UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 1-9341
HOWTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
(603) 882-5200
(Registrant's telephone number, including area code)
NotApplicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES |X| NO |_|.
As of the close of business on May 8, 2002 there were 15,544,844 shares
outstanding of the issuer's Common Stock, $.01 par value.
HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of March 31, 2002
(unaudited) and December 31, 2001 3
Statements of Operations for the three
month periods ended March 31, 2002 and
2001 (unaudited) 4
Statements of Cash Flows for the three month periods
ended March 31, 2002 and 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 10
Item 2 Changes in Securities and Use of Proceeds 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
HOWTEK, INC.
Balance Sheets
March 31, 2002 December 31, 2001
-------------- -----------------
Assets (unaudited) (audited)
Current assets:
Cash and equivalents $ 436,849 $ 495,360
Trade accounts receivable, net of allowance
for doubtful accounts of $165,000 in 2002 and 2001 311,193 691,415
Inventory 2,489,579 2,363,237
Prepaid and other 55,641 36,590
------------ ------------
Total current assets 3,293,262 3,586,602
------------ ------------
Property and equipment:
Equipment 1,446,167 1,408,347
Leasehold improvements 41,721 41,721
------------ ------------
1,487,888 1,450,068
Less accumulated depreciation and amortization 1,159,204 1,118,685
------------ ------------
Net property and equipment 328,684 331,383
------------ ------------
Other assets:
Deferred merger costs 95,466
Software development costs, net 230,264 230,247
Patents, net 11,490 12,893
------------ ------------
Total other assets 337,220 243,140
------------ ------------
Total assets $ 3,959,166 $ 4,161,125
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,215,247 $ 1,026,335
Accrued interest 218,299 203,299
Accrued expenses 322,687 203,064
Loans payable to related party -- 500,000
Convertible subordinated debentures 10,000 10,000
Current maurities of note payable 62,184 61,109
------------ ------------
Total current liabilities 1,828,417 2,003,807
Note payable, less current maturities 101,806 117,761
------------ ------------
Total liabilities 1,930,223 2,121,568
------------ ------------
Stockholders' equity:
Convertible preferred stock, $.01 par value: authorized
1,000,000 shares; issued and outstanding
8,550 in 2002 and 9,550 in 2001, with the aggregated
liquidation value of $2,115,000 in 2002 and
$2,215,000 in 2001, plus 7% annual dividend 86 96
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 15,597,720 in 2002
and 15,241,833 shares in 2001; outstanding
15,529,844 in 2002 and 15,173,957 shares in 2001 155,977 152,418
Additional paid-in capital 57,614,186 57,107,227
Accumulated deficit (54,791,042) (54,269,920)
Treasury stock, at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total stockholders' equity 2,028,943 2,039,557
------------ ------------
Total liabilities and stockholders' equity $ 3,959,166 $ 4,161,125
============ ============
See accompanying notes to financial statements.
3
HOWTEK, INC.
Statements of Operations
Three Months Three Months
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited) (unaudited)
Sales $ 775,633 $ 1,513,604
Cost of sales 595,412 1,121,463
------------ ------------
Gross margin 180,221 392,141
------------ ------------
Operating expenses:
Engineering and product development 189,756 163,976
General and administrative 225,355 306,311
Marketing and sales 267,080 538,065
------------ ------------
Total operating expenses 682,191 1,008,352
------------ ------------
Loss from operations (501,970) (616,211)
Interest expense - net 19,152 23,380
------------ ------------
Net loss (521,122) (639,591)
Preferred dividend 36,505 38,762
------------ ------------
Net loss available to common stockholders $ (557,627) $ (678,353)
============ ============
Net loss per share
Basic and diluted $ (0.04) $ (0.05)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 15,251,426 13,564,355
See accompanying notes to financial statements.
4
HOWTEK, INC.
