UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 1-9341
HOWTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
(603) 882-5200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [X] NO [_].
As of the close of business on November 13, 2000 there were 13,491,274
shares outstanding of the issuer's Common Stock, $.01 par value.
<PAGE>
HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Statements of Operations for the three month periods ended
September 30, 2000 and 1999 and for the nine month periods
ended September 30, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the nine month periods
ended September 30, 2000 and 1999 (unaudited) 5
Notes to Financial Statements (unaudited) 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 12
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
HOWTEK, INC.
Balance Sheets
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 267,378 $ 263,073
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $193,000 in 2000 and $151,000 in 1999 2,287,677 1,400,987
Inventory 3,042,705 2,649,460
Prepaid and other 180,266 144,390
------------ ------------
Total current assets 5,778,026 4,457,910
------------ ------------
Property and equipment:
Equipment 2,817,235 2,735,545
Leasehold improvements 33,321 33,321
Motor vehicles 6,050 6,050
------------ ------------
2,856,606 2,774,916
Less accumulated depreciation and amortization 2,308,877 2,058,734
------------ ------------
Net property and equipment 547,729 716,182
------------ ------------
Other assets:
Software development costs, net 341,067 472,427
Debt issuance costs, net 22,055 37,323
Patents, net 9,387 12,767
------------ ------------
Total other assets 372,509 522,517
------------ ------------
Total assets $ 6,698,264 $ 5,696,609
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,371,108 $ 1,176,480
Dividends payable 41,195 --
Accrued expenses 569,505 342,860
Loan payable to related parties 500,000 500,000
------------ ------------
Total current liabilities 3,481,808 2,019,340
Loan payable to related party 900,000 640,000
Convertible subordinated debentures 117,000 117,000
------------ ------------
Total liabilities 4,498,808 2,776,340
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,495,977 in 2000
and 13,330,542 shares in 1999; outstanding
13,428,101 in 2000 and 13,262,666 shares in 1999 134,959 133,305
Convertible preferred stock, $.01 par value: authorized
1,000,000 shares; issued and outstanding
8,150 in 2000 and 6,900 in 1999, with the aggregate
liquidation value of $815,000 plus 7% annual dividend 82 69
Additional paid-in capital 52,837,489 52,562,377
Accumulated deficit (49,822,810) (48,825,218)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Total Stockholders' equity 2,199,456 2,920,269
------------ ------------
Total liabilities and stockholders' equity $ 6,698,264 $ 5,696,609
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
HOWTEK, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 2,760,773 $ 1,614,930 $ 6,235,929 $ 5,078,671
Cost of Sales 1,977,544 1,176,456 4,503,017 3,897,695
------------ ------------ ------------ ------------
Gross Margin 783,229 438,474 1,732,912 1,180,976
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 198,544 205,127 559,207 632,726
General and administrative 283,288 293,066 839,334 1,059,610
Marketing and sales 437,294 460,735 1,219,215 1,322,037
------------ ------------ ------------ ------------
Total operating expenses 919,126 958,928 2,617,756 3,014,373
------------ ------------ ------------ ------------
Loss from operations (135,897) (520,454) (884,844) (1,833,397)
Interest expense - net 39,730 38,926 112,748 1,767,139
------------ ------------ ------------ ------------
Net loss $ (175,627) $ (559,380) $ (997,592) $ (3,600,536)
Preferred dividend 14,579 -- 41,195 --
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (190,206) $ (559,380) $ (1,038,787) $ (3,600,536)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.01) $ (0.04) $ (0.08) $ (0.29)
Weighted average number of shares used
in computing earnings per share
Basic and diluted 13,398,039 12,923,644 13,336,384 12,473,746
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HOWTEK, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (997,592) $(3,600,536)
----------- -----------
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation 250,143 310,582
Amortization 225,648 225,880
Interest relative to conversion of Convertible
Subordinated Debentures -- 1,671,158
Compensation expense related to issue of
Stock Subscription Warrants 27,000 --
Changes in operating assets and liabilities:
Accounts receivable (886,690) (366,844)
Inventory (393,245) 179,665
Other current assets (35,876) 42,071
Accounts payable 1,219,628 326,664
Accrued expenses 226,645 98,324
----------- -----------
Total adjustments 633,253 2,487,500
----------- -----------
Net cash used for operating activities (364,339) (1,113,036)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (75,640) (69,186)
Additions to property and equipment (81,690) (148,697)
----------- -----------
Net cash used for investing activities (157,330) (217,883)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 65,974 189,184
Issuance of preferred stock for cash 200,000 --
Proceeds of loan from related parties 260,000 525,000
Proceeds of loan from unrelated parties -- 660,000
----------- -----------
Net cash provided by financing activities 525,974 1,374,184
----------- -----------
Increase in cash and equivalents 4,305 43,265
Cash and equivalents, beginning of period 263,073 182,724
----------- -----------
Cash and equivalents, end of period $ 267,378 $ 225,989
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 5,265 $ 5,265
=========== ===========
</TABLE>
During the nine months ended September 30, 2000, $25,000 of accrued expenses
were converted to preferred stock of the Company.
