner
Engineering. In December 1993, he was named Vice President of Scanner
Engineering and in October 1996, he was named Vice President of Engineering.
Prior to joining the Company, Mr. Lehman was employed by Xerox Corporation for
23 years where he served in various engineering and managerial capacities.
Annette L. Heroux joined the Company in October 1987 as Accounting Manager and
was named Controller in October 1998 and Chief Financial Officer in July 1999.
Prior to joining the Company, Ms. Heroux worked from 1980 to 1987 for Laurier,
Inc., a small semiconductor equipment manufacturer, in various financial and
managerial capacities.
Joseph E. Manseau joined the Company in August 1998 as Regional Sales Manager
and was named to Vice President Sales and Marketing on April 1, 1999. Prior to
joining the Company Mr. Manseau worked from 1997 to 1998 for Escher-Grad Tech.,
Inc. where he was responsible for implementing the sales and marketing strategy
for its large format image setters. From 1981 to 1997 he worked for AGFA and
Compugraphic, currently divisions of Bayer Corporation, in various marketing and
sales capacities.
Maurice R. Auger joined the Company in October 2000 as Vice President of Medical
Sales. Prior to joining the Company Mr. Auger worked from 1983 to 2000 for
Cemax-Icon PACS (a Kodak Company) in various positions leading up to his
promotion as North East Zone Technical Sales in 1997.
29
Item 11. Executive Compensation.
The following table provides information on the compensation provided by the
Company during fiscal years 2001, 2000 and 1999 to the persons serving as the
Company's Chief Executive Officer during fiscal 2001, the Company's most highly
compensated executive officers and certain key employees serving at the end of
the 2001 fiscal year (named person). Included in this list are only those
executive officers and key employees whose total annual salary and bonus
exceeded $100,000 during the 2001 fiscal year.
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------- ---- --------- ---------
W. Scott Parr
Chief Executive Officer ................... 2001 145,669 4,000
2000 138,357 -0-
1999 138,197 127,337
Richard F. Lehman
Vice President, Engineering ............... 2001 114,135 4,000
2000 116,986 5,000
1999 112,735 5,000
Joseph E. Manseau
Vice President, Prepress Sales & Marketing. 2001 111,424 4,000
2000 130,271 28,000
1999 126,529 18,410
Maurice R. Auger
Vice President, Medical Sales ............. 2001 108,831 4,000
2000 29,153 90,457
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted by the Company to the named person in 2001.
(4)Potential
Individual Grants Realizable Value at
Number of Percent of Assumed Annual
Securities Total Options Rates of Stock
underlying Granted to Exercise of Price Appreciation
Options Employees Base Price Expiration for Option Term
Name Granted in Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ------- -------------- ------------ ---------- ----- ------
W. Scott Parr 4,000 2% .95 10/02/2011 2,390 6,056
Joseph E. Manseau 4,000 2% .95 10/02/2011 2,390 6,056
Richard F. Lehman 4,000 2% .95 10/02/2011 2,390 6,056
Maurice R. Auger 4,000 2% .95 10/02/2011 2,390 6,056
All options vested October 2, 2001.
4 The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming the Company's Common Stock appreciates at the compounded
rates specified over the term of the options. These numbers do not take into
account provisions of options providing for termination of the option following
termination of employment or non transferability of the options and do not make
any provision for taxes associated with exercise. Because actual gains will
depend upon, among other things, future performance of the Common Stock, there
can be no assurance that the amounts reflected in this table will be achieved.
30
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options during the Company's last completed fiscal year by each of the named
executive officers and key employees listed in the Summary Compensation Table
and the fiscal year-end value of unexercised options.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
Shares FY-End (#) FY-End($) (1)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
W. Scott Parr (2) 0 0 359,157/47,351 142,170/30,305
Joseph E. Manseau (2) 0 0 44,076/10,334 12,458/-0-
Richard F. Lehman (2) 0 0 62,961/ 1,667 13,998/-0-
Maurice R. Auger (2) 0 0 56,957/37,500 2,000/-0-
- --------------
(1) Based upon the closing price of the Common Stock on December 31, 2001, of
$1.45 per share.
(2) Options granted pursuant to the Company's 1993 Stock Option Plan, as
amended.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
There is no Compensation Committee or other committee of the Company's Board of
Directors performing similar functions. The person who performed the equivalent
function in 2001 was Robert Howard, Chairman of the Board under the direction of
the Board of Directors. W. Scott Parr, Chief Executive Officer and a director,
participated in discussions with Mr. Howard during the past completed fiscal
year in his capacity as an executive officer in connection with executive
officer compensation. During 2001 none of the executive officers of the Company
served on the Board of Directors or Compensation Committee of any other entity.
31
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The following table sets forth certain information regarding the Common Stock,
Series A and Series B Convertible Preferred Stock of the Company owned on March
1, 2002, by (i) each person who is known to the Company to own beneficially more
than 5% of the outstanding shares of the Company's Common Stock (ii) each
executive officer and key employee named in the Summary Compensation Table,
(iii) each director of the Company, and (iv) all current executive officers and
directors as a group. The table also provides information regarding beneficial
owners of more than 5% of the outstanding shares of the Company's Series A and
Series B Convertible Preferred Stock.
Number of Shares
Name and Address of Title Beneficially Percentage
Beneficial Owner of Class Owned (1) (2) of Class
---------------- -------- -------------- --------
Robert Howard Common 3,019,346(3) 19.7%
145 East 57th Street
New York, New York 10022
Donald Chapman Common 1,918,125(4) 11.9%
8650 South Ocean Drive Preferred Series A 4,600 64.3%
Jenson Beach, FL 34957 Preferred Series B 680 48.6%
W. Scott Parr Common 525,196(5) 3.3%
21 Park Avenue Preferred Series A 550 7.7%
Hudson, NH 03051 Preferred Series B 50 3.6%
Edgar Ball Preferred Series B 200 14.3%
PO Box 560726
Rockledge, FL 32956
Dr. Lawrence Howard Preferred Series A 1,000 14.0%
660 Madison Avenue
New York, NY 10021
John McCormick Preferred Series A 1,000 14.0%
11340 SW Aventine Circus
Portland, OR 97219
Dr. Herschel Sklaroff Preferred Series B 100 7.1%
1185 Park Avenue
New York, NY 10128
John Westerfield Preferred Series B 100 7.1%
4522 SW Bimini Circle N
Palm City, FL 34990
Ivan Gati Common 65,000(6) *
James Harlan Common 104,000(7) *
Kit Howard Common 40,000(8) *
Brett Smith Common 36,024(9) *
Preferred Series B 20 1.4%
Harvey Teich Common 75,000(10) *
Richard Lehman Common 63,961(11) *
Joseph Manseau Common 44,076(12) *
All current executive officers and Common 3,907,883(3)& 24.3%
directors as a group (8 persons) (5) through (10)
Preferred Series A 550 7.7%
Preferred Series B 70 5.0%
- ------------------------------------
* Less than one percent
32
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 1, 2002, upon the
exercise of options, warrants or rights; through the conversion of a
security; pursuant to the power to revoke a trust, discretionary account or
similar arrangement; or pursuant to the automatic termination of a trust,
discretionary account or similar arrangement. Each beneficial owner's
percentage ownership is determined by assuming that the options or other
rights to acquire beneficial ownership as described above, that are held by
such person (but not those held by any other person) and which are
exercisable within 60 days from March 1, 2002, have been exercised.