Statements of Cash Flows
Three Months Three Months
March 31, 2002 March 31, 2001
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(521,122) $ (639,591)
--------- -----------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 40,519 53,392
Amortization 31,426 62,367
Changes in operating assets and liabilities:
Accounts receivable 380,222 (266,626)
Inventory (126,342) (251,728)
Other current assets (19,051) 58,434
Accounts payable 188,912 589,743
Accrued expenses 2,652 80,218
--------- -----------
Total adjustments 498,338 325,800
--------- -----------
Net cash used for operating activities (22,784) (313,791)
--------- -----------
Cash flows from investing activities:
Additions to patents, software development and other (30,040) (32,975)
Additions to property and equipment (37,820) (33,203)
--------- -----------
Net cash used for investing activities (67,860) (66,178)
--------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 47,013 137,068
Proceeds of convertible note payable to principal
stockholders 500,000 --
Payment of demand note payable to principal
stockholders (500,000)
Payment of note payable (14,880) --
--------- -----------
Net cash provided by financing activities 32,133 137,068
--------- -----------
Decrease in cash and equivalents (58,511) (242,901)
Cash and equivalents, beginning of period 495,360 1,444,771
--------- -----------
Cash and equivalents, end of period $ 436,849 $ 1,201,870
========= ===========
Non-cash items from investing and financing activities:
Conversion of loan to related party into
Common Stock $ 500,000 $ --
========= ===========
Accrued dividends on convertible preferred stock $ 36,505 $ --
========= ===========
Accrual of deferred merger costs $ 95,466 $ --
========= ===========
See accompanying notes to financial statements.
5
HOWTEK, INC.
Notes to Financial Statements
(Unaudited)
March 31, 2002
(1) Accounting Policies
In the opinion of management all adjustments and accruals (consisting only
of normal recurring adjustments), which are necessary for a fair
presentation of operating results are reflected in the accompanying
financial statements. Reference should be made to Howtek, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2001 for a summary of
significant accounting policies. Interim period amounts are not
necessarily indicative of the results of operations for the full fiscal
year.
(2) Loan Payable to Related Party
The Company has a Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000. Outstanding advances are collateralized by substantially all
of the assets of the Company and bear interest at prime interest rate plus
2%. Mr. Howard is entitled 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 the first quarter of 2002, Mr. Howard advanced $500,000 to the
Company under the Loan Agreement. In March 2002, Mr. Howard converted
$500,000 of advances made under the Loan Agreement into 215,517 shares
of restricted common stock of the Company. As of March 31, 2002 no moneys
were owed and the Company had $3,000,000 available for future borrowings
under the Loan Agreement.
The Company had Secured Demand Notes and Security Agreements (the "Notes")
owed to Mr. Robert Howard. The principal of these Notes was 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. Payment of the Notes was
secured by a security interest in certain assets of the Company. In March
2002, the Company repaid the principal balance due in the amount of
$500,000 and the Notes were discharged.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain information included in this Item 2 and elsewhere in this Form
10-Q that are not historical facts contain forward looking statements that
involve a number of known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, product market acceptance,
possible technological obsolescence of products, increased competition,
litigation, the uncertainty of stockholder and other approvals necessary to
consummate the proposed merger with Intelligent Systems Software, Inc. ("ISSI"),
the effects of a decline in the economy in markets served by the Company and
other risks detailed in the Company's other filings with the Securities and
Exchange Commission. The words "believe", "demonstrate", "intend", "expect",
"estimate", "anticipate", "likely", and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
those forward-looking statements, which speak only as of the date the statement
was made.
Results of Operations
Proposed Merger with ISSI
The Company has entered into a plan and agreement of merger 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, which incorporates the Howtek digitizer, in the United States.
The Company's plan is to concentrate the sales efforts of the combined company
on products relating to the computer-aided detection of breast cancer market,
and on complementary markets for its medical film digitizers. In this regard,
the Company has already taken certain steps to shift its business focus which
has in part been responsible for the reductions during the first quarter of 2002
of sales of products relating to the Company's historic graphic arts business
and FotoFunnel(TM) product.
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 customers.
7
Consistent with the shift in Howtek's business focus, if the merger is
consummated the combined company will cease sales of Howtek's prepress and
graphics arts products, which will result in a write-off of approximately $2
million in current assets attributable to that business against a current
inventory reserve of approximately $700,000.
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 if
stockholder approval is obtained the merger will be consummated by June 30,
2002.
Quarter Ended March 31, 2002 compared to Quarter Ended March 31, 2001
Sales. Sales for the three months ended March 31, 2002 were $775,633, compared
with sales of $1,513,604 for the quarter ended March 31, 2001. 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 $400,656, from $580,626 in 2001 to $179,970.
Sales of the Company's medical imaging products decreased from $540,905 in the
quarter ended March 31, 2001 to $425,899 in the quarter ended March 31, 2002.
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.
Additionally, the Company's announcement of its intention to merge with ISSI, an
OEM customer competing in the market for systems providing computer-aided
detection of breast cancer, led to delays in anticipated orders from other such
OEMs which compete with ISSI. The Company believes that subsequent orders from
the CAD market will increase in future quarters.
