-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGXZ2iviwJGd+ynX+6XrJaRLDhh2nhnXoDHCptUd9aNKrI2Du+7rIL5UpUwDxUhY MwibT6bmc5JuYhHS9qceug== 0000891554-00-000865.txt : 20000331 0000891554-00-000865.hdr.sgml : 20000331 ACCESSION NUMBER: 0000891554-00-000865 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOWTEK INC CENTRAL INDEX KEY: 0000749660 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 020377419 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09341 FILM NUMBER: 585989 BUSINESS ADDRESS: STREET 1: 21 PARK AVE CITY: HUDSON STATE: NH ZIP: 03051 BUSINESS PHONE: 6038825200 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________ to ________________ Commission file number 1-9341 HOWTEK, INC. (Exact name of registrant as specified in its charter) Delaware 02-0377419 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 21 Park Avenue, Hudson, New Hampshire 03051 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (603) 882-5200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------- ---------------- 9% Convertible Subordinated Philadelphia Stock Exchange Debentures due 2001 Securities registered pursuant to Section 12 (g) of the Act: Title of Class -------------- Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES _X_ NO___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price for the registrant's Common Stock on March 10, 2000 was $31,686,519. As of March 10, 2000, the registrant had 13,268,076 shares of Common Stock outstanding. 2 "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this report on Form 10-K that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, possible technological obsolescence of products, competition and other risks detailed in Howtek's Securities and Exchange Commission filings. The words "believe", "expect", "anticipate" and "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. PART I Item 1. Business. General Howtek, Incorporated, ("Howtek" or the "Company"), located in Hudson, New Hampshire, was founded in 1984. Howtek develops, manufactures, and markets digitizing systems, or "scanners", which convert printed, photographic and other "hard copy" images to digital form for use in the photo-finishing, medical and graphic arts industries. The Company introduced the first "desktop" scanner in 1986, smaller, easier to use and less costly than alternative scanners at that time, helping to make possible the shift to decentralized corporate electronic publishing. Howtek followed with a series of award winning, industry leading products, continuing to improve the quality of digital imaging, and reducing the price and complexity of scanning systems. The Company marketed originally to the `high-end' of the graphic arts scanning marketplace, including advertising, corporate, service bureau and other printing and publishing customers. As part of its strategy to improve financial performance and increase growth, the Company has recently shifted its business focus, extending and promoting its scanning technology for use in photo finishing and medical applications. As part of its new business strategy Howtek has (1) shifted its product emphasis from the traditional graphic arts markets to the growing and higher margin medical and photo processing markets, (2) updated all product lines, introducing new products in medical and photo processing/Internet markets, (3) migrated from in-house manufacture to outsourcing to more effectively utilize outside engineering, development, and manufacturing resources, (4) substantially reduced personnel and overhead, and (5) revamped its marketing and sales effort consistent with its new business focus. Howtek has exploited its traditional graphic arts business to support development of its medical business, and introduction of a new line of products linking photo labs and processors to the Internet and worldwide web, while reducing its cost of operations. 3 Medical Imaging Products Howtek MultiRAD(TM) digitizers are used in medical imaging to convert radiological films to digital records for computer analysis, diagnosis, transmission or storage. The use of medical images to diagnose and treat diseases and injuries has been an important medical tool since the invention of x-ray technology and the emergence of diagnostic radiology as a medical specialty. Medical imaging has reduced the need for certain exploratory surgical procedures and has enabled clinicians to make faster and more precise diagnoses and prescribe more targeted courses of treatment. Medical imaging is used in all stages of the patient management cycle, from screening to diagnosis, treatment and post-treatment assessment. Where medical images are acquired on film, those films must be converted to digital form by medical film digitizers to be communicated, stored or analyzed electronically. Historically, digitizers that utilize a laser light source to illuminate a film, and a photo multiplier tube to sense and measure the amount of light penetrating different regions of the film, achieved the highest quality images. While these "first-generation" laser digitizers offer excellent image quality, they are expensive to acquire, comparatively delicate, and in many cases expensive to maintain. A "second-generation" of digitizers, using a fluorescent light source for image illumination and a charge coupled device ("CCD") sensor for image capture, offers reduced cost at the expense of reduced image quality. Howtek believes its competitive advantage is based on its film digitizer that utilizes high energy, narrow-band red light, generated by an array of individually controlled, solid state, light emitting diodes (LEDs), to improve illumination of films and increase resulting image quality. This "third-generation" (and newest) individually calibrated Red LED illumination technology avoids problems and disadvantages associated with use of common fluorescent light for film illumination, without the acquisition and maintenance costs commonly associated with film digitizers using laser illumination technology. As a result, the Company's MultiRAD(TM) scanners are less expensive than existing competitive products with comparable capabilities, and are superior in performance to scanners previously available at comparable prices. In the MultiRAD(TM) system, 56 individual, high-output LEDs transmit light through the radiological film, using a very high quality lens and imaging system to focus transmitted light on a sensitive 8000 element CCD detector. Generated light is nearly monochromatic at a wavelength of approximately 670 nanometers (nm). This red wavelength is matched to the peak sensitivity of the CCD camera, contributing to high signal strength, which results in improved dynamic range and image quality. The Company believes that this solid state Red LED illumination system offers several important advantages over competitive fluorescent illumination methods contributing to improved image quality and to operator productivity, including: o Near-Monochromatic Illumination o Higher and Flatter Illumination Profile o Adjustment to Lens Shape o Temporal Stability o Warm-up Characteristics o Adjustable Illumination Width 4 In general, medical digitizers like Howtek's MultiRAD(TM) digitizer operate in conjunction with, and require, image acquisition and management software developed and marketed by third parties. Channels that distribute and integrate such software are, therefore, a primary vehicle for digitizer sales. Specific interface (or driver) development is required by the software developer for a digitizer to operate with a software application. A customer's selection of an integrated medical imaging solution is typically based on the software application selected, and not on the digitizer choice. A particular digitizer may then be selected by the customer, or recommended by the systems integrator marketing the software application. The extent to which a particular digitizer is supported by and promoted by integrators offering a particular software solution to their customers will, therefore, impact digitizer choice and sales. Similarly, the relative popularity and sales growth of affiliated software applications can positively influence digitizer sales. The market for medical imaging software, and for related medical film digitizers, has evolved significantly over the last 18-24 months with the increasing market availability and acceptance of medical imaging, teleradiology and PACS solution software running under Microsoft(R)'s operating system Windows NT(TM). Such software permits use of low cost PCs in place of more specialized and higher priced hardware, and reduces the overall cost of implementing a medical image management system. The Company believes that one of the emerging software standards in this market is the RadWorks(TM) product developed and offered by Applicare Medical Imaging N.V. (purchased in late 1999 by General Electric Medical Systems). Applicare's products are sold through GE Medical Systems and more than 20 other distributors and OEM partners (including Kodak, Konica, Picker and Toshiba) all over the world. Over 5,000 systems have been installed in 700 hospitals and clinics in over 45 countries. Howtek has established a development and marketing relationship with Applicare and RadWorks(TM), supporting use of Howtek MultiRAD(TM) digitizers with RadWorks software. Howtek MultiRAD(TM) digitizers are currently supported by medical application software from Applicare Medical Imaging, B.V. (Applicare), Radiology Information Systems (RIS), Line Imaging, Rogan, Mitra, Qualia Computing and Scanis Computing. Software interface development is currently underway with additional applications developers. Products The Howtek MultiRAD(TM) medical film digitizer product line currently includes: o The MultiRAD 850 product, a high-resolution digitizer that is positioned to serve an increasing market for computer-aided mammography. The MultiRAD 850, priced at $18,995, has been chosen by Massachusetts General Hospital for use in the US National Mammography Study, and o The MultiRAD 450, priced at $15,995, is aimed at telemedicine and archiving applications Howtek's MultiRAD(TM) design permits the differentiation of resolution, and therefore of models and price levels, through firmware changes in the same basic product configuration. This means that each Howtek MultiRAD(TM) can be upgradeable through the Internet, which the Company believes can be a competitive advantage and a source of continuing upgrade revenues. 5 The following table summarizes current digitizer products: - -------------------------------------------------------------------------------- Product Distinguishing Features Suggested Retail Price at 12/31/99 - -------------------------------------------------------------------------------- MultiRAD(TM)450 o Multi-feed compact scanner $15,995 o Solid state, red-light illumination system o High definition CCD array o Digitizing area 14" x 36" o Maximum film size 15" x 36" o 1k - 4k resolution o Minimum 87 micron pixel size o Optical density 001-3.5 o 12 bit grayscale o SCSI-2 interface - -------------------------------------------------------------------------------- MultiRAD(TM)850 o Multi-feed compact scanner $18,995 o Solid state, red-light illumination system o High definition CCD array o Digitizing area 14" x 36" o Maximum film size 15" x 36" o 1k - 8k resolution o Minimum 43.5 micron pixel size o Optical density 001-3.5 o 12 bit grayscale o SCSI-2 interface - -------------------------------------------------------------------------------- Photographic Products On-line imaging is projected by the trade publication Advertising Age to reach $3.3 billion in revenues by 2002. To exploit this market Howtek introduced its new, under $5,000 list-price FotoFunnel(TM) high productivity Photographic Print Scanner in February 2000, with commercial shipments expected to begin in April 2000. Using application software from a variety of vendors, images captured by the Howtek scanner can be transmitted to the Internet for viewing or sharing, or stored in electronic form on Compact Disk (CD) or diskette. FotoFunnel(TM) offers smaller and lower volume photo finishers, photo labs and one-hour film processors a cost-effective way to offer increasingly demanded digital options to customers developing film. The "load and leave" feature of the FotoFunnel(TM) allows a merchant to offer this new, revenue enhancing service without necessarily increasing labor or space. FotoFunnel(TM) is also expected to provide mini-lab owners and other retailers with an opportunity to add new products and services to build up customer traffic and incremental business, offering to digitize existing photos for consumers with "shoeboxes" of old photo prints. The FotoFunnel can quickly and inexpensively convert those old photos into digital form, giving them new life in a range of potential uses, from electronic albums to images in correspondence, reports and email, to images on coffee mugs, shirts, calendars and gifts. 6 To permit customers to convert existing photo print libraries to digital form in the comfort of their own homes or offices, Howtek may also offer the FotoFunnel scanner directly to consumers, on a short-term rental basis, through e-commerce and resellers. Product [Graphic Omitted] FotoFunnel is a compact; automatic batch-feeding scanner designed to digitize both existing and recently developed photographic prints. FotoFunnel is offered at a suggested retail price of $4,995. The scanner will accommodate up to 70 prints in the feed tray and feed most size prints from 2 inches by 2 inches up to a 5-inch by 7 inch. FotoFunnel employs a charge coupled device ("CCD") technology and cold cathode tube illumination. A soft urethane rubber feed system is used to guide the prints through a short, straight paper path, eliminating scratches or other damage to the print. In addition, the scanner uses a unique combination of rubber and Mylar separators to eliminate the risk of misfeeds. The high speed of scanning - up to four photos per minute - allows the entire process from development of photos from film, scanning and production of CD or diskette to be completed within the one-hour processing requirements of many small photo labs. The Company believes the high quality of the equipment, the degree of automation of the process and the speed of processing combine to increase the usefulness of the FotoFunnel product to photo-finishers. The photos are put in an input tray and the scan process is started. From this point the system takes over, scanning the photographs at a resolution of up to 600 dpi and with a color depth of up to 36 bits. The system recognizes and skips duplicate prints that might be placed in the input tray. The software automatically calibrates for the optimum quality (for example lighting) of the photograph. A further advantage over other digital processing systems is that FotoFunnel scans directly from the photograph rather than negatives, eliminating potential color differentiation, which requires operator intervention in other systems. Matching the color of the print, rather than the negative, is also expected to eliminate occasional disagreements with customers about color accuracy. Photographic prints are fed into the scanner using soft silicon transport rollers that eliminate the possibility of damage to the original photograph during the scanning process. Another unique feature is that photos pass the CCD Sensor, without mirrors or the usual glass panel separation. This precludes any possible reflection or distortion of the picture through dust particles that might adhere to the glass panel, which (in the worst case) may cause lines on the final product. In addition, by eliminating glass panels, picture sharpness and contrast are enhanced. The FotoFunnel incorporates a standard SCSI 2-Interface, so that it can be connected to any PC with SCSI adapter and running Microsoft Windows 95/98/NT/2000. 