2) Unless otherwise noted, the Company believes that the persons referred to
in the table have sole voting and investment power with respect to all
shares reflected as beneficially owned by them.
3) Includes options to purchase 10,000 shares of the Company's Common stock at
$1.72 per share. Also, includes 40,000 shares beneficially owned by Mr.
Howard's wife.
4) Includes 28,000 shares owned by Mr. Chapman's wife, 460,000 shares of
Common Stock issuable upon conversion of 4,600 shares of Series A
Convertible Preferred Stock and 340,000 shares of Common Stock issuable
upon conversion of 680 shares of Series B Convertible Preferred Stock owned
by Mr. Chapman.
5) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to
purchase 275,268 shares of the Company's Common Stock at $1.13 per share,
77,649 shares at $0.81 per share, 2,250 shares at $1.00 per share, 4,000
shares at $0.95 per share and 25,000 shares at $1.75 per share, 55,000
shares of Common Stock issuable upon conversion of 550 shares of Series A
Convertible Preferred Stock and 25,000 shares of Common Stock issuable upon
conversion of 50 shares of Series B Convertible Preferred Stock owned by
Mr. Parr.
6) Includes options to purchase 15,000 of the Company's Common Stock at $1.72
per share, 25,000 shares at $1.50 per share and 25,000 shares at $0.81 per
share.
7) Includes options to purchase 25,000 shares of the Company's Common Stock at
$1.75 per share.
8) Includes options to purchase 25,000 shares of the Company's Common Stock at
$.81 per share.
9) Includes options to purchase 25,000 of the Company's Common Stock at $3.00
per share. Also, includes 10,000 shares of Common Stock issuable upon
conversion of 20 shares of Series B Convertible Preferred Stock.
10) Includes 5,000 shares owned by Mr. Teich's wife in an irrevocable trust.
Also includes options to purchase 20,000 of the Company's Common Stock at
$1.72 per share, 25,000 shares at $1.50 per share and 25,000 shares at
$0.81 per share.
33
11) Includes 1,000 shares owned by Mr. Lehman's wife. Also includes options to
purchase 26,500 of the Company's Common Stock at $1.72 per share, 16,376
shares at $1.13 per share, 7,752 shares at $1.00 per share, 5,000 shares at
$0.81 per share, 3,333 shares at $1.75 per share and 4,000 shares at $0.95
per share.
12) Includes options to purchase 3,000 shares of the Company's Common Stock at
$1.00 per share, 10,000 shares at $.81 per share, 8,410 shares at $1.13 per
share, 18,666 shares at $1.75 per share and 4,000 shares at $0.95 per
share.
34
Item 13. Certain Relationships and Related Transactions.
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. The Loan Agreement expires
January 4, 2003, subject to extension by the parties. 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 2001, Mr. Howard converted $1,244,219 principal and accrued interest on
advances made under the Convertible Note into 1,071,436 shares of restricted
common stock of the Company. As of December 31, 2001 no moneys were owed and the
Company had $3,000,000 available for future borrowings under the Loan Agreement.
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these notes are 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. A total of
$500,000 is outstanding pursuant to the Notes.
During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). Under the terms of the
Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per
annum. The Promissory Notes entitled the payee 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.
As of December 31, 2001, the Company had one lease obligation related to its
facility. The lease obligation through September 30, 2002 is approximately
$58,875. The Company's principal executive offices and research and development
laboratory is leased by the Company from Mr. Robert Howard pursuant to a lease
which expires September 30, 2002. Rental expense for the year ended December 31,
2001 was $78,500.
35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
a) The following documents are filed as part of this Annual Report on
Form 10-K:
i. Financial Statements - See Index on page 40.
ii. Financial Statement Schedule - See Index on page 40. All
other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are not applicable and, therefore, have
been omitted.
iii. Exhibits
2.1 Plan and Agreement of Merger dated February 15, 2002, by
and among the Registrant, ISSI Acquisition Corp. and
Intelligent Systems Software, Inc., Maha Sallam, Kevin
Woods and W. Kip Speyer.
3. The following documents are filed as exhibits to this
Annual Report on Form 10-K:
3(a) Certificate of Incorporation of the Registrant filed with
the Secretary of State of the State of Delaware on February
24, 1984 [incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-18
(Commission File No. 2-94097 NY), filed on October 31,
1984]
3(b) Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed with the Secretary of State of the
State of Delaware on May 31, 1984 [incorporated by
reference to Exhibit 3.1(a) to the Registrant's
Registration Statement on Form S-18 (Commission File No.
2-94097-NY), filed on October 31, 1984]
3(c) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed with the Secretary of State of the
State of Delaware on August 22, 1984 [incorporated by
reference to Exhibit 3.1(b) to the Registrant's
Registration Statement on Form S-18 (Commission File No.
2-94097-NY), filed on October 31, 1984].
3(d) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed with the Secretary of State of the
State of Delaware on October 22, 1987 [incorporated by
reference to Exhibit 3(d) to
36
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988].
3(e) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed with the Secretary of State of the
State of Delaware on September 28, 1999.
3(f) By-laws of Registrant [incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-18
(Commission File No. 2-94097-NY), filed on October 31,
1984].
10(a) Lease Agreement between the Registrant and its Chairman
with respect to premises located at 21 Park Avenue, Hudson,
New Hampshire, dated October 1, 1984, [incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement to Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984].
10(b) Form of Lease Renewal between the Registrant and its
Chairman, Robert Howard, with respect to premises located
at 21 Park Avenue, Hudson, New Hampshire.
10(c) Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and
Registrant dated October 26, 1987 (the "Loan Agreement")
[incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1987].
10(d) Letter Agreement dated December 30, 1999, amending the
Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and
Registrant dated October 26, 1987.
10(e) Form of Secured Demand Notes between the Registrant and Mr.
Robert Howard. [incorporated by reference to Exhibit 10(e)
to the Registrant's Report on Form 10-K for the year ended
December 31, 1998].
10(f) Form of Security Agreements between the Registrant and Mr.
Robert Howard [incorporated by reference to Exhibit 10(f)
to the Registrant's Report on Form 10-K for the year ended
December 31, 1998].
10(i) Certificate of Designation of 7% Series A Convertible
Preferred Stock dated December 22, 1999. [incorporated by
reference to
37
Exhibit10(i) to the Registrant's Report on Form 10-K for
the year ended December 31, 1999].
10(j) Certificate of Designation of 7% Series B Convertible
Preferred Stock dated October 16, 2000 [incorporated by
reference to Exhibit 10(j) to the Registrant's Report on
Form 10-K for the year ended December 31, 2000].
23(a) Consent of BDO Seidman, LLP.
(b) During the last quarter of the period covered by this
Annual Report on Form 10-K the Company filed no reports on
Form 8-K.
(c) Exhibits - See (a) iii above.
(d) Financial Statement Schedule - See (a) ii above.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOWTEK, INC.
