UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-9341 HOWTEK, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 02-0377419 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 21 Park Avenue, Hudson, New Hampshire 03051 (Address of principal executive offices) (Zip Code) (603) 882-5200 (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES |X| NO |_| . As of the close of business on August 3, 2001 there were 14,003,662 shares outstanding of the issuer's Common Stock, $.01 par value.
HOWTEK, INC. INDEX PAGE PART I FINANCIAL INFORMATION Item 1 Financial Statements Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000 3 Statements of Operations for the three month periods ended June 30, 2001 and 2000 and for the six month periods ended June 30, 2001 and 2000 (unaudited) 4 Statements of Cash Flows for the six month periods ended June 30, 2001 and 2000 (unaudited) 5 Notes to Financial Statements (unaudited) 6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Item 3 Quantitative and Qualitative Disclosures about Market Risk 11 PART II OTHER INFORMATION Item 2. Sale of Securities and Use of Proceeds 12 Item 6 Exhibits and Reports on Form 8-K 12 Signatures 13 2
HOWTEK, INC. Balance Sheets <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ------------- ----------------- <S> <C> <C> Assets (unaudited) (audited) Current assets: Cash and equivalents $ 718,744 $ 1,444,771 Trade accounts receivable, net of allowance for doubtful accounts of $247,000 in 2001 and $256,000 in 2000 666,738 1,082,783 Inventory 3,010,350 2,443,150 Prepaid and other 54,197 111,312 ------------ ------------ Total current assets 4,450,029 5,082,016 ------------ ------------ Property and equipment: Equipment 2,900,470 2,843,818 Leasehold improvements 41,721 36,821 Motor vehicles -- 6,050 ------------ ------------ 2,942,191 2,886,689 Less accumulated depreciation and amortization 2,513,000 2,398,553 ------------ ------------ Net property and equipment 429,191 488,136 ------------ ------------ Other assets: Software development costs, net 319,525 350,550 Debt issuance costs, net 8,483 16,965 Patents, net 6,008 8,261 ------------ ------------ Total other assets 334,016 375,776 ------------ ------------ Total assets $ 5,213,236 $ 5,945,928 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,553,261 $ 1,096,174 Accrued expenses 611,082 430,699 Loans payable to related party 500,000 500,000 Convertible subordinated debentures 117,000 117,000 ------------ ------------ Total current liabilities 2,781,343 2,143,873 Loans payable to related party 390,000 900,000 ------------ ------------ Total liabilities 3,171,343 3,043,873 ------------ ------------ Stockholders' equity: Convertible preferred stock, $.01 par value: authorized 1,000,000 shares; issued and outstanding 9,550, with the aggregated liquidation value of $2,215,000 plus 7% annual dividend 96 96 Common stock, $ .01 par value: authorized 25,000,000 shares; issued 14,070,372 in 2001 and 13,588,126 shares in 2000; outstanding 14,002,496 in 2001 and 13,520,250 shares in 2000 140,703 135,881 Additional paid-in capital 55,938,041 55,365,491 Accumulated deficit (53,086,683) (51,649,149) Treasury stock, at cost (67,876 shares) (950,264) (950,264) ------------ ------------ Total stockholders' equity 2,041,893 2,902,055 ------------ ------------ Total liabilities and stockholders' equity $ 5,213,236 $ 5,945,928 ============ ============ </TABLE> See accompanying notes to financial statements. 3
HOWTEK, INC. Statements of Operations <TABLE> <CAPTION> Three Months Six Months June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 (unaudited) (unaudited) <S> <C> <C> <C> <C> Sales $ 932,160 $ 1,957,638 $ 2,445,764 $ 3,475,156 Cost of Sales 785,533 1,360,512 1,906,996 2,525,473 ------------ ------------ ------------ ------------ Gross Margin 146,627 597,126 538,768 949,683 ------------ ------------ ------------ ------------ Operating expenses: Engineering and product development 198,888 150,760 362,864 360,663 General and administrative 287,828 266,796 594,139 556,046 Marketing and sales 427,818 398,266 965,883 781,921 ------------ ------------ ------------ ------------ Total operating expenses 914,534 815,822 1,922,886 1,698,630 ------------ ------------ ------------ ------------ Loss from operations (767,907) (218,696) (1,384,118) (748,947) Interest expense - net 30,036 38,805 53,416 73,018 ------------ ------------ ------------ ------------ Net loss $ (797,943) $ (257,501) $ (1,437,534) $ (821,965) Preferred dividend 39,193 14,407 77,956 26,616 ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (837,136) $ (271,908) $ (1,515,490) $ (848,581) ============ ============ ============ ============ Net loss per share Basic and diluted $ (0.06) $ (0.02) $ (0.11) $ (0.06) Weighted average number of shares used in computing earnings per share Basic and diluted 13,631,198 13,343,952 13,597,861 13,305,218 </TABLE> See accompanying notes to financial statements. 4
