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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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 1-9341
HOWTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
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 6, 2001 was $31,660,185.
As of March 6, 2001, the registrant had 13,574,000 shares of Common Stock
outstanding.
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"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, Inc. ("Howtek" or the "Company") historically a manufacturer of
high-end drum scanners for the graphic arts industry, has the largest share
domestically of the market for high performance drum scanners. This market,
however, has declined substantially over the last few years as increasingly
powerful flatbed scanners have captured most of the high-end scanner business.
In its traditional prepress market, the Company expects that drum scanner
business, and Howtek's sales, will continue to decline. Outside the prepress
industry, Howtek is promoting drum scanner sales into the wide format printer
market where the greater resolution of its HiResolve(TM) drum scanners permit
the capture of more information about an original image. Because wide format
printer output may require an original image to be enlarged many thousand
percent, lack of sufficient original image data can reduce output quality and
result in unacceptable image artifacts. For this reason, wide format printer
operators have become a "new market" for Howtek's traditional drum scanning
technologies offsetting, in part, declines in traditional prepress markets.
Over the last three years, facing diminishing returns in its traditional
graphic arts business, Howtek has invested in technology and product development
in the medical and photographic imaging markets. The Company's objective has
been to utilize its graphic arts business to gain entry into newer and larger
markets. With respect to both the photographic and medical industries, the
Company believes it can use its digitizing devices ("scanners") to create
recurring consumables and related internet-based business opportunities.
In support of it's shift in focus to photographic imaging and medical
markets, the Company has (1) updated products lines, introducing products in
medical and photographic imaging/internet markets; (2) migrated from in-house
manufacturing to outsourcing to more effectively utilize outside engineering,
development, and manufacturing resources, (3) substantially reduced personnel
and overhead, (4) implemented an OEM (original equipment
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manufacturer) and large scale systems integrators marketing and sales strategy
for primary digitizer markets, while reserving small business markets for direct
sales by Howtek, and (5) created an integrated direct sales and marketing
capability which it believes is applicable to its new markets.
Photographic Print Scanner Business
Market
Digital and web-based photo services promise to fundamentally change the
way consumers process, enhance, distribute and use photographs. No less than the
emergence of amateur photography fostered by George Eastman's Brownie camera, or
by the emergence of immediate on-site photo processing, web-based photo services
may represent a revolution in consumer photography. The promise of a digital
photographic solution that is simply better than traditional photography drives
not just digital camera manufacturers and users, it also fundamentally alters
and expands the demands and expectations of users of traditional cameras and
films.
The online imaging market is projected by Advertising Age to reach $3.3
billion in revenues by 2002. Industry estimates project revenues of $5 billion
by 2004. Sharing and use of digital images on the Internet, on web sites or by
e-mail, are among the fastest growing web activities, second only to ordinary
e-mail. This demand for digital images and services drives demand for Howtek's
photo scanning products, related consumables and services.
Traditional photos are processed at over 25,000 photo labs and
photofinishers located worldwide. The principal market for Howtek's
FotoFunnel(TM) products is an estimated 18,000 - 20,000 small, "one-hour" photo
finishers, typically located in high traffic retail locations. Approximately 60%
of this market is in the United States. Processing an average of from 12 to 70
rolls of film per day, on site, these photo labs currently have difficulty
justifying the cost of conversion to digital processing technologies. This
conversion, however, is increasingly requested by consumers and may be required
to address the digital products and services offered by competitors.
The FotoFunnel(TM) system may also provide a larger group of retailers
outside the current photographic market with an opportunity to add new products
and services to build up customer traffic and incremental business, by 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 uses, from electronic albums to
images in correspondence, reports and email, to images on coffee mugs, shirts
and gifts.
FotoFunnel Scanner
Howtek's FotoFunnel is a compact, automatic batch-feeding scanner designed
to quickly digitize either just developed prints or existing photographs, and
write (or "burn") these images to a CD or to the Internet. 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. Photo prints are put in an
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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 (dots per inch)
and with a color depth of up to 36 bits. The system recognizes and skips
duplicates. Scanning speed, gentle print feeding, and a design that avoids glass
and mirrors (which can create maintenance problems and distortions) are among
the competitive advantages the Company believes the FotoFunnel scanner offers.
The FotoFunnel scanner is offered at a suggested retail price of $4,995.
Discounts are made available to resellers and OEMs.
Howtek currently offers two 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, and
o A TWAIN interface, which is used by OEM's to integrate the FotoFunnel
scanner into their own software applications and systems.
Sales & Marketing
The Company's FotoFunnel sales and marketing strategy includes four
elements: First, FotoFunnel Batch Scanners are offered, directly and through
resale channels, to photofinishers and other photo retailers seeking to meet the
increasing demand among amateur photographers for digital images from original
rolls of film or existing photographic prints. The Company expects that larger
photo retailer chains and customers will typically purchase through its OEMs and
resellers, while smaller photo finishers and non-photo retailers may purchase
from Howtek directly.
As a result of targeted marketing and demonstration of the FotoFunnel
scanner at recent trade shows in Europe and the United States, FotoFunnel
scanners are under current evaluation by certain OEMs, including major mini-lab
manufacturers, and by selected international distributors. The FotoFunnel is
already being distributed, on a non-exclusive basis, by Telepix Imaging (a
subsidiary of Gretag Imaging, the largest manufacturer of photo processing
equipment in the world), Noritsu America Corporation, Pakon, Inc., and Digital
Now, Inc., and for distribution by Southern Photo and Silver Systems in the
United States. Howtek has also completed international distribution agreements
with Trek-Hall, Inc. (portions of Canada), Technotape BV (Europe), Color-Kolmio
OY (Finland), Shimone Group, Ltd. (Israel) and Aram & Magop (Jordan). The
Company anticipates entering into additional OEM and international distribution
agreements during 2001.
As a second element of the Company's marketing strategy, FotoFunnel Imaging
workstations will be offered directly by Howtek to smaller independent
photofinishers and other photo retailers, seeking a cost-effective means of
offering digital processing, web-based image services and e-commerce to their
customers, and to compete with larger photo retail and photo finishing
businesses able to develop and sustain their own web-business infrastructures
and models. Howtek FotoFunnel workstations, available since the fourth quarter
of 2000, are priced from $6,495, with discounts available to resellers.
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A third element of the Company's FotoFunnel marketing strategy is to create
and secure a consumable revenue stream by distinguishing and differentiating
co-branded Howtek CD's for sale by Howtek to FotoFunnel-equipped photo retailers
and by these photo retailers to their customers. To enhance their value to the
consumer, Howtek's CDs provide photo viewing, organizing and presentation tools
and utilities. Also loaded on the CDs will be a promotional software program
called "TryIt" software, which permits the consumer using the diskette to
activate or download a variety of software programs for a small fee, which is
shared between the software provider, Howtek and the retailer. To further
enhance their value to the photo retailer, the Howtek CDs offer co-branding
which provides continuing exposure to the retailer when the customer utilizes
the CD. Beginning in the fourth quarter of 2000, Howtek began offering CDs at a
per-disk cost of approximately $1.75 each, maintaining a premium over the cost
of blank high-quality CDs.
After careful review of the opportunities and competition, the Company has
deferred efforts to create Internet-based services directly. Instead, the
Company has cooperated with Intel Corporation to demonstrate a link between the
Howtek FotoFunnel system and the Intel Gatherround(TM) web site and photo
portal. The Company plans to focus primarily on CD and media driven products
during the coming year.
Marketing the FotoFunnel to retailers is based on a simple cash and
investment return analysis, which the Company believes can demonstrate an
attractive payback to FotoFunnel purchasers. Howtek's marketing message to
retailers is "Simply Profitable"(TM). Underlying sale of FotoFunnel consumables
is a more extensive point of sale marketing program Howtek is developing to
encourage and support consumer purchase of FotoFunnel-created CDs, thus
benefiting both the retailer and Howtek.
The Company's consumer marketing program is based on a simple premise, when
consumers buy photo processing and images on Howtek CDs, the consumer is buying
smiles. These are the smiles people get when looking over pictures and recalling
the good times they reflect, and the smiles they share when those pictures are
circulated. People invest time, effort and money in photographing, developing
and circulating prints because of the enjoyment and the smiles that result.
Howtek's FotoFunnel, in the hands of the photo retailer is meant to provide
the consumer with "more smiles", easier to view, organize and share images and
by making the digital image available, presented on computer as a show,
presentation, screen saver and more, while the average photo print is looked at
for minutes and stored away for years.
Howtek's key campaign point, therefore, is "Share the Smiles"(TM). This
title defines the CD the consumer is asked to purchase (a "Share the Smiles" CD
from Howtek). The title also defines the "Share the Smiles" advertising and
marketing campaign prepared by Howtek for the dealer to use at point of sale.
Howtek has secured domain names, trademarks and service marks underlying this
approach.
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Competition
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
(acquired by Kodak during the first quarter of 2001) and PictureVision (a Kodak
subsidiary). These systems are fast (they can digitize a roll of film in about 4
minutes). However, they are expensive and cost $10,000 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 competes with these systems on
price and convenience. Pakon and Digital Now have entered into distribution
agreements under which they can offer Howtek FotoFunnel scanners as part of
their systems.
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 for
multiple original prints in most cases. Kodak's subsidiary, PictureVision,
offers a Fujitsu office scanner, incorporating an automatic document feed
mechanism. The longevity and durability of an office scanner in the rigorous
commercial photo lab environment have yet to be proven. Moreover, flatbed
scanners with glass platens may demonstrate imaging artifacts when used to scan
matte or pebble finish original images. Finally, the batch feed mechanism of
this system, designed for comparatively thick sheets of ordinary paper, can not,
in most cases, accommodate full set of prints from a new roll of film,
decreasing productivity. The FotoFunnel competes with such products on the basis
of price, greater image quality, improved productivity, reduced space
requirement and gentle, reliable print feed design.
Medical Digitizer Business
Market
It has been over a hundred years since Dr. Roentgen placed his hand under
an X-ray source, exposing the film. After developing the film he saw the first
view of the inside of the human body and realized that X-rays would prove to be
the most useful diagnostic tool. In 1999, 270 million X-ray exams were performed
in the United States. With an average of 4 films per study, an estimated 1
billion films make X-ray the most prevalent diagnostic tool in medicine.
Correspondingly, Howtek's MultiRad X-ray and radiographic film digitizers play a
significant role in three distinct medical applications: computer aided
diagnosis of breast cancer, Teleradiology/Picture Archiving & Communication
(PACS), and patient record storage.
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Computer aided diagnosis is used to provide physicians with support in
detecting breast cancer at an early stage. Howtek's mammography customers have
now begun marketing their systems, (incorporating MulitRAD digitizers)
internationally, while seeking FDA clearance for US sales during 2001. This
market is forecast, by system vendors, to grow from under 100 units per year in
1999 to reach 2-3,000 units per year by 2004. Related markets providing support
in the area of Bone Densitometry, may add a total of 2-3,000 units per year by
2007.
Teleradiology is the practice of transmitting images for analysis,
consultation or diagnostic interpretation to another location. The Telemedicine
industry has doubled worldwide from $6.8 billion in 1997 to $13.8 billion in
1998, and is forecast to grow 40% annually over the next 10 years. By 2010, it
is estimated that up to 15% of all healthcare services worldwide may be provided
by Telemedicine. Growth in the related PACS market is expected to reach 7 to 10
percent per year for the next five years.
