Back to GetFilings.com
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, 1999
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:
Name of each exchange on
Title of each class which registered
- ------------------- ----------------
9% Convertible Subordinated Philadelphia Stock Exchange
Debentures due 2001
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 10, 2000 was $31,686,519.
As of March 10, 2000, the registrant had 13,268,076 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 photo-finishing, medical 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.
The Company marketed originally to the `high-end' of the graphic arts scanning
marketplace, including advertising, corporate, service bureau and other printing
and publishing customers. As part of its strategy to improve financial
performance and increase growth, the Company has recently shifted its business
focus, extending and promoting its scanning technology for use in photo
finishing and medical applications.
As part of its new business strategy Howtek has (1) shifted its product
emphasis from the traditional graphic arts markets to the growing and higher
margin medical and photo processing markets, (2) updated all product lines,
introducing new products in medical and photo processing/Internet markets, (3)
migrated from in-house manufacture to outsourcing to more effectively utilize
outside engineering, development, and manufacturing resources, (4) substantially
reduced personnel and overhead, and (5) revamped its marketing and sales effort
consistent with its new business focus. Howtek has exploited its traditional
graphic arts business to support development of its medical business, and
introduction of a new line of products linking photo labs and processors to the
Internet and worldwide web, while reducing its cost of operations.
3
Medical Imaging Products
Howtek MultiRAD(TM) digitizers are used in medical imaging to convert
radiological films to digital records for computer analysis, diagnosis,
transmission or storage. The use of medical images to diagnose and treat
diseases and injuries has been an important medical tool since the invention of
x-ray technology and the emergence of diagnostic radiology as a medical
specialty. Medical imaging has reduced the need for certain exploratory surgical
procedures and has enabled clinicians to make faster and more precise diagnoses
and prescribe more targeted courses of treatment. Medical imaging is used in all
stages of the patient management cycle, from screening to diagnosis, treatment
and post-treatment assessment. Where medical images are acquired on film, those
films must be converted to digital form by medical film digitizers to be
communicated, stored or analyzed electronically.
Historically, 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, achieved the highest quality 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.
Howtek believes its competitive advantage is based on its 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
"third-generation" (and newest) 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's MultiRAD(TM) scanners are less expensive
than existing competitive products with comparable capabilities, and are
superior in performance to scanners previously available at comparable prices.
In the MultiRAD(TM) 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. The Company believes that this solid state Red LED
illumination system offers several important advantages over competitive
fluorescent illumination methods contributing to improved image quality and to
operator productivity, including:
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
4
In general, medical digitizers like Howtek's MultiRAD(TM) digitizer operate in
conjunction with, and require, image acquisition and management software
developed and marketed by third parties. Channels that distribute and integrate
such software are, therefore, a primary vehicle for digitizer sales. Specific
interface (or driver) development is required by the software developer for a
digitizer to operate with a software application. A customer's selection of an
integrated medical imaging solution is typically based on the software
application selected, and not on the digitizer choice. A particular digitizer
may then be selected by the customer, or recommended by the systems integrator
marketing the software application. The extent to which a particular digitizer
is supported by and promoted by integrators offering a particular software
solution to their customers will, therefore, impact digitizer choice and sales.
Similarly, the relative popularity and sales growth of affiliated software
applications can positively influence digitizer sales.
The market for medical imaging software, and for related medical film
digitizers, has evolved significantly over the last 18-24 months with the
increasing market availability and acceptance of medical imaging, teleradiology
and PACS solution software running under Microsoft(R)'s operating system Windows
NT(TM). Such software permits use of low cost PCs in place of more specialized
and higher priced hardware, and reduces the overall cost of implementing a
medical image management system. The Company believes that one of the emerging
software standards in this market is the RadWorks(TM) product developed and
offered by Applicare Medical Imaging N.V. (purchased in late 1999 by General
Electric Medical Systems). Applicare's products are sold through GE Medical
Systems and more than 20 other distributors and OEM partners (including Kodak,
Konica, Picker and Toshiba) all over the world. Over 5,000 systems have been
installed in 700 hospitals and clinics in over 45 countries. Howtek has
established a development and marketing relationship with Applicare and
RadWorks(TM), supporting use of Howtek MultiRAD(TM) digitizers with RadWorks
software.
Howtek MultiRAD(TM) digitizers are currently supported by medical application
software from Applicare Medical Imaging, B.V. (Applicare), Radiology Information
Systems (RIS), Line Imaging, Rogan, Mitra, Qualia Computing and Scanis
Computing. Software interface development is currently underway with additional
applications developers.
Products
The Howtek MultiRAD(TM) medical film digitizer product line currently includes:
o The MultiRAD 850 product, a high-resolution digitizer that is positioned to
serve an increasing market for computer-aided mammography. The MultiRAD
850, priced at $18,995, has been chosen by Massachusetts General Hospital
for use in the US National Mammography Study, and
o The MultiRAD 450, priced at $15,995, is aimed at telemedicine and archiving
applications
Howtek's MultiRAD(TM) design permits the differentiation of resolution, and
therefore of models and price levels, through firmware changes in the same basic
product configuration. This means that each Howtek MultiRAD(TM) can be
upgradeable through the Internet, which the Company believes can be a
competitive advantage and a source of continuing upgrade revenues.
5
The following table summarizes current digitizer products:
- --------------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/99
- --------------------------------------------------------------------------------
MultiRAD(TM)450 o Multi-feed compact scanner $15,995
o Solid state, red-light
illumination system
o High definition CCD array
o Digitizing area 14" x 36"
o Maximum film size 15" x 36"
o 1k - 4k resolution
o Minimum 87 micron pixel size
o Optical density 001-3.5
o 12 bit grayscale
o SCSI-2 interface
- --------------------------------------------------------------------------------
MultiRAD(TM)850 o Multi-feed compact scanner $18,995
o Solid state, red-light illumination
system
o High definition CCD array
o Digitizing area 14" x 36"
o Maximum film size 15" x 36"
o 1k - 8k resolution
o Minimum 43.5 micron pixel size
o Optical density 001-3.5
o 12 bit grayscale
o SCSI-2 interface
- --------------------------------------------------------------------------------
Photographic Products
On-line imaging is projected by the trade publication Advertising Age to reach
$3.3 billion in revenues by 2002. To exploit this market Howtek introduced its
new, under $5,000 list-price FotoFunnel(TM) high productivity Photographic Print
Scanner in February 2000, with commercial shipments expected to begin in April
2000. Using application software from a variety of vendors, images captured by
the Howtek scanner can be transmitted to the Internet for viewing or sharing, or
stored in electronic form on Compact Disk (CD) or diskette. FotoFunnel(TM)
offers smaller and lower volume photo finishers, photo labs and one-hour film
processors a cost-effective way to offer increasingly demanded digital options
to customers developing film. The "load and leave" feature of the FotoFunnel(TM)
allows a merchant to offer this new, revenue enhancing service without
necessarily increasing labor or space.
FotoFunnel(TM) is also expected to provide mini-lab owners and other retailers
with an opportunity to add new products and services to build up customer
traffic and incremental business, offering to digitize existing photos for
consumers with "shoeboxes" of old photo prints. The FotoFunnel can quickly and
inexpensively convert those old photos into digital form, giving them new life
in a range of potential uses, from electronic albums to images in
correspondence, reports and email, to images on coffee mugs, shirts, calendars
and gifts.
6
To permit customers to convert existing photo print libraries to digital form in
the comfort of their own homes or offices, Howtek may also offer the FotoFunnel
scanner directly to consumers, on a short-term rental basis, through e-commerce
and resellers.
Product
[Graphic Omitted]
FotoFunnel is a compact; automatic batch-feeding scanner designed to digitize
both existing and recently developed photographic prints. FotoFunnel is offered
at a suggested retail price of $4,995.
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 a
charge coupled device ("CCD") technology and cold cathode tube illumination. A
soft urethane rubber feed system is used to guide the prints through a short,
straight paper path, eliminating scratches or other damage to the print. In
addition, the scanner uses a unique combination of rubber and Mylar separators
to eliminate the risk of misfeeds. 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.