HOWTEK, INC. Statements of Cash Flows Six Months Six Months June 30, 2001 June 30, 2000 ------------- ------------- (unaudited) (unaudited) Cash flows from operating activities: Net loss $(1,437,534) $ (821,965) ----------- ----------- Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 114,447 164,998 Amortization 124,735 150,432 Compensation expense related to issue of Stock Subscription Warrants -- 27,000 Changes in operating assets and liabilities: Accounts receivable 416,045 (520,078) Inventory (567,200) 91,920 Other current assets 57,115 (26,070) Accounts payable 457,087 398,073 Accrued expenses 102,427 96,994 ----------- ----------- Total adjustments 704,656 383,269 ----------- ----------- Net cash used for operating activities (732,878) (438,696) ----------- ----------- Cash flows from investing activities: Patents, software development and other (82,975) (56,302) Additions to property and equipment (55,502) (60,569) ----------- ----------- Net cash used for investing activities (138,477) (116,871) ----------- ----------- Cash flows from financing activities: Issuance of common stock for cash 145,328 9,632 Issuance of preferred stock for cash -- 200,000 Proceeds of loan from related parties -- 260,000 ----------- ----------- Net cash provided by financing activities 145,328 469,632 ----------- ----------- Decrease in cash and equivalents (726,027) (85,935) Cash and equivalents, beginning of period 1,444,771 263,073 ----------- ----------- Cash and equivalents, end of period $ 718,744 $ 177,138 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 5,265 $ 5,265 =========== =========== During the six months ended June 30, 2000, $25,000 of accrued expenses were converted to preferred stock of the Company. During the six months ended June 30, 2001, $510,000 of loans payable to related parties were converted to common stock of the Company See accompanying notes to financial statements. 5
HOWTEK, INC. Notes to Financial Statements June 30, 2001 (1) Accounting Policies In the opinion of management all adjustments and accruals (consisting only of normal recurring adjustments) which are necessary for a fair presentation of operating results are reflected in the accompanying financial statements. Reference should be made to Howtek, Inc.'s ("Howtek" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2000 for a summary of significant accounting policies. Interim period amounts are not necessarily indicative of the results of operations for the full fiscal year. (2) Loan Payable to Related Party The Company has a Convertible Revolving Credit Promissory Note ("the Convertible Note") and Revolving Loan and Security Agreement (the "Loan Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of the Company, under which Mr. Howard has agreed to advance funds, or to provide guarantees of advances made by third parties in an amount up to $3,000,000. Outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at prime interest rate plus 2%. The Convertible Note entitles Mr. Howard to convert outstanding advances into shares of the Company's common stock at any time based on the outstanding closing market price of the Company's common stock at the time each advance is made. In June 2001, Mr. Howard converted $510,000 of the Convertible Note into 369,903 shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). At June 30, 2001, $80,000 was outstanding under the Loan Agreement. The Company had $2,920,000 available for future borrowings. The Company has debt evidenced by Secured Demand Notes and Security Agreements (the "Notes") owed to Mr. Robert Howard. Principal of these Notes is due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. The Notes currently bear interest at 12%. Payment of the Notes is secured by a security interest in certain assets of the Company. As of June 30, 2001, the Company owed Mr. Howard $500,000 pursuant to the Notes. 6
HOWTEK, INC. Notes to Financial Statements June 30, 2001 (2) Loan Payable to Related Party (continued) During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on these Promissory Notes is payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per annum. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Notes entitle the payees to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. As of June 30, 2001, the Company owed $310,000 pursuant to the Promissory Notes. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, possible technological obsolescence of products, competition, and other risks detailed in Howtek's Securities and Exchange Commission filings. The words "believe", "expect", "anticipate" and "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Results of Operations Quarter Ended June 30, 2001 compared to Quarter Ended June 30, 2000 and Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000 Sales. Sales for the three months ended June 30, 2001 were $932,160, compared with sales of $1,957,638 for the quarter ended June 30, 2000. Sales for the six months ended June 30, 2001 were $2,445,764, compared with sales of $3,475,156 for the comparable period in 2000. Results for the quarter ended June 30, 2001 reflects the Company's strategic decision to withdraw from declining prepress and graphic arts markets to concentrate on greater business opportunities in medical and photographic imaging and digitization markets. As expected, sales of the Company's prepress and graphic arts products, including related maintenance and repair services, decreased by $950,173, from $1,197,170 in the second quarter of 2000 to $246,997 in the comparable period in 2001, and decreased