7 Once the photos have been scanned, they appear as thumbnail previews on the computer monitor, and can be manipulated. That would include selection of photographs and switching the horizontal/vertical orientation of the image. The system then automatically compresses the data so that, regardless of the size of the original photo, up to 80 photographs can be stored on a diskette and many more can be stored on a CD or can be transmitted over the Internet. Howtek will offer three software options for the FotoFunnel scanner, with additional third party development anticipated: o A "FotoFunnel" application, developed exclusively for the Company by ColorByte Software, offers a flexible, easy to use interface to photofinishers and consumers; o A Digital Photo Factory interface, permitting use of the FotoFunnel by existing and future users of the Digital Photo Factory system from Digital Now; and o A TWAIN interface, which is used by OEM's to integrate the FotoFunnel scanner into their own software applications and systems. Graphic Arts Products Howtek believes it is the global market leader in drum scanners, which have declined in popularity in traditional prepress markets but are demonstrating increased demand in support of wide format and photographic printers. The Company has succeeded in identifying and exploiting new sources of demand, while reducing its reliance on older, unprofitable prepress markets. Overview Scanning technology digitizes a graphic image in order to permit its manipulation and reproduction in traditional print media. In its sophisticated form, it is the central link between the producer of an image (a photographer or graphic artist) and the publisher who manipulates, edits, and reproduces the image in print form. Howtek pioneered a scanning technology that utilizes photo-multiplier tube (`PMT"), or "drum scanner" technology to capture and digitize an image. This technology is characterized by a high degree of accuracy and fidelity in the acquisition and reproduction of complex images, and is used extensively where high quality printing (magazine and catalog work, for example) is required. Professional quality, or high-end products offer large format imaging areas, resolutions in excess of 2,400 dots per inch, and dynamic range (a measure of the ability to distinguish detail in very light or very dark areas) in excess of 3.2. Professional products are typically priced in excess of $15,000, and up to $70,000-$80,000 for high-end drum scanners. Howtek's products, which are typically positioned to offer superior performance and a lower price than competitors, are priced from $17,000 to $34,000. Historically, Howtek has competed in the market for drum scanners on the basis of compact design, comparatively low price, quality and value. 8 Recently, a competitive scanning technology that uses "CCD" or "flatbed" technology, has resulted in significantly improved image and scanning quality. These devices are seemingly easier to use than drum scanners, are often less expensive, and have captured a significant portion of the market formerly held by Howtek and other drum scanner manufacturers. To supplement its product line, Howtek added a series of products based on "flatbed" technology. During the first quarter of 1999, Howtek secured exclusive rights to market and sell the award winning Scanview flatbed scanner line in the United States and Canada, with first sales occurring at the end of March 1999. In addition, to fill out its product offerings, Howtek completed updating all key prepress graphic arts hardware and software product lines during 1999. Products Howtek's HiResolve(TM) drum scanners, with true optical resolution up to 8,000 dots per inch ("dpi"), equal or exceed existing competitive products in terms of absolute resolution specifications. As a result, they are superior in image capture resolution to competitive desktop drum scanners, and significantly more extensive in imaging range and fidelity, when compared to competing flatbed scanners for specific applications. HiResolve(TM) scanners include: o The HiResolve 8000 is a compact desktop drum scanner, which offers "true" 8000-dpi optical resolution, with a suggested list price of $29,995. o The HiResolve Grand, priced at $35,995, including software, provides 5,000 dpi image capture resolution, coupled with an oversized 24" x 18.5" scanning area. o The HiResolve Sprint(TM), priced at $19,995, is a reduced resolution version of the 8000 model, offering 4,000 dpi image capture resolution to more price sensitive customers. Howtek's HiResolve(TM) scanners permit full resolution scans across the entire imaging area, an important advantage over many competitive scanner products. The HiResolve(TM) 8000 and the HiResolve(TM) Grand are the first scanners specifically designed to support large format photo-realistic printing, as well as addressing today's requirement of five, six and eight-color printing technologies. For any original size, HiResolve scanning permits accurate, high fidelity output on photo realistic large format printers. Howtek entered into an agreement in late January 1999, to act as the exclusive US and Canadian scanner distributor for Scanview, A/S, a privately held Danish firm. The agreement expires in January 2002, subject to certain successive one year renewal provisions. These flatbed scanners are targeted at what is now the largest segment of the high end scanner marketplace, consisting of users that do not require the ultimate quality of drum scanners and appreciate the convenience and ease of use associated with flatbed scanner designs. By filling this void in its product line, Howtek's sales force now is able to implement a market-driven sales strategy. 9 Products acquired for distribution pursuant to this agreement include: o the ScanMate(TM)F6 scanner, with a suggested retail price of $17,995; o the ScanMate(TM)F8+ scanner, with a suggested retail price of $27,995; o and the ScanMate(TM)F10 scanner, with a suggested retail price of $39,995. The products are distinguished by increasing scanning speed and resolution, and in the case of the F10 scanner, the ability to scan using X-Y technology, focusing at high resolutions on "tiles" across the imaging plate. This X-Y technology is currently the most innovative approach to flatbed scanning. The Company believes that its ability to market the Scanview ScanMate(TM) product line will allow it to compete on more favorable terms. The Company released the Scanview product line through its own distribution channels, bundled with Howtek's proprietary software, beginning in March 1999. In the second quarter of 2000, the Company expects to begin offering a new, lower priced Scanview flatbed scanner, manufactured in Taiwan. The ScanMate F4, with a suggested list price of $7,995, will offer a new level of image acquisition quality at under $10,000. Howtek expects to promote the ScanMate F4 through its existing channels, with an emphasis on direct marketing and web-based promotions. MultiRAD(TM), HiResolve(TM) and FotoFunnel(TM) are trademarks of Howtek, all other trademarks and service marks used in this report are the property of their respective owners. Sources and Availability of Materials The electronics industry is subject to periodic fluctuations in the production capacity of integrated circuit manufacturers and other key suppliers. Currently, the Company believes that there are adequate sources and availability of the components necessary to manufacture its products. Competition Medical Imaging Products Howtek's principal competition for high quality medical digitizing markets is the "first generation" LumiScan(TM) digitizer from Lumisys Corporation. Since 1990, Lumisys digitizers, using a monochromatic laser illumination source, have been considered the quality standard in medical image digitizers. In the computer-aided diagnosis and teleradiology/PACS markets, Lumisys digitizers have enjoyed a dominant market share. Because Lumisys' laser technology requires manufacturing costs greater than those of Howtek's newer generation technology products, Lumisys products are expensive to acquire. The Company believes that this technology is also comparatively delicate, and expensive to maintain when compared to its products. With the Howtek MultiRAD(TM) digitizer, the Company believes it is offering image quality comparable to the Lumisys system at lower prices. 10 Vidar Corporation, a privately held subsidiary of a Swedish firm, has historically held the second greatest overall market share in medical digitizers, as a result of Vidar's dominance in the lower quality and most price sensitive therapy and oncology treatment planning segment. Vidar digitizers might be considered a second generation of medical film digitizers (with Lumisys laser illuminated digitizers as the first generation). Vidar devices use a fluorescent light source to illuminate an image, capturing image information with a CCD. Offering a lower cost alternative to laser illuminated digitizers, (comparable in price to Howtek's products) the Vidar products, in the opinion of the Company, offer lower image quality than the Lumisys or the Howtek products. In general, Howtek uses its proprietary solid state, red-light illumination system and superior image quality to compete with Lumisys and Vidar. The Company competes with Lumisys on the basis of comparable (or superior) image quality and significantly lower price. With Vidar, the Company competes on the basis of superior image quality. A key comparative measure of a digitizer's ability to acquire high quality images is the "dynamic range" of the device. Dynamic range measures the range, from pure white to pure black, within which a digitizer is able to detect differences in lightness or darkness (density). The ability to distinguish shades within a primarily dark, or dense area of a radiological film is particularly significant in many diagnostic and medical imaging applications. Howtek digitizers have a greater dynamic range - and therefore a greater ability to distinguish meaningful information within seemingly dark areas of the radiological films - than Vidar devices. This is a competitive advantage. Other laser and fluorescent illuminated medical digitizers are available from companies which may have significantly greater financial resources than the Company, including General Scanning Corporation, Canon Corporation and RDI. To date, in the Company's view, these competitive products have not achieved a significant market share. Photographic Products Competition exists from products that digitize the strip of photo negatives created when processing new rolls of film, and from products using generic, flatbed scanners manufactured for general office use. Today, there are several companies offering negative film scanning systems including Digital Now, Pakon and PictureVision. These systems are fast (they can digitize a roll of film in about four minutes). However, they are expensive and cost $15,000 or more to acquire. They also require some operator training to ensure image quality and proper operation. Management and correction of colors in the conversion from a photo negative to a positive digital and printed image can be complicated and is subject to errors. Finally, these systems are unable to work with existing prints and cannot serve the "shoebox" market of customers seeking to digitize pictures that were developed previously. Howtek products compete with these systems on price and convenience. Comparatively inexpensive office flatbed scanners, available from a wide range of manufacturers, can also be used to digitize existing photo prints. Kodak has offered a flatbed scanner integrated into a retail kiosk to permit one-at-a-time digitizing and editing of particularly important images with some success. This service is expensive to the consumer however (approximately $8 per image) and the labor requirements involved in using a standard flatbed scanner in a conventional photo lab's workflow make this an impractical solution in most cases. A Fujitsu office scanner, 11 incorporating an automatic document feed mechanism, is offered by PictureVision as a compromise solution. The FotoFunnel competes with such products on the basis of price, greater image quality, reduced space requirement and gentle, reliable print feed design. Prepress Products The prepress market is divided between "office quality" and "professional quality" scanners. Office quality scanners, generally manufactured in Taiwan or China, have become commodity items, offered through discount and electronic retailers at prices from $100 (or below) to $1,000. The Company competes in the professional portion of the market. Professional quality, or high-end, products offer large format imaging areas, resolutions in excess of 2,400 dots per inch, and dynamic range (a measure of the ability to distinguish detail in very light or very dark areas) in excess of 3.2. The Company's products are positioned to offer superior performance and a lower price than competitors. The professional portion of the prepress marketplace is further divided between drum scanners which use a laser imaging device to capture maximum image accuracy and detail, and flatbed scanners, which offer ease of use advantages at a modest compromise in imaging quality. Historically, the Company has competed in the drum scanner market with Linotype, Agfa and Scanview A/S, as well as several smaller manufacturers. The Company's drum scanner products, with competitive features and lower prices, have been gaining market share in this area, while drum scanners as a whole has lost market share to flatbed scanning products. The recent agreement to become Scanview's exclusive US distributor adds several flatbed products to the Company's product line. In the prepress market, the Company could be at a competitive disadvantage with other scanner manufacturers that offer consumable printing products, as well as, scanner products. These competitors may offer scanner products at substantially reduced prices as an incentive to customers to secure long term supply orders of the competitors consumables. Patents The Company has eight patents covering its scanner and prepress technology in the US and certain foreign countries, which is the basis of its current business. These patents help the Company maintain a proprietary position in the scanner market, but because of the pace of innovation in that market it is difficult to determine the overall importance of these patents to the Company. The Company has current patent applications pending, has filed foreign patent applications on some of its patents and plans to file additional domestic and foreign applications when it believes such protection will benefit the Company. There is no assurance that additional patents will be obtained either in the United States or in foreign countries or that existing or future patents or copyrights will provide substantial protection or commercial benefit to the Company. 