The Company believes the high quality of the equipment, the degree of automation
of the process and the speed of processing combine to increase the usefulness of
the FotoFunnel product to photo-finishers. The photos 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 duplicate prints that might be placed
in the input tray. The software automatically calibrates for the optimum quality
(for example lighting) of the photograph. A further advantage over other digital
processing systems is that FotoFunnel scans directly from the photograph rather
than negatives, eliminating potential color differentiation, which requires
operator intervention in other systems. Matching the color of the print, rather
than the negative, is also expected to eliminate occasional disagreements with
customers about color accuracy.
Photographic prints are fed into the scanner using soft silicon transport
rollers that eliminate the possibility of damage to the original photograph
during the scanning process. Another unique feature 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. In addition, 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.
7
Once the photos have been scanned, they appear as thumbnail previews on the
computer monitor, and can be manipulated. That would include selection of
photographs and switching 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.
Howtek will offer three software options for the FotoFunnel scanner, with
additional third party development anticipated:
o A "FotoFunnel" application, developed exclusively for the Company by
ColorByte Software, offers a flexible, easy to use interface to
photofinishers and consumers;
o A Digital Photo Factory interface, permitting use of the FotoFunnel by
existing and future users of the Digital Photo Factory system from Digital
Now; and
o A TWAIN interface, which is used by OEM's to integrate the FotoFunnel
scanner into their own software applications and systems.
Graphic Arts Products
Howtek believes it is the global market leader in drum scanners, which have
declined in popularity in traditional prepress markets but are demonstrating
increased demand in support of wide format and photographic printers. The
Company has succeeded in identifying and exploiting new sources of demand, while
reducing its reliance on older, unprofitable prepress markets.
Overview
Scanning technology digitizes a graphic image in order to permit its
manipulation and reproduction in traditional print media. In its sophisticated
form, it is the central link between the producer of an image (a photographer or
graphic artist) and the publisher who manipulates, edits, and reproduces the
image in print form.
Howtek pioneered a scanning technology that utilizes photo-multiplier tube
(`PMT"), or "drum scanner" technology to capture and digitize an image. This
technology is characterized by a high degree of accuracy and fidelity in the
acquisition and reproduction of complex images, and is used extensively where
high quality printing (magazine and catalog work, for example) is required.
Professional quality, or high-end products offer large format imaging areas,
resolutions in excess of 2,400 dots per inch, and dynamic range (a measure of
the ability to distinguish detail in very light or very dark areas) in excess of
3.2. Professional products are typically priced in excess of $15,000, and up to
$70,000-$80,000 for high-end drum scanners. Howtek's products, which are
typically positioned to offer superior performance and a lower price than
competitors, are priced from $17,000 to $34,000. Historically, Howtek has
competed in the market for drum scanners on the basis of compact design,
comparatively low price, quality and value.
8
Recently, a competitive scanning technology that uses "CCD" or "flatbed"
technology, has resulted in significantly improved image and scanning quality.
These devices are seemingly easier to use than drum scanners, are often less
expensive, and have captured a significant portion of the market formerly held
by Howtek and other drum scanner manufacturers.
To supplement its product line, Howtek added a series of products based on
"flatbed" technology. During the first quarter of 1999, Howtek secured exclusive
rights to market and sell the award winning Scanview flatbed scanner line in the
United States and Canada, with first sales occurring at the end of March 1999.
In addition, to fill out its product offerings, Howtek completed updating all
key prepress graphic arts hardware and software product lines during 1999.
Products
Howtek's HiResolve(TM) drum scanners, with true optical resolution up to 8,000
dots per inch ("dpi"), equal or exceed existing competitive products in terms of
absolute resolution specifications. As a result, they are superior in image
capture resolution to competitive desktop drum scanners, and significantly more
extensive in imaging range and fidelity, when compared to competing flatbed
scanners for specific applications. HiResolve(TM) scanners include:
o The HiResolve 8000 is a compact desktop drum scanner, which
offers "true" 8000-dpi optical resolution, with a suggested
list price of $29,995.
o The HiResolve Grand, priced at $35,995, including software,
provides 5,000 dpi image capture resolution, coupled with an
oversized 24" x 18.5" scanning area.
o The HiResolve Sprint(TM), priced at $19,995, is a reduced
resolution version of the 8000 model, offering 4,000 dpi
image capture resolution to more price sensitive customers.
Howtek's HiResolve(TM) scanners permit full resolution scans across the entire
imaging area, an important advantage over many competitive scanner products.
The HiResolve(TM) 8000 and the HiResolve(TM) Grand are the first scanners
specifically designed to support large format photo-realistic printing, as well
as addressing today's requirement of five, six and eight-color printing
technologies. For any original size, HiResolve scanning permits accurate, high
fidelity output on photo realistic large format printers.
Howtek entered into an agreement in late January 1999, to act as the exclusive
US and Canadian scanner distributor for Scanview, A/S, a privately held Danish
firm. The agreement expires in January 2002, subject to certain successive one
year renewal provisions. These flatbed scanners are targeted at what is now the
largest segment of the high end scanner marketplace, consisting of users that do
not require the ultimate quality of drum scanners and appreciate the convenience
and ease of use associated with flatbed scanner designs. By filling this void in
its product line, Howtek's sales force now is able to implement a market-driven
sales strategy.
9
Products acquired for distribution pursuant to this agreement include:
o the ScanMate(TM)F6 scanner, with a suggested retail price of
$17,995;
o the ScanMate(TM)F8+ scanner, with a suggested retail price of
$27,995;
o and the ScanMate(TM)F10 scanner, with a suggested retail price of
$39,995.
The products are distinguished by increasing scanning speed and resolution, and
in the case of the F10 scanner, the ability to scan using X-Y technology,
focusing at high resolutions on "tiles" across the imaging plate. This X-Y
technology is currently the most innovative approach to flatbed scanning. The
Company believes that its ability to market the Scanview ScanMate(TM) product
line will allow it to compete on more favorable terms. The Company released the
Scanview product line through its own distribution channels, bundled with
Howtek's proprietary software, beginning in March 1999.
In the second quarter of 2000, the Company expects to begin offering a new,
lower priced Scanview flatbed scanner, manufactured in Taiwan. The ScanMate F4,
with a suggested list price of $7,995, will offer a new level of image
acquisition quality at under $10,000. Howtek expects to promote the ScanMate F4
through its existing channels, with an emphasis on direct marketing and
web-based promotions.
MultiRAD(TM), HiResolve(TM) and FotoFunnel(TM) are trademarks of Howtek, all
other trademarks and service marks used in this report are the property of their
respective owners.
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.
Competition
Medical Imaging Products
Howtek's principal competition for high quality medical digitizing markets is
the "first generation" LumiScan(TM) digitizer from Lumisys Corporation. Since
1990, Lumisys digitizers, using a monochromatic laser illumination source, have
been considered the quality standard in medical image digitizers. In the
computer-aided diagnosis and teleradiology/PACS markets, Lumisys digitizers have
enjoyed a dominant market share. Because Lumisys' laser technology requires
manufacturing costs greater than those of Howtek's newer generation technology
products, Lumisys products are expensive to acquire. The Company believes that
this technology is also comparatively delicate, and expensive to maintain when
compared to its products. With the Howtek MultiRAD(TM) digitizer, the Company
believes it is offering image quality comparable to the Lumisys system at lower
prices.
10
Vidar Corporation, a privately held subsidiary of a Swedish firm, has
historically held the second greatest overall market share in medical
digitizers, as a result of Vidar's dominance in the lower quality and most price
sensitive therapy and oncology treatment planning segment. 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 CCD. Offering a lower cost alternative to laser illuminated digitizers,
(comparable in price to Howtek's products) the Vidar products, in the opinion of
the Company, offer lower image quality than the Lumisys or the Howtek products.
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 greater ability
to distinguish meaningful information within seemingly dark areas of the
radiological films - than Vidar devices. This is a competitive advantage.
Other laser and fluorescent illuminated medical digitizers are available from
companies which may have significantly greater financial resources than the
Company, including General Scanning Corporation, Canon Corporation and RDI. To
date, in the Company's view, these competitive products have not achieved a
significant market share.