by $1,510,792, from $2,338,415 to $827,623 for the six months ended June 30, 2000 and 2001, respectively. The Company continues to emphasize its medical and photographic business opportunities, while managing the decline in it's traditional graphic arts business. Sales of the Company's medical imaging products decreased slightly from $627,858 in the quarter ended June 30, 2000 to $512,964 in the quarter ended June 30, 2001, due primarily to the timing of expected to be regular, multiple-unit orders from its medical OEM customers. Medical sales increased to $1,053,869 for the six months ended June 30, 2001 from $991,631 for the comparable period in 2000. Howtek's medical product sales are made primarily to the Company's respective "integration partners" or resellers, which add software and other components to Howtek's products to provide full medical imaging solutions to their customers. The Company believes that there has been a significant softening in the telemedicine and large-scale Picture Archiving and Communication System (PACS) segments of the medical marketplace, as customer purchases are being deferred or 8
reconsidered as a result of what is perceived to be an increasing overall softness in the economy. To address this the Company has increased the number of resellers offering the Howtek digitizers into the softening telemedicine and large-scale PACS markets. The increases in resellers are expected to contribute to increased sales of medical products in future periods. The Company has made a significant investment in time and resources in developing and supporting OEM customers using its digitizers in computer assisted diagnosis of breast cancer systems and applications. Products offered by two of the Company's OEM customers are in the final stage of review by the FDA. If approved, sales in the United States can commence, with significant immediate benefits anticipated for Howtek. Howtek has also commenced field testing of its new FilmFunnel(TM) and ImageFunnel(TM) systems, which couple Howtek digitizers with media-burning and its portable MyLivingRecord(TM) image viewing solutions. The Company expects that these will offer film libraries, radiology departments and individuals, a cost-effective approach to the duplication, distribution and personal retention of medical images. FilmFunnel and ImageFunnel systems are expected to contribute higher per sales revenues and margins than current digitizer sales, while the MyLivingRecord media component creates the potential for recurring, consumables revenues. Sales of the Company's FotoFunnel(TM) photo print scanning system increased from $132,610 in the quarter ended June 30, 2000 to $172,199 for the quarter ended June 30, 2001, and increased $419,161 from $145,110 to $564,271 for the six months ended June 30, 2000 and 2001, respectively. At the end of the first quarter of 2001 the Company described its new FotoFunnel product line as having the potential to be the fastest growing part of its business during 2001, noting that purchase decisions by large retail accounts, critical to achieving the Company's growth objectives, had been delayed by changing views of the Internet as a factor in retail photo finishing. The Company is now seeing such large accounts resume the purchasing process, and Howtek FotoFunnel products are currently in use by several large retail accounts to determine or confirm the applicability of Howtek's products to the customer's photo finishing systems requirements. Promotion of Howtek products to large retail purchasers increased during the second quarter 2001, domestically and internationally, through the Company's growing OEM reseller base, which currently includes Gretag Imaging, Noritsu Koki, Co., Inc, Noritsu America Corporation, and a leading photo minilab and consumables manufacturer with which the Company has recently concluded an OEM agreement. Noritsu America has made the Howtek FotoFunnel a part of its new Digital Print Station product and is now broadly promoting this product in the United States. Noritsu is also introducing this product on an international basis. Additionally, the Company recently introduced its new FlashFunnel System(TM) providing photofinishers and other retailers with the ability to offer fast, on-site Compact Disc (CD), digital image file and reprint production from digital camera memory and other sources. The FlashFunnel is available as a very compact turnkey solution, including a digital camera memory reader and flat panel display or in a software only version. Howtek believes that its new FlashFunnel is an important product introduction, expanding its retail, large account and OEM opportunities, in some cases beyond traditional photographic markets. 9