See accompanying notes to financial statements.
5
<PAGE>
HOWTEK, INC.
Notes to Financial Statements
September 30, 2000
(1) Accounting Policies
In the opinion of management all adjustments and accruals (consisting only
of normal recurring adjustments) which are necessary for a fair
presentation of operating results are reflected in the accompanying
financial statements. Reference should be made to Howtek, Inc.'s ("Howtek"
or the "Company") Annual Report on Form 10-K for the year ended December
31, 1999 for a summary of significant accounting policies. Interim period
amounts are not necessarily indicative of the results of operations for the
full fiscal year.
(2) Loan Payable to Related Party
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000. Outstanding advances are collateralized by substantially all of
the assets of the Company and bear interest at prime interest rate plus 2%.
The Convertible Note entitles Mr. Howard to convert outstanding advances
into shares of the Company's common stock at any time based on the
outstanding closing market price of the Company's common stock at the time
each advance is made. At September 30, 2000, $590,000 was outstanding under
the Loan Agreement. The Company had $2,410,000 available for future
borrowings.
The Company has Secured Demand Notes and Security Agreements (the "Notes")
owed to Mr. Robert Howard. Principal of the Notes is due and payable in
full, together with interest accrued and any penalties provided for, on
demand. Under the terms of the Notes the Company agreed to pay interest at
the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum
rate permitted by applicable law. The Notes currently bear interest at 12%.
Payment of the Notes is secured by a security interest in certain assets of
the Company. As of September 30, 2000, the Company owed $500,000 pursuant
to the Notes.
6
<PAGE>
HOWTEK, INC.
Notes to Financial Statements
September 30, 2000
(2) Loan Payable to Related Party (continued)
During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant
to Convertible Promissory Notes (the "Promissory Notes"). Principal on
these Promissory Notes is payable in equal payments based on the borrowed
amount at the end of each quarter starting March 31, 2003 through December
31, 2006. Under the terms of the Promissory Notes the Company agreed to pay
interest at a fixed rate of 7% per annum. At the Company's option it may
pay the interest in either cash or in restricted shares of the Company's
common stock, or in any combination thereof. Interest paid in shares of the
Company's common stock will be paid at the greater of $1.00 per share or
the per share closing market price at the time each interest payment is
due. The Promissory Notes entitle the payees to convert outstanding
principal due into shares of the Company's common stock at $1.00 per share,
which was the market price of the Company's stock at the date the
Promissory Notes were issued. As of September 30, 2000, the Company owed
$310,000 pursuant to the Promissory Notes.
(3) Subsequent Event
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Redeemable Preferred Stock ($.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. Each share of Series B Preferred Stock has a liquidation
preference of $1,000 per share, will entitle the holder to an annual
dividend of $70, is convertible into 500 shares of the Company's common
stock and is redeemable by the Company under certain circumstances.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this Item 2. and elsewhere in this Form 10-Q
that are not historical facts contain forward looking statements that involve a
number of known and unknown risks, uncertainties and other factors that could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, possible technological
obsolescence of products, competition, and other risks detailed in Howtek's
Securities and Exchange Commission filings. The words "believe", "expect",
"anticipate" and "seek" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made.
Results of Operations
Quarter Ended September 30, 2000 compared to Quarter Ended September 30, 1999
and Nine Months Ended September 30, 2000 compared to Nine Months Ended September
30, 1999
Sales. Sales for the three months ended September 30, 2000 were $2,760,773, a
71% increase from sales of $1,614,930 for the quarter ended September 30, 1999.