Photographic Products
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 Digital Now, Pakon
and PictureVision. These systems are fast (they can digitize a roll of film in
about four minutes). However, they are expensive and cost $15,000 or more to
acquire. 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. Howtek products compete with these
systems on 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 however (approximately $8 per image) and
the labor requirements involved in using a standard flatbed scanner in a
conventional photo lab's workflow make this an impractical solution in most
cases. A Fujitsu office scanner,
11
incorporating an automatic document feed mechanism, is offered by PictureVision
as a compromise solution. The FotoFunnel competes with such products on the
basis of price, greater image quality, reduced space requirement and gentle,
reliable print feed design.
Prepress Products
The prepress market is divided between "office quality" and "professional
quality" scanners. Office quality scanners, generally manufactured in Taiwan or
China, have become commodity items, offered through discount and electronic
retailers at prices from $100 (or below) to $1,000.
The Company competes in the professional portion of the market. Professional
quality, or high-end, products offer large format imaging areas, resolutions in
excess of 2,400 dots per inch, and dynamic range (a measure of the ability to
distinguish detail in very light or very dark areas) in excess of 3.2. The
Company's products are positioned to offer superior performance and a lower
price than competitors.
The professional portion of the prepress marketplace is further divided between
drum scanners which use a laser imaging device to capture maximum image accuracy
and detail, and flatbed scanners, which offer ease of use advantages at a modest
compromise in imaging quality. Historically, the Company has competed in the
drum scanner market with Linotype, Agfa and Scanview A/S, as well as several
smaller manufacturers. The Company's drum scanner products, with competitive
features and lower prices, have been gaining market share in this area, while
drum scanners as a whole has lost market share to flatbed scanning products. The
recent agreement to become Scanview's exclusive US distributor adds several
flatbed products to the Company's product line. In the prepress market, the
Company could be at a competitive disadvantage with other scanner manufacturers
that offer consumable printing products, as well as, scanner products. These
competitors may offer scanner products at substantially reduced prices as an
incentive to customers to secure long term supply orders of the competitors
consumables.
Patents
The Company has eight patents covering its scanner and prepress technology in
the US 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 on some of its 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.
12
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.
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).
Engineering and Product and Software Development
For the years ended December 31, 1999, 1998 and 1997 the Company spent $799,960
(or 12% of sales), $1,075,620 (or 20% of sales) and $1,401,989 (or 18% of
sales), respectively, on engineering and product development. In addition, for
the years ended December 31, 1999, 1998 and 1997 the Company spent $122,135 (or
2% of sales), $190,720 (or 4% of sales) and $355,465 (or 5% of sales),
respectively, on software development.
Manufacturing
The Company operates an ISO 9001 and FDA-certified manufacturing facility in
Hudson, NH. Historically the Company has undertaken final assembly of all its
scanners and digitizers from components and subassemblies purchased from various
suppliers. The software applications which are sold with the Company's products
are either developed in-house or licensed from third parties. During the first
calendar quarter of 1999, the Company shifted assembly of its MultiRAD(TM)
medical film digitizer to a local manufacturing company, which has demonstrated
a high level of quality in previous work performed for the Company. During the
third quarter of 1999, the Company shifted assembly of its HiResolve 8000 to a
manufacturing company in Minnesota.
13
Employees
On March 10, 2000 the Company had 30 full time employees and 2 temporary
employees.
Backlog
The dollar amount of the Company's backlog, and orders believed to be firm, as
of December 31, 1999 was approximately $63,000 as compared to approximately
$121,000 on the corresponding date in 1998.
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, manufacturing facility 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, 2000 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
14
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 bid
prices for each quarterly period during 1999 and 1998. The high and low bid
price, reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Fiscal year ended High Low
---- ---
December 31, 1999
First Quarter $1-7/8 $ 7/8
Second Quarter 2 7/8
Third Quarter 1-9/16 5/8
Fourth Quarter 3-1/8 1
Fiscal year ended
December 31, 1998
First Quarter $2-7/16 $1-5/16
Second Quarter 2 1-1/32
Third Quarter 1-9/16 15/16
Fourth Quarter 1-9/16 15/16
As of March 10, 2000 there were 309 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
payment of cash dividends in the foreseeable future is not contemplated by the
Company. 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.
Nasdaq Listing
During the second quarter of 1999, the bid price for the Company's common stock
had fallen below the $1 bid level required for continued trading of the
Company's common stock on the Nasdaq Small Cap Market. In October 1999 the
Company had been notified by Nasdaq that its listing was being reviewed. The
Company was subsequently notified by Nasdaq that the required bid levels had
been achieved and the Company's common stock would continue to be traded on the
Nasdaq Small Cap Market.
15
Recent Sales of Unregistered Securities
In October 1999 the Company issued 200,326 shares of restricted common stock to
Dr. Lawrence Howard in connection with the conversion of indebtedness of
$200,000 plus interest accrued pursuant to an exemption from registration under
Section 3(a) (9) and/or 4(2) of the Securities Act of 1933.
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 the price of $2.50 per share.
The warrant was issued by the Company pursuant to an exemption from registration
under Section 2(a)(3) or 4(2) of the Securities Act of 1933.
On December 31, 1999, the Company issued 6,900 shares of 7% Series A convertible
preferred stock to certain unrelated parties and Mr. W. Scott Parr in connection
with the conversion of indebtedness of $690,000 and issued a total of 15,878
shares of restricted common stock to the parties for interest accrued on the
indebtedness pursuant to exemption from registration under Section 3(a) (9)
and/or 4(2) of the Securities Act of 1933.
16
Item 6. Selected Financial Data
Selected Statement of Operations Data
Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Sales $ 6,663,230 $ 5,323,601 $ 7,874,813 $ 11,263,253 $ 20,603,654
Gross margin 1,594,124 1,223,135 1,663,317 1,918,798 6,619,835
Restructuring charge -- -- -- -- (2,662,632)
Unusual charges -- -- (3,394,406) -- --
Total operating expenses (3,789,306) (4,096,944) (8,236,477) (7,355,481) (11,441,837)
Loss from operations (2,195,182) (2,873,809) (6,573,160) (5,436,683) (4,822,002)
Interest expense - net (1,801,646) (498,514) (258,912) (623,537) (433,045)
Income from legal settlement -- -- 6,000,000 -- --
Net Loss (3,996,828) (3,372,323) (832,072) (6,060,220) (5,255,047)
Net Loss per share (0.32) (0.33) (0.09) (0.76) (0.66)
Selected Balance Sheet Data
As of December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Total current assets $ 4,457,910 $ 4,798,576 $ 5,332,546 $ 9,697,890 $14,137,204
Total assets 5,696,609 6,351,421 7,071,294 12,795,467 18,495,240
Total current liabilities 2,019,340 2,198,995 1,540,222 3,002,453 4,203,168
Loans payable to related parties 1,140,000 765,000 -- 3,478,604 3,578,604
Convertible Subordinated Debentures 117,000 1,881,000 2,181,000 2,181,000 2,181,000
Stockholders' equity 2,920,269 2,271,426 3,350,072 4,133,410 8,532,468
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Overview
The Company marketed originally to the `high-end' of the graphic arts scanning
marketplace, including advertising, corporate, service bureau and other printing
and publishing customers. As part of its strategy to improve financial
performance and increase growth, the Company has recently shifted its business
focus, extending and promoting its scanning technology for use in photo
finishing and medical applications.