Date: March 28 , 2002
By: /s/ W. Scott Parr
-------------------------
W. Scott Parr
President, Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert Howard Chairman of the
- -------------------------- Board, Director March 28, 2002
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- ------------------------- Officer, Director March 28, 2002
W. Scott Parr
/s/ Annette Heroux Chief Financial Officer, Principal
- ------------------------- Accounting Officer March 28, 2002
Annette Heroux
/s/ Ivan Gati Director March 28, 2002
- -------------------------
Ivan Gati
/s/ James Harlan Director March 28, 2002
- -------------------------
James Harlan
/s/ Kit Howard Director March 28, 2002
- -------------------------
Kit Howard
/s/ Brett Smith Director March 28, 2002
- -------------------------
Brett Smith
/s/ Harvey Teich Director March 28, 2002
- -------------------------
Harvey Teich
39
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 41
Balance Sheets
As of December 31, 2001 and 2000 42
Statements of Operations
For the years ended December 31, 2001,
2000 and 1999 43
Statements of Stockholders' Equity
For the years ended December 31, 2001,
2000 and 1999. 44
Statements of Cash Flows
For the years ended December 31, 2001,
2000 and 1999. 45
Notes to Financial Statements 46-64
Schedule II - Valuation and Qualifying
Accounts and Reserves 65
40
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Howtek, Inc.
Hudson, New Hampshire
We have audited the accompanying balance sheets of Howtek, Inc. as of December
31, 2001 and 2000 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Howtek, Inc. at December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
Boston, Massachussetts
February 19, 2002
41
HOWTEK, INC.
Balance Sheets
December 31, December 31,
------------ ------------
2001 2000
----- -----
Assets (note 2)
Current assets:
Cash and equivalents $ 495,360 $ 1,444,771
Trade accounts receivable net of allowance
for doubtful accounts of $165,000 in 2001
and $256,000 in 2000 (note 7) 691,415 1,082,783
Inventory (note 1) 2,363,237 2,443,150
Prepaid and other 36,590 111,312
------------ ------------
Total current assets 3,586,602 5,082,016
------------ ------------
Property and equipment (note 1):
Equipment 1,408,347 2,843,818
Leasehold improvements 41,721 36,821
Motor vehicles -- 6,050
------------ ------------
1,450,068 2,886,689
Less accumulated depreciation and amortization 1,118,685 2,398,553
------------ ------------
Net property and equipment 331,383 488,136
------------ ------------
Other assets (note 1):
Software development costs, net 230,247 350,550
Debt issuance costs, net -- 16,965
Patents, net 12,893 8,261
------------ ------------
Total other assets 243,140 375,776
------------ ------------
Total assets $ 4,161,125 $ 5,945,928
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,026,335 $ 1,096,174
Accrued interest 203,299 244,947
Accrued expenses 203,064 185,752
Loans payable to related party (note 2) 500,000 500,000
Convertible subordinated debentures (note 3) 10,000 117,000
Current maturities of note payable (note 4) 61,109 --
------------ ------------
Total current liabilities 2,003,807 2,143,873
Loans payable to related party (note 2) -- 900,000
Note payable, less current maturities (note 4) 117,761 --
------------ ------------
Total liabilities 2,121,568 3,043,873
------------ ------------
Commitments and contingencies (notes 2 and 8)
Stockholders' equity (notes 2, 3 and 5):
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares; issued and outstanding
9,550 in 2001 and 2000, with the aggregate liquidation
value of $2,215,000 plus 7% annual dividend 96 96
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 15,241,833 in 2001
and 13,588,126 shares in 2000; outstanding
15,173,957 in 2001 and 13,520,250 shares in 2000 152,418 135,881
Additional paid-in capital 57,107,227 55,365,491
Accumulated deficit (54,269,920) (51,649,149)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,039,557 2,902,055
------------ ------------
Total liabilities and stockholders' equity $ 4,161,125 $ 5,945,928
============ ============
See accompanying notes to financial statements.
42
HOWTEK, INC.
Statements of Operations
For the Years Ended December 31,
---------------------------------------------------------
2001 2000 1999
----- ----- -----
Sales (notes 2 and 7) $ 4,835,297 $ 7,793,517 $ 6,663,230
Cost of sales 3,936,406 5,893,490 5,069,106
------------ ------------ ------------
Gross margin 898,891 1,900,027 1,594,124
------------ ------------ ------------
Operating expenses:
Engineering and product development 751,467 709,595 799,960
General and administrative 1,124,710 1,165,392 1,286,895
Marketing and sales 1,563,380 1,720,674 1,702,451
------------ ------------ ------------
Total operating expenses 3,439,557 3,595,661 3,789,306
------------ ------------ ------------
Loss from operations (2,540,666) (1,695,634) (2,195,182)
Interest expense - net (includes $114,952,
$145,979 and $104,486, respectively,
to related parties) (note 3) (80,105) (132,014) (1,801,646)
------------ ------------ ------------
Net loss (2,620,771) (1,827,648) (3,996,828)
Preferred dividends 155,050 72,589 --
Accreted dividends -- 996,283 --
------------ ------------ ------------
Net loss available to common shareholders $ (2,775,821) $ (2,896,520) $ (3,996,828)
============ ============ ============
Net loss per share (note 5)
Basic and diluted $ (0.20) $ (0.22) $ (0.32)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 13,950,119 13,373,086 12,660,613
See accompanying notes to financial statements.
43
HOWTEK, INC.
Statements of Stockholders' Equity
Preferred Stock Common Stock
------------------------------ ------------------------------- Additional
Number of Number of Paid-in
Shares Issued Par Value Shares Issued Par Value Capital
-------------- ------------- --------------- -------------- ----------------
Balance at December 31, 1998 -- $ -- 11,128,082 $ 111,281 $ 47,938,799
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) -- -- 1,764,000 17,639 3,417,519
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (b)) -- -- 200,326 2,003 223,363
Issuance of common stock in lieu of
payment of accounts payable -- -- 195,090 1,951 187,233
Issuance of common stock pursuant
to incentive stock option plan -- -- 27,166 272 39,988
Issuance of common stock for
payment of interest to investors -- -- 15,878 159 38,544
Issuance of preferred stock relative
to conversion of loans payable to
investors (note 5 (a)) 6,900 69 -- -- 689,931
Issuance of stock subscription warrant
for services (note 5 (d)) -- -- -- -- 27,000
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 6,900 69 13,330,542 133,305 52,562,377
Issuance of common stock pursuant
to incentive stock option plan -- -- 131,822 1,318 143,619
Issuance of common stock for payment
of dividends to investors (note 5 (a)) -- -- 25,762 258 72,010
Issuance of common stock relative to
conversion of preferred stock (note 2) (1,000) (10) 100,000 1,000 (990)
Issuance of preferred stock to
investors (note 5 (a)) 3,650 37 -- -- 1,624,963
Issuance of stock subscription warrant
for services (note 5 (d)) -- -- -- -- 39,818
Preferred stock dividends (note 5 (a)) -- -- -- -- (72,589)
Accreted dividends (note 5 (a)) -- -- -- -- 996,283
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 9,550 96 13,588,126 135,881 55,365,491
Issuance of common stock pursuant
to incentive stock option plan -- -- 118,832 1,188 151,071
Issuance of common stock relative
to conversion of loan payable to
related parties (note 2) -- -- 1,432,910 14,329 1,591,364
Issuance of common stock for payment
of dividends to investors (note 5 (a)) -- -- 101,965 1,020 154,351
Preferred stock dividends (note 5 (a)) -- -- -- -- (155,050)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 9,550 $ 96 15,241,833 $ 152,418 $ 57,107,227
============ ============ ============ ============ ============
See accompanying notes to financial statements.