MultiRAD Technology and Products
In Howtek's MultiRAD(TM) medical digitizers, 56 individual, high-output
LEDs (light emitting diodes) transmit light through the radiological film, using
a very high quality lens and imaging system to focus transmitted light on a
sensitive 8000 element charge-coupled device (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. Howtek digitizers are less expensive to buy and maintain than
competitive laser-based film digitizers. At the same time, Howtek's solid state
Red LED illumination system offers improved image quality and operator
productivity when compared with alternative fluorescent film digitizers.
The Howtek MultiRAD(TM) medical film digitizer product line currently includes:
o The MultiRAD 860 product, a high-resolution digitizer that is positioned to
serve an increasing market for computer-assisted diagnosis of breast
cancer. The MultiRAD 860, priced at $19,995, has been chosen by
Massachusetts General Hospital for use in the US National Mammography
Study, and
o The MultiRAD 460, priced at $16,995, 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.
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The following table summarizes current digitizer products:
------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/00
------------------------------------------------------------------------
MultiRAD(TM)460 o Multi-feed compact scanner $16,995
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 001-3.85
o 12 bit grayscale
o SCSI-2 interface
------------------------------------------------------------------------
MultiRAD(TM)860 o Multi-feed compact scanner $19,995
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 001-3.85
o 12 bit grayscale
o SCSI-2 interface
------------------------------------------------------------------------
To promote digitizer sales and (as in Howtek's FotoFunnel business) to
create a continuing source of proprietary consumable revenues, Howtek plans to
add a new "FilmFunnel"(TM) medical scanning and CD-burning system, based on a
MultiRAD digitizer, during the first half of 2001. This will include a modular
workstation that will digitize radiographic films, and store them on proprietary
compact disk or other media. Images will be stored on the CD in the complex
DICOM 3.0 medical image format standard, permitting viewing by every computer
and viewer supporting this standard. The CD will be unique in that it also
contains an integrated viewer, created for Howtek by a third party licensor,
which permits the images on the CD to be viewed and saved on systems which do
not support the DICOM standard. The CD may later carry a web link to download
upgrades to the viewer, cross view images on the Web server and conference with
other parties who also have access to the viewer.
Initial suggested retail pricing for a turnkey FilmFunnel solution is
expected to be under $25,000, with discounts available to resellers. This is
30-70% lower than comparable existing entry-level CD creation solutions. CDs are
expected to be priced at $8 each in small volumes and $5 each in high volume. A
patient will pay the same price for their entire record on a CD as they would
have paid for one duplicate film, with overall costs reduced for the hospital or
site generating the copy.
Sales and Marketing
Howtek is a leading supplier of digitizers for medical film images and has
established a reputation for delivering high-quality, cost-effective products
establishing a new standard for
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image quality. The Company intends to build on its initial success by exploiting
key strategic developmental and distribution relations to increase geographic
distribution and market share in computer-aided mammography and
telemedicine/PACS markets. The Company's marketing and sales strategy includes a
continuing priority to develop and expand the Company's Computer-aided Diagnosis
of Breast Cancer business. The Company's MultiRAD digitizer has already been
selected for inclusion in computer based diagnostic support systems for
Mammography by technology and market leaders CADx, Scanis and Medizeus; both
CADx and Scanis have now released their systems internationally, pending FDA
approval for general sales and marketing within the United States.
Howtek's strategy is to take advantage of the price/performance advantage
it believes it's MultiRAD digitizers enjoy over the Lumisys laser-illuminated
film digitizer, previously the market leader. Selection of the Company's
MultiRAD(TM) medical film digitizer, for resale, by medical imaging market
leaders GE Medical Systems, Konica, Toshiba, and Imation (Hong Kong) indicate
progress in this effort. Moreover, the Company is working to build on the
credibility and market momentum created through the selection of MultiRAD
digitizers by these market leaders. Howtek is also working with each of them to
train sales personnel, provide marketing and sales support and define and
implement effective reseller sales programs.
The Company's new FilmFunnel and related CD-based consumable will be
promoted to larger customers through its MultiRAD OEMs and resellers, and to
smaller or otherwise more distributed customers through Howtek's direct sales
efforts. The Company believes this represents a significant new opportunity and
is a good complement to its evolving FotoFunnel and related consumable business.
Competition
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 an overwhelming market share. As described more fully below, however,
the Company believes that the technology employed by the Lumisys devices has
several inherent weaknesses. Because Lumisys' laser technology requires
manufacturing costs greater than those of Howtek's newer generation products,
Lumisys products are expensive to acquire. Lumisys' technology is also
comparatively delicate, and expensive to maintain. With the introduction of the
Howtek MultiRAD digitizer, offering image quality comparable to the Lumisys
system at prices from 20% to 50% lower, Lumisys has been under increasing
pressure in the market. Recently, in filings with the SEC, Lumisys indicated it
was reducing its emphasis on the laser digitizer market in favor of other
markets. Howtek believes the market position and share previously enjoyed by
Lumisys is vulnerable. During the fourth quarter of 2000, Lumisys was purchased
by Kodak, which has announced its primary interest is in a line of computed
radiography (CR) products developed by Lumisys. The extent to which Kodak will
support Lumisys' previous film digitizer business, and the manner in which
previous Lumisys customers
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that are also Kodak competitors will react remain uncertain, but may represent
an opportunity for Howtek.
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 charge-coupled device (CCD). Offering a lower cost alternative to laser
illuminated digitizers, (comparable in price to Howtek's products) the Vidar
products offer lower image quality than the Lumisys or the Howtek products.
Vidar's most recent announcement of the Sierra Film Digitizer, priced under
$10,000 reinforces Vidar's position in the low end market entry niche. Although
it is substantially slower and less productive than Vidar's own high end or
Lumisys or Howtek, the Sierra will pull low end sales that are based largely on
price. Howtek believes its digitizers have a significantly greater dynamic range
and therefore a significantly greater ability to distinguish meaningful
information within seemingly dark areas of the radiological films, than Vidar
devices.
Prepress and Graphic Arts Business
Howtek, historically a manufacturer of high-end drum scanners for the
prepress and graphic arts market, has the largest share domestically of the
market for high performance drum scanners. This market, however, has been
challenged as increasingly powerful flatbed scanners have captured most of the
high-end scanner market. The market for drum scanners, and Howtek's drum scanner
sales, have declined significantly during 2000 and will continue to decline. The
Company has focused marketing activities for the HiResolve drum scanner line on
wide format printing applications, where the advantages of drum scanners over
competing flatbed scanners provide a continuing opportunity. In general,
however, the Company is gradually reducing its activities in this business area,
and has elected not to renew a distribution agreement under which it could
redistribute flatbed scanners manufactured by Scanview, A/S, to permit greater
focus on photo and medical markets with continuing residual revenue
opportunities and greater potential returns.
Products
Howtek's HiResolve(TM) drum scanners include:
o The HiResolve 8000, a compact desktop drum scanner, which offers "true"
8000-dpi optical resolution, with a suggested list price of $29,995, and
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.
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Risk Factors
There are enormous uncertainties and risks associated with the Company's
business strategy, as there are with many other new and ambitious business
plans. Howtek's future operating results will depend, among other factors, on
its ability to continue to increase sales significantly, on retaining current
key employees and on attracting additional qualified personnel. Risk factors
include, but are not limited to, the Company's history of significant operating
losses, intense competition in all of its product lines, and the timely
availability of sufficient quantities of parts, materials and components which
are in some cases available from sole sources or a limited number of suppliers.
Government Regulation
Current products in the Company's medical digitizer product line are subject to
regulation by the Food and Drug Administration ("FDA"). The Company has received
FDA 510(k) pre-market clearance, which is required for the sale of its medical
products.
Sources and Availability of Materials
The electronics industry is subject to periodic fluctuations in the
production capacity of integrated circuit manufacturers and other key suppliers.
Currently, the Company believes that there are adequate sources and availability
of the components necessary to manufacture its products.
Patents
The Company has several patents covering its scanner and prepress
technology in the 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 based on some of its U.S. patents and plans to file
additional domestic and foreign applications when it believes such protection
will benefit the Company.
There is no assurance that additional patents will be obtained either in
the United States or in foreign countries or that existing or future patents or
copyrights will provide substantial protection or commercial benefit to the
Company.
There is rapid technological development in the Company's markets with
concurrent extensive patent filings and a rapid rate of issuance of new patents.
Although the Company believes that its technologies have been independently
developed and do not infringe the patents or intellectual property rights of
others, certain components of the Company's products could infringe patents,
either existing or which may be issued in the future, in which event the Company
may be required to modify its designs or obtain a license. No assurance can be
given that the
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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).
Manufacturing
The Company operates an ISO 9001 and FDA-certified manufacturing facility
in Hudson, NH. Currently, the Company's FotoFunnel, Medical and drum scanner
products are manufactured by third party contract manufacturing organizations.
The software applications that are sold with the Company's products are either
developed in-house or licensed from third parties.
Employees
On March 6, 2001 the Company had 31 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, 2000 was approximately $108,000 as compared to approximately
$63,000 on the corresponding date in 1999.
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.
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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, 2001 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 sale
prices for each quarterly period during 2000 and 1999.
High Low
Fiscal year ended ---- ---
December 31, 2000
First Quarter $4.125 $1.875
Second Quarter 2.563 .625
Third Quarter 3.063 1.188
Fourth Quarter 4.281 1.750
Fiscal year ended
December 31, 1999
First Quarter $1.875 $ .875
Second Quarter 2.000 .875
Third Quarter 1.563 .625
Fourth Quarter 3.125 1.000
As of March 6, 2001 there were 297 holders of record of the Company's Common
Stock.
The Company has not paid any cash dividends on its Common Stock to date, and the
Company does not contemplate payment of cash dividends in the foreseeable
future. Future dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other factors considered relevant to the
Company's Board of Directors. There are no non-statutory restrictions on the
Company's present or future ability to pay dividends.
Recent Sales of Unregistered Securities
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Redeemable Preferred Stock ($.01 per share
par value), at $1,000 per share, consisting of 1,350 shares to unrelated
parties, and 50 shares to Mr. W. Scott Parr, for gross proceeds of $1,400,000.
Each share of Series B Preferred Stock has a liquidation preference of $1,000
per share, will entitle the holder to an annual dividend of $70, is convertible
into 500 shares of the Company's common stock and is redeemable by the Company
under certain circumstances. These sales were made pursuant to the exemption
from registration provided by Section 4 (2) of the Securities Act of 1933.
15
Item 6. Selected Financial Data
Selected Statement of Operations Data
Year Ended December 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Sales $ 7,793,517 $ 6,663,230 $ 5,323,601 $ 7,874,813 $ 11,263,253
Gross margin 1,900,027 1,594,124 1,223,135 1,663,317 1,918,798
Unusual charges -- -- -- (3,394,406) --
Total operating expenses (3,595,661) (3,789,306) (4,096,944) (8,236,477) (7,355,481)
Loss from operations (1,695,634) (2,195,182) (2,873,809) (6,573,160) (5,436,683)
Interest expense - net (132,014) (1,801,646) (498,514) (258,912) (623,537)
Income from legal settlement -- -- -- 6,000,000 --
Net loss (1,827,648) (3,996,828) (3,372,323) (832,072) (6,060,220)
Net loss available to common shareholders (2,896,520) (3,996,828) (3,372,323) (832,072) (6,060,220)
Net loss per share (0.22) (0.32) (0.33) (0.09) (0.76)
Selected Balance Sheet Data
As of December 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total current assets $ 5,082,016 $ 4,457,910 $ 4,798,576 $ 5,332,546 $ 9,697,890
Total assets 5,945,928 5,696,609 6,351,421 7,071,294 12,795,467
Total current liabilities 2,143,873 2,019,340 2,198,995 1,540,222 3,002,453
Loans payable to related parties, including
current portion 1,400,000 1,140,000 765,000 -- 3,478,604
Convertible Subordinated Debentures,
including current portion 117,000 117,000 1,881,000 2,181,000 2,181,000
Stockholders' equity 2,902,055 2,920,269 2,271,426 3,350,072 4,133,410
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Overview
Howtek, historically a manufacturer of high-end drum scanners for the graphic
arts industry, has the largest share domestically of the market for high
performance drum scanners. This market, however, has declined substantially over
the last few years as increasingly powerful flatbed scanners have captured most
of the high-end scanner business. In its traditional prepress market, the
Company expects that drum scanner business, and Howtek's sales, will continue to
decline. Outside the prepress industry, Howtek is promoting drum scanner sales
into the wide format printer market where the greater resolution of its
HiResolve drums scanners permits the capture of more information about an
original image. Because wide format printer output may require an original image
to be enlarged many thousand percent, lack of sufficient original image data can
reduce output quality and result in unacceptable image artifacts. For this
reason, wide format printer operators have become a "new market" for Howtek's
traditional drum scanning technologies, offsetting in part declines in
traditional prepress markets.