As part of its new business strategy Howtek has (1) shifted its product
emphasis from the traditional graphic arts markets to the growing and higher
margin medical and photo processing markets, (2) updated all products lines,
introducing new products in medical and photo processing/Internet markets, (3)
migrated from in-house manufacture to outsourcing to more effectively utilize
outside engineering, development, and manufacturing resources, (4) substantially
reduced personnel and overhead, and (5) revamped its marketing and sales effort
consistent with its new business focus. Howtek has exploited its traditional
graphic arts business to support development of its medical business, and
introduction of a new line of products linking photo labs and processors to the
Internet and worldwide web, while reducing its cost of operations.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Sales. Sales for the year ended December 31, 1999 were $6,663,230, an increase
of $1,339,629 or 25% from sales during the year ended December 31, 1998 of
$5,323,601. The Company continues to emphasize its medical business
opportunities. Sales of the company's medical imaging products increased 21%
from $1,245,558 for the year ended December 31, 1998 to $1,508,197 for the year
ended December 31, 1999. Sales of the Company's prepress and graphic arts
products increased 13% from $3,032,089 in 1998 to $3,440,160 in 1999. Increased
prepress sales are due primarily to the introduction of the Company's new
HiResolve(TM) drum scanner product during the fourth quarter of 1998, and the
introduction of its new Digital PhotoLab(TM) products in the first quarter of
1999. Moreover, during the first quarter of 1999, the Company entered into an
agreement to act as exclusive distributor of the award winning Scanview flatbed
scanner line in the United States and Canada.
Gross Margin. Gross margin for the year ended December 31, 1999 increased to 24%
from 23% in 1998. Gross margins are expected to improve as a result of reduced
production overhead and indirect production expenses, associated with the
Company's continuing overhead and expense control measures and with the
Company's increased outsourcing of production and assembly services.
18
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 1999 decreased 26% from $1,075,620 in 1998 to
$799,960 in 1999. The overall decrease in engineering and product development
costs results primarily from planned reductions in personnel expenses. The
Company expects to continue reducing costs and overhead associated with
engineering and product development as it increases its utilization of outside
and contract engineering resources as appropriate. In general, the Company seeks
to shift its engineering and development priorities, and the allocation of its
engineering and development resources, to its medical business opportunities.
General and Administrative. General and administrative expense decreased
slightly from $1,319,062 in 1998 to $1,286,895 in 1999. During the first quarter
of 1999 the Company established a reserve of $186,662 to permit the Company to
take back discontinued HiDemand 400 graphic arts scanner products to encourage
resellers and customers to acquire new Scanview products, especially in reseller
demonstration locations, and a non-recurring expense of $21,142 associated with
the write off of tooling and inventories associated with the discontinued
HiDemand 400 product. Prior to accounting for this reserve and write down, the
general and administrative expenses for the year ended December 31, 1999,
decreased 18% to $1,079,091. This decrease is due primarily to reductions in
personnel expenses. The Company expects general and administrative expenses to
decline in 2000 as compared to 1999.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 1999 increased slightly from $1,702,262 in 1998 to $1,702,451 in 1999. The
change results from increases in advertising, promotional and trade show
expenses, and a reduction in compensation due to a change in the Company sales
compensation structure to provide compensation on the basis of gross margin,
rather than net sales. The Company expects marketing and sales expenses to
increase in 2000 as compared to 1999.
Interest Expense. Net interest expense of $1,801,646 for the year ended December
31, 1999 includes 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 is 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. See "Liquidity and
Capital Resources".
As a result of the foregoing, the Company recorded a net loss of $3,996,828 or
$0.32 per share for the year ended December 31, 1999 on sales of $6,663,230
compared to a net loss of $3,372,323 or $0.33 per share for the same period in
1998 on sales of $5,323,601.
19
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Sales. Sales for the year ended December 31, 1998 were $5,323,601, a decrease of
32% from sales during the year ended December 31, 1997 of $7,874,813. The
Company attributed the decrease in sales primarily to increased competition for
drum scanners from high-end flatbed scanners, the maturing of the Company's
Scanmaster(TM) 2500 product and the economic crisis in Asia.
Gross Margin. The Company's gross margin, as a percentage of sales, for the year
ended December 31, 1998 increased to 23% from 21% in 1997. During 1998, gross
margins increased from 8% in the first quarter, to 13% in the second quarter,
25% in the third quarter and 35% in the fourth quarter. The improvement in gross
margin was primarily due to better management of indirect production costs and
to the increased sales of products which had higher gross margins.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 1998 decreased 23% from $1,401,989 in 1997 to
$1,075,620 in 1998. The overall decrease in engineering and product development
costs resulted primarily from planned reductions in manpower and anticipated
depreciation expenses.
General and Administrative. General and administrative expense decreased 23%
from $1,716,199 in 1997 to $1,319,062 in 1998. The decrease in general and
administrative expenses resulted primarily from the reduction in personnel,
salaries, and legal fees in connection with a lawsuit, against a former contract
manufacturer, that was settled in April 1997.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 1998 decreased slightly from $1,723,883 in 1997 to $1,702,262 in 1998. The
change resulted from reductions in trade show expenses. The Company increased
its reliance on direct mail and telemarketing to support its sales efforts, and
reduced trade show expenditures.
Interest Expense. Net interest expense of $498,514 included interest expense of
$284,211 relative to the conversion of Convertible Subordinated Debentures as
required in terms of Statement of Financial Accounting Standards No. 84,
"Induced Conversions of Convertible Debt". This charge was wholly offset by a
corresponding account increase of $284,211 in additional paid-in capital. The
charge and corresponding benefit relate to the conversion to equity during 1998
of $300,000 of the Company's previously outstanding 9% Convertible Subordinated
Debentures, due 2001 (the "9% Debenture").
In comparing the Company's performance to that for the year ended December 31,
1997 a $6,000,000 legal settlement granted to the Company in April 1997 (See
Note 9 of Notes to Financial Statements), offset by $3,394,406 in unusual
charges taken during 1997, made comparison difficult. After giving effect to the
legal settlement income and unusual charges, the Company's loss was $832,072 or
$0.09 per share for the year ended December 31, 1997 on sales of $7,874,813
compared to net loss of $3,372,323 or $0.33 per share for the year ended
December 31,1998 on sales of $5,323,601.
20
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, of which $2,670,000 was available at December 31, 1999. 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 $161,011 from $2,599,581 at December 31, 1998 to
$2,438,570 at December 31, 1999. The ratio of current assets to current
liabilities at December 31, 1999 and 1998 was 2.2.
As of December 31, 1998, the Company's outstanding balance on its $8,000,000, 9%
Convertible Subordinated Debentures (the "Debentures"), which become due in
2001, was $1,881,000. 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 a
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 not owned by related parties
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 were recorded relative to the conversion of Convertible
Subordinated Debentures as required in terms of SFAS No. 84. As of December 31,
1999 the Company's outstanding balance of its Debentures was $117,000. Interest
on the Debentures is payable semi-annually on June 1 and December 1.
In the third quarter of 1998, the Company borrowed, (i) $565,000 from Mr. Robert
Howard, the Company's Chairman, and (ii) $200,000 from Dr. Lawrence Howard, the
son of Mr. Robert Howard, pursuant to Secured Demand Notes and Security
Agreements (The "Notes"). Principal on 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.
In February 1999, the Company repaid $65,000 to Mr. Robert Howard and 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
21
share of the Company (the "Common Stock"). The number of shares issued was
calculated using the market price of Howtek's stock on the date of conversion.
As of December 31, 1999, the Company owed $500,000 to Mr. Robert Howard, and no
moneys were owed to Dr. Lawrence Howard. The Company believes it can adequately
fund its working capital and capital equipment requirements based upon its
anticipated level of sales for 2000 and the line of credit available under the
Revolving Loan Agreement with its Chairman.
During 1999 the Company borrowed, (i) $660,000 from unrelated parties, (ii)
$30,000 from Mr. W. Scott Parr, the Company's President, Chief Executive
Officer, and (iii) $310,000 from Mr. Robert Howard, the Company's Chairman,
pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on
these Promissory Notes are 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, 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 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.
On December 31, 1999, the Company consummated an agreement with the unrelated
parties and Mr. W. Scott Parr to convert the Promissory Notes 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"). As of
December 31, 1999, the Company owed $310,000 to Mr. Robert Howard.
Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 , as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.