12 There is rapid technological development in the Company's markets with concurrent extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its technologies have been independently developed and do not infringe the patents or intellectual property rights of others, certain components of the Company's products could infringe patents, either existing or which may be issued in the future, in which event the Company may be required to modify its designs or obtain a license. No assurance can be given that the Company will be able to do so in a timely manner or upon acceptable terms and conditions; and the failure to do either of the foregoing could have a material adverse effect upon the Company's business. In addition to protecting its technology and products by seeking patent protection when deemed appropriate, the Company also relies on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company requires all of its employees to execute confidentiality agreements. Insofar as the Company relies on confidentiality agreements, there is no assurance that others will not independently develop similar technology or that the Company's confidentiality agreements will not be breached. All key officers and employees have agreed to assign to the Company certain technical and other information and patent rights, if any, acquired by them during their employment with the Company and after any termination of their employment with the Company (if such information or rights arose out of information obtained by them during their employment). Engineering and Product and Software Development For the years ended December 31, 1999, 1998 and 1997 the Company spent $799,960 (or 12% of sales), $1,075,620 (or 20% of sales) and $1,401,989 (or 18% of sales), respectively, on engineering and product development. In addition, for the years ended December 31, 1999, 1998 and 1997 the Company spent $122,135 (or 2% of sales), $190,720 (or 4% of sales) and $355,465 (or 5% of sales), respectively, on software development. Manufacturing The Company operates an ISO 9001 and FDA-certified manufacturing facility in Hudson, NH. Historically the Company has undertaken final assembly of all its scanners and digitizers from components and subassemblies purchased from various suppliers. The software applications which are sold with the Company's products are either developed in-house or licensed from third parties. During the first calendar quarter of 1999, the Company shifted assembly of its MultiRAD(TM) medical film digitizer to a local manufacturing company, which has demonstrated a high level of quality in previous work performed for the Company. During the third quarter of 1999, the Company shifted assembly of its HiResolve 8000 to a manufacturing company in Minnesota. 13 Employees On March 10, 2000 the Company had 30 full time employees and 2 temporary employees. Backlog The dollar amount of the Company's backlog, and orders believed to be firm, as of December 31, 1999 was approximately $63,000 as compared to approximately $121,000 on the corresponding date in 1998. Environmental Protection Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings (losses) and competitive position of the Company. Item 2. Properties The Company's principal executive offices, manufacturing facility and research and development laboratory are located at 21 Park Avenue, Hudson, New Hampshire. The facility consists of approximately 21,000 square feet of manufacturing, research and development and office space and is leased by the Company from Mr. Robert Howard, Chairman of the Board of Directors of the Company, pursuant to a lease which expires September 30, 2000 at an annual rent of $78,500. Additionally, the Company is required to pay real estate taxes, provide insurance and maintain the premises. If the Company is required to seek additional or replacement facilities, it believes there are adequate facilities available at commercially reasonable rates. Item 3. Legal Proceedings. Not applicable Item 4. Submission of Matters to a Vote of Security-Holders Not applicable 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ ---------------------------------------------------------------------- The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol "HOWT". The following table sets forth the range of high and low bid prices for each quarterly period during 1999 and 1998. The high and low bid price, reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Fiscal year ended High Low ---- --- December 31, 1999 First Quarter $1-7/8 $ 7/8 Second Quarter 2 7/8 Third Quarter 1-9/16 5/8 Fourth Quarter 3-1/8 1 Fiscal year ended December 31, 1998 First Quarter $2-7/16 $1-5/16 Second Quarter 2 1-1/32 Third Quarter 1-9/16 15/16 Fourth Quarter 1-9/16 15/16 As of March 10, 2000 there were 309 holders of record of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock to date, and the payment of cash dividends in the foreseeable future is not contemplated by the Company. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant to the Company's Board of Directors. There are no non-statutory restrictions on the Company's present or future ability to pay dividends. Nasdaq Listing During the second quarter of 1999, the bid price for the Company's common stock had fallen below the $1 bid level required for continued trading of the Company's common stock on the Nasdaq Small Cap Market. In October 1999 the Company had been notified by Nasdaq that its listing was being reviewed. The Company was subsequently notified by Nasdaq that the required bid levels had been achieved and the Company's common stock would continue to be traded on the Nasdaq Small Cap Market. 15 Recent Sales of Unregistered Securities In October 1999 the Company issued 200,326 shares of restricted common stock to Dr. Lawrence Howard in connection with the conversion of indebtedness of $200,000 plus interest accrued pursuant to an exemption from registration under Section 3(a) (9) and/or 4(2) of the Securities Act of 1933. In December 1999 the Company issued a common stock purchase warrant (the "warrant") to the company (the "manufacturer) responsible for the assembly of the Company's MultiRAD(TM) medical film digitizer, as part of its manufacturing agreement. The warrant entitles the manufacturer to purchase from the Company up to 50,000 shares of the Company's common stock at the price of $2.50 per share. The warrant was issued by the Company pursuant to an exemption from registration under Section 2(a)(3) or 4(2) of the Securities Act of 1933. On December 31, 1999, the Company issued 6,900 shares of 7% Series A convertible preferred stock to certain unrelated parties and Mr. W. Scott Parr in connection with the conversion of indebtedness of $690,000 and issued a total of 15,878 shares of restricted common stock to the parties for interest accrued on the indebtedness pursuant to exemption from registration under Section 3(a) (9) and/or 4(2) of the Securities Act of 1933. 16 Item 6. Selected Financial Data Selected Statement of Operations Data
Year Ended December 31, ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Sales $ 6,663,230 $ 5,323,601 $ 7,874,813 $ 11,263,253 $ 20,603,654 Gross margin 1,594,124 1,223,135 1,663,317 1,918,798 6,619,835 Restructuring charge -- -- -- -- (2,662,632) Unusual charges -- -- (3,394,406) -- -- Total operating expenses (3,789,306) (4,096,944) (8,236,477) (7,355,481) (11,441,837) Loss from operations (2,195,182) (2,873,809) (6,573,160) (5,436,683) (4,822,002) Interest expense - net (1,801,646) (498,514) (258,912) (623,537) (433,045) Income from legal settlement -- -- 6,000,000 -- -- Net Loss (3,996,828) (3,372,323) (832,072) (6,060,220) (5,255,047) Net Loss per share (0.32) (0.33) (0.09) (0.76) (0.66)
Selected Balance Sheet Data As of December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Total current assets $ 4,457,910 $ 4,798,576 $ 5,332,546 $ 9,697,890 $14,137,204 Total assets 5,696,609 6,351,421 7,071,294 12,795,467 18,495,240 Total current liabilities 2,019,340 2,198,995 1,540,222 3,002,453 4,203,168 Loans payable to related parties 1,140,000 765,000 -- 3,478,604 3,578,604 Convertible Subordinated Debentures 117,000 1,881,000 2,181,000 2,181,000 2,181,000 Stockholders' equity 2,920,269 2,271,426 3,350,072 4,133,410 8,532,468
17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Overview The Company marketed originally to the `high-end' of the graphic arts scanning marketplace, including advertising, corporate, service bureau and other printing and publishing customers. As part of its strategy to improve financial performance and increase growth, the Company has recently shifted its business focus, extending and promoting its scanning technology for use in photo finishing and medical applications. As part of its new business strategy Howtek has (1) shifted its product emphasis from the traditional graphic arts markets to the growing and higher margin medical and photo processing markets, (2) updated all products lines, introducing new products in medical and photo processing/Internet markets, (3) migrated from in-house manufacture to outsourcing to more effectively utilize outside engineering, development, and manufacturing resources, (4) substantially reduced personnel and overhead, and (5) revamped its marketing and sales effort consistent with its new business focus. Howtek has exploited its traditional graphic arts business to support development of its medical business, and introduction of a new line of products linking photo labs and processors to the Internet and worldwide web, while reducing its cost of operations. Year Ended December 31, 1999 compared to Year Ended December 31, 1998 Sales. Sales for the year ended December 31, 1999 were $6,663,230, an increase of $1,339,629 or 25% from sales during the year ended December 31, 1998 of $5,323,601. The Company continues to emphasize its medical business opportunities. Sales of the company's medical imaging products increased 21% from $1,245,558 for the year ended December 31, 1998 to $1,508,197 for the year ended December 31, 1999. Sales of the Company's prepress and graphic arts products increased 13% from $3,032,089 in 1998 to $3,440,160 in 1999. Increased prepress sales are due primarily to the introduction of the Company's new HiResolve(TM) drum scanner product during the fourth quarter of 1998, and the introduction of its new Digital PhotoLab(TM) products in the first quarter of 1999. Moreover, during the first quarter of 1999, the Company entered into an agreement to act as exclusive distributor of the award winning Scanview flatbed scanner line in the United States and Canada. Gross Margin. Gross margin for the year ended December 31, 1999 increased to 24% from 23% in 1998. Gross margins are expected to improve as a result of reduced production overhead and indirect production expenses, associated with the Company's continuing overhead and expense control measures and with the Company's increased outsourcing of production and assembly services. 18 Engineering and Product Development. Engineering and product development costs for the year ended December 31, 1999 decreased 26% from $1,075,620 in 1998 to $799,960 in 1999. The overall decrease in engineering and product development costs results primarily from planned reductions in personnel expenses. The Company expects to continue reducing costs and overhead associated with engineering and product development as it increases its utilization of outside and contract engineering resources as appropriate. In general, the Company seeks to shift its engineering and development priorities, and the allocation of its engineering and development resources, to its medical business opportunities. General and Administrative. General and administrative expense decreased slightly from $1,319,062 in 1998 to $1,286,895 in 1999. During the first quarter of 1999 the Company established a reserve of $186,662 to permit the Company to take back discontinued HiDemand 400 graphic arts scanner products to encourage resellers and customers to acquire new Scanview products, especially in reseller demonstration locations, and a non-recurring expense of $21,142 associated with the write off of tooling and inventories associated with the discontinued HiDemand 400 product. Prior to accounting for this reserve and write down, the general and administrative expenses for the year ended December 31, 1999, decreased 18% to $1,079,091. This decrease is due primarily to reductions in personnel expenses. The Company expects general and administrative expenses to decline in 2000 as compared to 1999. Marketing and Sales. Marketing and sales expenses for the year ended December 31, 1999 increased slightly from $1,702,262 in 1998 to $1,702,451 in 1999. The change results from increases in advertising, promotional and trade show expenses, and a reduction in compensation due to a change in the Company sales compensation structure to provide compensation on the basis of gross margin, rather than net sales. The Company expects marketing and sales expenses to increase in 2000 as compared to 1999. Interest Expense. Net interest expense of $1,801,646 for the year ended December 31, 1999 includes interest expense of $1,671,158 relative to the conversion of Convertible Subordinated Debentures as required by Statement of Financial Accounting Standards No. 84, "Induced Conversions of Convertible Debt". This charge is wholly offset by a corresponding increase to additional paid-in capital by $1,671,158. The charge and corresponding benefit relate to the conversion to equity during the first quarter of 1999 of $1,764,000 of the Company's previously outstanding 9% Convertible Subordinated Debentures, due 2001 (the "9% Debenture"). In December 1998, the Company provided for a temporary reduction in the conversion price of the 9% Debenture to encourage conversion to common stock, and thereby reduce cash interest expenses, and sinking fund payments associated with the 9% Debenture. See "Liquidity and Capital Resources". As a result of the foregoing, the Company recorded a net loss of $3,996,828 or $0.32 per share for the year ended December 31, 1999 on sales of $6,663,230 compared to a net loss of $3,372,323 or $0.33 per share for the same period in 1998 on sales of $5,323,601. 19 Year Ended December 31, 1998 compared to Year Ended December 31, 1997 Sales. Sales for the year ended December 31, 1998 were $5,323,601, a decrease of 32% from sales during the year ended December 31, 1997 of $7,874,813. The Company attributed the decrease in sales primarily to increased competition for drum scanners from high-end flatbed scanners, the maturing of the Company's Scanmaster(TM) 2500 product and the economic crisis in Asia. Gross Margin. The Company's gross margin, as a percentage of sales, for the year ended December 31, 1998 increased to 23% from 21% in 1997. During 1998, gross margins increased from 8% in the first quarter, to 13% in the second quarter, 25% in the third quarter and 35% in the fourth quarter. The improvement in gross margin was primarily due to better management of indirect production costs and to the increased sales of products which had higher gross margins. Engineering and Product Development. Engineering and product development costs for the year ended December 31, 1998 decreased 23% from $1,401,989 in 1997 to $1,075,620 in 1998. The overall decrease in engineering and product development costs resulted primarily from planned reductions in manpower and anticipated depreciation expenses. General and Administrative. General and administrative expense decreased 23% from $1,716,199 in 1997 to $1,319,062 in 1998. The decrease in general and administrative expenses resulted primarily from the reduction in personnel, salaries, and legal fees in connection with a lawsuit, against a former contract manufacturer, that was settled in April 1997. Marketing and Sales. Marketing and sales expenses for the year ended December 31, 1998 decreased slightly from $1,723,883 in 1997 to $1,702,262 in 1998. The change resulted from reductions in trade show expenses. The Company increased its reliance on direct mail and telemarketing to support its sales efforts, and reduced trade show expenditures. Interest Expense. Net interest expense of $498,514 included interest expense of $284,211 relative to the conversion of Convertible Subordinated Debentures as required in terms of Statement of Financial Accounting Standards No. 84, "Induced Conversions of Convertible Debt". This charge was wholly offset by a corresponding account increase of $284,211 in additional paid-in capital. The charge and corresponding benefit relate to the conversion to equity during 1998 of $300,000 of the Company's previously outstanding 9% Convertible Subordinated Debentures, due 2001 (the "9% Debenture"). In comparing the Company's performance to that for the year ended December 31, 1997 a $6,000,000 legal settlement granted to the Company in April 1997 (See Note 9 of Notes to Financial Statements), offset by $3,394,406 in unusual charges taken during 1997, made comparison difficult. After giving effect to the legal settlement income and unusual charges, the Company's loss was $832,072 or $0.09 per share for the year ended December 31, 1997 on sales of $7,874,813 compared to net loss of $3,372,323 or $0.33 per share for the year ended December 31,1998 on sales of $5,323,601. 