Over the last three years, facing diminishing returns in its traditional graphic
arts business, Howtek has invested in technology and product development in the
fields of medical and photographic imaging and digitization. The Company's
objective has been to utilize its graphic arts business to gain entry into newer
and larger markets. With respect to both the photographic and medical
industries, the Company believes it can use its digitizing devices ("scanners")
to create recurring consumables and related internet-based business
opportunities.
In support of it's shift in focus to photographic imaging and medical markets,
the Company has (1) updated products lines, introducing products in medical and
photographic imaging/internet markets; (2) migrated from in-house manufacturing
to outsourcing to more effectively utilize outside engineering, development, and
manufacturing resources, (3) substantially reduced personnel and overhead, (4)
implemented an OEM (original equipment manufacturer) and large scale systems
integrators marketing and sales strategy for primary digitizer markets, while
reserving small business markets for direct sales by Howtek, and (5) created an
integrated direct sales and marketing capability which it believes is applicable
to its new markets.
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
Sales. Sales for the year ended December 31, 2000 were $7,793,517, an increase
of $1,130,287 or 17% from sales during the year ended December 31, 1999 of
$6,663,230. The Company continues to emphasize its medical business
opportunities. Sales of the Company's medical imaging products increased 50%
from $1,508,197 (23% of sales) for the year ended December 31, 1999 to
$2,256,312 (29% of sales) for the year ended December 31, 2000. Sales through
recently announced system integrators and resellers, including General Electric
Medical Systems
17
and Konica Medical Imaging, Inc., contributed to increased sales in 2000. The
Company's medical product sales also benefited from demand by key OEM customers
involved in computer-assisted detection of breast cancer. These customers are
marketing systems including Howtek digitizers outside the United States while
seeking FDA approval to sell domestically. A key objective over the coming
quarters is to add additional, qualified OEM and systems integration resellers.
These resellers are expected to contribute to increase sales of medical products
in future periods.
In 2000 the Company began commercial shipments of its new FotoFunnel(TM)
photographic print scanner line from its third party manufacturing supplier.
FotoFunnel sales were $2,217,798 (28% of sales), with virtually all sales made
to Telepix Imaging, Inc., a member of the Gretag Imaging Group. During the third
quarter the Company reduced production of its FotoFunnel print scanner to
implement new design features, and deliver enhanced scanner units. Several
engineering design and manufacturing changes which offer increased scanning
speed, improved customer workflow and generally enhanced scanner performance
were achieved during the third quarter.
Sales of the Company's prepress and graphic arts products, including related
maintenance and repair services, decreased 36% from $5,155,033 (77% of sales) in
1999 to $3,319,407 (43% of sales) in 2000. This decline reflects increased
competition in the market for the Company's graphic arts scanners, and a
decision by the Company not to renew a distribution agreement under which it
could redistribute flatbed scanners manufactured by Scanview, A/S. This
reduction in sales was acute during the fourth calendar quarter of 2000, as the
Company reduced and focused its prepress and graphic arts sales channels,
eliminating a number of previous dealers and distributors. The Company expects
sales of graphic arts products to continue to decline over time.
Gross Margin. Gross margin for the year ended December 31, 2000 remained steady
from 1999, at 24% of sales, in spite of a decision by the Company to increase
inventory reserves associated with its prepress and graphic arts product lines
from $200,175 to $361,931. Gross margins are expected to improve as a result of
several factors, including reduced production overhead and indirect production
expenses, associated with the Company's continuing overhead and expense control
measures, increased sale of higher margin medical digitizers into the market for
computer assisted diagnosis of breast cancer, and increased sale of FotoFunnel
products through channels which offer higher margins than the Company's original
OEM channel.
Engineering and Product Development. Engineering and product development costs
for the year ended December 31, 2000 decreased 11% from $799,960 in 1999 to
$709,595 in 2000. The overall decrease in engineering and product development
costs results primarily from reductions in manpower. The Company expects to
continue to increase its utilization of outside and contract engineering
resources as appropriate.
General and Administrative. General and administrative expense decreased 9% from
$1,286,895 in 1999 to $1,165,392 in 2000. During the first quarter of 1999 the
Company established reserves of $186,662 to permit the Company to take back
discontinued HiDemand(TM) 400 graphic arts scanner products to encourage
resellers and customers to acquire its Scanview line of products and a
non-recurring expense of $21,142 associated with the write off of tooling and
18
inventories associated with the discontinued HiDemand 400 product. Giving effect
to the HiDemand 400 reserve and write down for the year ended December 31, 1999,
the general and administrative expenses increased 8%, from $1,079,091 in 1999
compared to $1,165,392 for the comparable period in 2000. The increase is due to
primarily to the expense incurred to redesign the Company's Web site. The
Company expects general and administrative expenses to increase in 2001 as
compared to 2000, while declining as a percentage of sales.
Marketing and Sales. Marketing and sales expenses for the year ended December
31, 2000 increased slightly from $1,702,451 in 1999 to $1,720,674 in 2000. The
change results from decreases in advertising and promotional expenses in the
graphic arts area, where there is an increasing reliance on direct mail and
telemarketing to support its sales efforts, while medical sales expenses
increased and new expenses were incurred relating to the FotoFunnel business.
The Company expects marketing and sales expenses to increase in 2001 as compared
to 2000.
Interest Expense. Net interest expense for the year ended December 31, 2000
decreased to $132,014 from $1,801,646 in 1999. During the first quarter of 1999
the Company recorded interest expense of $1,671,158 relative to the conversion
of Convertible Subordinated Debentures as required by Statement of Financial
Accounting Standards No. 84, "Induced Conversions of Convertible Debt". This
charge was wholly offset by a corresponding increase to additional paid-in
capital by $1,671,158. The charge and corresponding benefit relate to the
conversion to equity during the first quarter of 1999 of $1,764,000 of the
Company's previously outstanding 9% Convertible Subordinated Debentures, due
2001 (the "9% Debenture"). In December 1998, the Company provided for a
temporary reduction in the conversion price of the 9% Debenture to encourage
conversion to common stock, and thereby reduce cash interest expenses, and
sinking fund payments associated with the 9% Debenture.
As a result of the foregoing, the Company recorded a net loss of $1,827,648 or
$0.22 per share for the year ended December 31, 2000 on sales of $7,793,517
compared to a net loss of $3,996,828 or $0.32 per share for the same period in
1999 on sales of $6,663,230.
During the year ended December 31, 2000 the Company issued 1,400 shares of 7%
Series B Convertible Redeemable Preferred Stock with a conversion price below
the Company's Common Stock quoted value and as a result accreted dividends of
$996,283 were recorded and included in the net loss per share calculation.
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. 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. The Company
attributed the increase in prepress sales to the introduction of
19
its HiResolve(TM) drum scanner product during the fourth quarter of 1998, and
the introduction of its Digital PhotoLab(TM) product in the first quarter of
1999.
Gross Margin. Gross margin for the year ended December 31, 1999 increased to 24%
from 23% in 1998. The improvement in gross margin was primarily due to
reductions in 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.
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 resulted primarily from planned reductions in personnel expenses.
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 reserves in the amount of $186,662 to permit the
Company to take back its discontinued HiDemand 400 graphic arts scanner products
to encourage resellers and customers to acquire its Scanview line of products
and a non-recurring expense of $21,142 associated with the write off of tooling
and inventories associated with the discontinued HiDemand 400 product. 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. The
decrease was due primarily to reductions in personnel expenses.
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 resulted 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.
Interest Expense. Net interest expense of $1,801,646 for the year ended December
31, 1999 included interest expense of $1,671,158 relative to the conversion of
Convertible Subordinated Debentures as required by Statement of Financial
Accounting Standards No. 84, "Induced Conversions of Convertible Debt". This
charge was wholly offset by a corresponding increase to additional paid-in
capital by $1,671,158. The charge and corresponding benefit relate to the
conversion to equity during the first quarter of 1999 of $1,764,000 of the
Company's previously outstanding 9% Convertible Subordinated Debentures, due
2001 (the "9% Debenture"). In December 1998, the Company provided for a
temporary reduction in the conversion price of the 9% Debenture to encourage
conversion to common stock, and thereby reduce cash interest expenses, and
sinking fund payments associated with the 9% Debenture.
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.
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, Mr. Robert Howard, of which $2,410,000 was available at December 31,
2000. 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 increased $499,573 from $2,438,570 at December 31, 1999 to
$2,938,143 at December 31, 2000. The ratio of current assets to current
liabilities at December 31, 2000 and 1999 was 2.4 and 2.2, respectively.
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these notes is due and payable in full,
together with interest accrued and any penalties provided for, on demand. Under
the terms of the Notes the Company agreed to pay interest at the lower rate of
(a) 12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. The Notes currently bear interest at 12%. Payment of the Notes
is secured by a security interest in certain assets of the Company. As of
December 31, 2000, the Company owed $500,000 pursuant to the Notes.
During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). Principal on these
Promissory Notes is payable in equal payments based on the borrowed amount at
the end of each quarter starting March 31, 2003 through December 31, 2006. Under
the terms of the Promissory Notes the Company agreed to pay interest at a fixed
rate of 7% per annum. At the Company's option it may pay the interest in either
cash or in restricted shares of the Company's common stock, or in any
combination thereof. Interest paid in shares of the Company's common stock will
be paid at the greater of $1.00 per share or the average per share closing
market price for the 10 trading days preceding the day which each interest
payment is due. The Promissory Notes entitle 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. As of December 31, 2000, and 1999, the Company owed $310,000
pursuant to the Promissory Notes.
During the second quarter of 2000 the Company sold, in private transactions, a
total of 2,250 shares of its 7% Series A convertible Preferred Stock ($.01 per
share par value), at $100 per share, consisting of 1,000 shares to an unrelated
party, 1,000 shares to Dr. Lawrence Howard, son of the Company's Chairman, Mr.
Robert Howard, and 250 shares to Mr. W. Scott Parr, the Company's President,
Chief Executive Officer, for gross proceeds of $225,000.
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Preferred Stock ($.01 per share par
value), at $1,000 per share, consisting of 1,350 shares to unrelated parties,
and 50 shares to Mr. W. Scott Parr, for gross proceeds of $1,400,000.
21
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 derivative 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.
In March 2000, the Financial Accounting Standards Board issued interpretation
No. 44 ("FIN44"), "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." FIN44 clarifies the
application of APB No. 25 for (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN44 became
effective July 2, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company has adopted
Fin44 in Fiscal 2000 and it did not have a material effect on the Company's
financial statements.