22
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.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
Director
Name Age Position Since
Robert Howard............ 76 Chairman of the Board, and Director 1984
W. Scott Parr............ 48 President, Chief Executive Officer
and Director 1998
Ivan Gati................ 52 Director 1989
Sheila Horwitz........... 63 Director 1996
Kit Howard............... 56 Director 1999
Harvey Teich............. 80 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 is the founder and Chairman of the Board of Directors of the
Company. He is the inventor of many products including the impact dot matrix
printer, the desktop laser printer and an early digital computer together with
Dr. An Wang. He has been the founder or a principal in many public companies
since the 1960's. 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 serves as Chairman Emeritus 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. 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
Exchange Act.
24
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 on
February 4, 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. (now Virtual Fund.Com, Inc.).
Ivan Gati has served as Chairman of Turner Management, Inc. since 1983. Turner
Management, Inc. is a vertically integrated real estate investment company with
offices located in New York, Texas and Tennessee, and whose subsidiary companies
provide property management and finance services. Mr. Gati is a member of the
Board of Directors of Universal Automation Systems, Inc.
Sheila Horwitz is a Senior Vice President of Schroder Wertheim & Co., Inc., a
securities brokerage firm. She has an extensive background in the securities
brokerage industry, having worked at her current firm, formerly known as
Wertheim, Schroder & Co., since 1990. Previously Ms. Horwitz worked for
Oppenheimer & Co. from 1988 to 1990, and for L. F. Rothschild & Co. from 1978 to
1988, in similar capacities.
Kit Howard holds a Bachelor of Science Degree from New York University. She has
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.
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 17 years, ceased to operate as a partnership. He is a member of the New
York and Florida State Societies for Certified Public Accountants.
Executive Officers and Key Employees
- ------------------------------------
Name Age Position
- ---- --- --------
W. Scott Parr(1) 48 President, Chief Executive Officer, Director
Richard F. Lehman(2) 62 Vice President, Engineering
Annette L. Heroux(1) 43 Chief Financial Officer
Joseph E. Manseau(2) 43 Vice President Sales and Marketing
- ------------------------------
(1) Officer appointed by the Board of Directors.
(2) Key Employees
25
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.
Item 11. Executive Compensation.
The following table provides information on the compensation provided by the
Company during fiscal years 1999, 1998 and 1997 to the persons serving as the
Company's Chief Executive Officer during fiscal 1999, the Company's most highly
compensated executive officers and certain key employees serving at the end of
the 1999 fiscal year. Included in this list are only those executive officers
and key employees whose total annual salary and bonus exceeded $100,000 during
the 1999 fiscal year.
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------- ---- --------- ----------
W. Scott Parr
Chief Executive Officer.................. 1999 138,197 127,337
1998 131,502 277,431
1997 - 0 - - 0 -
Richard Lehman
Vice President, Engineering.............. 1999 112,735 5,000
1998 101,976 19,128
1997 113,698 5,000
26
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------- ---- --------- ---------
Joseph E. Manseau
Vice President, Sales & Marketing........ 1999 126,529 18,410
1998 - 0 - - 0 -
1997 - 0 - - 0 -
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential
------------------------------ Realizable Value at
Number of Percent of Assumed Annual
Securities Total Options Rates of Stock
underlying Granted to Exercise of Price Appreciation
Options Employees Base Price Expiration for Option Term
Name Granted* in Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---- -------- -------------- ------ ---- ----- ------
W. Scott Parr 125,000 29.0 .81 07/07/2009 63,676 161,366
2,337 .5 1.13 10/07/2009 1,661 4,209
Joseph Manseau 10,000 2.3 .81 07/07/2009 5,094 12,909
8,410 2.0 1.13 10/07/2009 5,977 15,146
Richard Lehman 5,000 1.2 .81 07/07/2009 2,547 6,455
- ----------
* Except for the options for 2,337 shares granted to Mr. Parr which vested
immediately, all the options vest in annual installments at various times
between July 7, 1999 and September 1, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information on an aggregated basis regarding each
exercise of stock options during the Company's last completed fiscal year by
each of the executive officers and key employees named 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
FY-End (#) FY-End($) (1)
Shares ---------- -------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---- ------------ --------- ------------- -------------
W. Scott Parr (2) 0 0 99,546/328,855 139,089/347,805
Joseph Manseau (2) 0 0 6,243/16,167 9,370/23,695
Richard Lehman (2) 0 0 50,294/5,334 52,989/6,866
- --------------
(1) Based upon the closing price of the Common Stock on December 31, 1999, of
$2.44 per share.
(2) Options granted pursuant to the Company's 1993 Stock Option Plan, as
amended.
27
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 1999 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 1999 none of the executive officers of the Company
served on the Board of Directors or Compensation Committee of any other entity,
any of whose officers has served on the Board of Directors of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the Common Stock
owned on March 10, 2000, 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.
Number of
Shares
Name and Address of Beneficially Percentage
Beneficial Owner(1) Owned (1) (2) of Class
- ------------------- ------------- --------
Robert Howard.......................... 2,477,030(3) 17.84%
303 East 57th Street
New York, New York 10022
Donald Chapman......................... 1,198,424(4) 9.03%
8650 South Ocean Drive
Jenson Beach, FL 34957
W. Scott Parr.......................... 194,498(5) 1.45%
Sheila Horwitz......................... 79,000(6) *
Kit Howard............................. 40,000(7) *
Richard Lehman......................... 47,628(8) *
Joseph Manseau......................... 8,409(9) *
Harvey Teich........................... 70,000(10) *
Ivan Gati.............................. 65,000(11) *
All current executive officers and
directors as a group (7 persons)....... 2,953,844 (3) & (5) through
(7), (10) & (11) 20.66%
- ----------
* Less than one percent.
28
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 10, 2000, 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 10, 2000, 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 294,399 shares exercisable on conversion of
$330,000 principal amount of indebtedness outstanding as of December 31,
1999, pursuant to a loan made by Mr. Howard to the Company, which is
convertible into 145,455 shares of Common Stock at $1.31 per share, 86,505
shares at $1.16 per share and 62,439 shares at $1.28 per share and 310,000
shares exercisable at $1.00 per share on conversion of $310,000 principal
amount of indebtedness outstanding pursuant to Convertible Promissory
Notes. Does not include 15,000 shares owned by Mr. Howard's wife.
4) Includes 25,000 shares owned by Mr. Chapman's wife and 150,000 owned by a
revocable trust.
5) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to
purchase 139,364 shares of the Company's Common Stock at $1.13 per share,
25,883 shares at $0.81 per share and 2,250 shares at $1.00 per share.
6) Includes options to purchase 10,000 shares 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
$.81 per share.
8) Includes 2,000 shares owned by Mr. Lehman's wife. Also includes options to
purchase 20,500 of the Company's Common Stock at $1.72 per share, 16,376
shares at $1.13 per share, 2,752 shares at $1.00 per share and 1,666 shares
at $0.81 per share.
9) Includes options to purchase 1,000 shares of the Company's Common Stock at
$1.00 per share, 3,333 shares at $.81 per share and 4,076 shares at $1.13
per share.
10) 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.
11) 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.
29
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, of which $2,670,000 was
available at December 31, 1999. The Loan Agreement expires January 4, 2001.
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 December 31,
1999, $330,000 was outstanding under the Loan Agreement.
The Company has Secured Demand Notes and Security Agreements (the "New 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 New 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 New Notes currently bear interest at 12%. Payment of the New
Notes is secured by a security interest in certain assets of the Company. As of
December 31, 1999 $500,000 was outstanding pursuant to the New 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 are 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. As of December 31, 1999, the Company
owed $310,000 pursuant to the Promissory Notes.
As of December 31, 1999, the Company had one lease obligation related to its
facility. The lease obligation through September 30, 2000 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, 2000. Rental expense for the year ended December 31,
1999 was $78,500.
As of December 31, 1998, the Company owed Dr. Lawrence Howard $200,000, pursuant
to Secured Demand Notes and Security Agreements (The "New LH Notes"). Principal
of these notes were due and payable in full, together with interest accrued and
any penalties provided for, on demand. Under the terms of the New LH 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 New LH Notes is secured by a security interest in certain assets of the
Company.
30
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").
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 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").
During the year ended December 31, 1999 the Company sold engineering services
totaling $77,394 to Presstek, Inc., which Mr. Howard was the Chairman Emeritus
of the Board and is a principal stockholder.