The Company's FotoFunnel(TM) batch photographic print scanner contributed sales
of $169,764 in the first quarter of 2002 compared to sales of $392,073 during
the comparable period in 2001. The Company has established distribution
channels, 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 currently participating in FotoFunnel
field evaluation and testing programs with a variety of retail and photo chains
and mass merchants which precede purchase decisions by such buyers.
Gross Margins. Gross margins for the three month period ended March 31, 2002
decreased to 23% from 26% in the comparable period in 2001. Gross margins
decreased as a result of reduced sales without a corresponding reduction in
production overhead and indirect production expenses.
8
Engineering and Product Development. Engineering and product development costs
for the three month period ended March 31, 2002 increased 16% from $163,976 in
2001 to $189,756 in 2002. The increase in engineering and product development
costs resulted primarily from increases in the Company's utilization of outside
and contract engineering resources required in its new product development. The
Company expects engineering and product development costs to increase over the
remainder of 2002.
General and Administrative. General and administrative expenses in the three
month period ended March 31, 2002 decreased 26% from $306,311 in 2001 to
$225,355 in 2002. This change results primarily from a reduction in salaries and
a decrease in provision for doubtful accounts.
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended March 31, 2002 decreased 50% from $538,065 in 2001 to $267,080 in
2002. This decrease is due primarily to a significant reduction in expenses
related to the Company's traditional graphic art business, and a decrease in
personnel and promotional expenses in its FotoFunnel area, where there is an
increasing reliance on marketing through selected OEM customers.
Interest Expense. Net interest expense for the three month period ended March
31, 2002 decreased to $19,152 from $23,380 in 2001. This decrease is due
primarily to a decrease in loan balances and interest rates.
As a result of the foregoing, the Company recorded a net loss of $521,122 or
$0.04 per share for the three month period ended March 31, 2002 on sales of
$775,633 compared to a net loss of $639,591 or $0.05 per share from the same
period in 2001 on sales of $1,513,604.
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 the Loan Agreement with its Chairman, Mr. Robert Howard, of which
$3,000,000 was available at March 31, 2002.
At March 31, 2002 the Company had current assets of $3,293,262, current
liabilities of $1,732,951 and working capital of $1,560,311. The ratio of
current assets to current liabilities was 1.9:1
The Company had Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. The principal of these Notes was 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. Payment of the Notes was secured by a security interest in
certain assets of the Company. In March 2002, the Company repaid the principal
balance due in the amount of $500,000 and the Notes were discharged.
9
Legal Proceedings
A complaint was filed against the Company and 213 other defendants in the United
States District Court for the Eastern District of Texas, entitled The
Massachusetts Institute of Technology and Electronics for Imaging, Inc. v.
Abacus Software Inc. et al., Case No. 501CV344. The plaintiff claims the Company
and other defendants have infringed a United States patent alleged to cover
color reproduction system technology. With respect to the Company, the alleged
infringement involves certain of the Company scanners and other products sold to
customers in the graphic arts/prepress and photographic markets. The case seeks
unspecified damages together with interest, injunctive relief and recovery of
reasonable attorney's fees. The Company disputes these claims and intends to
defend vigorously this matter. However, the outcome of any litigation is
uncertain and an unfavorable outcome could have a material adverse effect on the
Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
A complaint was filed against the Company and 213 other defendants in the United
States District Court for the Eastern District of Texas, entitled The
Massachusetts Institute of Technology and Electronics for Imaging, Inc. v.
Abacus Software Inc. et al., Case No. 501CV344. The plaintiff claims the Company
and other defendants have infringed a United States patent alleged to cover
color reproduction system technology. With respect to the Company, the alleged
infringement involves certain of the Company scanners and other products sold to
customers in the graphic arts/prepress and photographic markets. The case seeks
unspecified damages together with interest, injunctive relief and recovery of
reasonable attorney's fees. The Company disputes these claims and intends to
defend vigorously this matter.
Item 2. Changes in Securities and Use of Proceeds
In March 2002, Mr. Robert Howard converted $500,000 of advances made under the
Loan Agreement and represented by a convertible note into 215,517 shares of
restricted common stock of the Company. The convertible note and shares of
common stock were issued pursuant to the exemption from registration provided by
Sections 4(2) and 3(a)(9) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) A report on Form 8-K was filed during the quarter for which this
report is filed under items 5 and 7 to report the Company's
execution of a definitive agreement to acquire ISSI.
10
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Howtek, Inc.
(Company)
Date: May 13, 2002 By: /s/ W. Scott Parr
------------------------- -----------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: May 13, 2002 By: /s/ Annette L. Heroux
------------------------- -----------------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
11