Accumulated Treasury Stockholders'
Deficit Stock Equity
------------- ------------- -------------
Balance at December 31, 1998 $(44,828,390) $ (950,264) $ 2,271,426
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) -- -- 3,435,158
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (b)) -- -- 225,366
Issuance of common stock in lieu of
payment of accounts payable -- -- 189,184
Issuance of common stock pursuant
to incentive stock option plan -- -- 40,260
Issuance of common stock for
payment of interest to investors -- -- 38,703
Issuance of preferred stock relative
to conversion of loans payable to
investors (note 5 (a)) -- -- 690,000
Issuance of stock subscription warrant
for services (note 5 (d)) -- -- 27,000
Net loss (3,996,828) -- (3,996,828)
------------ ------------ ------------
Balance at December 31, 1999 (48,825,218) (950,264) 2,920,269
Issuance of common stock pursuant
to incentive stock option plan -- -- 144,937
Issuance of common stock for payment
of dividends to investors (note 5 (a)) -- -- 72,268
Issuance of common stock relative to
conversion of preferred stock (note 2) -- -- --
Issuance of preferred stock to
investors (note 5 (a)) -- -- 1,625,000
Issuance of stock subscription warrant
for services (note 5 (d)) -- -- 39,818
Preferred stock dividends (note 5 (a)) -- -- (72,589)
Accreted dividends (note 5 (a)) (996,283) -- --
Net loss (1,827,648) -- (1,827,648)
------------ ------------ ------------
Balance at December 31, 2000 (51,649,149) (950,264) 2,902,055
Issuance of common stock pursuant
to incentive stock option plan -- -- 152,259
Issuance of common stock relative
to conversion of loan payable to
related parties (note 2) -- -- 1,605,693
Issuance of common stock for payment
of dividends to investors (note 5 (a)) -- -- 155,371
Preferred stock dividends (note 5 (a)) -- -- (155,050)
Net loss (2,620,771) -- (2,620,771)
------------ ------------ ------------
Balance at December 31, 2001 $(54,269,920) $ (950,264) $ 2,039,557
============ ============ ============
44
HOWTEK, INC.
Statements of Cash Flows
For the Years Ended December 31,
----------------------------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss $(2,620,771) $(1,827,648) $(3,996,828)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 242,335 339,818 341,290
Amortization 243,804 283,882 301,457
Interest relative to conversion of Convertible
Subordinated Debentures (note 3) -- -- 1,671,158
Compensation expense relative to issue of
Stock Subscription Warrants (note 5 (d)) -- 39,818 27,000
Changes in operating assets and liabilities:
Accounts receivable 391,368 318,204 169,094
Inventory 79,913 206,310 277,622
Other current assets 74,722 33,078 (25,701)
Accounts payable 80,161 (55,306) 77,873
Accrued interest 114,045 145,979 61,327
Accrued expenses 17,633 (58,461) 135,329
----------- ----------- -----------
Total adjustments 1,243,981 1,253,322 3,036,449
----------- ----------- -----------
Net cash used by
operating activities (1,376,790) (574,326) (960,379)
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (111,168) (137,140) (122,135)
Additions to property and equipment (85,582) (111,773) (206,466)
----------- ----------- -----------
Net cash used by investing activities (196,750) (248,913) (328,601)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 152,259 144,937 40,260
Issuance of preferred stock for cash -- 1,600,000 --
Proceeds of loans payable to related parties 480,000 260,000 632,163
Proceeds of loans payble to unrelated parties -- -- 696,906
Proceeds of note payable 193,492 -- --
Payment of loans payable to related parties (80,000) -- --
Payment of note payable (14,622) -- --
Payment of convertible subordinated debentures (107,000) -- --
----------- ----------- -----------
Net cash provided by financing activities 624,129 2,004,937 1,369,329
----------- ----------- -----------
Increase (decrease) in cash and equivalents (949,411) 1,181,698 80,349
Cash and equivalents, beginning of year 1,444,771 263,073 182,724
----------- ----------- -----------
Cash and equivalents, end of year $ 495,360 $ 1,444,771 $ 263,073
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 10,530 $ 10,530 $ 10,530
=========== =========== ===========
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock (note 2) $ 1,605,693 $ -- $ 225,366
=========== =========== ===========
Conversion of accounts payable into related
party loan payable $ 150,000 $ -- $ --
=========== =========== ===========
Conversion of accounts payable into
Common Stock $ -- $ 25,000 $ 189,184
=========== =========== ===========
Conversion of accrued interest payable
to investors into Common Stock $ -- $ -- $ 38,703
=========== =========== ===========
Conversion of loans payable to investors
into Preferred Stock (note 5 (a)) $ -- $ -- $ 690,000
=========== =========== ===========
Issuance of common stock relative to conversion
of Convertible Subordinated Debentures (note 3) $ -- $ -- $ 3,435,158
=========== =========== ===========
Conversion of dividends payable into
Common Stock $ 155,371 $ 72,268 $ --
=========== =========== ===========
See accompanying notes to financial statements.
45
HOWTEK, INC.
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
(a) Nature of Operations and Use of Estimates
Howtek, Inc. (the "Company") designs, engineers, develops and manufactures
digital image scanners, film digitizers and related software for
applications in the medical imaging, prepress and photographic markets. The
Company considers itself a single reportable business segment. The Company
sells its products throughout the world through various distributors,
resellers, systems integrators and OEMs. See Note 7 for geographical and
major customer information.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Many of the Company's estimates and assumptions used in the
preparation of the financial statements relate to the Company's products,
which are subject to rapid technological change. It is reasonably possible
that changes may occur in the near term that would affect management's
estimates with respect to inventories, equipment and software development
costs.
(b) Inventory
Inventory is valued at the lower of cost or market value, with cost
determined by the first-in, first-out method. At December 31, inventory
consisted of raw material and finished goods of approximately $1,330,000
and $1,033,000, respectively, for 2001 and raw material and finished goods
of approximately $1,509,000 and $934,000, respectively, for 2000.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the various classes
of assets (ranging from 3 to 5 years).
(d) Debt Issuance Costs
Debt issuance costs, related to the outstanding Convertible Subordinated
Debentures, was amortized over the 15-year term of the Debentures, ending
December 2001, using the straight-line method. The debt issuance costs
balances are presented net of accumulated amortization, which was $333,971
and $317,006 at December 31, 2001, and 2000, respectively.
46
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(e) Patents
The costs for patents are being amortized over the estimated useful life of
the respective assets using the straight-line method. The patents balances
are presented net of accumulated amortization, which was $107,941 and
$103,280 at December 31, 2001 and 2000, respectively.
(f) Software Development Costs
Software development costs for application software and application
software enhancements are capitalized subsequent to the establishment of
their technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86). The Company capitalized $101,875, $137,140
and $122,135 of internally developed and externally purchased software
costs during fiscal 2001, 2000 and 1999, respectively.
The capitalized software balances are presented net of accumulated
amortization, which was $965,693 and $743,515 at December 31, 2001, and
2000, respectively. Capitalized software costs are amortized using the
straight-line method over their estimated economic life, principally 3
years, commencing when each product is available for general release.
(g) Revenue Recognition
Revenues from product sales are recognized at the time the product is
shipped.
(h) Cost of Sales
Cost of sales consists of the costs of products purchased for resale, any
associated inbound and outbound freight and duty, any costs associated with
manufacturing, warehousing, material movement and inspection, amortization
of any license rights, and amortization of capitalized software.