31
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:
1. Financial Statements - See Index on page 36.
2. Financial Statement Schedule - See Index on page 36.
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.
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
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988].
3(e) 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].
32
4(a) Form of Common Stock Certificate [incorporated by
reference to the Registrant's Form 8-A, filed on March
13, 1985].
4(b) Form of Indenture dated as of December 1, 1986 between
Registrant and Continental Stock Transfer and Trust
Company, including Form of Debenture [incorporated by
reference to Exhibit 4(c) to the Registrant's
Registration Statement on Form S-1 (Commission File No.
33-8971), 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 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(g)Form of Convertible Promissory Note between the
Registrant and Mr. Robert Howard.
33
10(h)Second Supplemental Indenture dated as of December 31,
1998, between the Registrant and Continental Stock
Transfer and Trust Company. [incorporated by reference
to Exhibit 10(h) 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.
23(a) Consent of BDO Seidman, LLP.
27 Financial Data Schedule (For SEC use only)
(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) 3 above.
(d) Financial Statement Schedule - See (a) 2 above.
34
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 30, 2000
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
Robert Howard Board, Director March 30, 2000
/s/ W. Scott Parr
- ------------------------- President, Chief Executive
W. Scott Parr Officer, Director March 30, 2000
/s/ Annette L. Heroux
- ------------------------- Chief Financial Officer, Principal
Annette L. Heroux Accounting Officer March 30, 2000
- ------------------------- Director March 30, 2000
Ivan Gati
/s/ Sheila Horwitz
- ------------------------- Director March 30, 2000
Sheila Horwitz
/s/ Kit Howard
- ------------------------- Director March 30, 2000
Kit Howard
/s/ Harvey Teich
- ------------------------- Director March 30, 2000
Harvey Teich
35
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 37
Balance Sheets
As of December 31, 1999 and 1998 38
Statements of Operations
For the years ended December 31, 1999,
1998 and 1997 39
Statements of Stockholders' Equity
For the years ended December 31, 1999,
1998 and 1997. 40
Statements of Cash Flows
For the years ended December 31, 1999,
1998 and 1997. 41
Notes to Financial Statements 42-57
Schedule II - Valuation and Qualifying
Accounts and Reserves 58
36
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, 1999 and 1998 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, 1999. 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 generally accepted auditing
standards. 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
New York, New York
February 18, 2000
37
HOWTEK, INC.
Balance Sheets
December 31, December 31,
------------ ------------
1999 1998
------------ ------------
Assets (note 3)
Current assets:
Cash and equivalents $ 263,073 $ 182,724
Trade accounts receivable net of allowance
for doubtful accounts of $151,000 in 1999
and $118,000 in 1998 (note 7) 1,400,987 1,570,081
Inventory (note 1) 2,649,460 2,927,082
Prepaid and other 144,390 118,689
------------ ------------
Total current assets 4,457,910 4,798,576
------------ ------------
Property and equipment
Equipment 2,735,545 2,534,635
Leasehold improvements 33,321 27,765
Motor vehicles 6,050 6,050
------------ ------------
2,774,916 2,568,450
Less accumulated depreciation and amortization 2,058,734 1,717,445
------------ ------------
Net property and equipment 716,182 851,005
------------ ------------
Other assets (note 1):
Software development costs, net 472,427 626,577
Debt issuance costs, net 37,323 57,682
Patents, net 12,767 17,581
------------ ------------
Total other assets 522,517 701,840
------------ ------------
Total assets $ 5,696,609 $ 6,351,421
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,176,480 $ 1,287,791
Accrued expenses 342,860 146,204
Loans payable to related parties (note 3) 500,000 765,000
------------ ------------
Total current liabilities 2,019,340 2,198,995
Loans payable to related parties (note 3) 640,000 --
Convertible subordinated debentures (note 4) 117,000 1,881,000
------------ ------------
Total liabilities 2,776,340 4,079,995
------------ ------------
Commitments and contingencies (notes 3 and 8)
Stockholders' equity (notes 3, 4 and 5):
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,330,542 in 1999
and 11,128,082 shares in 1998; outstanding
13,262,666 in 1999 and 11,060,206 shares in 1998 133,305 111,281
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares in 1999; issued and outstanding
6,900 in 1999, with the aggregate liquidation value of
$690,000 plus 7% annual dividend 69 --
Additional paid-in capital 52,562,377 47,938,799
Accumulated deficit (48,825,218) (44,828,390)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,920,269 2,271,426
------------ ------------
Total liabilities and stockholders' equity $ 5,696,609 $ 6,351,421
============ ============
See accompanying notes to financial statements.
38
HOWTEK, INC.
Statements of Operations
For the Years Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Sales (note 7) $ 6,663,230 $ 5,323,601 $ 7,874,813
Cost of sales 5,069,106 4,100,466 6,211,496
------------ ------------ ------------
Gross margin 1,594,124 1,223,135 1,663,317
------------ ------------ ------------
Operating expenses:
Engineering and product development 799,960 1,075,620 1,401,989
General and administrative 1,286,895 1,319,062 1,716,199
Marketing and sales 1,702,451 1,702,262 1,723,883
Unusual charges (note 2) -- -- 3,394,406
------------ ------------ ------------
Total operating expenses 3,789,306 4,096,944 8,236,477
------------ ------------ ------------
Loss from operations (2,195,182) (2,873,809) (6,573,160)
Interest expense - net (includes $104,486,
$30,205 and $114,649, respectively,
to related parties) (1,801,646) (498,514) (258,912)
Income from legal settlement (note 9) -- -- 6,000,000
------------ ------------ ------------
Net loss $ (3,996,828) $ (3,372,323) $ (832,072)
============ ============ ============
Net loss per share (note 5)
Basic and diluted $ (0.32) $ (0.33) $ (0.09)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 12,660,613 10,142,672 9,038,632
See accompanying notes to financial statements.
39
HOWTEK, INC.
Statements of Stockholders' Equity
Common Stock Preferred Stock
--------------------- -------------------
Number of Number of Additional
Shares Shares Paid-in Accumulated Treasury Stockholders'
Issued Par Value Issued Par Value Capital Deficit Stock Equity
---------- --------- -------- --------- ----------- ------------ --------- -----------
Balance at January 1, 1997 9,099,732 $ 90,997 $ -- $ -- $45,616,672 $(40,623,995) $(950,264) $ 4,133,410
Issuance of common stock
pursuant to incentive stock
option plan 28,350 284 -- -- 48,450 -- -- 48,734
Net loss -- -- -- -- -- (832,072) -- (832,072)
---------- --------- -------- --------- ----------- ------------ --------- -----------
Balance at December 31, 1997 9,128,082 91,281 -- -- 45,665,122 (41,456,067) (950,264) 3,350,072
Sale of common stock 1,000,000 10,000 -- -- 990,000 -- -- 1,000,000
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 3 (a) & (b)) 700,000 7,000 -- -- 702,466 -- -- 709,466
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 4) 300,000 3,000 -- -- 581,211 -- -- 584,211
Net loss -- -- -- -- -- (3,372,323) -- (3,372,323)
---------- --------- -------- --------- ----------- ------------ --------- -----------
Balance at December 31, 1998 11,128,082 111,281 -- -- 47,938,799 (44,828,390) (950,264) 2,271,426
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 4) 1,764,000 17,639 -- -- 3,417,519 -- -- 3,435,158
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 3 (b)) 200,326 2,003 -- -- 223,363 -- -- 225,366
Issuance of common stock in lieu of
payment of accounts payable 195,090 1,951 -- -- 187,233 -- -- 189,184
Issuance of common stock pursuant
to incentive stock option plan 27,166 272 -- -- 39,988 -- -- 40,260
Issuance of common stock for
payment of interest to investors 15,878 159 -- -- 38,544 -- -- 38,703
Issuance of preferred stock relative
to conversion of loans payable to
investors (note 5 (a)) -- -- 6,900 69 689,931 -- -- 690,000
Issuance of stock subscription warrant
for services (note 5 (d)) -- -- -- -- 27,000 -- -- 27,000
Net loss -- -- -- -- -- (3,996,828) -- (3,996,828)
---------- --------- -------- --------- ----------- ------------ --------- -----------
Balance at December 31, 1999 13,330,542 $ 133,305 6,900 $ 69 $52,562,377 $(48,825,218) $(950,264) $ 2,920,269
========== ========= ======== ========= =========== ============ ========= ===========
See accompanying notes to financial statements.