20 Liquidity and Capital Resources The Company's ability to generate cash adequate to meet its requirements depends primarily on operating cash flow and the availability of a $3,000,000 credit line under a Convertible Note and Revolving Loan and Security Agreement with its Chairman, of which $2,670,000 was available at December 31, 1999. The Company believes that these sources are sufficient to satisfy its cash requirements for the foreseeable future. (See Item 13 - "Certain Relationships and Related Transactions".) Working capital decreased $161,011 from $2,599,581 at December 31, 1998 to $2,438,570 at December 31, 1999. The ratio of current assets to current liabilities at December 31, 1999 and 1998 was 2.2. As of December 31, 1998, the Company's outstanding balance on its $8,000,000, 9% Convertible Subordinated Debentures (the "Debentures"), which become due in 2001, was $1,881,000. The Debentures were convertible into common stock of the Company at the conversion price of $19.00 per share, subject to adjustment in certain events. On December 31, 1998, the Company and the Trustee of the Debentures entered into a Second Supplemental Indenture (the "Agreement"). The purpose of the Agreement was to reduce the conversion price for the Debentures from $19.00 per share to $1.00 per share, subject to adjustment as set forth in the Indenture, during the period from December 31, 1998 through March 23, 1999. Under the Agreement, Debentures owned by related parties in the principal amount of $300,000 were converted into 300,000 shares of Common Stock, at the conversion price of $1.00 per share on December 31, 1998. Interest expense and a corresponding credit to additional paid-in capital of $284,211 were recorded relative to the conversion of Convertible Subordinated Debentures as required in terms of Statement of Financial Accounting Standards No. 84, ("SFAS No. 84") "Induced Conversions of Convertible Debt". In the first quarter of 1999 Debentures in the principal amount of $1,764,000 not owned by related parties were converted into 1,764,000 shares of Common Stock, at the conversion price of $1.00 per share. Interest expense and corresponding credit to additional paid-in capital of $1,671,158 were recorded relative to the conversion of Convertible Subordinated Debentures as required in terms of SFAS No. 84. As of December 31, 1999 the Company's outstanding balance of its Debentures was $117,000. Interest on the Debentures is payable semi-annually on June 1 and December 1. In the third quarter of 1998, the Company borrowed, (i) $565,000 from Mr. Robert Howard, the Company's Chairman, and (ii) $200,000 from Dr. Lawrence Howard, the son of Mr. Robert Howard, pursuant to Secured Demand Notes and Security Agreements (The "Notes"). Principal on these Notes are due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. The Notes currently bear interest at 12%. Payment of the Notes is secured by a security interest in certain assets of the Company. In February 1999, the Company repaid $65,000 to Mr. Robert Howard and in the fourth quarter of 1999 the Company consummated an agreement with Dr. Lawrence Howard to convert the Notes and interest accrued into 200,326 shares of restricted common stock, par value $.01 per 21 share of the Company (the "Common Stock"). The number of shares issued was calculated using the market price of Howtek's stock on the date of conversion. As of December 31, 1999, the Company owed $500,000 to Mr. Robert Howard, and no moneys were owed to Dr. Lawrence Howard. The Company believes it can adequately fund its working capital and capital equipment requirements based upon its anticipated level of sales for 2000 and the line of credit available under the Revolving Loan Agreement with its Chairman. During 1999 the Company borrowed, (i) $660,000 from unrelated parties, (ii) $30,000 from Mr. W. Scott Parr, the Company's President, Chief Executive Officer, and (iii) $310,000 from Mr. Robert Howard, the Company's Chairman, pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on these Promissory Notes are payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per annum, beginning on December 31, 1999 and each succeeding year during the terms hereof. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Notes entitle the payees to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. On December 31, 1999, the Company consummated an agreement with the unrelated parties and Mr. W. Scott Parr to convert the Promissory Notes into shares of 7.0% Series A convertible preferred stock, par value $.01 per share, of the Company (the "Preferred Stock") and converted the interest accrued into shares of its common stock, par value $.01 per share (the "Common Stock"). As of December 31, 1999, the Company owed $310,000 to Mr. Robert Howard. Effect of New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS 133 , as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to affect its financial statements. 22 Item 7a. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. See Financial Statements and Schedule attached hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 23 PART III
Item 10. Directors and Executive Officers of the Registrant. Directors Director Name Age Position Since Robert Howard............ 76 Chairman of the Board, and Director 1984 W. Scott Parr............ 48 President, Chief Executive Officer and Director 1998 Ivan Gati................ 52 Director 1989 Sheila Horwitz........... 63 Director 1996 Kit Howard............... 56 Director 1999 Harvey Teich............. 80 Director 1988
All persons listed above are currently serving a term of office as directors which continues until the next annual meeting of stockholders. Robert Howard is the founder and Chairman of the Board of Directors of the Company. He is the inventor of many products including the impact dot matrix printer, the desktop laser printer and an early digital computer together with Dr. An Wang. He has been the founder or a principal in many public companies since the 1960's. Mr. Howard was Chief Executive Officer of the Company from its establishment in 1984 until December of 1993. He was the founder, and from 1969 to April 1980 he served as President and Chairman of the Board, of Centronics Data Computer Corp. ("Centronics"), a manufacturer of a variety of computer printers. He resigned from Centronics' Board of Directors in 1983. From April 1980 until 1983, Mr. Howard was principally engaged in the management of his investments. Commencing in mid-1982, Mr. Howard, doing business as R.H. Research, developed the ink jet technology upon which the Company was initially based. Mr. Howard contributed this technology, without compensation, to the Company. Mr. Howard serves as Chairman Emeritus of the Board of Presstek, Inc. ("Presstek"), a public company which has developed proprietary imaging and consumables technologies for the printing and graphic arts industries. In February 1994 Mr. Howard entered into a settlement agreement in the form of a consent decree with the Securities and Exchange Commission (the "Commission") in connection with the Commission's investigation covering trading in the Company's Common Stock by an acquaintance of Mr. Howard and a business associate of such acquaintance. Mr. Howard, without admitting or denying the Commission's allegations of securities laws violations, agreed to pay a fine and to the entry of a permanent injunction against future violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. In addition, in December of 1997, in connection with the Commission's investigation into trading in the securities of Presstek, Mr. Howard, without admitting or denying the Commission's allegations of securities laws violations, agreed to pay a civil penalty of $2,700,000 and to the entry of a final judgement enjoining him future violations of Section 10(b) and 13(a) and Rules 10b-5, 12b-20, 13a-1 and 13a-20 of the Exchange Act. 24 W. Scott Parr joined the Company in January 1998, as President and Chief Executive Officer. He was appointed to the Company's Board of Directors on February 4, 1998. Prior to joining Howtek, Mr. Parr served as Divisional Director and a member of the Board of Directors of SABi International Ventures, Inc. in 1997, where he was responsible for restructuring and upgrading certain US companies owned by foreign and venture investors. From 1995 to 1997, Mr. Parr was Chief Executive Officer, General Counsel and Director of Allied Logic Corporation, a start-up venture specializing in proprietary molding and manufacturing technologies. From 1990 to 1995 Mr. Parr was General Counsel and a Director of LaserMaster Technologies, Inc. (now Virtual Fund.Com, Inc.). Ivan Gati has served as Chairman of Turner Management, Inc. since 1983. Turner Management, Inc. is a vertically integrated real estate investment company with offices located in New York, Texas and Tennessee, and whose subsidiary companies provide property management and finance services. Mr. Gati is a member of the Board of Directors of Universal Automation Systems, Inc. Sheila Horwitz is a Senior Vice President of Schroder Wertheim & Co., Inc., a securities brokerage firm. She has an extensive background in the securities brokerage industry, having worked at her current firm, formerly known as Wertheim, Schroder & Co., since 1990. Previously Ms. Horwitz worked for Oppenheimer & Co. from 1988 to 1990, and for L. F. Rothschild & Co. from 1978 to 1988, in similar capacities. Kit Howard holds a Bachelor of Science Degree from New York University. She has worked in the financial community as a stockbroker from 1980 until 1986. Since then she has assisted Robert Howard, her husband and Chairman of the Company, in his various business enterprises. Harvey Teich is a retired certified public accountant. On January 1, 1992, the accounting firm of Merman & Teich, where Mr. Teich had been a principal for the previous 17 years, ceased to operate as a partnership. He is a member of the New York and Florida State Societies for Certified Public Accountants. Executive Officers and Key Employees - ------------------------------------ Name Age Position - ---- --- -------- W. Scott Parr(1) 48 President, Chief Executive Officer, Director Richard F. Lehman(2) 62 Vice President, Engineering Annette L. Heroux(1) 43 Chief Financial Officer Joseph E. Manseau(2) 43 Vice President Sales and Marketing - ------------------------------ (1) Officer appointed by the Board of Directors. (2) Key Employees 25 Richard F. Lehman joined the Company in July 1990, as Director of Scanner Engineering. In December 1993, he was named Vice President of Scanner Engineering and in October 1996, he was named Vice President of Engineering. Prior to joining the Company, Mr. Lehman was employed by Xerox Corporation for 23 years where he served in various engineering and managerial capacities. Annette L. Heroux joined the Company in October 1987 as Accounting Manager and was named Controller in October 1998 and Chief Financial Officer in July 1999. Prior to joining the Company, Ms. Heroux worked from 1980 to 1987 for Laurier, Inc., a small semiconductor equipment manufacturer, in various financial and managerial capacities. Joseph E. Manseau joined the Company in August 1998 as Regional Sales Manager and was named to Vice President Sales and Marketing on April 1, 1999. Prior to joining the Company Mr. Manseau worked from 1997 to 1998 for Escher-Grad Tech., Inc. where he was responsible for implementing the sales and marketing strategy for its large format image setters. From 1981 to 1997 he worked for AGFA and Compugraphic, currently divisions of Bayer Corporation, in various marketing and sales capacities. Item 11. Executive Compensation. The following table provides information on the compensation provided by the Company during fiscal years 1999, 1998 and 1997 to the persons serving as the Company's Chief Executive Officer during fiscal 1999, the Company's most highly compensated executive officers and certain key employees serving at the end of the 1999 fiscal year. Included in this list are only those executive officers and key employees whose total annual salary and bonus exceeded $100,000 during the 1999 fiscal year. SUMMARY COMPENSATION TABLE Securities Underlying Name and Principal Position Year Salary($) Option(#) - --------------------------- ---- --------- ---------- W. Scott Parr Chief Executive Officer.................. 1999 138,197 127,337 1998 131,502 277,431 1997 - 0 - - 0 - Richard Lehman Vice President, Engineering.............. 1999 112,735 5,000 1998 101,976 19,128 1997 113,698 5,000 26 Securities Underlying Name and Principal Position Year Salary($) Option(#) - --------------------------- ---- --------- --------- Joseph E. Manseau Vice President, Sales & Marketing........ 1999 126,529 18,410 1998 - 0 - - 0 - 1997 - 0 - - 0 -
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Potential ------------------------------ Realizable Value at Number of Percent of Assumed Annual Securities Total Options Rates of Stock underlying Granted to Exercise of Price Appreciation Options Employees Base Price Expiration for Option Term Name Granted* in Fiscal Year ($/Sh) Date 5%($) 10%($) - ---- -------- -------------- ------ ---- ----- ------ W. Scott Parr 125,000 29.0 .81 07/07/2009 63,676 161,366 2,337 .5 1.13 10/07/2009 1,661 4,209 Joseph Manseau 10,000 2.3 .81 07/07/2009 5,094 12,909 8,410 2.0 1.13 10/07/2009 5,977 15,146 Richard Lehman 5,000 1.2 .81 07/07/2009 2,547 6,455
- ---------- * Except for the options for 2,337 shares granted to Mr. Parr which vested immediately, all the options vest in annual installments at various times between July 7, 1999 and September 1, 2003. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information on an aggregated basis regarding each exercise of stock options during the Company's last completed fiscal year by each of the executive officers and key employees named in the Summary Compensation Table and the fiscal year-end value of unexercised options.
Number of Securities Value of Underlying Unexercised Unexercised In-the Money Options at Options at FY-End (#) FY-End($) (1) Shares ---------- ------------- Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized Unexercisable Unexercisable - ---- ------------ --------- ------------- ------------- W. Scott Parr (2) 0 0 99,546/328,855 139,089/347,805 Joseph Manseau (2) 0 0 6,243/16,167 9,370/23,695 Richard Lehman (2) 0 0 50,294/5,334 52,989/6,866
- -------------- (1) Based upon the closing price of the Common Stock on December 31, 1999, of $2.44 per share. (2) Options granted pursuant to the Company's 1993 Stock Option Plan, as amended. 27 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There is no Compensation Committee or other committee of the Company's Board of Directors performing similar functions. The person who performed the equivalent function in 1999 was Robert Howard, Chairman of the Board under the direction of the Board of Directors. W. Scott Parr, Chief Executive Officer and a director, participated in discussions with Mr. Howard during the past completed fiscal year in his capacity as an executive officer in connection with executive officer compensation. During 1999 none of the executive officers of the Company served on the Board of Directors or Compensation Committee of any other entity, any of whose officers has served on the Board of Directors of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information regarding the Common Stock owned on March 10, 2000, by (i) each person who is known to the Company to own beneficially more than 5% of the outstanding shares of the Company's Common Stock, (ii) each executive officer and key employee named in the Summary Compensation Table, (iii) each director of the Company, and (iv) all current executive officers and directors as a group.