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires
the following to occur before the Company can recognize income: 1) Persuasive
evidence of an arrangement exists, 2) Delivery has occurred or services have
been rendered. 3) The price is fixed or determinable. 4) Collectibility is
reasonably assured. SAB 101 has not had a material impact on the Company's
balance sheet, statements of operations or cash flows.
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.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
Director
Name Age Position Since
- ---- --- -------- -----
Robert Howard... 77 Chairman of the Board, and Director 1984
W. Scott Parr... 49 President, Chief Executive Officer
And Director 1998
Ivan Gati....... 53 Director 1989
Kit Howard...... 57 Director 1999
James Harlan.... 49 Director 2000
Brett Smith..... 31 Director 2000
Harvey Teich.... 81 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 was Chairman of the Board of Presstek, Inc. ("Presstek"), a
public company which has developed proprietary imaging and consumables
technologies for the printing and graphic arts industries from June 1988 to
September 1998 and served as Chairman Emeritus of the Board from September 1998
to December 2000. In February 1994 Mr. Howard entered into a settlement
agreement in the form of a consent decree with the Securities and Exchange
Commission (the "Commission") in connection with the Commission's investigation
covering trading in the Company's Common Stock by an acquaintance of Mr. Howard
and a business associate of such acquaintance. Mr. Howard, without admitting or
denying the Commission's allegations of securities laws violations, agreed to
pay a fine and to the entry of a permanent injunction against future violations
of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. In
addition, in December of 1997, in connection with the Commission's investigation
into trading in the securities of Presstek, Mr. Howard, without admitting or
denying the Commission's allegations of securities laws violations, agreed to
pay a civil penalty of $2,700,000 and to the entry of a final judgement
enjoining him future violations of Section 10(b) and 13(a) and Rules 10b-5,
12b-20, 13a-1 and 13a-20 of the Exchange Act.
23
W. Scott Parr joined the Company in January 1998, as President and Chief
Executive Officer. He was appointed to the Company's Board of Directors in
February, 1998. Prior to joining Howtek, Mr. Parr served as Divisional Director
and a member of the Board of Directors of SABi International Ventures, Inc. in
1997, where he was responsible for restructuring and upgrading certain US
companies owned by foreign and venture investors. From 1995 to 1997, Mr. Parr
was Chief Executive Officer, General Counsel and Director of Allied Logic
Corporation, a start-up venture specializing in proprietary molding and
manufacturing technologies. From 1990 to 1995 Mr. Parr was General Counsel and a
Director of LaserMaster Technologies, Inc. (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.
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.
James Harlan is currently the Executive Vice President and CFO of HNG Storage
Company, a natural gas storage and electric development company. From 1991 to
1997 Mr. Harlan served as General Manager and CFO of Pacific Resources Group and
planning and finance development work with various Australasian manufacturing
and distribution businesses. He also served as operations research and planning
analyst for the White House Office of Energy Policy and Planning from 1977 to
1978, the Department of Energy from 1978 to 1981, and U.S. Synthetic Fuels
Corporation from 1981 to 1984. He has a PhD in applied economics with an
operations research dissertation from Harvard University and a BS in Chemical
Engineering from Washington University.
Brett Smith, the son of Mrs. Kit Howard, is currently the Chairman and CEO of
ei3 Corporation, a provider of technology services to manufacturing companies
utilizing advanced frame relay and internet technologies. Prior to ei3 Mr. Smith
was a member of the restructuring team for Delta V Technologies, a subsidiary of
Presstek, Inc., where he served as Director of Business Development from 1996 to
1999. From 1995 to 1996 Mr. Smith worked for the Asia Times newspaper start-up
team in Hong Kong. He began his career as an analyst, from 1992 to 1994, at
Susquehanna Investment Group. Mr. Smith received a BS from Emory University.
Harvey Teich is a retired certified public accountant. On January 1, 1992, the
accounting firm of Merman & Teich, where Mr. Teich had been a principal for the
previous 17 years, ceased to operate as a partnership. He is a member of the New
York and Florida State Societies for Certified Public Accountants.
24
Executive Officers and Key Employees
Name Age Position
- ---- --- --------
W. Scott Parr(1) 49 President, Chief Executive Officer, Director
Richard F. Lehman(2) 63 Vice President, Engineering
Annette L. Heroux(1) 44 Chief Financial Officer
Joseph E. Manseau(2) 44 Vice President Sales and Marketing
- ----------
(1) Officer appointed by the Board of Directors.
(2) Key employees
Richard F. Lehman joined the Company in July 1990, as Director of Scanner
Engineering. In December 1993, he was named Vice President of Scanner
Engineering and in October 1996, he was named Vice President of Engineering.
Prior to joining the Company, Mr. Lehman was employed by Xerox Corporation for
23 years where he served in various engineering and managerial capacities.
Annette L. Heroux joined the Company in October 1987 as Accounting Manager and
was named Controller in October 1998 and Chief Financial Officer in July 1999.
Prior to joining the Company, Ms. Heroux worked from 1980 to 1987 for Laurier,
Inc., a small semiconductor equipment manufacturer, in various financial and
managerial capacities.
Joseph E. Manseau joined the Company in August 1998 as Regional Sales Manager
and was named to Vice President Sales and Marketing on April 1, 1999. Prior to
joining the Company Mr. Manseau worked from 1997 to 1998 for Escher-Grad Tech.,
Inc. where he was responsible for implementing the sales and marketing strategy
for its large format image setters. From 1981 to 1997 he worked for AGFA and
Compugraphic, currently divisions of Bayer Corporation, in various marketing and
sales capacities.
Item 11. Executive Compensation.
The following table provides information on the compensation provided by the
Company during fiscal years 2000, 1999 and 1998 to the persons serving as the
Company's Chief Executive Officer during fiscal 2000, the Company's most highly
compensated executive officers and certain key employees serving at the end of
the 2000 fiscal year. Included in this list are only those executive officers
and key employees whose total annual salary and bonus exceeded $100,000 during
the 2000 fiscal year.
25
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Option(#)
- --------------------------- ---- --------- ---------
W. Scott Parr
Chief Executive Officer....................... 2000 138,357 - 0 -
1999 138,197 127,337
1998 131,502 277,431
Richard Lehman
Vice President, Engineering................... 2000 116,986 5,000
1999 112,735 5,000
1998 101,976 19,128
Joseph E. Manseau
Vice President, Sales & Marketing............. 2000 130,271 28,000
1999 126,529 18,410
1998 - 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%($)
- ---- ------- -------------- ------ ---- ----- ------
Joseph Manseau 28,000 7% 1.75 09/21/2010 30,816 78,093
Richard Lehman 5,000 1% 1.75 09/21/2010 5,503 13,945
All options vest in installments at various times between March 21, 2001
and September 21,2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options during the Company's last completed fiscal year by each of the named
executive officers and key employees listed in the Summary Compensation Table
and the fiscal year-end value of unexercised options.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
FY-End (#) FY-End($)(1)
Shares ---------- ------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ---- ------------ -------- ------------- -------------
W. Scott Parr (2) 0 0 193,380/209,138 406,083/441,025
Joseph Manseau (2) 0 0 14,909/35,501 33,120/57,102
Richard Lehman (2) 0 0 55,628/ 5,000 101,663/7,200
- ----------
(1) Based upon the closing price of the Common Stock on December 31, 2000, of
$3.19 per share.
(2) Options granted pursuant to the Company's 1993 Stock Option Plan, as
amended.
26
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 2000 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 2000 none of the executive officers of the Company
served on the Board of Directors or Compensation Committee of any other entity.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the Common Stock,
Series A and Series B Convertible Preferred Stock of the Company owned on March
6, 2001, 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 employees named in the Summary Compensation Table,
(iii) each director of the Company, and (iv) all current executive officers and
directors as a group. The table also provides information regarding beneficial
owners of more than 5% of the outstanding shares of the Company's Series A and
Series B Convertible Preferred Stock.
Number of Shares
Name and Address of Title Beneficially Percentage
Beneficial Owner of Class Owned (1) (2) of Class
---------------- -------- ---------------- ----------
Robert Howard Common 2,423,043 (3) 17.0%
145 East 57th Street
New York, New York 10022
Donald Chapman Common 1,862,677 (4) 13.0%
8650 South Ocean Drive Preferred Series A 4,600 56.4%
Jenson Beach, FL 34957 Preferred Series B 680 48.6%
W. Scott Parr Common 386,632 (5) 2.8%
21 Park Avenue Preferred Series A 550 6.7%
Hudson, NH 03051 Preferred Series B 50 3.6%
Edgar Ball Preferred Series B 200 14.3%
PO Box 560726
Rockledge, FL 32956
Dr. Lawrence Howard Preferred Series A 1,000 12.3%
660 Madison Avenue
New York, NY 10021
John McCormick Preferred Series A 1,000 12.3%
11340 SW Aventine Circus
Portland, OR 97219
George Walker Preferred Series A 1,000 12.3%
2461 Shannon Road
Northbrook, IL 60062
Dr. Herschel Sklaroff Preferred Series B 100 7.1%
1185 Park Avenue
New York, NY 10128
John Westerfield Preferred Series B 100 7.1%
4522 SW Bimini Circle N.
Palm City, FL 34990
Ivan Gati Common 65,000 (6) *
James Harlan Common 102,000 (7) *
Kit Howard Common 40,000 (8) *
Brett Smith Common 35,102 (9) *
Preferred Series B 20 1.4%
Harvey Teich Common 75,000 (10) *
Richard Lehman Common 56,627 (11) *
Joseph Manseau Common 24,242 (12) *
All current executive officers and Common 3,131,593 (3) & 21.0%
directors as a group (8 persons) (5) through (10)
Preferred Series A 550 6.7%
Preferred Series B 70 5.0%
- ----------
* Less than one percent
27
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 6, 2001, 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 6, 2001, 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 393,607 shares exercisable on conversion of
$590,000 principal amount of indebtedness outstanding, 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,
62,439 shares at $1.28 per share, 28,445 shares at $2.81, 23,704 shares at
$3.38 and $47,059 shares at $2.13 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. Also, includes 40,000
shares owned by Mr. Howard's wife.
4) Includes 25,000 shares owned by Mr. Chapman's wife, 460,000 shares of
Common Stock issuable upon conversion of 4,600 shares of Series A
Convertible Preferred Stock and 340,000 shares of Common Stock issuable
upon conversion of 680 shares of Series B Convertible Preferred Stock owned
by Mr. Chapman.
5) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to
purchase 204,979 shares of the Company's Common Stock at $1.13 per share,
51,766 shares at $0.81 per share and 2,250 shares at $1.00 per share,
55,000 shares of Common Stock issuable upon conversion of 550 shares of
Series A Convertible Preferred Stock and 25,000 shares of Common Stock
issuable upon conversion of 50 shares of Series B Convertible Preferred
Stock owned by Mr. Parr.
6) Includes options to purchase 15,000 of the Company's Common Stock at $1.72
per share, 25,000 shares at $1.50 per share and 25,000 shares at $0.81 per
share.
7) Includes options to purchase 25,000 shares of the Company's Common Stock at
$1.75 per share.
8) Includes options to purchase 25,000 shares of the Company's Common Stock at
$.81 per share.
28
9) Includes options to purchase 25,000 of the Company's Common Stock at $3.00
per share. Also, includes 10,000 shares of Common Stock issuable upon
conversion of 20 shares of Series B Convertible Preferred Stock.
10) Includes 5,000 shares owned by Mr. Teich's wife. Also includes options to
purchase 20,000 of the Company's Common Stock at $1.72 per share, 25,000
shares at $1.50 per share and 25,000 shares at $0.81 per share.