40
HOWTEK, INC.
Statements of Cash Flows
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(3,996,828) $(3,372,323) $ (832,072)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 341,290 462,128 1,048,865
Amortization 301,457 188,208 301,360
Interest relative to conversion of Convertible
Subordinated Debentures (note 4) 1,671,158 284,211 --
Asset writedowns and reserve increases (note 2) -- -- 3,394,406
Compensation expense relative to issue of
Stock Subscription Warrants (note 5) 27,000 -- --
Changes in operating assets and liabilities:
Accounts receivable 169,094 (94,129) 1,243,323
Inventory 277,622 588,911 496,664
Other current assets (25,701) (13,414) 125,540
Accounts payable 77,873 (114,096) (768,471)
Accrued interest 61,327 20,738 (672,531)
Accrued expenses 135,329 (12,869) (21,229)
----------- ----------- -----------
Total adjustments 3,036,449 1,309,688 5,147,927
----------- ----------- -----------
Net cash provided (used) by
operating activities (960,379) (2,062,635) 4,315,855
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (122,135) (190,720) (377,995)
Additions to property and equipment (206,466) (273,713) (507,807)
----------- ----------- -----------
Net cash used by investing activities (328,601) (464,433) (885,802)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 40,260 1,000,000 48,734
Proceeds of loans payable to unrelated parties 696,906 -- --
Proceeds of loans payable to related parties 632,163 1,474,466 --
Repayment of loans payable to related parties -- -- (3,478,604)
----------- ----------- -----------
Net cash provided (used) by financing activities 1,369,329 2,474,466 (3,429,870)
----------- ----------- -----------
Increase (decrease) in cash and equivalents 80,349 (52,602) 183
Cash and equivalents, beginning of year 182,724 235,326 235,143
----------- ----------- -----------
Cash and equivalents, end of year $ 263,073 $ 182,724 $ 235,326
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash flows from financing activities:
Interest paid $ 10,530 $ 188,854 $ 983,471
=========== =========== ===========
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock (note 3) $ 225,366 $ 709,466 $ --
=========== =========== ===========
Conversion of accounts payable into
Common Stock $ 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 4) $ 3,435,158 $ 584,211 $ --
=========== =========== ===========
See accompanying notes to financial statements.
41
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 integrator and OEM's.
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
$1,773,000 and $876,000, respectively, for 1999 and raw material and
finished goods of approximately $2,387,000 and $540,000, respectively,
for 1998.
(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, are being amortized over the 15-year term of
the Debentures using the straight-line method. The debt issuance costs
balances are presented net of accumulated amortization, which was
$296,648, and $276,920 at December 31, 1999, and 1998, respectively.
42
HOWTEK, INC.
Notes to Financial Statements (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 $98,774, and $93,960 at December 31, 1999, and 1998, 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
$122,135, $190,720, and $355,465 of internally developed and externally
purchased software costs during fiscal 1999, 1998 and 1997,
respectively. During 1997 the Company wrote-off previously capitalized
software development costs for non-current products with a net book
value of $272,361 in the second quarter and $157,550 in the fourth
quarter. See Note 2 - Unusual Charges.
The capitalized software balances are presented net of accumulated
amortization, which was $484,498, and $208,214 at December 31, 1999,
and 1998, 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 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 to 365 day period, depending on the
product. Warranty costs were not material in any period presented.
43
HOWTEK, INC.
Notes to Financial Statements (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". No
write-downs have been necessary through December 31, 1999 except as
described in Note 2.
44
HOWTEK, INC.
Notes to Financial Statements (continued)
(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.
(p) Advertising
The Company expenses advertising costs as incurred. Advertising expense
for the years ended December 31, 1999, 1998 and 1997 were $143,000,
$135,000 and $45,000, respectively.
(2) Unusual charges
During 1997 the Company recorded unusual charges of $3,394,406
consisting of the following: (i) an inventory reserve of $1,750,000
resulting from management's decision in the second quarter of 1997 to
discontinue support of certain products which had reached end of life;
(ii) a bad debt reserve of $750,000 prompted by the bankruptcy filing
of a major European distributor in the second quarter of 1997; (iii) a
write-off of test equipment for non-current products of $224,610 in the
second quarter of 1997 and $239,885 in the fourth quarter of 1997; and
(iv) a write-off of software development for non-current products in
the amount of $272,361 in the second quarter of 1997 and $157,550 in
the fourth quarter of 1997.
(3) 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, of which $2,670,000 was available at December 31, 1999.
The Loan Agreement expires January 4, 2001. 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 December 31, 1999, $330,000 was outstanding under the Loan
Agreement.
45
HOWTEK, INC.
Notes to Financial Statements (continued)
(3) Related Party Transactions (continued)
(a) Loan Payable to Principal Stockholder (continued)
In 1998 the Company borrowed $400,000 from Mr. Robert Howard, pursuant
to Secured Demand Notes and Security Agreements (the "Notes").
Principal on 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. In May 1998, the Company consummated an
agreement with Mr. Howard to convert the Notes into 400,000 shares of
restricted common stock, par value $.01 per share, of the Company (the
"Common Stock").
The Company has Secured Demand Notes and Security Agreements (the "New
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 New 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 New Notes currently bear interest at 12%. Payment of the New Notes
is secured by a security interest in certain assets of the Company. As
of December 31, 1999 and 1998, the Company owed $500,000 and $565,000,
respectively pursuant to the New 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 December 31, 1999, the Company owed $310,000
pursuant to the Promissory Notes.
46
HOWTEK, INC.
Notes to Financial Statements (continued)
(3) Related Party Transactions (continued)
(b) Loan Payable to Related Party
In 1998 the Company borrowed $300,000 from Dr. Lawrence Howard, son of
the Company's Chairman, Robert Howard, pursuant to Secured Demand Notes
and Security Agreements (The "Notes"). Principal on these Notes were
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.
In May 1998, the Company consummated an agreement with Dr. Howard to
convert the Notes into 300,000 shares of restricted common stock, par
value $.01 per share, of the Company (the "Common Stock").
As of December 31, 1998, the Company owed Dr. Lawrence Howard $200,000,
pursuant to Secured Demand Notes and Security Agreements (The "New LH
Notes"). Principal of these notes were due and payable in full,
together with interest accrued and any penalties provided for, on
demand. Under the terms of the New LH 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 New LH
Notes is 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, 2000. As of
December 31, 1999, future minimum lease payments under this lease is
$78,500 for 2000. The Company is required to pay real estate taxes,
provide insurance and maintain the premises.
(d) Related Party Sales
During the year ended December 31, 1999 the Company sold engineering
services totaling $77,394 to Presstek, Inc., which Mr. Howard was the
Chairman Emeritus of the Board and is a principal stockholder. There
were no sales to Presstek, Inc. in 1998 and 1997.
47
HOWTEK, INC.
Notes to Financial Statements (continued)
(3) Related Party Transactions (continued)
(e) Sales and Issues of Securities
During 1998, Mr. Robert Howard and Dr. Lawrence Howard converted their
Convertible Subordinated Debentures into Common Stock (see Note 4).
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 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").
(4) Convertible Subordinated Debentures
The Company has 9% Convertible Subordinated Debentures (the
"Debentures"), which become due in 2001. Interest on the Debentures is
payable semi-annually on June 1 and December 1. The Debentures are
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".
48
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Convertible Subordinated Debentures
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, 1999 and 1998, the
Company's outstanding balance on its Debentures, was $117,000 and
$1,881,000, respectively.
(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 is 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
49
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
adjusted for any stock dividends, combinations or splits) plus all
declared or accumulated 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 shall be payable annually, in arrears, on the last
day of December in each year, commencing December 31, 1999. No
dividends were payable in 1999.