Number of Shares Name and Address of Beneficially Percentage Beneficial Owner(1) Owned (1) (2) of Class - ------------------- ------------- -------- Robert Howard.......................... 2,477,030(3) 17.84% 303 East 57th Street New York, New York 10022 Donald Chapman......................... 1,198,424(4) 9.03% 8650 South Ocean Drive Jenson Beach, FL 34957 W. Scott Parr.......................... 194,498(5) 1.45% Sheila Horwitz......................... 79,000(6) * Kit Howard............................. 40,000(7) * Richard Lehman......................... 47,628(8) * Joseph Manseau......................... 8,409(9) * Harvey Teich........................... 70,000(10) * Ivan Gati.............................. 65,000(11) * All current executive officers and directors as a group (7 persons)....... 2,953,844 (3) & (5) through (7), (10) & (11) 20.66%
- ---------- * Less than one percent. 28 1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from March 10, 2000, upon the exercise of options, warrants or rights; through the conversion of a security; pursuant to the power to revoke a trust, discretionary account or similar arrangement; or pursuant to the automatic termination of a trust, discretionary account or similar arrangement. Each beneficial owner's percentage ownership is determined by assuming that the options or other rights to acquire beneficial ownership as described above, that are held by such person (but not those held by any other person) and which are exercisable within 60 days from March 10, 2000, have been exercised. 2) Unless otherwise noted, the Company believes that the persons referred to in the table have sole voting and investment power with respect to all shares reflected as beneficially owned by them. 3) Includes options to purchase 10,000 shares of the Company's Common stock at $1.72 per share. Also, includes 294,399 shares exercisable on conversion of $330,000 principal amount of indebtedness outstanding as of December 31, 1999, pursuant to a loan made by Mr. Howard to the Company, which is convertible into 145,455 shares of Common Stock at $1.31 per share, 86,505 shares at $1.16 per share and 62,439 shares at $1.28 per share and 310,000 shares exercisable at $1.00 per share on conversion of $310,000 principal amount of indebtedness outstanding pursuant to Convertible Promissory Notes. Does not include 15,000 shares owned by Mr. Howard's wife. 4) Includes 25,000 shares owned by Mr. Chapman's wife and 150,000 owned by a revocable trust. 5) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to purchase 139,364 shares of the Company's Common Stock at $1.13 per share, 25,883 shares at $0.81 per share and 2,250 shares at $1.00 per share. 6) Includes options to purchase 10,000 shares of the Company's Common Stock at $1.72 per share, 25,000 shares at $1.50 per share and 25,000 shares at $0.81 per share. 7) Includes options to purchase 25,000 shares of the Company's Common Stock at $.81 per share. 8) Includes 2,000 shares owned by Mr. Lehman's wife. Also includes options to purchase 20,500 of the Company's Common Stock at $1.72 per share, 16,376 shares at $1.13 per share, 2,752 shares at $1.00 per share and 1,666 shares at $0.81 per share. 9) Includes options to purchase 1,000 shares of the Company's Common Stock at $1.00 per share, 3,333 shares at $.81 per share and 4,076 shares at $1.13 per share. 10) Includes options to purchase 20,000 of the Company's Common Stock at $1.72 per share, 25,000 shares at $1.50 per share and 25,000 shares at $0.81 per share. 11) Includes options to purchase 15,000 of the Company's Common Stock at $1.72 per share, 25,000 shares at $1.50 per share and 25,000 shares at $0.81 per share. 29 Item 13. Certain Relationships and Related Transactions. The Company has a Convertible Revolving Credit Promissory Note ("the Convertible Note") and Revolving Loan and Security Agreement (the "Loan Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of the Company, under which Mr. Howard has agreed to advance funds, or to provide guarantees of advances made by third parties in an amount up to $3,000,000, of which $2,670,000 was available at December 31, 1999. The Loan Agreement expires January 4, 2001. Outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at prime interest rate plus 2%. The Convertible Note entitles Mr. Howard to convert outstanding advances into shares of the Company's common stock at any time based on the outstanding closing market price of the Company's common stock at the time each advance is made. At December 31, 1999, $330,000 was outstanding under the Loan Agreement. The Company has Secured Demand Notes and Security Agreements (the "New Notes") owed to Mr. Robert Howard. Principal of these notes are due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the New Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. The New Notes currently bear interest at 12%. Payment of the New Notes is secured by a security interest in certain assets of the Company. As of December 31, 1999 $500,000 was outstanding pursuant to the New Notes. During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on these Promissory Notes are payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per annum. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Notes entitle the payees to convert outstanding principal due into shares of the Company's common stock at $1.00 per share. As of December 31, 1999, the Company owed $310,000 pursuant to the Promissory Notes. As of December 31, 1999, the Company had one lease obligation related to its facility. The lease obligation through September 30, 2000 is approximately $58,875. The Company's principal executive offices and research and development laboratory is leased by the Company from Mr. Robert Howard pursuant to a lease which expires September 30, 2000. Rental expense for the year ended December 31, 1999 was $78,500. As of December 31, 1998, the Company owed Dr. Lawrence Howard $200,000, pursuant to Secured Demand Notes and Security Agreements (The "New LH Notes"). Principal of these notes were due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the New LH Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. Payment of the New LH Notes is secured by a security interest in certain assets of the Company. 30 In the fourth quarter of 1999 the Company consummated an agreement with Dr. Lawrence Howard to convert the Notes and interest accrued into 200,326 shares of restricted common stock, par value $.01 per share of the Company (the "Common Stock"). In February 1999, the Company borrowed $30,000 from Mr. W. Scott Parr, the Company's President, Chief Executive Officer pursuant to a Convertible Promissory Note (the "Promissory Note"). Principal on the Promissory Note was payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Note the Company agreed to pay interest at a fixed rate of 7% per annum, beginning on December 31, 1999 and each succeeding year during the terms hereof. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Note entitled the payee to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. On December 31, 1999, the Company consummated an agreement with Mr. Parr to convert the Promissory Note into shares of 7.0% Series A convertible preferred stock, par value $.01 per share, of the Company (the "Preferred Stock") and converted the interest accrued into shares of its common stock, par value $.01 per share (the "Common Stock"). During the year ended December 31, 1999 the Company sold engineering services totaling $77,394 to Presstek, Inc., which Mr. Howard was the Chairman Emeritus of the Board and is a principal stockholder. 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements - See Index on page 36. 2. Financial Statement Schedule - See Index on page 36. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. The following documents are filed as exhibits to this Annual Report on Form 10-K: 3(a) Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on February 24, 1984 [incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097 NY), filed on October 31, 1984] 3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant, filed with the Secretary of State of the State of Delaware on May 31, 1984 [incorporated by reference to Exhibit 3.1(a) to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984] 3(c) Certificate of Amendment of Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on August 22, 1984 [incorporated by reference to Exhibit 3.1(b) to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 3(d) Certificate of Amendment of Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on October 22, 1987 [incorporated by reference to Exhibit 3(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988]. 3(e) By-laws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 32 4(a) Form of Common Stock Certificate [incorporated by reference to the Registrant's Form 8-A, filed on March 13, 1985]. 4(b) Form of Indenture dated as of December 1, 1986 between Registrant and Continental Stock Transfer and Trust Company, including Form of Debenture [incorporated by reference to Exhibit 4(c) to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-8971), filed on October 31, 1984]. 10(a)Lease Agreement between the Registrant and its Chairman with respect to premises located at 21 Park Avenue, Hudson, New Hampshire, dated October 1, 1984, [incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement to Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 10(b)Form of Lease Renewal between the Registrant and its Chairman with respect to premises located at 21 Park Avenue, Hudson, New Hampshire. 10(c)Revolving Loan and Security Agreement, and Convertible Revolving Credit Promissory Note between Robert Howard and Registrant dated October 26, 1987 (the "Loan Agreement") [incorporated by reference to Exhibit 10 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1987]. 10(d)Letter Agreement dated December 30, 1999, amending the Revolving Loan and Security Agreement, and Convertible Revolving Credit Promissory Note between Robert Howard and Registrant dated October 26, 1987. 10(e)Form of Secured Demand Notes between the Registrant and Mr. Robert Howard. [incorporated by reference to Exhibit 10(e) to the Registrant's Report on Form 10-K for the year ended December 31, 1998]. 10(f)Form of Security Agreements between the Registrant and Mr. Robert Howard [incorporated by reference to Exhibit 10(f) to the Registrant's Report on Form 10-K for the year ended December 31, 1998]. 10(g)Form of Convertible Promissory Note between the Registrant and Mr. Robert Howard. 33 10(h)Second Supplemental Indenture dated as of December 31, 1998, between the Registrant and Continental Stock Transfer and Trust Company. [incorporated by reference to Exhibit 10(h) to the Registrant's Report on Form 10-K for the year ended December 31, 1998]. 10(i)Certificate of Designation of 7% Series A Convertible Preferred Stock dated December 22, 1999. 23(a) Consent of BDO Seidman, LLP. 27 Financial Data Schedule (For SEC use only) (b) During the last quarter of the period covered by this Annual Report on Form 10-K the Company filed no reports on Form 8-K. (c) Exhibits - See (a) 3 above. (d) Financial Statement Schedule - See (a) 2 above. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOWTEK, INC. Date: March 30, 2000 By: /s/ W. Scott Parr --------------------- W. Scott Parr President, Chief Executive Officer, Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Robert Howard - ------------------------- Chairman of the Robert Howard Board, Director March 30, 2000 /s/ W. Scott Parr - ------------------------- President, Chief Executive W. Scott Parr Officer, Director March 30, 2000 /s/ Annette L. Heroux - ------------------------- Chief Financial Officer, Principal Annette L. Heroux Accounting Officer March 30, 2000 - ------------------------- Director March 30, 2000 Ivan Gati /s/ Sheila Horwitz - ------------------------- Director March 30, 2000 Sheila Horwitz /s/ Kit Howard - ------------------------- Director March 30, 2000 Kit Howard /s/ Harvey Teich - ------------------------- Director March 30, 2000 Harvey Teich 35 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Page ---- Report of Independent Certified Public Accountants 37 Balance Sheets As of December 31, 1999 and 1998 38 Statements of Operations For the years ended December 31, 1999, 1998 and 1997 39 Statements of Stockholders' Equity For the years ended December 31, 1999, 1998 and 1997. 40 Statements of Cash Flows For the years ended December 31, 1999, 1998 and 1997. 41 Notes to Financial Statements 42-57 Schedule II - Valuation and Qualifying Accounts and Reserves 58 36 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Howtek, Inc. Hudson, New Hampshire We have audited the accompanying balance sheets of Howtek, Inc. as of December 31, 1999 and 1998 and the related statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. We have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Howtek, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP New York, New York February 18, 2000 37 HOWTEK, INC. Balance Sheets
December 31, December 31, ------------ ------------ 1999 1998 ------------ ------------ Assets (note 3) Current assets: Cash and equivalents $ 263,073 $ 182,724 Trade accounts receivable net of allowance for doubtful accounts of $151,000 in 1999 and $118,000 in 1998 (note 7) 1,400,987 1,570,081 Inventory (note 1) 2,649,460 2,927,082 Prepaid and other 144,390 118,689 ------------ ------------ Total current assets 4,457,910 4,798,576 ------------ ------------ Property and equipment Equipment 2,735,545 2,534,635 Leasehold improvements 33,321 27,765 Motor vehicles 6,050 6,050 ------------ ------------ 2,774,916 2,568,450 Less accumulated depreciation and amortization 2,058,734 1,717,445 ------------ ------------ Net property and equipment 716,182 851,005 ------------ ------------ Other assets (note 1): Software development costs, net 472,427 626,577 Debt issuance costs, net 37,323 57,682 Patents, net 12,767 17,581 ------------ ------------ Total other assets 522,517 701,840 ------------ ------------ Total assets $ 5,696,609 $ 6,351,421 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,176,480 $ 1,287,791 Accrued expenses 342,860 146,204 Loans payable to related parties (note 3) 500,000 765,000 ------------ ------------ Total current liabilities 2,019,340 2,198,995 Loans payable to related parties (note 3) 640,000 -- Convertible subordinated debentures (note 4) 117,000 1,881,000 ------------ ------------ Total liabilities 2,776,340 4,079,995 ------------ ------------ Commitments and contingencies (notes 3 and 8) Stockholders' equity (notes 3, 4 and 5): Common stock, $ .01 par value: authorized 25,000,000 shares; issued 13,330,542 in 1999 and 11,128,082 shares in 1998; outstanding 13,262,666 in 1999 and 11,060,206 shares in 1998 133,305 111,281 Convertible preferred stock, $ .01 par value: authorized 1,000,000 shares in 1999; issued and outstanding 6,900 in 1999, with the aggregate liquidation value of $690,000 plus 7% annual dividend 69 -- Additional paid-in capital 52,562,377 47,938,799 Accumulated deficit (48,825,218) (44,828,390) Treasury stock at cost (67,876 shares) (950,264) (950,264) ------------ ------------ Stockholders' equity 2,920,269 2,271,426 ------------ ------------ Total liabilities and stockholders' equity $ 5,696,609 $ 6,351,421 ============ ============
See accompanying notes to financial statements. 38 HOWTEK, INC. Statements of Operations
For the Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Sales (note 7) $ 6,663,230 $ 5,323,601 $ 7,874,813 Cost of sales 5,069,106 4,100,466 6,211,496 ------------ ------------ ------------ Gross margin 1,594,124 1,223,135 1,663,317 ------------ ------------ ------------ Operating expenses: Engineering and product development 799,960 1,075,620 1,401,989 General and administrative 1,286,895 1,319,062 1,716,199 Marketing and sales 1,702,451 1,702,262 1,723,883 Unusual charges (note 2) -- -- 3,394,406 ------------ ------------ ------------ Total operating expenses 3,789,306 4,096,944 8,236,477 ------------ ------------ ------------ Loss from operations (2,195,182) (2,873,809) (6,573,160) Interest expense - net (includes $104,486, $30,205 and $114,649, respectively, to related parties) (1,801,646) (498,514) (258,912) Income from legal settlement (note 9) -- -- 6,000,000 ------------ ------------ ------------ Net loss $ (3,996,828) $ (3,372,323) $ (832,072) ============ ============ ============ Net loss per share (note 5) Basic and diluted $ (0.32) $ (0.33) $ (0.09) Weighted average number of shares used in computing earnings per share Basic and diluted 12,660,613 10,142,672 9,038,632