11) Includes 1,000 shares owned by Mr. Lehman's wife. Also includes options to
purchase 26,500 of the Company's Common Stock at $1.72 per share, 16,376
shares at $1.13 per share, 7,752 shares at $1.00 per share, 3,333 shares at
$0.81 per share and 1,666 at $1.75 per share.
12) Includes options to purchase 2,000 shares of the Company's Common Stock at
$1.00 per share, 6,666 shares at $.81 per share, 6,243 shares at $1.13 per
share and 9,333 shares at $1.75 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 $2,410,000 was
available at December 31, 2000. The Loan Agreement expires January 4, 2002.
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. A total of
$590,000 is outstanding under the Loan Agreement.
The Company has Secured Demand Notes and Security Agreements (the "Notes") owed
to Mr. Robert Howard. Principal of these notes are due and payable in full,
together with interest accrued and any penalties provided for, on demand. Under
the terms of the Notes the Company agreed to pay interest at the lower rate of
(a) 12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. The Notes currently bear interest at 12%. Payment of the Notes
is secured by a security interest in certain assets of the Company. A total of
$500,000 is outstanding pursuant to the Notes.
During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to
Convertible Promissory Notes (the "Promissory Notes"). 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 for the 10 trading days preceding the day which each interest
payment is due. The Promissory Notes entitles the payee to convert outstanding
principal due into shares of the Company's common stock at $1.00 per share. The
Company owes $310,000 pursuant to the Promissory Notes.
As of December 31, 2000, the Company had one lease obligation related to its
facility. The lease obligation through September 30, 2001 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, 2001. Rental expense for the year ended December 31,
2000 was $78,500.
During the year ended December 31, 2000 the Company sold engineering services
totaling $24,456 to Presstek, Inc.. Mr. Howard was a director of Presstek until
December 2000.
30
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 35.
2. Financial Statement Schedule - See Index on page 35. 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].
31
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. [incorporated by reference to Exhibit 10(g)
to the Registrant's Report on Form 10-K for the year ended
December 31, 1999].
32
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. [incorporated by
reference to Exhibit 10(i) to the Registrant's Report on Form
10-K for the year ended December 31, 1999].
10(j) Certificate of Designation of 7% Series B Convertible
Preferred Stock dated October 16, 2000
23(a) Consent of BDO Seidman, LLP.
(b) During the last quarter of the period covered by this Annual
Report on Form 10-K the Company filed no reports on Form 8-K.
(c) Exhibits - See (a) 3 above.
(d) Financial Statement Schedule - See (a) 2 above.
33
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 20, 2001
By: /s/ W. Scott Parr
-------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Robert Howard Chairman of the
- ---------------------- Board, Director March 20, 2001
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- ---------------------- Officer, Director March 20, 2001
W. Scott Parr
/s/ Annette Heroux Chief Financial Officer, Principal
- ---------------------- Accounting Officer March 20, 2001
Annette Heroux
/s/ Ivan Gati Director March 20, 2001
- ----------------------
Ivan Gati
/s/ Kit Howard Director March 20, 2001
- ----------------------
Kit Howard
/s/ James Harlan Director March 20, 2001
- ----------------------
James Harlan
/s/ Brett Smith Director March 20, 2001
- ----------------------
Brett Smith
/s/ Harvey Teich Director March 20, 2001
- ----------------------
Harvey Teich
34
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 36
Balance Sheets
As of December 31, 2000 and 1999 37
Statements of Operations
For the years ended December 31, 2000,
1999 and 1998 38
Statements of Stockholders' Equity
For the years ended December 31, 2000,
1999 and 1998. 39
Statements of Cash Flows
For the years ended December 31, 2000,
1999 and 1998. 40
Notes to Financial Statements 41-59
Schedule II - Valuation and Qualifying
Accounts and Reserves 60
35
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, 2000 and 1999 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, 2000. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Howtek, Inc. at December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
Boston, Massachussetts
February 14, 2001
36
HOWTEK, INC.
Balance Sheets
December 31, December 31,
------------ ------------
2000 1999
---- ----
Assets (note 2)
Current assets:
Cash and equivalents $ 1,444,771 $ 263,073
Trade accounts receivable net of allowance
for doubtful accounts of $256,000 in 2000
and $151,000 in 1999 (note 6) 1,082,783 1,400,987
Inventory (note 1) 2,443,150 2,649,460
Prepaid and other 111,312 144,390
------------ ------------
Total current assets 5,082,016 4,457,910
------------ ------------
Property and equipment (note 1):
Equipment 2,843,818 2,735,545
Leasehold improvements 36,821 33,321
Motor vehicles 6,050 6,050
------------ ------------
2,886,689 2,774,916
Less accumulated depreciation and amortization 2,398,553 2,058,734
------------ ------------
Net property and equipment 488,136 716,182
------------ ------------
Other assets (note 1):
Software development costs, net 350,550 472,427
Debt issuance costs, net 16,965 37,323
Patents, net 8,261 12,767
------------ ------------
Total other assets 375,776 522,517
------------ ------------
Total assets $ 5,945,928 $ 5,696,609
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,096,174 $ 1,176,480
Accrued expenses 430,699 342,860
Loans payable to related parties (note 2) 500,000 500,000
Convertible subordinated debentures (note 3) 117,000 --
------------ ------------
Total current liabilities 2,143,873 2,019,340
Loans payable to related parties (note 2) 900,000 640,000
Convertible subordinated debentures (note 3) -- 117,000
------------ ------------
Total liabilities 3,043,873 2,776,340
------------ ------------
Commitments and contingencies (notes 2 and 7)
Stockholders' equity (notes 2, 3 and 4):
Convertible preferred stock, $ .01 par value: authorized
1,000,000 shares; issued and outstanding 9,550 in 2000, with the aggregate
liquidation value of $2,215,000 plus 7% annual dividend; 6,900 in 1999,
with the aggregate liquidation value of $690,000 plus
7% annual dividend 96 69
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,588,126 in 2000
and 13,330,542 shares in 1999; outstanding
13,520,250 in 2000 and 13,262,666 shares in 1999 135,881 133,305
Additional paid-in capital 55,365,491 52,562,377
Accumulated deficit (51,649,149) (48,825,218)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,902,055 2,920,269
------------ ------------
Total liabilities and stockholders' equity $ 5,945,928 $ 5,696,609
============ ============
See accompanying notes to financial statements.
37
HOWTEK, INC.
Statements of Operations
For the Years Ended December 31,
----------------------------------------------------------
2000 1999 1998
---- ---- ----
Sales (notes 2 and 6) $ 7,793,517 $ 6,663,230 $ 5,323,601
Cost of sales 5,893,490 5,069,106 4,100,466
------------ ------------ ------------
Gross margin 1,900,027 1,594,124 1,223,135
------------ ------------ ------------
Operating expenses:
Engineering and product development 709,595 799,960 1,075,620
General and administrative 1,165,392 1,286,895 1,319,062
Marketing and sales 1,720,674 1,702,451 1,702,262
------------ ------------ ------------
Total operating expenses 3,595,661 3,789,306 4,096,944
------------ ------------ ------------
Loss from operations (1,695,634) (2,195,182) (2,873,809)
Interest expense - net (includes $145,979,
$104,486 and $30,205, respectively,
to related parties) (note 3) (132,014) (1,801,646) (498,514)
------------ ------------ ------------
Net loss (1,827,648) (3,996,828) (3,372,323)
Preferred dividends 72,589 -- --
Accreted dividends 996,283 -- --
------------ ------------ ------------
Net loss available to common shareholders $ (2,896,520) $ (3,996,828) $ (3,372,323)
============ ============ ============
Net loss per share (note 4)
Basic and diluted $ (0.22) $ (0.32) $ (0.33)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 13,373,086 12,660,613 10,142,672
See accompanying notes to financial statements.
38
HOWTEK, INC.
Statements of Stockholders' Equity
Preferred Stock Common Stock
---------------------------- ---------------------------
Number of Number of
Shares Issued Par Value Shares Issued Par Value
------------ ------------ ------------ ------------
Balance at January 1, 1998 -- $ -- 9,128,082 $ 91,281
Sale of common stock -- -- 1,000,000 10,000
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (a) & (b)) -- -- 700,000 7,000
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) -- -- 300,000 3,000
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 -- -- 11,128,082 111,281
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) -- -- 1,764,000 17,639
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (b)) -- -- 200,326 2,003
Issuance of common stock in lieu of
payment of accounts payable -- -- 195,090 1,951
Issuance of common stock pursuant
to incentive stock option plan -- -- 27,166 272
Issuance of common stock for
payment of interest to investors -- -- 15,878 159
Issuance of preferred stock relative
to conversion of loans payable to
investors (note 4 (a)) 6,900 69 -- --
Issuance of stock subscription warrant
for services (note 4 (d)) -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 6,900 69 13,330,542 133,305
Issuance of common stock pursuant
to incentive stock option plan -- -- 131,822 1,318
Issuance of common stock for payment
of dividends to investors (note 4 (a)) -- -- 25,762 258
Issuance of common stock relative to
conversion of preferred stock (note 2) (1,000) (10) 100,000 1,000
Issuance of preferred stock to
investors (note 4 (a)) 3,650 37 -- --
Issuance of stock subscription warrant
for services (note 4 (d)) -- -- -- --
Preferred stock dividends (note 4 (a)) -- -- -- --
Accreted dividends -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 2000 9,550 $ 96 13,588,126 $ 135,881
============ ============ ============ ============
Additional
Paid-in Accumulated Treasury Stockholders'
Capital Deficit Stock Equity
------------ ------------ ------------ ------------
Balance at January 1, 1998 $ 45,665,122 $(41,456,067) $ (950,264) $ 3,350,072
Sale of common stock 990,000 -- -- 1,000,000
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (a) & (b)) 702,466 -- -- 709,466
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) 581,211 -- -- 584,211
Net loss -- (3,372,323) -- (3,372,323)
------------ ------------ ------------ ------------
Balance at December 31, 1998 47,938,799 (44,828,390) (950,264) 2,271,426
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 3) 3,417,519 -- -- 3,435,158
Issuance of comon stock relative
to conversion of loans payable to
related parties (note 2 (b)) 223,363 -- -- 225,366
Issuance of common stock in lieu of
payment of accounts payable 187,233 -- -- 189,184
Issuance of common stock pursuant
to incentive stock option plan 39,988 -- -- 40,260
Issuance of common stock for
payment of interest to investors 38,544 -- -- 38,703
Issuance of preferred stock relative
to conversion of loans payable to
investors (note 4 (a)) 689,931 -- -- 690,000
Issuance of stock subscription warrant
for services (note 4 (d)) 27,000 -- -- 27,000
Net loss -- (3,996,828) -- (3,996,828)
------------ ------------ ------------ ------------
Balance at December 31, 1999 52,562,377 (48,825,218) (950,264) 2,920,269
Issuance of common stock pursuant
to incentive stock option plan 143,619 -- -- 144,937
Issuance of common stock for payment
of dividends to investors (note 4 (a)) 72,010 -- -- 72,268
Issuance of common stock relative to
conversion of preferred stock (note 2) (990) -- -- --
Issuance of preferred stock to
investors (note 4 (a)) 1,624,963 -- -- 1,625,000
Issuance of stock subscription warrant
for services (note 4 (d)) 39,818 -- -- 39,818
Preferred stock dividends (note 4 (a)) (72,589) -- -- (72,589)
Accreted dividends 996,283 (996,283) -- --
Net loss -- (1,827,648) -- (1,827,648)
------------ ------------ ------------ ------------
Balance at December 31, 2000 $ 55,365,491 $(51,649,149) $ (950,264) $ 2,902,055
============ ============ ============ ============
See accompanying notes to financial statements.