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.
(b) Stock Options
The Company has two 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 1999: no dividends paid; expected volatility of
45.8%; risk-free interest rates of 5.79%, 5.88% & 5.99%; and expected
lives from 3 to 5 years. The weighted-average assumptions used for
grants in 1998 were: no dividends paid; expected volatility of 40%;
risk-free interest rates of 5%; and expected lives of 5 years. The
weighted-average assumptions used for grants in 1997 were: no dividends
paid; expected volatility of 40%; risk-free interest rate of 6.7%; and
expected lives of 1year. 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.
50
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(b) Stock Options (continued)
Net loss 1999 1998 1997
---- ---- ----
As reported $(3,996,828) $(3,372,323) $ (832,072)
Pro forma $(4,101,278) $(3,450,229) $ (938,783)
Basic loss per share
As reported $ ( .32) $ ( .33) $ ( .09)
Pro forma $ ( .32) $ ( .34) $ ( .10)
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 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.
51
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:
1993 STOCK OPTION PLAN & DIRECTOR INCENTIVE PLAN
Option Price range Weighted
Shares per share Average
---------------------------------------------------------------
Outstanding, January 1, 1997 532,335 $1.50-$3.63 $2.55
Granted 124,000 $1.00-$1.81 $1.44
Exercised (28,350) $1.72 $1.72
Cancelled (72,200) $1.72-$3.63 $2.68
---------------------------------------------------------------
Outstanding, December 31, 1997 555,785 $1.00-$1.81 $1.44
Granted 775,924 $1.00-$1.25 $1.08
Exercised -0- -0- -0-
Cancelled (324,593) $1.00-$1.81 $1.43
---------------------------------------------------------------
Outstanding, December 31, 1998 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
===============================================================
Exercisable at year-end
1997 408,635 $1.50-$1.72 $1.61
1998 409,793 $1.00-$1.72 $1.27
1999 642,772 $ .81-$1.81 $1.21
Available for future grants
1999 475,838
The weighted-average fair value of options granted during the year was $0.42 per
option for 1999, $0.63 per option for 1998 and $0.32 per option for 1997.
The weighted-average remaining contractual life of stock options outstanding for
all plans at December 31, 1999 was 8.3 years.
52
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(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
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, 1999, 1998 and 1997, but not
included in the calculation of diluted net loss per share because such
shares are antidilutive:
December 31,
1999 1998 1997
---- ---- ----
Stock options 1,283,574 1,007,116 555,785
Stock warrants 50,000 -- --
Convertible Subordinated Debentures 6,158 99,000 114,789
Convertible Revolving Promissory Note 294,399 -- --
Convertible Promissory Note 310,000 -- --
(d) Stock Subscription Warrant
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 entered into earlier in 1999. The Warrant entitles
the manufacturer to purchase from the Company up to 50,000 shares of the
Company's common stock at the price of $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 Warrants at
the date of issue to be $54,000 using the Black-Scholes option-pricing
model. Accordingly, the value of the Warrants will be recorded as stock
compensation expense over the period of the manufacturing agreement.
53
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) Income Taxes
As a result of the 1999, 1998 and 1997 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:
1999 1998
------------ ------------
Inventory (Section 263A) (133,000) $ (429,000)
Inventory reserves (68,000) (35,000)
Receivable reserves (51,000) (40,000)
Other accruals (19,000) (29,000)
Tax credits (2,506,000) (2,383,000)
NOL carryforward (15,630,000) (14,215,000)
------------ ------------
Gross deferred tax asset $(18,407,000) $(17,131,000)
------------ ------------
Accumulated depreciation 36,000 34,000
------------ ------------
Gross deferred tax liabilities 36,000 34,000
------------ ------------
Net tax assets $(18,371,000) $(17,097,000)
Deferred tax assets valuation
allowance $ 18,371,000 $ 17,097,000
============ ============
Net deferred tax assets $ -0- $ -0-
============ =============
As of December 31, 1999, the Company has net operating loss carryforwards
totaling approximately $46,049,000. 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:
54
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) Income Taxes (continued)
Expiration date Amount of remaining NOL
2000 1,100,000
2001 5,000,000
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 3,800,000
In addition the Company has available tax credit carryforwards (adjusted to
reflect provisions of the Tax Reform Act of 1986) of approximately
$2,506,000, which are available to offset future taxable income and income
tax liabilities, when earned or incurred. These amounts expire in various
years through 2019.
(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 $740,000 or 11% of total sales in 1999,
$1,252,000 or 23% of total sales in 1998 and $4,362,000 or 55% of total
sales in 1997.
The Company's principal concentration of export sales has been in Europe
which accounted for 41% of 1999 export sales, 47% in 1998 and 69% in 1997.
The balance of the export sales were into the Far East, Mexico, Central
America, and Canada.
As of December 31, 1999 and 1998 the Company had outstanding receivables of
$133,000 and $281,000, respectively, from distributors of its products who
are located outside of the United States.
55
HOWTEK, INC.
Notes to Financial Statements (continued)
(7) Sales Information (continued)
(b) Major Customers
During the year ended December 31,1999, the Company's sales of its prepress
and graphic arts products to its U.S. based international distributor
continued to be adversely affected by the economic weakness in Asia. Since
1998 the Company has taken actions designed to accelerate sales growth in
new markets, such as its medical imaging and photographic market. For the
year ended December 31, 1998 the Company had one major customer which
operated as a U.S. based international distributor of computer and related
products. In 1997 the Company had two major customers, one of which
operated as a U.S. based international distributor of computer and related
products and the other as an OEM. There were no major customers in 1999.
The following represents the comparative sales and accounts receivable:
1998 1997
Sales Amount % Amount %
----- -------------- ----------------
Customer 1 $ 572,836 11 $1,832,000 23
Customer 2 $ -- -- $1,388,000 18
Accounts Receivable
Customer 1 $ 52,000 $ 254,000
Customer 2 $ -- $ 201,000
(8) Commitments and Contingencies
As of December 31, 1999, the Company had one lease obligation related to
its facility. The lease obligation for 2000 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, 2000.
Rental expense for all leases for the years ended December 31, 1999, 1998
and 1997 was $93,740, $161,425 and $243,343 respectively.
56
HOWTEK, INC.
Notes to Financial Statements (continued)
(9) Legal Proceedings
Howtek, Inc. v. TECO et al
As previously reported in the Company's 1996 Annual Report on Form 10-K, on
June 7, 1994, the Company filed a complaint in the United States District
Court, District of New Hampshire, against TECO Electric and Machinery Co.
Ltd. TECO Information Systems Co., Ltd., Relisys (a TECO subsidiary) and
Herman Hsu. The Company claimed, inter alia, breach of contract,
misappropriation of trade secrets, and breach of exclusive dealing. On
April 24, 1997, the Company announced that the lawsuit had been settled.
All existing agreements between the companies had been terminated. The
Company has released the TECO companies, Relisys and Mr. Hsu from all
covenants not to compete and from any claims relating to the scanner
technology involved in the case. TECO, in turn, made a one-time payment of
$6,000,000 to the Company on April 23, 1997, and released the Company from
any obligation to manufacture scanner products through TECO. Neither party
admitted to any breach of contract or other wrong-doing in connection with
the settlement of this lawsuit.
(10) 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, 1999 and
1998, due to either short maturity or terms similar to those available to
similar companies in the open market.
(11) Subsequent Events
In January and February 2000, the Company borrowed an additional $160,000
from Mr. Robert Howard under the Convertible Note and Revolving Loan and
Security Agreement, of which $2,510,000 was available at February 18, 2000.
57
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, 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
Year End December 31, 1998:
Allowance for Doubtful Accounts $ 70,000 $ 53,064 $ 4,715 (1) $ 118,349
Inventory Reserve $ 236,658 $ 69,166 $ 204,271 (2) $ 101,553
Year End December 31, 1997:
Allowance for Doubtful Accounts $ 537,748 $ 770,000 $ 1,237,748 (1) $ 70,000
Inventory Reserve $ 500,000 $2,119,467 $ 2,382,809 (2) $ 236,658
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
58