Sales for the nine months ended September 30, 2000 were $6,235,929, compared
with sales of $5,078,671 for the comparable period in 1999. The Company
continues to emphasize its medical business opportunities. Sales of the
Company's medical imaging products increased 48%, from $436,237 in the quarter
ended September 30, 1999 to $647,132 in the quarter ended September 30, 2000,
and increased 42%, from $1,150,360 to $1,638,763 for the nine months ended
September 30, 1999 and 2000, respectively. Sales through recently announced
system integrators and resellers, including General Electric Medical Systems and
Konica Medical Imaging, Inc., contributed to increased sales in the third
quarter. Howtek's medical product sales also benefited from demand by key OEM
customers involved in computer-assisted detection of breast cancer. These
customers are marketing systems including Howtek digitizers outside the United
States while seeking FDA approval to sell domestically. A key objective over the
coming quarters is to add additional, qualified OEM and systems integration
resellers. These resellers are expected to contribute to increased sales of
medical products in future periods.
Sales of the Company's prepress and graphic arts products, including related
maintenance and repair services, decreased 44%, from $1,178,693 in the third
quarter of 1999 to $665,484 over the comparable period in 2000, and a 24%
decrease, from $3,928,310 to $3,003,899 for the nine month periods ended
September 30, 1999 and 2000. This decline reflects increased competition in the
market for the Company's graphic arts scanners, and a de-emphasis on sales of
scanners acquired from third parties for resale by Howtek. The Company expects
sales of graphic arts products to continue to decline over time.
8
<PAGE>
In the second quarter 2000, the Company began commercial shipments of its new
FotoFunnel(TM) photographic print scanner line from its third party
manufacturing supplier. FotoFunnel sales in the third quarter were $1,448,157,
with virtually all sales made to Telepix Imaging, Inc., a member of the Gretag
Imaging Group.
During the third quarter the Company took advantage of an opportunity to offer
improved performance in FotoFunnel scanners manufactured during this period.
Several engineering design and manufacturing changes which offered increased
scanning speed, improved customer workflow and generally enhanced scanner
performance were achieved. Rather than wait to release these improvements in a
new model, the Company reduced production to implement the new design features,
and deliver enhanced scanner units. The consequence of this was to shift some
FotoFunnel deliveries and sales from the third quarter to the fourth quarter
2000.
Gross Margins. Gross margins for the three and nine month periods ended
September 30, 2000 increased to 28%, from 27% and 23%, respectively, in the
comparable periods in 1999. Gross margins improved as a result of reduced
production overhead and indirect production expenses, associated with the
Company's overhead and expense control measures and with the Company's
outsourcing of production and assembly services. Improving production costs of
the FotoFunnel product will be a Company priority during the coming quarters, as
the product moves beyond the production start up phase.
Engineering and Product Development. Engineering and product development costs
for the three month period ended September 30, 2000 decreased slightly from
$205,127 in 1999 to $198,544 in 2000. Engineering and product development costs
for the nine month period ended September 30, 2000 decreased 12% from $632,726
in 1999 to $559,207 in 2000. The decrease results primarily from reductions in
manpower. The Company expects to continue to increase its utilization of outside
and contract engineering resources as it deems appropriate.
General and Administrative. General and administrative expenses in the three
month period ended September 30, 2000 decreased slightly from $293,066 in 1999
to $283,288 in 2000. General and administrative expenses in the nine month
period ended September 30, 2000 decreased 21% from $1,059,610 in 1999 to
$839,334 in 2000. During the first quarter of 1999 the Company established
reserves in the amount $186,662 to permit the Company to take back its
discontinued HiDemand 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 nine months ended September 30,
1999, the general and administrative expenses decreased slightly, from $851,806
in 1999 compared to $839,334 for the comparable period in 2000. The decrease is
due primarily to a continued effort to reduce overall expenses. The Company
expects general and administrative expenses to increase for the balance of 2000.
9
<PAGE>
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended September 30, 2000 decreased slightly from $460,735 in 1999 to
$437,294 in 2000. Marketing and sales expenses for the nine month period ended
September 30, 2000 decreased 8% from $1,322,037 in 1999 to $1,219,215 for the
comparable period in 2000. This decrease is due primarily to a reduction in
sales commission and promotional expenses. In 1999 the Company changed its sales
compensation structure to provide commissions on the basis of gross margins
rather than net sales. Promotional expenses decreased in the graphic arts area,
where there is an increasing reliance on direct mail and telemarketing to
support its sales efforts. Medical sales expenses increased and new expenses
were incurred relating to the FotoFunnel business. The Company expects marketing
and sales expenses, in it's medical and photographic product lines, to increase
in 2000.