(i) Warranty Costs
The Company's products are generally under warranty against defects in
material and workmanship from a 90 day to 2year period, depending on the
product. Warranty costs were not material in any period presented.
47
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(j) Engineering and Product Development
These costs relate to research and development costs which are expensed as
incurred, except for amounts related to software development costs incurred
after the establishment of technological feasibility (see (f) above) which
are capitalized.
(k) Net Loss Per Common Share
Net loss per common share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". See Note 5 -
Stockholders' Equity.
(l) Cash Flow Information
For purposes of reporting cash flows, the Company defines cash and
equivalents as all bank transaction accounts, certificates of deposit,
money market funds and deposits, and other money market instruments
maturing in less than 90 days, which are unrestricted as to withdrawal.
(m) Income Taxes
The Company follows the liability method under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). The primary objectives of
accounting for taxes under SFAS 109 are to (a) recognize the amount of tax
payable for the current year and (b) recognize the amount of deferred tax
liability or asset for the future tax consequences of events that have been
reflected in the Company's financial statements or tax returns.
(n) Long Lived Assets
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets are written down to fair value. This
policy is in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets To Be Disposed Of".
(o) Stock-Based Compensation
The Company has not adopted the optional fair value based method for
accounting for employee stock compensation plans, as permitted by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". See Note 5 - Stockholders' Equity.
48
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(p) Advertising
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 2001, 2000 and 1999 was $151,000, $134,000 and
$143,000, respectively.
(q) New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires companies to use the
purchase method of accounting for all business combinations initiated after
June 30, 2001, and establishes specific criteria for the recognition of
intangible assets separately from goodwill. SFAS 142 addresses the
accounting for acquired goodwill and intangible assets. Goodwill and
indefinite-lived intangible assets will no longer be amortized and will be
tested for impairment at least annually. The provisions of SFAS 142 will be
effective for the Company in fiscal year 2002. Goodwill and intangible
assets acquired after June 30, 2001, will be subject immediately to the
non-amortization and amortization provisions of this statement.
Historically, the Company has not had goodwill or acquired other intangible
assets. Accordingly, the Company does not expect adoption of these new
standards to affect its financial statements as they relate to previous
transactions. However these new standards will affect the accounting for
any business combinations initiated after June 30, 2001.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets"
("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes SFAS
121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
and APB Opinion No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the Disposal of a
Segment of a Business". SFAS 144 becomes effective for the fiscal years
beginning after December 15, 2001. The Company expects to adopt SFAS 144 in
the first quarter of fiscal 2002 and is currently reviewing the effects of
adopting SFAS 144 on its financial position and results of operations.
(r) Financial Statements
Certain balances in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.
49
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions
(a) Loan Payable to Principal Stockholder
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. The Loan Agreement expires January 4, 2003, subject to
extension by the parties. 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 2001, Mr. Howard converted $1,244,219 principal and accrued interest of
advances made under the Convertible Note into 1,071,436 shares of
restricted common stock of the Company. As of December 31, 2001 no moneys
were owed and the Company had $3,000,000 available for future borrowings
under the Loan Agreement.
The Company has Secured Demand Notes and Security Agreements (the "Notes")
owed to Mr. Robert Howard. Principal of these notes are 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. A total of $500,000 is outstanding pursuant to the Notes.
During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant
to Convertible Promissory Notes (the "Promissory Notes"). Under the terms
of the Promissory Notes the Company agreed to pay interest at a fixed rate
of 7% per annum. The Promissory Notes entitled the payee 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.
(b) Loan Payable to Related Party
In 1998 the Company borrowed $200,000 from Dr. Lawrence Howard, son of the
Company's Chairman, Robert Howard, pursuant to Secured Demand Notes and
Security Agreements (the "Notes"). Principal of these notes were due and
payable in full, together
50
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions (continued)
(b) Loan Payable to Related Party (continued)
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. Payment of the Notes was secured by a security interest in
certain assets of the Company.
In the fourth quarter of 1999 the Company consummated an agreement with Dr.
Lawrence Howard to convert the Notes and interest accrued into 200,326
shares of restricted common stock, par value $.01 per share of the Company
(the "Common Stock"). The number of shares issued was determined using the
market price of the Company's stock at the date of conversion.
(c) Premises Lease and Other Expenses
The Company conducts its operations in premises owned by Mr. Robert Howard,
pursuant to a lease which expires September 30, 2002. As of December 31,
2001, future minimum lease payments under this lease are $58,875 for 2002.
The Company is required to pay real estate taxes, provide insurance and
maintain the premises.
(d) Related Party Sales
During the years ended December 31, 2000 and 1999, the Company sold
engineering services totaling $24,456 and $93,045, respectively, to
Presstek, Inc., which Mr. Howard was the Chairman Emeritus of the Board
through December 2000. There were no sales to Presstek, Inc. in 2001.
(e) Sales and Issues of Securities
In February 1999, the Company borrowed $30,000 from Mr. W. Scott Parr, the
Company's President, Chief Executive Officer, pursuant to a Convertible
Promissory Note (the "Promissory Note"). Principal on the Promissory Note
was 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 Note the Company agreed to pay interest at a fixed
rate of 7% per annum, beginning on December 31, 1999 and each succeeding
year during the terms hereof. 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
51
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions (continued)
(e) Sales and Issues of Securities (continued)
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 Note entitled the payee 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. On December 31, 1999, the Company consummated an agreement with Mr.
Parr to convert the Promissory Note into shares of 7.0% Series A
convertible preferred stock, par value $.01 per share, of the Company (the
"Preferred Stock") and converted the interest accrued into shares of its
common stock, par value $.01 per share (the "Common Stock"). (See also Note
5.)
(3) Convertible Subordinated Debentures
The Company has 9% Convertible Subordinated Debentures (the "Debentures"),
which became due December 1, 2001. Interest on the Debentures is payable
semi-annually on June 1 and December 1. The Debentures were convertible
into common stock of the Company at the conversion price of $19.00 per
share, subject to adjustment in certain events.
On December 31, 1998, the Company and the Trustee of the Debentures entered
into a Second Supplemental Indenture (the "Agreement"). The purpose of the
Agreement was to reduce the conversion price for the Debentures from $19.00
per share to $1.00 per share, subject to adjustment as set forth in the
Indenture, during the period from December 31, 1998 through March 23, 1999.
Under the Agreement, Debentures owned by related parties in the principal
amount of $300,000 were converted into 300,000 shares of Common Stock, at
the conversion price of $1.00 per share on December 31, 1998. Interest
expense and corresponding credit to additional paid-in capital of $284,211
were recorded relative to the conversion of Convertible Subordinated
Debentures as required in terms of Statement of Financial Accounting
Standards No. 84, ("SFAS No. 84") "Induced Conversions of Convertible
Debt".
In the first quarter of 1999, Debentures in the principal amount of
$1,764,000 were converted into 1,764,000 shares of Common Stock, at the
conversion price of $1.00 per share. Interest expense and corresponding
credit to additional paid-in capital of $1,671,158 was recorded relative to
the conversion of Convertible Subordinated Debentures as required in terms
of SFAS No. 84. As of December 31, 2000, the Company's outstanding balance
on its Debentures was $117,000. In December 2001, $107,000 of its
Debentures were presented for payment. As of December 31, 2001 the
Company's outstanding balance on its Debentures was $10,000.