39
HOWTEK, INC.
Statements of Cash Flows
For the Years Ended December 31,
-----------------------------------------------------
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss $(1,827,648) $(3,996,828) $(3,372,323)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 339,818 341,290 462,128
Amortization 283,882 301,457 188,208
Interest relative to conversion of Convertible
Subordinated Debentures (note 3) -- 1,671,158 284,211
Compensation expense relative to issue of
Stock Subscription Warrants (note 4) 39,818 27,000 --
Changes in operating assets and liabilities:
Accounts receivable 318,204 169,094 (94,129)
Inventory 206,310 277,622 588,911
Other current assets 33,078 (25,701) (13,414)
Accounts payable (55,306) 77,873 (114,096)
Accrued interest 145,979 61,327 20,738
Accrued expenses (58,461) 135,329 (12,869)
----------- ----------- -----------
Total adjustments 1,253,322 3,036,449 1,309,688
----------- ----------- -----------
Net cash used by
operating activities (574,326) (960,379) (2,062,635)
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (137,140) (122,135) (190,720)
Additions to property and equipment (111,773) (206,466) (273,713)
----------- ----------- -----------
Net cash used by investing activities (248,913) (328,601) (464,433)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 144,937 40,260 1,000,000
Issuance of preferred stock for cash 1,600,000 -- --
Proceeds of loans payable to related parties 260,000 632,163 1,474,466
Proceeds of loans payable to unrelated parties -- 696,906 --
----------- ----------- -----------
Net cash provided by financing activities 2,004,937 1,369,329 2,474,466
----------- ----------- -----------
Increase (decrease) in cash and equivalents 1,181,698 80,349 (52,602)
Cash and equivalents, beginning of year 263,073 182,724 235,326
----------- ----------- -----------
Cash and equivalents, end of year $ 1,444,771 $ 263,073 $ 182,724
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 10,530 $ 10,530 $ 188,854
=========== =========== ===========
Non-cash items from financing activities:
Conversion of loans and accrued interest payable
to related parties into Common Stock (note 2) $ -- $ 225,366 $ 709,466
=========== =========== ===========
Conversion of accounts payable into
Common Stock $ 25,000 $ 189,184 $ --
=========== =========== ===========
Conversion of accrued interest payable
to investors into Common Stock $ -- $ 38,703 $ --
=========== =========== ===========
Conversion of loans payable to investors
into Preferred Stock (note 4 (a)) $ -- $ 690,000 $ --
=========== =========== ===========
Issuance of common stock relative to conversion
of Convertible Subordinated Debentures (note 3) $ -- $ 3,435,158 $ 584,211
=========== =========== ===========
Conversion of dividends payable into
Common Stock $ 72,268 $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
40
HOWTEK, INC.
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
(a) Nature of Operations and Use of Estimates
Howtek, Inc. (the "Company") designs, engineers, develops and manufactures
digital image scanners, film digitizers and related software for
applications in the medical imaging, prepress and photographic markets. The
Company considers itself a single reportable business segment. The Company
sells its products throughout the world through various distributors,
resellers, systems integrators and OEMs. See Note 6 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 $1,509,000
and $934,000, respectively, for 2000 and raw material and finished goods of
approximately $1,773,000 and $876,000, respectively, for 1999.
(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 $317,006 and $296,648
at December 31, 2000, and 1999, respectively.
41
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(e) Patents
The costs for patents are being amortized over the estimated useful life of
the respective assets using the straight-line method. The patents balances
are presented net of accumulated amortization, which was $103,280 and
$98,774 at December 31, 2000 and 1999, 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 $137,140, $122,135
and $190,720 of internally developed and externally purchased software
costs during fiscal 2000, 1999 and 1998, respectively.
The capitalized software balances are presented net of accumulated
amortization, which was $743,515 and $484,498 at December 31, 2000, and
1999, respectively. Capitalized software costs are amortized using the
straight-line method over their estimated economic life, principally 3
years, commencing when each product is available for general release.
(g) Revenue Recognition
Revenues from product sales are recognized at the time the product is
shipped.
(h) Cost of Sales
Cost of sales consists of the costs of products purchased for resale, any
associated inbound and outbound freight and duty, any costs associated with
manufacturing, warehousing, material movement and inspection, amortization
of any license rights, and amortization of capitalized software.
(i) Warranty Costs
The Company's products are generally under warranty against defects in
material and workmanship from a 90 to 730 day period, depending on the
product. Warranty costs were not material in any period presented.
42
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(j) Engineering and Product Development
These costs relate to research and development costs which are expensed as
incurred, except for amounts related to software development costs incurred
after the establishment of technological feasibility (see (f) above) which
are capitalized.
(k) Net Loss Per Common Share
Net loss per common share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". See Note 4 -
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".
43
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (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 4 -Stockholders' Equity.
(p) Advertising
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 2000, 1999 and 1998 was $134,000, $143,000 and
$135,000, respectively.
(q) New Accounting Standards
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 derivative 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 derivative 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.
In March 2000, the Financial Accounting Standards Board issued
interpretation No. 44 ("FIN44"), "Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB Opinion No. 25."
FIN44 clarifies the application of APB No. 25 for (a) the definition of
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequences of various modifications to the previously fixed stock option
or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN44 became effective July 2, 2000 but
certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Company has adopted FIN44 in Fiscal 2000
and it did not have a material effect on the Company's financial
statements.
44
HOWTEK, INC.
Notes to Financial Statements (continued)
(1) Summary of Significant Accounting Policies (continued)
(q) New Accounting Standards (continued)
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires the following to occur before the Company can recognize income: 1)
Persuasive evidence of an arrangement exists, 2) Delivery has occurred or
services have been rendered, 3) The price is fixed or determinable, 4)
Collectibility is reasonably assured. SAB 101 has not had a material impact
on the Company's balance sheet, statements of operations or cash flows.
(2) Related Party Transactions
a) Loan Payable to Principal Stockholder
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000, of which $2,410,000 was available at December 31, 2000. The
Loan Agreement expires January 4, 2002. 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,
2000, $590,000 was outstanding under the Loan Agreement.
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").
45
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions (continued)
(a) Loan Payable to Principal Stockholder (continued)
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, 2000 and 1999, the
Company owed $500,000 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 for the 10 trading days
preceding the day which each interest payment is due. The Promissory Notes
entitles 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. As of
December 31, 2000, and 1999, the Company owed $310,000 pursuant to the
Promissory Notes.
(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").
46
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions (continued)
(b) Loan Payable to Related Party (continued)
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, 2001. As of December 31,
2000, future minimum lease payments under this lease are $58,875 for 2001.
The Company is required to pay real estate taxes, provide insurance and
maintain the premises.
(d) Related Party Sales
During the years ended December 31, 2000 and 1999, the Company sold
engineering services totaling $24,456 and $93,045, respectively, to
Presstek, Inc., which Mr. Howard was the Chairman Emeritus of the Board
through December 2000. There were no sales to Presstek, Inc. in 1998.
(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 3).
47
HOWTEK, INC.
Notes to Financial Statements (continued)
(2) Related Party Transactions (continued)
(e) Sales and Issues of Securities (continued)
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"). (See also Note 4.)
(3) 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)
(3) Convertible Subordinated Debentures (continued)
In the first quarter of 1999, Debentures in the principal amount of
$1,764,000 were converted into 1,764,000 shares of Common Stock, at the
conversion price of $1.00 per share. Interest expense and corresponding
credit to additional paid-in capital of $1,671,158 was recorded relative to
the conversion of Convertible Subordinated Debentures as required in terms
of SFAS No. 84. As of December 31, 2000 and 1999, the Company's outstanding
balance on its Debentures, was $117,000.
(4) Stockholders' Equity
(a) Preferred Stock
On December 22, 1999 the Company, pursuant to the authority of the
Company's Board of Directors, adopted a resolution creating a series of
preferred stock designated as 7.0% Series A Convertible Preferred Stock
(the "Series A Preferred Stock"). The number of shares initially
constituting the Series A Preferred Stock was 10,000, par value $.01 per
share, which may be decreased (but not increased) by the Board of Directors
without a vote of stockholders, provided, however, that such number may not
be decreased below the number of then outstanding shares of Series A
Preferred Stock. The holders of the shares of Series A Preferred Stock
shall vote together with the Common Stock as a single class on all actions
to be voted on by the stockholders of the Company. Each share of Series A
Preferred Stock shall entitle the holder thereof to such number of votes
per share on each such action as shall equal the number of whole shares of
Common Stock into which each share of Series A Preferred Stock is then
convertible. The holders shall be entitled to notice of any stockholder's
meeting in accordance with the By-Laws of the Company. Each share of Series
A Preferred Stock, is convertible into that number of shares of Common
Stock determined by dividing the aggregate liquidation preference of the
number of shares of Series A Preferred Stock being converted by $1.00 (the
"Conversion Rate"). The Conversion Rate shall be subject to appropriate
adjustment by stock split, dividend or similar division of the Common Stock
or reverse split or similar combinations of the Common Stock prior to
conversion. The Company may at any time after the date of issuance, at the
option of the Board of Directors, redeem in whole or in part the Series A
Preferred Stock by paying cash equal to $100 per share together with any
accrued and unpaid dividends (the "Redemption Price"). The Redemption Price
shall be subject to appropriate adjustment by the Board of Directors of
similar division of shares of Series A Preferred Stock or reverse split or
similar combination of the Series A Preferred Stock. In the event the
Company shall liquidate, dissolve or wind up, no distribution shall be made
to the holders of shares of Common Stock unless, prior thereto the holders
of shares of Series A Preferred Stock shall have received $100 per share
(as
49
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) 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.
On December 31, 1999, the Company consummated an agreement with all the
unrelated parties and Mr. W. Scott Parr to convert $690,000 pursuant to
Convertible Promissory Notes into 6,900 shares of Series A Preferred Stock,
par value $.01 per share, of the Company.
On April 12, 2000, the Company sold, in private transactions, a total of
2,250 shares of its 7% Series A convertible Preferred Stock ($.01 per share
par value), at $100 per share, consisting of 1,000 shares to an unrelated
party, 1,000 shares to Dr. Lawrence Howard, son of the Company's Chairman,
Mr. Robert Howard, and 250 shares to Mr. W. Scott Parr, the Company's
President, Chief Executive Officer, for gross proceeds of $225,000.
On October 19, 2000 the Company, pursuant to the authority of the Company's
Board of Directors, adopted a resolution creating a series of preferred
stock designated as 7.0% Series B Convertible Preferred Stock (the "Series
B Preferred Stock"). The number of shares initially constituting the Series
B Preferred Stock was 2,000, par value $.01 per share, which may be
decreased (but not increased) by the Board of Directors without a vote of
stockholders, provided, however, that such number may not be decreased
below the number of then outstanding shares of Series B Preferred Stock.