Gross Margins. Gross margins for the three and six month periods ended June 30, 2001 decreased to 16% and 22%, respectively, from 31% and 27%, respectively, in the comparable periods in 2000. This decrease results from a reduction in sales without a corresponding reduction in production overhead and indirect production expenses. The Company anticipates a decrease in overhead and indirect production expenses in future quarters, as it continues its cost reduction efforts. The Company expects margins to improve as a result of anticipated increases in sales of higher margin medical digitizers and FotoFunnel products over the next several quarters. Engineering and Product Development. Engineering and product development costs for the three month period ended June 30, 2001 increased 32% from $150,760 in 2000 to $198,888 in 2001. Engineering and product development costs for the six month period ended June 30, 2001 increased slightly from $360,663 in 2000 to $362,864 in 2001. This increase resulted primarily from an increase in regulatory expenses associated with product retesting for compliance to a new European electrical emissions requirement and an increase in outside engineering resources. The Company expects to continue to increase its utilization of outside and contract engineering resources as it deems appropriate. The Company expects engineering and product development costs to increase in absolute terms in 2001, while declining as a percentage of overall sales. General and Administrative. General and administrative expenses in the three and six month periods ended June 30, 2001 increased slightly from $266,796 and $556,046 in 2000 to $287,828 and $594,139 in 2001. The Company expects general and administrative expenses to remain relatively constant during the balance of 2001, as a percentage of sales. Marketing and Sales Expenses. Marketing and sales expenses in the three month period ended June 30, 2001 increased slightly from $398,266 in 2000 to $427,818 in 2001. Marketing and sales expenses for the six month period ended June 30, 2001 increased 24% from $781,921 in 2000 to $965,883 for the comparable period in 2001. During the second quarter of 2001, the Company significantly reduced expenses related to its traditional graphic art business. The increase in marketing and sales expenses resulted primarily from increases in advertising, trade show and promotional expenses related to medical and FotoFunnel products. The Company expects marketing and sales expenses to increase in 2001 compared to 2000. Interest Expense. Net interest expense for the three and six month periods ended June 30, 2001 decreased to $30,036 and $53,416 in 2001, from $38,805 and $73,018 in 2000. This decrease is due primarily to the increase in interest income related to higher cash balances which were a result of the funds raised from the sale of securities in the fourth quarter of 2000. As a result of the foregoing, the Company recorded a net loss of $797,943 or $0.06 per share for the three month period ended June 30, 2001 on sales of $932,160 compared to a net loss of $257,501 or $0.02 per share from the same period in 2000 on sales of $1,957,638. The loss for the six months ended June 30, 2001 was $1,437,534 or $0.11 per share on sales of $2,445,764 compared with $821,965 or $0.06 per share on sales of $3,475,156 for the six months ended June 30, 2000. 10
Liquidity and Capital Resources The Company's ability to generate cash adequate to meet its requirements depends primarily on operating cash flow and the availability of a $3,000,000 credit line under a Convertible Note and Revolving Loan and Security Agreement with its Chairman, Mr. Robert Howard, of which $2,920,000 was available at June 30, 2001. At June 30, 2001 the Company had current assets of $4,450,029, current liabilities of $2,781,343 and working capital of $1,668,686. The ratio of current assets to current liabilities was 1.6:1. The Company has debt evidenced by Secured Demand Notes and Security Agreements (the "Notes") owed to Mr. Robert Howard. Principal of these notes is due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. The Notes currently bear interest at 12%. Payment of the Notes is secured by a security interest in certain assets of the Company. As of June 30, 2001, the Company owed Mr. Howard $500,000 pursuant to the Notes. During 1999 the Company borrowed $310,000 from Mr. Robert Howard, pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on these Promissory Notes is payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per annum. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Notes entitle the payees to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. As of June 30, 2001, the Company owed $310,000 pursuant to the Promissory Notes. In June 2001, Mr. Howard converted $510,000 of the Convertible Note into 369,903 shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). At June 30, 2001, $80,000 was outstanding under the Loan Agreement. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. 11
PART II OTHER INFORMATION Item 2. Sale of Securities and Use of Proceeds In June 2001, Mr. Robert Howard converted $510,000 of the Convertible Note into 369,903 shares of restricted common stock of the Company. These shares of common stock were issued pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 12
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Howtek, Inc. ------------------------------------ (Company) Date: August 10, 2001 By: /s/ W. Scott Parr ---------------------- ------------------------------------ W. Scott Parr President, Chief Executive Officer, Director Date: August 10, 2001 By: /s/ Annette L. Heroux ---------------------- ------------------------------------ Annette L. Heroux Vice President Finance, Chief Financial Officer 13