See accompanying notes to financial statements. 39 HOWTEK, INC. Statements of Stockholders' Equity
Common Stock Preferred Stock --------------------- ------------------- Number of Number of Additional Shares Shares Paid-in Accumulated Treasury Stockholders' Issued Par Value Issued Par Value Capital Deficit Stock Equity ---------- --------- -------- --------- ----------- ------------ --------- ----------- Balance at January 1, 1997 9,099,732 $ 90,997 $ -- $ -- $45,616,672 $(40,623,995) $(950,264) $ 4,133,410 Issuance of common stock pursuant to incentive stock option plan 28,350 284 -- -- 48,450 -- -- 48,734 Net loss -- -- -- -- -- (832,072) -- (832,072) ---------- --------- -------- --------- ----------- ------------ --------- ----------- Balance at December 31, 1997 9,128,082 91,281 -- -- 45,665,122 (41,456,067) (950,264) 3,350,072 Sale of common stock 1,000,000 10,000 -- -- 990,000 -- -- 1,000,000 Issuance of comon stock relative to conversion of loans payable to related parties (note 3 (a) & (b)) 700,000 7,000 -- -- 702,466 -- -- 709,466 Issuance of common stock relative to conversion of Convertible Subordinated Debentures (note 4) 300,000 3,000 -- -- 581,211 -- -- 584,211 Net loss -- -- -- -- -- (3,372,323) -- (3,372,323) ---------- --------- -------- --------- ----------- ------------ --------- ----------- Balance at December 31, 1998 11,128,082 111,281 -- -- 47,938,799 (44,828,390) (950,264) 2,271,426 Issuance of common stock relative to conversion of Convertible Subordinated Debentures (note 4) 1,764,000 17,639 -- -- 3,417,519 -- -- 3,435,158 Issuance of comon stock relative to conversion of loans payable to related parties (note 3 (b)) 200,326 2,003 -- -- 223,363 -- -- 225,366 Issuance of common stock in lieu of payment of accounts payable 195,090 1,951 -- -- 187,233 -- -- 189,184 Issuance of common stock pursuant to incentive stock option plan 27,166 272 -- -- 39,988 -- -- 40,260 Issuance of common stock for payment of interest to investors 15,878 159 -- -- 38,544 -- -- 38,703 Issuance of preferred stock relative to conversion of loans payable to investors (note 5 (a)) -- -- 6,900 69 689,931 -- -- 690,000 Issuance of stock subscription warrant for services (note 5 (d)) -- -- -- -- 27,000 -- -- 27,000 Net loss -- -- -- -- -- (3,996,828) -- (3,996,828) ---------- --------- -------- --------- ----------- ------------ --------- ----------- Balance at December 31, 1999 13,330,542 $ 133,305 6,900 $ 69 $52,562,377 $(48,825,218) $(950,264) $ 2,920,269 ========== ========= ======== ========= =========== ============ ========= ===========
See accompanying notes to financial statements. 40 HOWTEK, INC. Statements of Cash Flows
For the Years Ended December 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net loss $(3,996,828) $(3,372,323) $ (832,072) ----------- ----------- ----------- Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 341,290 462,128 1,048,865 Amortization 301,457 188,208 301,360 Interest relative to conversion of Convertible Subordinated Debentures (note 4) 1,671,158 284,211 -- Asset writedowns and reserve increases (note 2) -- -- 3,394,406 Compensation expense relative to issue of Stock Subscription Warrants (note 5) 27,000 -- -- Changes in operating assets and liabilities: Accounts receivable 169,094 (94,129) 1,243,323 Inventory 277,622 588,911 496,664 Other current assets (25,701) (13,414) 125,540 Accounts payable 77,873 (114,096) (768,471) Accrued interest 61,327 20,738 (672,531) Accrued expenses 135,329 (12,869) (21,229) ----------- ----------- ----------- Total adjustments 3,036,449 1,309,688 5,147,927 ----------- ----------- ----------- Net cash provided (used) by operating activities (960,379) (2,062,635) 4,315,855 ----------- ----------- ----------- Cash flows from investing activities: Patents, software development and other (122,135) (190,720) (377,995) Additions to property and equipment (206,466) (273,713) (507,807) ----------- ----------- ----------- Net cash used by investing activities (328,601) (464,433) (885,802) ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock for cash 40,260 1,000,000 48,734 Proceeds of loans payable to unrelated parties 696,906 -- -- Proceeds of loans payable to related parties 632,163 1,474,466 -- Repayment of loans payable to related parties -- -- (3,478,604) ----------- ----------- ----------- Net cash provided (used) by financing activities 1,369,329 2,474,466 (3,429,870) ----------- ----------- ----------- Increase (decrease) in cash and equivalents 80,349 (52,602) 183 Cash and equivalents, beginning of year 182,724 235,326 235,143 ----------- ----------- ----------- Cash and equivalents, end of year $ 263,073 $ 182,724 $ 235,326 =========== =========== =========== Supplemental disclosure of cash flow information: Cash flows from financing activities: Interest paid $ 10,530 $ 188,854 $ 983,471 =========== =========== =========== Non-cash items from financing activities: Conversion of loans and accrued interest payable to related parties into Common Stock (note 3) $ 225,366 $ 709,466 $ -- =========== =========== =========== Conversion of accounts payable into Common Stock $ 189,184 $ -- $ -- =========== =========== =========== Conversion of accrued interest payable to investors into Common Stock $ 38,703 $ -- $ -- =========== =========== =========== Conversion of loans payable to investors into Preferred Stock (note 5 (a)) $ 690,000 $ -- $ -- =========== =========== =========== Issuance of common stock relative to conversion of Convertible Subordinated Debentures (note 4) $ 3,435,158 $ 584,211 $ -- =========== =========== ===========
See accompanying notes to financial statements. 41 HOWTEK, INC. Notes to Financial Statements (1) Summary of Significant Accounting Policies (a) Nature of Operations and Use of Estimates Howtek, Inc. (the "Company") designs, engineers, develops and manufactures digital image scanners, film digitizers and related software for applications in the medical imaging, prepress and photographic markets. The Company considers itself a single reportable business segment. The Company sells its products throughout the world through various distributors, resellers, systems integrator and OEM's. See Note 7 for geographical and major customer information. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the Company's estimates and assumptions used in the preparation of the financial statements relate to the Company's products, which are subject to rapid technological change. It is reasonably possible that changes may occur in the near term that would affect management's estimates with respect to inventories, equipment and software development costs. (b) Inventory Inventory is valued at the lower of cost or market value, with cost determined by the first-in, first-out method. At December 31, inventory consisted of raw material and finished goods of approximately $1,773,000 and $876,000, respectively, for 1999 and raw material and finished goods of approximately $2,387,000 and $540,000, respectively, for 1998. (c) Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the various classes of assets (ranging from 3 to 5 years). (d) Debt Issuance Costs Debt issuance costs, related to the outstanding Convertible Subordinated Debentures, are being amortized over the 15-year term of the Debentures using the straight-line method. The debt issuance costs balances are presented net of accumulated amortization, which was $296,648, and $276,920 at December 31, 1999, and 1998, respectively. 42 HOWTEK, INC. Notes to Financial Statements (continued) (e) Patents The costs for patents are being amortized over the estimated useful life of the respective assets using the straight-line method. The patents balances are presented net of accumulated amortization, which was $98,774, and $93,960 at December 31, 1999, and 1998, respectively. (f) Software Development Costs Software development costs for application software and application software enhancements are capitalized subsequent to the establishment of their technological feasibility (as defined in Statement of Financial Accounting Standards No. 86). The Company capitalized $122,135, $190,720, and $355,465 of internally developed and externally purchased software costs during fiscal 1999, 1998 and 1997, respectively. During 1997 the Company wrote-off previously capitalized software development costs for non-current products with a net book value of $272,361 in the second quarter and $157,550 in the fourth quarter. See Note 2 - Unusual Charges. The capitalized software balances are presented net of accumulated amortization, which was $484,498, and $208,214 at December 31, 1999, and 1998, respectively. Capitalized software costs are amortized using the straight-line method over their estimated economic life, principally 3 years, commencing when each product is available for general release. (g) Revenue Recognition Revenues from product sales are recognized at the time the product is shipped. (h) Cost of Sales Cost of sales consists of the costs of products purchased for resale, any associated freight and duty, any costs associated with manufacturing, warehousing, material movement and inspection, amortization of any license rights, and amortization of capitalized software. (i) Warranty Costs The Company's products are generally under warranty against defects in material and workmanship from a 90 to 365 day period, depending on the product. Warranty costs were not material in any period presented. 43 HOWTEK, INC. Notes to Financial Statements (continued) (j) Engineering and Product Development These costs relate to research and development costs which are expensed as incurred, except for amounts related to software development costs incurred after the establishment of technological feasibility (see (f) above) which are capitalized. (k) Net Loss Per Common Share Net loss per common share has been computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". See Note 5 - Stockholders' Equity. (l) Cash Flow Information For purposes of reporting cash flows, the Company defines cash and equivalents as all bank transaction accounts, certificates of deposit, money market funds and deposits, and other money market instruments maturing in less than 90 days, which are unrestricted as to withdrawal. (m) Income Taxes The Company follows the liability method under Statement of Financial Accounting Standards No. 109 (SFAS 109). The primary objectives of accounting for taxes under SFAS 109 are to (a) recognize the amount of tax payable for the current year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company's financial statements or tax returns. (n) Long-Lived Assets Long-lived assets, such as property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets are written down to fair value. This policy is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". No write-downs have been necessary through December 31, 1999 except as described in Note 2. 44 HOWTEK, INC. Notes to Financial Statements (continued) (o) Stock-Based Compensation The Company has not adopted the optional fair value based method for accounting for employee stock compensation plans, as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". See Note 5 -Stockholders' Equity. (p) Advertising The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1999, 1998 and 1997 were $143,000, $135,000 and $45,000, respectively. (2) Unusual charges During 1997 the Company recorded unusual charges of $3,394,406 consisting of the following: (i) an inventory reserve of $1,750,000 resulting from management's decision in the second quarter of 1997 to discontinue support of certain products which had reached end of life; (ii) a bad debt reserve of $750,000 prompted by the bankruptcy filing of a major European distributor in the second quarter of 1997; (iii) a write-off of test equipment for non-current products of $224,610 in the second quarter of 1997 and $239,885 in the fourth quarter of 1997; and (iv) a write-off of software development for non-current products in the amount of $272,361 in the second quarter of 1997 and $157,550 in the fourth quarter of 1997. (3) Related Party Transactions (a) Loan Payable to Principal Stockholder The Company has a Convertible Revolving Credit Promissory Note ("the Convertible Note") and Revolving Loan and Security Agreement (the "Loan Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of the Company, under which Mr. Howard has agreed to advance funds, or to provide guarantees of advances made by third parties in an amount up to $3,000,000, of which $2,670,000 was available at December 31, 1999. The Loan Agreement expires January 4, 2001. Outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at prime interest rate plus 2%. The Convertible Note entitles Mr. Howard to convert outstanding advances into shares of the Company's common stock at any time based on the outstanding closing market price of the Company's common stock at the time each advance is made. At December 31, 1999, $330,000 was outstanding under the Loan Agreement. 45 HOWTEK, INC. Notes to Financial Statements (continued) (3) Related Party Transactions (continued) (a) Loan Payable to Principal Stockholder (continued) In 1998 the Company borrowed $400,000 from Mr. Robert Howard, pursuant to Secured Demand Notes and Security Agreements (the "Notes"). Principal on these Notes was due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. In May 1998, the Company consummated an agreement with Mr. Howard to convert the Notes into 400,000 shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). The Company has Secured Demand Notes and Security Agreements (the "New Notes") owed to Mr. Robert Howard. Principal of these notes is due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the New Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. The New Notes currently bear interest at 12%. Payment of the New Notes is secured by a security interest in certain assets of the Company. As of December 31, 1999 and 1998, the Company owed $500,000 and $565,000, respectively pursuant to the New Notes. During 1999 the Company borrowed, $310,000 from Mr. Robert Howard, pursuant to Convertible Promissory Notes (the "Promissory Notes"). Principal on these Promissory Notes is payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Notes the Company agreed to pay interest at a fixed rate of 7% per annum. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Notes entitle the payees to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. As of December 31, 1999, the Company owed $310,000 pursuant to the Promissory Notes. 46 HOWTEK, INC. Notes to Financial Statements (continued) (3) Related Party Transactions (continued) (b) Loan Payable to Related Party In 1998 the Company borrowed $300,000 from Dr. Lawrence Howard, son of the Company's Chairman, Robert Howard, pursuant to Secured Demand Notes and Security Agreements (The "Notes"). Principal on these Notes were due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. In May 1998, the Company consummated an agreement with Dr. Howard to convert the Notes into 300,000 shares of restricted common stock, par value $.01 per share, of the Company (the "Common Stock"). As of December 31, 1998, the Company owed Dr. Lawrence Howard $200,000, pursuant to Secured Demand Notes and Security Agreements (The "New LH Notes"). Principal of these notes were due and payable in full, together with interest accrued and any penalties provided for, on demand. Under the terms of the New LH Notes the Company agreed to pay interest at the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate permitted by applicable law. Payment of the New LH Notes is secured by a security interest in certain assets of the Company. In the fourth quarter of 1999 the Company consummated an agreement with Dr. Lawrence Howard to convert the Notes and interest accrued into 200,326 shares of restricted common stock, par value $.01 per share of the Company (the "Common Stock"). The number of shares issued was determined using the market price of the Company's stock at the date of conversion. (c) Premises Lease and Other Expenses The Company conducts its operations in premises owned by Mr. Robert Howard, pursuant to a lease which expires September 30, 2000. As of December 31, 1999, future minimum lease payments under this lease is $78,500 for 2000. The Company is required to pay real estate taxes, provide insurance and maintain the premises. (d) Related Party Sales During the year ended December 31, 1999 the Company sold engineering services totaling $77,394 to Presstek, Inc., which Mr. Howard was the Chairman Emeritus of the Board and is a principal stockholder. There were no sales to Presstek, Inc. in 1998 and 1997. 