The holders of the shares of Series B Preferred Stock 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 B 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 B 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 B
Preferred Stock, is convertible into that number of shares of Common Stock
determined by dividing the aggregate liquidation preference of the number
of shares of Series B Preferred Stock being converted by $2.00 (the
"Conversion Rate"). The Conversion Rate shall be subject to appropriate
adjustment by stock split, dividend or similar division of the Common Stock
or reverse split or similar
50
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Stockholders' Equity (continued)
(a) Preferred Stock (continued)
combinations of the Common Stock prior to conversion. The Company may at
any time after the date of issuance, at the option of the Board of
Directors, redeem in whole or in part the Series B Preferred Stock by
paying cash equal to $1,000 per share together with any accrued and unpaid
dividends (the "Redemption Price"). The Redemption Price shall be subject
to appropriate adjustment by the Board of Directors of similar division of
shares of Series B Preferred Stock or reverse split or similar combination
of the Series B Preferred Stock. In the event the Company shall liquidate,
dissolve or wind up, no distribution shall be made to the holders of shares
of Common Stock unless, prior thereto, the holders of shares of Series B
Preferred Stock shall have received $1,000 per share (as adjusted for any
stock dividends, combinations or splits) plus all declared or accumulated
but unpaid dividends. The holders of shares of Series B Preferred Stock, in
preference to the holders of shares of Common Stock, shall be entitled to
receive cumulative dividends of $70.00 per annum per share, payable
annually, subject to appropriate adjustment by the Board of Directors of
the Company in the event of any stock split, dividend or similar division
of shares of Series B Preferred. Dividends shall be payable annually, in
arrears, on the last day of December in each year, commencing December 31,
2000.
In October 2000 the Company sold, in private transactions, a total of 1,400
shares of its 7% Series B Convertible Preferred Stock ($.01 per share par
value), at $1,000 per share, consisting of 1,350 shares to unrelated
parties, and 50 shares to Mr. W. Scott Parr, for gross proceeds of
$1,400,000.
The 1,400 shares of 7% Series B Convertible Redeemable Preferred Stock were
issued with a conversion price below the Company's Common Stock quoted
value and as a result accreted dividends of $996,283 were recorded and
included in the net loss per share calculation.
(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.
51
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Stockholders' Equity (continued)
(b) Stock Options (continued)
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 2000: no dividends paid;
expected volatility of 76%; risk-free interest rates of 6.62%, and 5.96%;
and expected lives of 4 and 5 years. The weighted-average assumptions used
for grants in 1999 were: no dividends paid; expected volatility of 45.8%;
risk-free interest rates of 5.79%, 5.88% and 5.99%; and expected lives 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
rate of 5%; and expected lives of 5 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below:
2000 1999 1998
---- ---- ----
Net loss available to common shareholders
As reported $(2,896,520) $(3,996,828) $(3,372,323)
Pro forma $(3,037,055) $(4,101,278) $(3,450,229)
Basic and diluted loss per share
As reported $ (.22) $ (.32) $ (.33)
Pro forma $ (.23) $ (.32) $ (.34)
52
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Stockholders' Equity (continued)
(b) Stock Options (continued)
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.
53
HOWTEK, INC
Notes to Financial Statements (continued)
(4) 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, 1998 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
Granted 401,179 $1.37-$1.75 $1.74
Exercised (131,822) $ .81-$1.72 $1.10
Cancelled (127,442) $ .81-$1.81 $1.15
------------------------------------------
Outstanding, December 31, 2000 1,425,489 $ .81-$1.81 $1.31
==========================================
Exercisable at year-end
1998 409,793 $1.00-$1.72 $1.27
1999 642,772 $ .81-$1.81 $1.21
2000 678,417 $ .81-$1.81 $1.28
Available for future grants
2000 204,741
The weighted-average fair value of options granted during the year was $1.15 per
option for 2000, $0.42 per option for 1999 and $0.63 per option for 1998.
The weighted-average remaining contractual life of stock options outstanding for
all plans at December 31, 2000 was 8.4 years.
54
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) 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
preferred stock and assumed exercise of options and warrants are not
included in the calculation of diluted loss per share since the effect
would be antidilutive. Accordingly, basic and diluted net loss per share do
not differ for any period presented.
The following table summarizes the common stock equivalent of securities
that were outstanding as of December 31, 2000, 1999 and 1998, but not
included in the calculation of diluted net loss per share because such
shares are antidilutive:
2000 1999 1998
---- ---- ----
Stock options 1,425,489 1,283,574 1,007,116
Stock warrants 57,000 50,000 --
Convertible Subordinated Debentures 6,158 6,158 99,000
Convertible Revolving Promissory Note 393,607 294,399 --
Convertible Promissory Note 310,000 310,000 --
Convertible Series A Preferred Stock 815,000 -- --
Convertible Series B Preferred Stock 700,000 -- --
(d) Stock Subscription Warrants
In December, 1999 the Company issued a common stock purchase warrant (the
"Warrant") to the company (the "Manufacturer") responsible for the assembly
of the Company's MultiRAD(TM) medical film digitizer, as part of its
manufacturing agreement. The Warrant entitles the Manufacturer to purchase
from the Company up to 50,000 shares of the Company's common stock at 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 Warrant at the date of issue to be $54,000
using the Black-Scholes option-pricing model. Accordingly, the value of the
Warrant was recorded as stock compensation expense over the period of the
agreement. Stock compensation expense totaling $27,000 was recorded during
2000 and 1999.
During 2000 the Company issued a common stock purchase warrant (the "New
Warrant") to the company (the "Supplier") responsible for software
development of certain of the Company's software, as part of its
development agreement entered into in 2000. The Warrant entitles the
Supplier to purchase from the Company up to 7,000 shares of the Company's
common stock at the price of $3.00 per share. The Supplier may exercise the
Warrant at any time or from time to time on or prior to February 28, 2005.
The Company estimated the fair value of the Warrant at the date of issue to
be $12,818 using the Black-Scholes option-pricing model. The value of the
Warrant was recorded as stock compensation expense in 2000.
55
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Income Taxes
As a result of the 2000, 1999 and 1998 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:
2000 1999
---- ----
Inventory (Section 263A) $ (105,000) $ (133,000)
Inventory reserves (123,000) (68,000)
Receivable reserves (87,000) (51,000)
Other accruals (18,000) (19,000)
Accumulated depreciation (14,000) (--)
Tax credits (2,317,000) (2,506,000)
NOL carryforward (15,232,000) (15,630,000)
============ ============
Gross deferred tax asset $(17,896,000) $(18,407,000)
============ ============
Accumulated depreciation (--) 36,000
Gross deferred tax liabilities (--) 36,000
Net tax assets $(17,896,000) $(18,371,000)
Deferred tax assets valuation
allowance $ 17,896,000 $ 18,371,000
============ ============
Net deferred tax assets $ 0 $ 0
============ ============
As of December 31, 2000, the Company has net operating loss carryforwards
totaling approximately $44,800,000. The amount of the net operating loss
carryforwards, which may be utilized in any future period, may be subject
to certain limitations based upon changes in the ownership of the Company's
common stock. The following is a breakdown of the net operating loss
expiration period:
56
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Income Taxes (continued)
Expiration date Amount of remaining NOL
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 2,200,000
2020 1,500,000
In addition the Company has available tax credit carryforwards (adjusted to
reflect provisions of the Tax Reform Act of 1986) of approximately
$2,317,000, which are available to offset future taxable income and income
tax liabilities, when earned or incurred. These amounts expire in various
years through 2020.
(6) 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 $3,243,000 or 42% of total sales in 2000,
$740,000 or 11% of total sales in 1999 and $1,252,000 or 24% of total sales
in 1998.
With the addition of a new OEM customer, the Company's principal
concentration of export sales was in Canada, which accounted for 71% of
2000 export sales. The Company's principal concentration of export sales
had been in Europe with 41% of export sales in 1999 and 47% in 1998. The
balance of the export sales was into the Far East, Mexico and Central
America.
As of December 31, 2000 and 1999 the Company had outstanding receivables of
$601,000 and $133,000, respectively, from distributors of its products who
are located outside of the United States.
57
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) Sales Information (continued)
(c) Major Customers
During the year ended December 31, 2000, the Company had one major customer
that operated as an OEM. For the year ended December 31, 1998 the Company
had one major customer that operated as a U.S. based international
distributor of computer and related products. In 1999, the Company's sales
of its prepress and graphic arts products to its U.S. based international
distributor continue to be adversely affected by the economic weakness in
Asia. There were no major customers in 1999. The following represents the
comparative sales and accounts receivable:
2000 1998
Amount % Amount %
------------ -----------
Sales
Customer 1 $ -- -- $ 572,836 11
Customer 2 $2,062,955 26 $ -- --
Accounts Receivable
Customer 1 $ -- $ 52,000
Customer 2 $ 428,994 $ --
(7) Commitments and Contingencies
As of December 31, 2000, the Company had one lease obligation related to
its facility. The lease obligation for 2001 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, 2001.
Rental expense for all leases for the years ended December 31, 2000, 1999
and 1998 was $78,500, $93,740 and $161,425, respectively.
58
HOWTEK, INC.
Notes to Financial Statements (continued)
(8) 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, 2000 and
1999, due to either short maturity or terms similar to those available to
similar companies in the open market.
(9) Quarterly Financial Data (unaudited)
Net Gross Net Loss
sales profit loss per share
----- ------ ---- ---------
2000
----
First quarter $ 1,517,518 $ 352,557 $ (564,464) $ (0.04)
Second quarter $ 1,957,638 $ 597,126 $ (257,501) $ (0.02)
Third quarter $ 2,760,773 $ 783,229 $ (175,627) $ (0.01)
Fourth quarter $ 1,557,588 $ 167,115 $ (830,056) $ (0.14)
1999
----
First quarter $ 1,561,133 $ 256,776 $(2,697,448) $ (0.23)
Second quarter $ 1,902,608 $ 485,726 $ (343,708) $ (0.03)
Third quarter $ 1,614,930 $ 438,474 $ (559,380) $ (0.04)
Fourth quarter $ 1,584,559 $ 413,148 $ (396,292) $ (0.02)
59
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, 2000:
Allowance for Doubtful Accounts $ 150,500 $ 105,499 $ -- (1) $ 255,999
Inventory Reserve $ 200,175 $ 289,370 $ 127,614 (2) $ 361,931
Year End December 31, 1999:
Allowance for Doubtful Accounts $ 118,349 $ 281,312 $ 249,161 (1) $ 150,500
Inventory Reserve $ 101,553 $ 117,583 $ 18,961 (2) $ 200,175
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
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
60
EXHIBIT 10(b)
RENEWAL OF LEASE
Effective October 1, 2000, the Indenture of Lease (the "Lease") dated
October 1, 1984 between Robert Howard ("Lessor") and Howtek, Inc. ("Lessee"), of
the premises located at 21 Park Avenue, Hudson, NH, is renewed for a term of one
(1) year at the base rent of $78,499.92, payable in twelve (12) monthly
installments of $6,541.66. All other terms and conditions of the Lease remain in
effect.
LESSOR LESSEE
HOWTEK, INC.
/s/ Robert Howard BY: /s/ W. Scott Parr
- ------------------------- -------------------------
ROBERT HOWARD PRESIDENT
EXHIBIT 10 (d)
ADDENDUM NO. 13
REVOLVING LOAN AND SECURITY AGREEMENT
CONVERTIBLE REVOLVING CREDIT PROMISSORY NOTE
DATED OCTOBER 26, 1987
For consideration given and received, Robert Howard and Howtek, Inc. hereby
agree to extend the repayment date in Paragraph D of the above referenced
Convertible Revolving Credit Promissory Note, as amended, (the "Note") from
January 4, 2001 to January 4, 2002. Also the Note hereafter will be a maximum
principal sum of Three Million Dollars ($3,000,000).
Effective the 29th day of December 2000.
HOWTEK, INC.
By: /s/ W. Scott Parr /s/ Robert Howard
----------------------- -----------------------
Title: President, CEO Robert Howard
EXHIBIT 10(j)
Howtek, Inc.
CERTIFICATE OF DESIGNATION
OF
7.0% SERIES B CONVERTIBLE PREFERRED STOCK
SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
-------------------------
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, Howtek, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, in accordance with
the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority of Directors of the Board of Directors of
the Corporation by Article Fourth of the Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation"), and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution creating a series of preferred stock designated as 7.0% Series B
Convertible Preferred Stock.