Interest Expense. Net interest expense for the three month period ended
September 30, 2000 increased to $39,730 from $38,926 in 1999. Net interest
expense for the nine month period decreased to $112,748 from $1,767,139 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 $175,627 or
$0.01 per share for the three month period ended September 30, 2000 on sales of
$2,760,773 compared to a net loss of $559,380 or $0.04 per share from the same
period in 1999 on sales of $1,614,930. The loss for the nine months ended
September 30, 2000 was $997,592 or $0.08 per share on sales of $6,235,929
compared with $3,600,536 or $0.29 per share on sales of $5,078,671 for the nine
months ended September 30, 1999. Earnings for the nine month period ended
September 30, 1999 were reduced by $1,671,158 in non-recurring accounting
charges during the first quarter of 1999, associated with the conversion of the
Company's outstanding 9% Debentures.
Liquidity and Capital Resources
The Company's ability to generate cash adequate to meet its requirements depends
primarily on operating cash flow and the availability of a $3,000,000 credit
line under a Convertible Note and Revolving Loan and Security Agreement with its
Chairman, Mr. Robert Howard, of which $2,410,000 was available at September 30,
2000.
At September 30, 2000 the Company had current assets of $5,778,026, current
liabilities of $3,481,808 and working capital of $2,296,218. The ratio of
current assets to current liabilities was 1.7:1.
10
<PAGE>
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these Notes is due and payable in full,
together with interest accrued and any penalties provided for, on demand. Under
the terms of the Notes the Company agreed to pay interest at the lower rate of
(a) 12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. The Notes currently bear interest at 12%. Payment of the Notes
is secured by a security interest in certain assets of the Company. As of
September 30, 2000, the Company owed $500,000 pursuant to the Notes.
During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). Principal on these
Promissory Notes is payable in equal payments based on the borrowed amount at
the end of each quarter starting March 31, 2003 through December 31, 2006. Under
the terms of the Promissory Notes the Company agreed to pay interest at a fixed
rate of 7% per annum. At the Company's option it may pay the interest in either
cash or in restricted shares of the Company's common stock, or in any
combination thereof. Interest paid in shares of the Company's common stock will
be paid at the greater of $1.00 per share or the average per share closing
market price at the time each interest payment is due. The Promissory Notes
entitle the payees to convert outstanding principal due into shares of the
Company's common stock at $1.00 per share, which was the market price of the
Company's stock at the date the Promissory Notes were issued. As of September
30, 2000, the Company owed $310,000 pursuant to the Promissory Notes.
During the second quarter of 2000 the Company sold, in private transactions, a
total of 2,250 shares of its 7% Series A Convertible Preferred Stock ($.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 $225,000.
There are enormous uncertainties and risks associated with the Company's
business strategy, as there are with any other new and ambitious business plans.
The Company's future operating results will depend, among other factors, on our
ability to continue to increase our sales significantly, on retaining our
current key employees and on attracting additional qualified personnel. Risk
factors include, but are not limited to, the Company's history of significant
operating losses, intense competition in all of our product lines, and the
timely availability of sufficient quantities of parts, materials and components
which are in some cases available from sole sources or a limited number of
suppliers.
Subsequent Event
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Redeemable Preferred Stock ($.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.
Each share of Series B Preferred Stock has a liquidation preference of $1,000
per share, will entitle the holder to an annual dividend of $70, is convertible
into 500 shares of the Company's common stock and is redeemable by the Company
under certain circumstances.
11
<PAGE>
The Company anticipates applying funds to accelerate promotion of its FotoFunnel
scanner product and its associated consumable products, and to development of
hard tooling which it believes can reduce FotoFunnel productions costs. Among
other purposes, the funds will be used to expand the Company's web-based sales
capabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
12
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Howtek, Inc.
-------------------------
(Company)
Date: November 14, 2000 By: /s/ W. Scott Parr
----------------------- -------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: November 14, 2000 By: /s/ Annette L. Heroux
----------------------- -------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
13