47 HOWTEK, INC. Notes to Financial Statements (continued) (3) Related Party Transactions (continued) (e) Sales and Issues of Securities During 1998, Mr. Robert Howard and Dr. Lawrence Howard converted their Convertible Subordinated Debentures into Common Stock (see Note 4). In February 1999, the Company borrowed $30,000 from Mr. W. Scott Parr, the Company's President, Chief Executive Officer pursuant to a Convertible Promissory Note (the "Promissory Note"). Principal on the Promissory Note was payable in equal payments based on the borrowed amount at the end of each quarter starting March 31, 2003 through December 31, 2006. Under the terms of the Promissory Note the Company agreed to pay interest at a fixed rate of 7% per annum, beginning on December 31, 1999 and each succeeding year during the terms hereof. At the Company's option it may pay the interest in either cash or in restricted shares of the Company's common stock, or in any combination thereof. Interest paid in shares of the Company's common stock will be paid at the greater of $1.00 per share or the average per share closing market price at the time each interest payment is due. The Promissory Note entitled the payee to convert outstanding principal due into shares of the Company's common stock at $1.00 per share, which was the market price of the Company's stock at the date the Promissory Notes were issued. On December 31, 1999, the Company consummated an agreement with Mr. Parr to convert the Promissory Note into shares of 7.0% Series A convertible preferred stock, par value $.01 per share, of the Company (the "Preferred Stock") and converted the interest accrued into shares of its common stock, par value $.01 per share (the "Common Stock"). (4) Convertible Subordinated Debentures The Company has 9% Convertible Subordinated Debentures (the "Debentures"), which become due in 2001. Interest on the Debentures is payable semi-annually on June 1 and December 1. The Debentures are convertible into common stock of the Company at the conversion price of $19.00 per share, subject to adjustment in certain events. On December 31, 1998, the Company and the Trustee of the Debentures entered into a Second Supplemental Indenture (the "Agreement"). The purpose of the Agreement was to reduce the conversion price for the Debentures from $19.00 per share to $1.00 per share, subject to adjustment as set forth in the Indenture, during the period from December 31, 1998 through March 23, 1999. Under the Agreement, Debentures owned by related parties in the principal amount of $300,000 were converted into 300,000 shares of Common Stock, at the conversion price of $1.00 per share on December 31, 1998. Interest expense and corresponding credit to additional paid-in capital of $284,211 were recorded relative to the conversion of Convertible Subordinated Debentures as required in terms of Statement of Financial Accounting Standards No. 84, ("SFAS No. 84") "Induced Conversions of Convertible Debt". 48 HOWTEK, INC. Notes to Financial Statements (continued) (4) Convertible Subordinated Debentures In the first quarter of 1999, Debentures in the principal amount of $1,764,000 were converted into 1,764,000 shares of Common Stock, at the conversion price of $1.00 per share. Interest expense and corresponding credit to additional paid-in capital of $1,671,158 was recorded relative to the conversion of Convertible Subordinated Debentures as required in terms of SFAS No. 84. As of December 31, 1999 and 1998, the Company's outstanding balance on its Debentures, was $117,000 and $1,881,000, respectively. (5) Stockholders' Equity (a) Preferred Stock On December 22, 1999 the Company, pursuant to the authority of the Company's Board of Directors, adopted a resolution creating a series of preferred stock designated as 7.0% Series A Convertible Preferred Stock (the "Series A Preferred Stock"). The number of shares initially constituting the Series A Preferred Stock is 10,000, par value $.01 per share, which may be decreased (but not increased) by the Board of Directors without a vote of stockholders, provided, however, that such number may not be decreased below the number of then outstanding shares of Series A Preferred Stock. The holders of the shares of Series A Preferred Stock shall vote together with the Common Stock as a single class on all actions to be voted on by the stockholders of the Company. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of whole shares of Common Stock into which each share of Series A Preferred Stock is then convertible. The holders shall be entitled to notice of any stockholder's meeting in accordance with the By-Laws of the Company. Each share of Series A Preferred Stock, is convertible into that number of shares of Common Stock determined by dividing the aggregate liquidation preference of the number of shares of Series A Preferred Stock being converted by $1.00 (the "Conversion Rate"). The Conversion Rate shall be subject to appropriate adjustment by stock split, dividend or similar division of the Common Stock or reverse split or similar combinations of the Common Stock prior to conversion. The Company may at any time after the date of issuance, at the option of the Board of Directors, redeem in whole or in part the Series A Preferred Stock by paying cash equal to $100 per share together with any accrued and unpaid dividends (the "Redemption Price"). The Redemption Price shall be subject to appropriate adjustment by the Board of Directors of similar division of shares of Series A Preferred Stock or reverse split or similar combination of the Series A Preferred Stock. In the event the Company shall liquidate, dissolve or wind up, no distribution shall be made to the holders of shares of Common Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share (as 49 HOWTEK, INC. Notes to Financial Statements (continued) (5) Stockholders' Equity (continued) (a) Preferred Stock (continued) adjusted for any stock dividends, combinations or splits) plus all declared or accumulated but unpaid dividends. The holders of shares of Series A Preferred Stock, in preference to the holders of shares of Common Stock, shall be entitled to receive cumulative dividends of $7.00 per annum per share, payable annually, subject to appropriate adjustment by the Board of Directors of the Company in the event of any stock split, dividend or similar division of shares of Series A Preferred. Dividends shall be payable annually, in arrears, on the last day of December in each year, commencing December 31, 1999. No dividends were payable in 1999. On December 31, 1999, the Company consummated an agreement with all the unrelated parties and Mr. W. Scott Parr to convert $690,000 pursuant to Convertible Promissory Notes into 6,900 shares of Series A Preferred Stock, par value $.01 per share, of the Company. (b) Stock Options The Company has two stock option plans, which are described below. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the plans. Under APB Opinion 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized. Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation," ("SFAS No.123") requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value-based method prescribed in SFAS No. 123. The Company estimates the fair value of each granting of options at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999: no dividends paid; expected volatility of 45.8%; risk-free interest rates of 5.79%, 5.88% & 5.99%; and expected lives from 3 to 5 years. The weighted-average assumptions used for grants in 1998 were: no dividends paid; expected volatility of 40%; risk-free interest rates of 5%; and expected lives of 5 years. The weighted-average assumptions used for grants in 1997 were: no dividends paid; expected volatility of 40%; risk-free interest rate of 6.7%; and expected lives of 1year. Under the accounting provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below. 50 HOWTEK, INC. Notes to Financial Statements (continued) (5) Stockholders' Equity (continued) (b) Stock Options (continued)
Net loss 1999 1998 1997 ---- ---- ---- As reported $(3,996,828) $(3,372,323) $ (832,072) Pro forma $(4,101,278) $(3,450,229) $ (938,783) Basic loss per share As reported $ ( .32) $ ( .33) $ ( .09) Pro forma $ ( .32) $ ( .34) $ ( .10)
The Howtek, Inc. 1993 Stock Option Plan, ("The 1993 Plan"). The 1993 Plan (the "Plan") was adopted in November 1993. On September 28, 1999, the Company held its Annual Meeting of Stockholders at which the Stockholders voted to amend the Company's 1993 Stock Option Plan to increase the number of shares of the Company's common stock issuable thereunder from 1,000,000 to 1,625,000 shares. The Plan provides for the granting of non-qualifying and incentive stock options to employees and other persons to purchase up to an aggregate of 1,625,000 shares of the Company's common stock. The purchase price of each share for which an option is granted shall be at the discretion of the Board of Directors or the Committee appointed by the Board of Directors provided that the purchase price of each share for which an incentive option is granted shall not be less than the fair market value of the Company's common stock on the date of grant, except for options granted to 10% holders for whom the exercise price shall not be less than 110% of the market price. Incentive options granted under the Plan vest 100% over periods extending from six months to five years from the date of grant and expire ten years after the date of grant, except for 10% holders whose options shall expire five years after the date of grant. Non-qualifying options granted under the Plan are generally exercisable over a ten year period, vesting 1/3 each on the first, second, and third anniversaries of the date of grant. The Howtek, Inc. Director Incentive Plan The Company has a Director Incentive Plan (the "Director Plan"). The Company has reserved for issuance 250,000 shares under the Director Plan. The Director Plan provides for the award of (i) restricted and unrestricted stock, (ii) qualified stock options, and (iii) non-qualified stock options. The Director Plan is administered by a committee of at least one director or non-director appointed by the Board. The term of the Director Plan is ten years and the term of individual grants of stock options thereunder is ten years. Vesting periods for exercise of options and restrictions on the transferability of stock awards is determined by the committee administering the Director Plan. 51 HOWTEK, INC Notes to Financial Statements (continued) (5) Stockholders' Equity (continued) (b) Stock Options (continued) A summary of stock option (incentive and non-qualifying) activity is as follows: 1993 STOCK OPTION PLAN & DIRECTOR INCENTIVE PLAN
Option Price range Weighted Shares per share Average --------------------------------------------------------------- Outstanding, January 1, 1997 532,335 $1.50-$3.63 $2.55 Granted 124,000 $1.00-$1.81 $1.44 Exercised (28,350) $1.72 $1.72 Cancelled (72,200) $1.72-$3.63 $2.68 --------------------------------------------------------------- Outstanding, December 31, 1997 555,785 $1.00-$1.81 $1.44 Granted 775,924 $1.00-$1.25 $1.08 Exercised -0- -0- -0- Cancelled (324,593) $1.00-$1.81 $1.43 --------------------------------------------------------------- Outstanding, December 31, 1998 1,007,116 $1.00-$1.81 $1.27 Granted 505,922 $ .81-$1.13 $ .94 Exercised (27,166) $ .81-$1.72 $1.48 Cancelled (202,298) $ .81-$1.81 $1.23 --------------------------------------------------------------- Outstanding, December 31, 1999 1,283,574 $ .81-$1.81 $1.22 =============================================================== Exercisable at year-end 1997 408,635 $1.50-$1.72 $1.61 1998 409,793 $1.00-$1.72 $1.27 1999 642,772 $ .81-$1.81 $1.21 Available for future grants 1999 475,838
The weighted-average fair value of options granted during the year was $0.42 per option for 1999, $0.63 per option for 1998 and $0.32 per option for 1997. The weighted-average remaining contractual life of stock options outstanding for all plans at December 31, 1999 was 8.3 years. 52 HOWTEK, INC. Notes to Financial Statements (continued) (5) Stockholders' Equity (continued) (c) Earnings per Share The Company follows Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires the presentation of both basic and diluted earning per share on the face of the Statements of Operations. Conversion of the subordinated debentures and other convertible debt and assumed exercise of options and warrants are not included in the calculation of diluted loss per share since the effect would be antidilutive. Accordingly, basic and diluted net loss per share do not differ for any period presented. The following table summarizes the common stock equivalent of securities that were outstanding as of December 31, 1999, 1998 and 1997, but not included in the calculation of diluted net loss per share because such shares are antidilutive: December 31, 1999 1998 1997 ---- ---- ---- Stock options 1,283,574 1,007,116 555,785 Stock warrants 50,000 -- -- Convertible Subordinated Debentures 6,158 99,000 114,789 Convertible Revolving Promissory Note 294,399 -- -- Convertible Promissory Note 310,000 -- -- (d) Stock Subscription Warrant In December, 1999 the Company issued a common stock purchase warrant (the "Warrant") to the company (the "manufacturer) responsible for the assembly of the Company's MultiRAD(TM) medical film digitizer, as part of its manufacturing agreement entered into earlier in 1999. The Warrant entitles the manufacturer to purchase from the Company up to 50,000 shares of the Company's common stock at the price of $2.50 per share. The manufacturer may exercise the Warrant at any time or from time to time on or prior to December 31, 2004. The Company estimated the fair value of the Warrants at the date of issue to be $54,000 using the Black-Scholes option-pricing model. Accordingly, the value of the Warrants will be recorded as stock compensation expense over the period of the manufacturing agreement. 53 HOWTEK, INC. Notes to Financial Statements (continued) (6) Income Taxes As a result of the 1999, 1998 and 1997 losses, no income tax expense was incurred for these years. Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Deferred tax liabilities (assets) are comprised of the following at December 31: 1999 1998 ------------ ------------ Inventory (Section 263A) (133,000) $ (429,000) Inventory reserves (68,000) (35,000) Receivable reserves (51,000) (40,000) Other accruals (19,000) (29,000) Tax credits (2,506,000) (2,383,000) NOL carryforward (15,630,000) (14,215,000) ------------ ------------ Gross deferred tax asset $(18,407,000) $(17,131,000) ------------ ------------ Accumulated depreciation 36,000 34,000 ------------ ------------ Gross deferred tax liabilities 36,000 34,000 ------------ ------------ Net tax assets $(18,371,000) $(17,097,000) Deferred tax assets valuation allowance $ 18,371,000 $ 17,097,000 ============ ============ Net deferred tax assets $ -0- $ -0- ============ ============= As of December 31, 1999, the Company has net operating loss carryforwards totaling approximately $46,049,000. The amount of the net operating loss carryforwards which may be utilized in any future period may be subject to certain limitations, based upon changes in the ownership of the Company's common stock. The following is a breakdown of the net operating loss expiration period: 54 HOWTEK, INC. Notes to Financial Statements (continued) (6) Income Taxes (continued) Expiration date Amount of remaining NOL 2000 1,100,000 2001 5,000,000 2002 8,900,000 2003 3,300,000 2004 4,200,000 2005 2,200,000 2006 2,200,000 2007 300,000 2008 600,000 2009 100,000 2010 4,000,000 2011 4,400,000 2012 2,300,000 2018 3,600,000 2019 3,800,000 In addition the Company has available tax credit carryforwards (adjusted to reflect provisions of the Tax Reform Act of 1986) of approximately $2,506,000, which are available to offset future taxable income and income tax liabilities, when earned or incurred. These amounts expire in various years through 2019. (7) Sales Information (a) Geographic Information The Company's sales are made to U.S. distributors, dealers and to foreign distributors of computer and related products. Total export sales, which includes sales made to a U.S. based international distributor of computer and related products, were $740,000 or 11% of total sales in 1999, $1,252,000 or 23% of total sales in 1998 and $4,362,000 or 55% of total sales in 1997. The Company's principal concentration of export sales has been in Europe which accounted for 41% of 1999 export sales, 47% in 1998 and 69% in 1997. The balance of the export sales were into the Far East, Mexico, Central America, and Canada. As of December 31, 1999 and 1998 the Company had outstanding receivables of $133,000 and $281,000, respectively, from distributors of its products who are located outside of the United States. 