52
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Note Payable
During 2001 the Company entered into a financing agreement with a supplier
to purchase $193,492 of components, pursuant to a note payable (the
"Note"). Principal on the Note is payable over 36 months starting October
1, 2001. Under the terms of the Note the Company agreed to pay interest at
a fixed rate of 7% per annum. As of December 31, 2001, the Company owed
$178,870 pursuant to the Note. Principal payments are due as follows:
December 31, 2002 - $61,109, December 31, 2003 - $65,526, December 31, 2004
- $52,235.
(5) Stockholders' Equity
(a) Preferred Stock
On December 22, 1999 the Company, pursuant to the authority of the
Company's Board of Directors, adopted a resolution creating a series of
preferred stock designated as 7.0% Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). The number of shares initially
constituting the Series A Preferred Stock was 10,000, par value $.01 per
share, which may be decreased (but not increased) by the Board of Directors
without a vote of stockholders, provided, however, that such number may not
be decreased below the number of then outstanding shares of Series A
Preferred Stock. The holders of the shares of Series A Preferred Stock
shall vote together with the Common Stock as a single class on all actions
to be voted on by the stockholders of the Company. Each share of Series A
Preferred Stock shall entitle the holder thereof to such number of votes
per share on each such action as shall equal the number of whole shares of
Common Stock into which each share of Series A Preferred Stock is then
convertible. The holders shall be entitled to notice of any stockholder's
meeting in accordance with the By-Laws of the Company. Each share of Series
A Preferred Stock is convertible into that number of shares of Common Stock
determined by dividing the aggregate liquidation preference of the number
of shares of Series A Preferred Stock being converted by $1.00 (the
"Conversion Rate"). The Conversion Rate shall be subject to appropriate
adjustment by stock split, dividend or similar division of the Common Stock
or reverse split or similar combinations of the Common Stock prior to
conversion. The Company may at any time after the date of issuance, at the
option of the Board of Directors, redeem in whole or in part the Series A
Preferred Stock by paying cash equal to $100 per share together with any
accrued and unpaid dividends (the "Redemption Price"). The Redemption Price
shall be subject to appropriate adjustment by the Board of Directors of
similar division of shares of Series A Preferred Stock or reverse split or
similar combination of the Series A Preferred Stock. In the event the
Company shall liquidate, dissolve or wind up, no distribution shall be made
to the holders of shares of Common Stock unless, prior thereto the holders
of shares of Series A Preferred Stock shall have received $100 per share
(as adjusted for any stock dividends, combinations or splits) plus all
declared or accumulated
53
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
but unpaid dividends. The holders of shares of Series A Preferred Stock, in
preference to the holders of shares of Common Stock, shall be entitled to
receive cumulative dividends of $7.00 per annum per share, payable
annually, subject to appropriate adjustment by the Board of Directors of
the Company in the event of any stock split, dividend or similar division
of shares of Series A Preferred. Dividends are payable annually, in
arrears, on the last day of December in each year.
On December 31, 1999, the Company consummated an agreement with all the
unrelated parties and Mr. W. Scott Parr to convert $690,000 pursuant to
Convertible Promissory Notes into 6,900 shares of Series A Preferred Stock,
par value $.01 per share, of the Company.
On April 12, 2000, the Company sold, in private transactions, a total of
2,250 shares of its 7% Series A convertible Preferred Stock ($.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.
On October 19, 2000 the Company, pursuant to the authority of the Company's
Board of Directors, adopted a resolution creating a series of preferred
stock designated as 7.0% Series B Convertible Preferred Stock (the "Series
B Preferred Stock"). The number of shares initially constituting the Series
B Preferred Stock was 2,000, par value $.01 per share, which may be
decreased (but not increased) by the Board of Directors without a vote of
stockholders, provided, however, that such number may not be decreased
below the number of then outstanding shares of Series B Preferred Stock.
The holders of the shares of Series B Preferred Stock have no voting rights
other than is required by law. Each share of Series B Preferred Stock, is
convertible into that number of shares of Common Stock determined by
dividing the aggregate liquidation preference of the number of shares of
Series B Preferred Stock being converted by $2.00 (the "Conversion Rate").
The Conversion Rate shall be subject to appropriate adjustment by stock
split, dividend or similar division of the Common Stock or reverse split or
similar combinations of the Common Stock prior to conversion. The Company
may at any time after the date of issuance, at the option of the Board of
Directors, redeem in whole or in part the Series B Preferred Stock by
paying cash equal to $1,000 per share together with any accrued and unpaid
dividends (the "Redemption Price"). The Redemption Price shall be subject
to appropriate adjustment by the Board of Directors of similar division of
shares of Series B Preferred Stock or reverse split or similar combination
of the Series B Preferred Stock. In
54
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
the event the Company shall liquidate, dissolve or wind up, no distribution
shall be made to the holders of shares of Common Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock shall have
received $1,000 per share (as adjusted for any stock dividends,
combinations or splits) plus all declared or accumulated but unpaid
dividends. The holders of shares of Series B Preferred Stock, in preference
to the holders of shares of Common Stock, shall be entitled to receive
cumulative dividends of $70.00 per annum per share, payable annually,
subject to appropriate adjustment by the Board of Directors of the Company
in the event of any stock split, dividend or similar division of shares of
Series B Preferred. Dividends are payable annually, in arrears, on the last
day of December in each year.
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Preferred Stock ($.01 per share par
value), at $1,000 per share, consisting of 1,350 shares to unrelated
parties, and 50 shares to Mr. W. Scott Parr, for gross proceeds of
$1,400,000.
The 1,400 shares of 7% Series B Convertible Redeemable Preferred Stock were
issued with a conversion price below the Company's Common Stock quoted
value and as a result accreted dividends of $996,283 were recorded and
included in the net loss per share calculation for the year ended December
31, 2000.
(b) Stock Options
The Company has three stock option plans, which are described below. The
Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for the plans. Under APB Opinion
25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") requires the Company to provide
pro forma information regarding net income and earnings per share as if
compensation cost for the Company's stock option plans had been determined
in accordance with the fair value- based method prescribed in SFAS No. 123.
The Company estimates the fair value of each granting of options at the
grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2001: no dividends paid;
55
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(b) Stock Options (continued)
expected volatility of 75.9%; risk-free interest rates of 4.78%, and 3.87%;
and expected lives of 1 and 4 years. The weighted-average assumptions used
for grants in 2000 were: no dividends paid; expected volatility of 76%;
risk-free interest rates of 6.62% and 5.96%; and expected lives from 4 and
5 years. The weighted-average assumptions used for grants in 1999 were: no
dividends paid; expected volatility of 45.8%; risk-free interest rates of
5.79%, 5.88% and 5.99%; and expected lives of 3 to 5 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
2001 2000 1999
---- ---- ----
Net loss available to common shareholders
As reported $(2,775,821) $(2,896,520) $(3,996,828)
Pro forma $(2,918,031) $(3,037,055) $(4,101,278)
Basic and diluted loss per share
As reported $ (.20) $ (.22) $ (.32)
Pro forma $ (.21) $ (.23) $ (.32)
The Howtek, Inc. 1993 Stock Option Plan, ("The 1993 Plan").