RESOLVED that, pursuant to the authority vested in the Board of Directors
of the Corporation in accordance with the General Corporation Law of the State
of Delaware and the provisions of the Certificate of Incorporation, a series of
the class of authorized Preferred Stock, liquidation preference $1,000 per
share, of the Corporation is hereby created and that the designation and number
of shares thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations and restrictions thereof, are as follows:
Designation, Number and Rank. (a) The shares of such series shall be
designated "7.0% Series B Convertible Preferred Stock" (the "Series B
Preferred Stock"). The number of shares initially constituting the
Series B Preferred Stock shall be 2,000, par value $.01 per share,
which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such
number may not be decreased below the number of then outstanding
shares of Series B Preferred Stock.
The Series B Preferred Stock shall, with respect to dividend rights
and rights on liquidation, dissolution or winding up, be equivalent to
the rights of the Company's 7% Series A Convertible Preferred Stock
and pari passu to any other issue of preferred stock hereinafter
created by the Corporation which does not expressly provide that it
ranks either junior to or senior to the Series B Preferred Stock as to
dividends, liquidation preference or otherwise and shall rank prior in
right to the common stock, par value $.01 per share, of the
Corporation (the "Common Stock").
Dividends and Distributions. (a) The holders of shares of Series B
Preferred Stock, in preference to the holders of shares of Common
Stock and of any shares of other capital stock of the Corporation
(other than shares of the 7% Series A Convertible Preferred Stock or
any other issue of preferred stock hereinafter created by the
Corporation unless the issue of preferred stock hereinafter created
expressly provides that it ranks junior to or senior to the Series B
Preferred Stock as to dividends and distributions), shall be entitled
to receive, out of the assets of the Corporation legally available
therefor, cumulative dividends of $70.00 per annum per share, payable
annually, subject to appropriate adjustment by the Board of Directors
of the Corporation in the event of any stock split, dividend or
similar division of shares of Series B Preferred Stock
or reverse split or similar combination of the Series B Preferred
Stock. Dividends shall be payable annually, in arrears, on the last
day of December in each year, commencing December 31, 2000, provided,
however, if any such date shall fall on a day other than a business
day, then such payment shall, at the Corporation's option, be made on
either the first business day preceding or the first business day
following the date on which such payment shall have so fallen due.
(b) Dividends payable pursuant to paragraph (a) of this Section 2
shall begin to accrue and be cumulative from the date of issuance,
whether or not earned or declared. The amount of dividends so payable
shall be determined on the basis of twelve 30-day months and a 360-day
year. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series B Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors
may fix a record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive payment of a dividend
declared hereon, which record date shall be no more than sixty days
prior to the date fixed for the payment thereof.
Dividends payable pursuant to paragraph (a) of this Section 2 shall be
payable at the Corporation's option in either cash or in that number
of shares of Common Stock determined by dividing the total amount of
dividends due by the Fair Market Value of the Common Stock. For
purposes of this paragraph (c) "Fair Market Value" shall mean the
average of the closing sales price of the Common Stock as reported on
Nasdaq (or such other exchange or quotation medium on which the Common
Stock is then traded) for the ten (10) day trading period immediately
preceding the record date for such dividend, or the payment date if no
record date shall have been established. In the event of payment of
interest in shares of Common Stock no fractional shares shall be
issued but cash shall be paid in lieu of the issuance of the
fractional share based upon the Fair Market Value of such fractional
shares.
No dividends or other cash distributions shall be paid or set apart
for payment on any shares of Common Stock unless and until all accrued
and unpaid dividends on the Series B Preferred Stock, including the
full dividend for the then-current annual dividend period, shall have
been paid or declared and set apart for payment.
The holders of shares of Series B Preferred Stock shall not be
entitled to receive any dividends or other distributions except as
provided herein.
Voting Rights. Except as provided in the Corporation's Certificate of
Incorporation or By-Laws or as provided in the Delaware General
Corporation Law, the Series B Preferred Stock shall have no voting
rights.
Redemption at the Option of the Corporation.
Provided (i) the Corporation has not received a notice of conversion
pursuant to Section 7 hereof and (ii) the closing sales prices of the
Common Stock as reported by Nasdaq (or such other exchange or
quotation medium on which the Common Stock is then traded) has been
125% or more of the then Conversion Rate (as hereinafter defined) for
any five consecutive trading days (the "Trigger Period"), the
Corporation may at any time after the date of issuance, at the option
of the Board of Directors, redeem in whole or in part the Series B
Preferred Stock by paying in
cash therefor a sum equal to $1,000 per share, together with any
accrued and unpaid dividends thereon (the "Redemption Price"). Written
notice of redemption may be given no more than twenty (20) days after
the last day of the Trigger Period and shall be mailed, first class
postage prepaid, to each holder of record (at the close of business on
the business day next preceding the day on which notice is given) of
the Series B Preferred Stock to be redeemed, at the address last shown
on the records of the Corporation for such holder. Each such notice of
redemption shall specify the date fixed for redemption, which date
shall not be less than fifteen (15) days nor more than sixty (60) days
after the date notice of redemption is first given, the redemption
price, the place or places of payment, the then effective Conversion
Rate (as hereinafter defined), that the right of holders of shares of
Series B Preferred Stock being redeemed to exercise their conversion
right shall terminate as to such shares at the close of business on
the day that immediately precedes the date that is fixed for
redemption (provided that no default by the Corporation in the payment
of the applicable redemption price shall have occurred and be
continuing), that payment will be made upon presentation and surrender
of the shares of Series B Preferred Stock, that accrued but unpaid
dividends to the date fixed for redemption (whether or not declared)
will be paid on the date fixed for redemption, and that on and after
the redemption date, dividends will cease to accrue on such shares.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder of the
Series B Preferred Stock receives such notice; and failure to give
such notice by mail, or any defect in such notice, to the holders of
any shares designated for redemption shall not affect the validity of
the proceedings for the redemption of any other shares of Series B
Preferred Stock. On or after the date fixed for redemption as stated
in such notice, each holder of the shares of Series B Preferred Stock
shall surrender the certificate (or certificates) evidencing such
shares to the Corporation at the place designated in such notice and
shall thereupon be entitled to receive payment of the applicable
Redemption Price. If, on the date fixed for redemption, funds
necessary for the redemption shall be available therefor and shall
have been irrevocably deposited or set aside, then, notwithstanding
that the certificates evidencing any shares so called for redemption
shall not have been surrendered, the dividends with respect to the
shares so called shall cease to accrue after the date fixed for
redemption, the shares shall no longer be deemed outstanding, the
holders thereof shall cease to be stockholders, and all rights
whatsoever with respect to the shares so called for redemption (except
the right of the holders to receive the applicable Redemption Price,
without interest, upon surrender of their certificates therefor) shall
terminate. Any monies deposited by the Corporation pursuant to the
foregoing provision and unclaimed at the end of one year from the date
fixed for redemption shall, to the extent permitted by law, be
returned to the Corporation, after which the holders of shares of
Series B Preferred Stock so called for redemption shall look only to
the Corporation for the payment thereof.
Notwithstanding the provisions of paragraph (b) of this Section 5, no
redemption of the Series B Preferred Stock may be made unless at the
date fixed for redemption the shares of Common Stock that may be
issued upon conversion of the Series B Preferred Stock have either
been registered under the Securities Act of 1933 (the "Act") or may be
publicly sold under either Rule 144 promulgated under the Act or
another applicable exemption from registration under the Act.
Reacquired Shares. Any shares of Series B Preferred Stock converted,
redeemed, purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares of Series B Preferred Stock shall
upon their cancellation, and, if required, upon the filing of an
appropriate certificate with the Secretary
of State of the State of Delaware, become authorized but unissued
shares of Preferred Stock of the Corporation and may be reissued as
part of another series of Preferred Stock of the Corporation.
Liquidation, Dissolution or Winding Up.
If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or state bankruptcy,
insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under such law or to the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or
other similar official) of the Corporation or of any substantial part
of its property, or make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal
bankruptcy laws or any other applicable federal or state bankruptcy,
insolvency or similar law, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official)
of the Corporation or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such
decree or order shall be unstayed and in effect for a period of 180
consecutive days and on account of any such event the Corporation
shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up, no distribution shall be
made (i) to the holders of shares of Common Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock shall have
received $1,000 with respect to each share (as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus
all declared or accumulated but unpaid dividends on such shares.
Neither the consolidation, merger or other business combination of the
Corporation with or into any other entity nor the sale of all or
substantially all the assets of the Corporation shall be deemed to be
a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 6.
Conversion. The holders of the Series B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
Right to Convert. Each share of Series B Preferred Stock, if not
redeemed by the Corporation, is convertible into that number of shares
of Common Stock determined by dividing the aggregate liquidation
preference of the number of Series B Preferred Stock being converted
by $2.00 (the "Conversion Rate"). The Conversion Rate shall be subject
to appropriate adjustment by the Board of Directors of the Corporation
in the event of any stock split, dividend or similar division of the
Common Stock, or the Series B Preferred Stock, as the case may be, or
reverse split or similar combination of the Common Stock, or the
Series B Preferred Stock, as the case may be, prior to conversion.
Mechanics of Conversion. Before any holder of Series B Preferred Stock
shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent
for the Series B Preferred Stock, and shall give written notice to the
Corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter,
subject to the receipt by the Corporation from the converting
holder of any representations or other documentation the Corporation
may reasonably request in order to comply with the federal securities
laws with respect to the issue of the Common Stock upon such
conversion, to issue and deliver at such office to such holder of
Series B Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of the shares of
Series B Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
In case any shares of Series B Preferred Stock are to be redeemed
pursuant to Section 4, such right of conversion shall cease and
terminate as to the shares of Series B Preferred Stock to be redeemed
at the close of business on the business day next preceding the date
fixed for redemption unless the Corporation shall default in the
payment of the Redemption Price.
Upon conversion, the holder of shares of Series B Preferred Stock
shall be entitled to receive, at the Corporation's option, in cash, or
shares of Common Stock, any accrued and unpaid dividends on the shares
of Series B Preferred Stock surrendered for conversion to the date of
such conversion.
Once the Corporation has received the written notice of the holder of
the election to convert, the right of the Corporation to redeem such
shares of Series B Preferred Stock shall terminate.
The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series B Preferred Stock, such
number of its authorized but unissued shares of Common Stock as will
from time to time be sufficient to permit the conversion of all
outstanding shares of Series B Preferred Stock, and shall take all
action required to increase the authorized number of shares of Common
Stock if necessary to permit the conversion of all outstanding shares
of Series B Preferred Stock.
Certain Covenants. Any registered holder of Series B Preferred Stock
may proceed to protect and enforce its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific
enforcement of any provision in this Certificate of Designation or in
aid of the exercise of any power granted herein, or to enforce any
other proper remedy.
IN WITNESS WHEREOF, a duly authorized officer of the Corporation has caused
this Certificate to be duly executed on this 19th day of October, 2000.
HOWTEK, INC.
By: /s/ W. Scott Parr
----------------------------
Name: W. Scott Parr
Title: President
EXHIBIT 23 (a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Howtek, Inc.
Hudson, New Hampshire
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statement on Form S-8 (No. 33-72534) and
S-3 (No. 333-88867) of our report dated February 14, 2001, appearing in this
Annual Report on Form 10-K of Howtek, Inc. for the year ended December 31, 2000.
We also consent to the references to us under the caption "Experts" in the
Prospectuses.
/s/ BDO SEIDMAN, LLP
Boston, Massachusetts
March 19, 2001