The 1993 Plan (the "Plan") was adopted in November 1993. On September 28,
1999, the Company held its Annual Meeting of Stockholders at which the
Stockholders voted to amend the Company's 1993 Stock Option Plan to
increase the number of shares of the Company's common stock issuable
thereunder from 1,000,000 to 1,625,000 shares. The Plan provides for the
granting of non-qualifying and incentive stock options to employees and
other persons to purchase up to an aggregate of 1,625,000 shares of the
Company's common stock. The purchase price of each share for which an
option is granted shall be at the discretion of the Board of Directors or
the Committee appointed by the Board of Directors provided that the
purchase price of each share for which an incentive option is granted shall
not be less than the fair market value of the Company's common stock on
56
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(b) Stock Options (continued)
the date of grant, except for options granted to 10% holders for whom the
exercise price shall not be less than 110% of the market price. Incentive
options granted under the Plan vest 100% over periods extending from six
months to five years from the date of grant and expire ten years after the
date of grant, except for 10% holders whose options shall expire five years
after the date of grant. Non-qualifying options granted under the Plan are
generally exercisable over a ten year period, vesting 1/3 each on the
first, second, and third anniversaries of the date of grant.
The Howtek, Inc. Director Incentive Plan
The Company has a Director Incentive Plan (the "Director Plan"). The
Company has reserved for issuance 250,000 shares under the Director Plan.
The Director Plan provides for the award of (i) restricted and unrestricted
stock, (ii) qualified stock options, and (iii) non-qualified stock options.
The Director Plan is administered by a committee of at least one director
or non-director appointed by the Board. The term of the Director Plan is
ten years and the term of individual grants of stock options thereunder is
ten years. Vesting periods for exercise of options and restrictions on the
transferability of stock awards is determined by the committee
administering the Director Plan.
The Howtek, Inc. 2001 Stock Option Plan, ("The 2001 Plan").
The 2001 Plan was adopted in August 2001, at the Annual Meeting of
Stockholders at which the Stockholders voted to replace the 1993 plan which
had no further stock available for grant. The 2001 Plan provides for the
granting of non-qualifying and incentive stock options to employees and
other persons to purchase up to an aggregate of 1,200,000 shares of the
Company's common stock. The purchase price of each share for which an
option is granted shall be at the discretion of the Board of Directors or
the Committee appointed by the Board of Directors provided that the
purchase price of each share for which an incentive option is granted shall
not be less than the fair market value of the Company's common stock on the
date of grant, except for options granted to 10% holders for whom the
exercise price shall not be less than 110% of the market price. Incentive
options granted under the 2001 Plan vest 100% over periods extending from
six months to five years from the date of grant and expire ten years after
the date of grant, except for 10% holders whose options shall expire five
years after the date of grant. Non-qualifying options granted under the
2001 Plan are generally exercisable over a ten year period, vesting 1/3
each on the first, second, and third anniversaries of the date of grant.
57
HOWTEK, INC
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(b) Stock Options (continued)
A summary of stock option (incentive and non-qualifying) activity is as
follows:
Option Price range Weighted
Shares per share Average
----------------------------------------------------
Outstanding, January 1, 1999 1,007,116 $1.00-$1.81 $1.27
Granted 505,922 $ .81-$1.13 $ .94
Exercised (27,166) $ .81-$1.72 $1.48
Cancelled (202,298) $ .81-$1.81 $1.23
----------------------------------------------------
Outstanding, December 31, 1999 1,283,574 $ .81-$1.81 $1.22
Granted 401,179 $1.37-$1.75 $1.74
Exercised (131,822) $ .81-$1.72 $1.10
Cancelled (127,442) $ .81-$1.81 $1.15
----------------------------------------------------
Outstanding, December 31, 2000 1,425,489 $ .81-$1.81 $1.31
Granted 197,000 $ .95-$3.00 $1.21
Exercised (118,832) $ .81-$1.72 $1.28
Cancelled (27,068) $ .81-$1.75 $1.42
----------------------------------------------------
Outstanding, December 31, 2001 1,476,589 $ .81-$3.00 $1.28
====================================================
Exercisable at year-end
1999 642,772 $ .81-$1.81 $1.21
2000 678,417 $ .81-$1.81 $1.28
2001 1,078,641 $ .81-$3.00 $1.27
Available for future grants
2001 1,200,000
The weighted-average fair value of options granted during the year was
$0.61 per option for 2001, $1.15 per option for 2000 and $0.42 per option
for 1999.
The weighted-average remaining contractual life of stock options
outstanding for all plans at December 31, 2001 was 7.6 years.
58
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(b) Stock Options (continued)
The following table summarizes information about stock options outstanding
at December 31, 2001:
$ .81 $ 1.00 $ 1.50
to to to
Range of Exercise Prices: $ .95 $ 1.13 $ 3.00
------------------------------------------------------
Outstanding options:
Number outstanding at December 31, 2001 490,336 431,626 554,627
Weighted average remaining contractual life (years) 8.4 6.5 7.7
Weighted average exercise price $ .86 $ 1.12 $ 1.78
Exercisable options:
Number outstanding at December 31, 2001 335,485 354,783 388,373
Weighted average remaining contractual life (years) 8.0 6.6 7.3
Weighted average exercise price $ .84 $ 1.12 $ 1.79
(c) Earnings per Share
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share", which requires the presentation of both basic and
diluted earning per share on the face of the Statements of Operations.
Conversion of the subordinated debentures and other convertible debt and
preferred stock and assumed exercise of options and warrants are not
included in the calculation of diluted loss per share since the effect
would be antidilutive. Accordingly, basic and diluted net loss per share do
not differ for any period presented. The following table summarizes the
common stock equivalent of securities that were outstanding as of December
31, 2001, 2000 and 1999, but not included in the calculation of diluted net
loss per share because such shares are antidilutive:
2001 2000 1999
---- ---- ----
Stock options 1,476,589 1,425,489 1,283,574
Stock warrants 57,000 57,000 50,000
Convertible Subordinated Debentures -- 6,158 6,158
Convertible Revolving Promissory Note -- 393,607 294,399
Convertible Promissory Note -- 310,000 310,000
Convertible Series A Preferred Stock 815,000 815,000 --
Convertible Series B Preferred Stock 700,000 700,000 --
59
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(d) Stock Subscription Warrants
In December, 1999 the Company issued a common stock purchase warrant (the
"Warrant") to the company (the "Manufacturer") responsible for the assembly
of the Company's MultiRAD(TM) medical film digitizer, as part of its
manufacturing agreement. The Warrant entitles the Manufacturer to purchase
from the Company up to 50,000 shares of the Company's common stock at $2.50
per share. The Manufacturer may exercise the Warrant at any time or from
time to time on or prior to December 31, 2004. The Company estimated the
fair value of the Warrant at the date of issue to be $54,000 using the
Black-Scholes option-pricing model. Accordingly, the value of the Warrant
was expensed over the two- year period of the agreement.
During 2000 the Company issued a common stock purchase warrant (the "New
Warrant") to the company (the "Supplier") responsible for software
development of certain of the Company's software, as part of its
development agreement entered into in 2000. The Warrant entitles the
Supplier to purchase from the Company up to 7,000 shares of the Company's
common stock at $3.00 per share. The Supplier may exercise the Warrant at
any time or from time to time on or prior to February 28, 2005. The Company
estimated the fair value of the Warrant at the date of issue to be $12,818
using the Black-Scholes option-pricing model. The value of the Warrant was
expensed in 2000.
(6) Income Taxes
As a result of the 2001, 2000 and 1999 losses, no income tax expense was
incurred for these years.
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. Deferred tax
liabilities (assets) are comprised of the following at December 31:
2001 2000
---- ----
Inventory (Section 263A) $ (155,000) $ (105,000)
Inventory reserves (136,000) (123,000)
Receivable reserves (56,000) (87,000)
Other accruals (18,000) (18,000)
Accumulated depreciation 1,000 (14,000)
Tax credits (2,388,000) (2,317,000)
NOL carry forward (14,222,000) (15,232,000)
------------ ------------
Gross deferred tax asset (16,974,000) (17,896,000)
------------ ------------
Deferred tax assets valuation allowance $ 16,974,000 $ 17,896,000
------------ ------------
Net deferred tax assets $ -0 - $ -0-
============ ============
60
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) Income Taxes (continued)
As of December 31, 2001, the Company has net operating loss carryforwards
totaling approximately $41,800,000. The amount of the net operating loss
carryforwards, which may be utilized in any future period, may be subject
to certain limitations based upon changes in the ownership of the Company's
common stock. The following is a breakdown of the net operating loss
expiration period:
Expiration date Amount of remaining NOL
2002 8,900,000
2003 3,300,000
2004 4,200,000
2005 2,200,000
2006 2,200,000
2007 300,000
2008 600,000
2009 100,000
2010 4,000,000
2011 4,400,000
2012 2,300,000
2018 3,600,000
2019 2,200,000
2020 1,400,000
2021 2,100,000
In addition the Company has available tax credit carryforwards (adjusted to
reflect provisions of the Tax Reform Act of 1986) of approximately
$2,388,000, which are available to offset future taxable income and income
tax liabilities, when earned or incurred. These amounts expire in various
years through 2021.
(7) Sales Information
(a) Geographic Information
The Company's sales are made to U.S. distributors, dealers and to foreign
distributors of computer and related products. Total export sales, which
includes sales made to a U.S. based international distributor of computer
and related products, were $944,000 or 20% of total sales in 2001,
$3,243,000 or 42% of total sales in 2000 and $740,000 or 11% of total sales
in 1999.
61
HOWTEK, INC.
Notes to Financial Statements (continued)
(7) Sales Information (continued)
(a) Geographic Information (continued)
The Company's principal concentration of export sales was in Australia,
which accounted for 35% of 2001 export sales. In 2000, with the addition of
a large OEM customer, the Company's principal concentration of export sales
was in Canada, which accounted for 71% of export sales. The Company's
principal concentration of export sales had been in Europe with 41% of
export sales in 1999. The balance of the export sales was into the Far
East, Mexico and Central America.
As of December 31, 2001 and 2000 the Company had outstanding receivables of
$136,000 and $601,000, respectively, from distributors of its products who
are located outside of the United States.
(b) Major Customers
During the years ended December 31, 2001 and 1999, the Company had no major
customers. In 2000 the Company had one major customer that operated as an
OEM, with sales of $2,062,955 (or 26% of sales) and an accounts receivable
balance of $428,994 at December 31, 2000.
(c) Product Information
The Company's revenues by product line are as follows:
For the year ended December 31, 2001 2000 1999
---- ---- ----
Medical imaging $2,315,738 $2,256,312 $1,508,197
FotoFunnel 988,199 2,217,798 --
Graphic arts 1,531,360 3,319,407 5,155,033
---------- ---------- ----------
Total $4,835,297 $7,793,517 $6,663,230
========== ========== ==========
(8) Commitments and Contingencies
As of December 31, 2001, the Company had one lease obligation related to
its facility. The lease obligation for 2002 is approximately $58,875. The
Company's principal executive offices and research and development
laboratory is leased by the Company from Mr. Robert Howard, Chairman of the
Board of Directors pursuant to a lease which expires September 30, 2002.
Rental expense for all leases for the years ended December 31, 2001, 2000
and 1999 was $78,500, $78,500 and $93,740, respectively.
62
HOWTEK, INC.
Notes to Financial Statements (continued)
(9) Financial instruments
The carrying amounts of financial instruments, including cash and
equivalents, accounts receivable, accounts payable, accrued expenses,
demand notes payable to related parties and convertible debentures and
other convertible debt approximated fair value as of December 31, 2001 and
2000, due to either short maturity or terms similar to those available to
similar companies in the open market.
(10) Quarterly Financial Data (unaudited)
Net Gross Net Loss
2001 sales profit loss per share
---- ---------- ----------- ----------- ---------
First quarter $1,513,604 $ 392,141 $ (639,591) $ (0.05)
Second quarter $ 932,160 $ 146,627 $ (797,943) $ (0.06)
Third quarter $1,139,025 $ 302,348 $ (548,205) $ (0.04)
Fourth quarter $1,250,508 $ 57,775 $ (635,032) $ (0.05)
2000
----
First quarter $1,517,518 $ 352,557 $ (564,464) $ (0.04)
Second quarter $1,957,638 $ 597,126 $ (257,501) $ (0.02)
Third quarter $2,760,773 $ 783,229 $ (175,627) $ (0.01)
Fourth quarter $1,557,588 $ 167,115 $ (830,056) $ (0.14)
(11) Subsequent Event
The Company recently announced that it has entered into a definitive
agreement with Intelligent Systems Software Inc. ("ISSI"), a privately held
company based in Boca Raton, Florida, pursuant to which ISSI would merge
with and into a subsidiary of Howtek. If the merger is consummated, a total
of 8,400,000 shares of Howtek common stock will be issued in the merger in
exchange for all of the issued and outstanding capital stock of ISSI. In
January 2002, ISSI received approval from the U.S. Food and Drug
Administration (FDA) to market and sell ISSI's new MammoReader(TM) Computer
Aided Detection CAD system in the United States.
Subsequent to completion of the contemplated merger, Howtek's existing film
and photo digitizer operations, including engineering, manufacturing
management, marketing and support, will be conducted through a wholly owned
subsidiary corporation, based at the Company's current headquarters in
Hudson, NH. The Company's objective is to continue to grow its medical
business, providing industry-leading digitizers to ISSI and to other
respected customers.
63
HOWTEK, INC.
Notes to Financial Statements (continued)
(11) Subsequent Event (continued)
The completion of the merger is subject to the registration of the shares
of Howtek common stock to be issued in the merger under the Securities Act
of 1933, as amended, and other customary conditions, including approval of
the merger by stockholders of both Howtek and ISSI. It is currently
expected that the merger will be consummated by June 30, 2002.
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HOWTEK, INC.
Schedule II - Valuation and Qualifying Accounts and Reserves
Col. A Col. B Col. C Col. D Col. E
- -----------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Cost and at end
Description of Year Expenses Deductions of Year
- -----------------------------------------------------------------------------------------------
Year End December 31, 2001:
Allowance for Doubtful Accounts $ 255,999 $ 50,845 $ 141,844 (1) $165,000
Inventory Reserve $ 361,931 $ 379,285 $ 41,216 (2) $700,000
Year End December 31, 2000:
Allowance for Doubtful Accounts $ 150,500 $ 105,499 $ - (1) $255,999
Inventory Reserve $ 200,175 $ 289,370 $ 127,614 (2) $361,931
Year End December 31, 1999:
Allowance for Doubtful Accounts $ 118,349 $ 281,312 $ 249,161 (1) $150,500
Inventory Reserve $ 101,553 $ 117,583 $ 18,961 (2) $200,175
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
65