55 HOWTEK, INC. Notes to Financial Statements (continued) (7) Sales Information (continued) (b) Major Customers During the year ended December 31,1999, the Company's sales of its prepress and graphic arts products to its U.S. based international distributor continued to be adversely affected by the economic weakness in Asia. Since 1998 the Company has taken actions designed to accelerate sales growth in new markets, such as its medical imaging and photographic market. For the year ended December 31, 1998 the Company had one major customer which operated as a U.S. based international distributor of computer and related products. In 1997 the Company had two major customers, one of which operated as a U.S. based international distributor of computer and related products and the other as an OEM. There were no major customers in 1999. The following represents the comparative sales and accounts receivable: 1998 1997 Sales Amount % Amount % ----- -------------- ---------------- Customer 1 $ 572,836 11 $1,832,000 23 Customer 2 $ -- -- $1,388,000 18 Accounts Receivable Customer 1 $ 52,000 $ 254,000 Customer 2 $ -- $ 201,000 (8) Commitments and Contingencies As of December 31, 1999, the Company had one lease obligation related to its facility. The lease obligation for 2000 is approximately $58,875. The Company's principal executive offices and research and development laboratory is leased by the Company from Mr. Robert Howard, Chairman of the Board of Directors pursuant to a lease which expires September 30, 2000. Rental expense for all leases for the years ended December 31, 1999, 1998 and 1997 was $93,740, $161,425 and $243,343 respectively. 56 HOWTEK, INC. Notes to Financial Statements (continued) (9) Legal Proceedings Howtek, Inc. v. TECO et al As previously reported in the Company's 1996 Annual Report on Form 10-K, on June 7, 1994, the Company filed a complaint in the United States District Court, District of New Hampshire, against TECO Electric and Machinery Co. Ltd. TECO Information Systems Co., Ltd., Relisys (a TECO subsidiary) and Herman Hsu. The Company claimed, inter alia, breach of contract, misappropriation of trade secrets, and breach of exclusive dealing. On April 24, 1997, the Company announced that the lawsuit had been settled. All existing agreements between the companies had been terminated. The Company has released the TECO companies, Relisys and Mr. Hsu from all covenants not to compete and from any claims relating to the scanner technology involved in the case. TECO, in turn, made a one-time payment of $6,000,000 to the Company on April 23, 1997, and released the Company from any obligation to manufacture scanner products through TECO. Neither party admitted to any breach of contract or other wrong-doing in connection with the settlement of this lawsuit. (10) Financial instruments The carrying amounts of financial instruments, including cash and equivalents, accounts receivable, accounts payable, accrued expenses, demand notes payable to related parties and convertible debentures and other convertible debt approximated fair value as of December 31, 1999 and 1998, due to either short maturity or terms similar to those available to similar companies in the open market. (11) Subsequent Events In January and February 2000, the Company borrowed an additional $160,000 from Mr. Robert Howard under the Convertible Note and Revolving Loan and Security Agreement, of which $2,510,000 was available at February 18, 2000. 57 HOWTEK, INC. Schedule II - Valuation and Qualifying Accounts and Reserves
Col. A Col. B Col. C Col. D Col. E - ----------------------------------------------------------------------------------------- Balance at Charged to Balance Beginning Cost and at end Description of Year Expenses Deductions of Year - ----------------------------------------------------------------------------------------- Year End December 31, 1999: Allowance for Doubtful Accounts $ 118,349 $ 281,312 $ 249,161 (1) $ 150,500 Inventory Reserve $ 101,553 $ 117,583 $ 18,961 (2) $ 200,175 Year End December 31, 1998: Allowance for Doubtful Accounts $ 70,000 $ 53,064 $ 4,715 (1) $ 118,349 Inventory Reserve $ 236,658 $ 69,166 $ 204,271 (2) $ 101,553 Year End December 31, 1997: Allowance for Doubtful Accounts $ 537,748 $ 770,000 $ 1,237,748 (1) $ 70,000 Inventory Reserve $ 500,000 $2,119,467 $ 2,382,809 (2) $ 236,658
(1) Represents the amount of accounts charged off. (2) Represents inventory written off and disposed of. 58 EX-10.(B) 2 RENEWAL OF LEASE EXHIBIT 10(b) RENEWAL OF LEASE Effective October 1, 1999, 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 59 EX-10.(D) 3 REVOLVING LOAN AND SECURITY AGREEMENT 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, 2000 to January 4, 2001. Also the Note hereafter will be a maximum principal sum of Three Million Dollars ($3,000,000). Effective the 30th day of December 1999. HOWTEK, INC. By: /s/ W. Scott Parr /s/ Robert Howard ----------------------------- ------------------------------- Title: President, CEO Robert Howard 60 EX-10.(G) 4 CONVERTIBLE PROMISSORY NOTE EXHIBIT 10(g) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED PURSUANT TO THE PROVISIONS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR UNLESS AN OPINION OF COUNSEL, SATISFACTORY TO HOWTEK, INC., IS OBTAINED STATING THAT SUCH DISPOSITION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION CONVERTIBLE PROMISSORY NOTE $______________ Hudson, New Hampshire ________ __, 1999 FOR VALUE RECEIVED, the undersigned, HOWTEK, INC., a Delaware corporation, with its principal place of business at 21 Park Avenue, Hudson, New Hampshire 03051 (the "Borrower"), promises to pay to the order of __________________, with a residence or principal place of business of _____________________________ or his designee (the "Payee"), at such residence or place of business or such other place as the Payee shall hereafter specify in writing to the Borrower, the principal sum of $_____________________, together with the interest, all as provided for below. Principal and interest hereunder shall be payable as follows: (1) On December 31, 1999 and on December 31 of each succeeding year during the term hereof, the Borrower shall make payments of interest in the amount and in the form specified herein; and (2) On March 31, 2003 and on each succeeding June 30, September 30, December 31 and March 31, through December 31, 2006, the Borrower shall make equal payments of principal in the amount of $________. Interest shall be calculated and charged daily on the basis of a 360 day banking year on the unpaid principal balance outstanding from time to time. 61 The interest rate hereunder shall be a fixed rate equal to seven percent (7.0%) per annum. All cash payments on this Note shall be made in such currency of the United States of America as shall be legal tender for payment of public and private debts. Any payment which shall fall due on a Saturday, Sunday or public holiday in the State of New Hampshire, shall be made on the next succeeding business day, and in the case of a principal payment, interest shall continue to accrue on the amount of such payment until the same has been made to Payee. Notwithstanding anything herein to the contrary, interest hereunder may be paid, at the Borrower's option, in either cash or in restricted shares of common stock, $.01 par value per share, of the Borrower (the "Common Stock") or in any combination thereof. If any payment of interest is paid in shares of Common Stock, the number of shares of Common Stock to be issued by Borrower to the Payee shall equal the largest whole number of shares determined by dividing the amount of interest then payable to the Payee by the greater of (i) $1.00 or (ii) the average per share closing price of a share of the Common Stock, (as reported by, as the case may be, on the principal exchange on which the shares of Common Stock are then traded, or, the Nasdaq Stock Market, Inc. if the Common Stock is then traded on either Nasdaq or the Over-the Counter Bulletin Board), for the 10 trading days preceding the date on which interest is payable. The Payee shall have the right at his option, by delivering 10 days' written notice to the Borrower at its principal executive office together with this Note, to convert into shares of restricted Common Stock, any unpaid principal balance of this Note together with accrued and unpaid interest thereon. The number of shares of Common Stock to be issued upon any such conversion shall equal to the largest whole number determined by dividing the total amount of any unpaid principal balance hereof and any accrued and unpaid interest thereon by $1.00. The notice shall specify the number of shares of Common Stock to be acquired, the principal amount, and interest, if any, (as calculated by the Payee) and the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The foregoing notwithstanding, no holder of this Note shall be entitled to transfer this Note by conversion without first complying with all applicable restrictions on the transfer of this Note. The conversion will be deemed to have occurred upon the date of such delivery and the person entitled to receive share certificates for Common Stock shall be regarded for all corporate purposes from and after such date as the record holder of the number of shares to which it is entitled upon the conversion. The Borrower may rely on record ownership of this Note for all corporate purposes, notwithstanding any contrary notice. The Borrower may, in the event of either (i) the average per share closing 62 price of the Common Stock for any 10 day trading period equaling or exceeding $2.50, or (ii) any merger or consolidation of Borrower or sale of substantially all of the Borrower's assets or other corporate transaction requiring the approval of Borrower's shareholders, by delivering, within 10 days of such event, 10 days' written notice to the holder hereof, require the Payee hereof to accept the transfer to the Payee in full satisfaction of any unpaid principal balance of this Note or accrued and unpaid interest thereon, that number of shares of Common Stock equal to the largest whole number determined by dividing the total of any unpaid principal balance hereof and any accrued and unpaid interest thereon by the average per share closing price of the shares of Common Stock for the 10 trading days preceding the date of such notice. The Borrower may at any time, without penalty, upon 20 days' written notice to the Payee, prepay the unpaid principal balance and any accrued but unpaid interest hereof, subject to the Payee's rights as set forth herein to require the Borrower to transfer to the Payee, or his designee, shares of Common Stock in full satisfaction of the unpaid balance and unpaid interest thereon. Notwithstanding anything herein to the contrary, any stock split, dividend, or similar division of shares of Common Stock or combination or reverse split of the Common Stock, or if shares of Common Stock changed into the same or a different number of type of securities whether by capital reorganization, reclassification or otherwise, then the number of shares of Common Stock to be issued upon conversion of this Note or in lieu of the cash payment of interest due on this Note as provided above, shall be equitably adjusted by the Borrower to a new number of shares of Common Stock, proportionately reduced in the event of a combination or reverse split or increased in the event of a stock split or subdivision, or other securities to preserve the rights of the Borrower and the Payee. Upon the failure of the Borrower to pay principal or interest when due in accordance with the terms hereof, which failure is not cured within 90 days of written notice thereof from the Payee, at the option of the Payee, this Note shall become immediately due and payable in full, without further demand or notice. The entire principal balance hereof, together with accrued interest, shall after maturity, whether by acceleration or otherwise, bear interest at the contract rate of this Note. The Borrower agrees to pay on demand all reasonable out-of-pocket costs of collection hereunder, including reasonable attorneys' fees. No waiver of any right, privilege or remedy or any amendment to this Note shall be effective unless made in writing and signed by the Borrower and the Payee. The acceptance by the Payee of any payment after any default shall not operate to extend the time of payment of any amount then remaining unpaid hereunder or constitute a waiver of any rights of the Payee hereunder. 63 All rights and remedies of the Payee, whether granted herein or otherwise, shall be cumulative and may be exercised singularly or concurrently. The Borrower hereby waives, to the fullest extent permitted by law, presentment, notice, protest and all other demands and notices of any description and assents to any extension of the time of payment or any other indulgence. This Note may not be modified except by a writing duly executed by the Borrower and the Payee. This Note and the obligations of the Borrower and the rights of the Payee shall be governed by and construed in accordance with the laws of the State of New Hampshire without giving effect to the choice of laws provisions. IN WITNESS WHEREOF, the Borrower, acting by and through its duly authorized officer, has executed this Note on the day and year first hereinbefore stated. HOWTEK, INC. (the "Borrower") By: /s/ W. Scott Parr ---------------------------------- President, Chief Executive Officer 64 EX-10.(I) 5 CERTIFICATE OF DESIGNATION EXHIBIT 10(i) HOWTEK, INC. CERTIFICATE OF DESIGNATION OF 7.0% SERIES A 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 A 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 $100 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: Section 1. Designation, Number and Rank. (a) The shares of such series shall be designated "7.0% Series A Convertible Preferred Stock" (the "Series A Preferred Stock"). The number of shares initially constituting the Series A Preferred Stock shall be 10,000, 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 A Preferred Stock. (b) The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, dissolution or winding up, rank prior to the common stock, par value $.01 per share, of the Corporation (the "Common Stock") and any other issue of preferred stock hereinafter created by the Corporation which does not expressly provide that it ranks senior to or pari passu with the Series A Preferred Stock as to dividends, liquidation preference or otherwise. 65 Section 2. Dividends and Distributions. (a) The holders of shares of Series A 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 any other issue of preferred stock hereinafter created by the Corporation that expressly provides that it ranks senior to or pari passu with the Series A 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 $7.00 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 A Preferred Stock or reverse split or similar combination of the Series A Preferred Stock. Dividends shall be payable annually, in arrears, on the last day of December in each year, commencing December 31, 1999. (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 A 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 A 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. (c) 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) and Section 7(d) "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 ending on the third trading date immediately preceding the payment date. In the event of payment of dividends in shares of Common Stock no fractional shares shall be issued but cash shall be paid in lieu of the issuance of the fractional shares based upon the Fair Market Value of such fractional shares. (d) No dividends or other distributions shall be paid or set apart for payment on, and no purchase, redemption or other acquisition shall be made by the Corporation of any shares of Common Stock unless and until all accrued and unpaid dividends on the Series A Preferred Stock, including the full dividend for the then-current annual dividend period, shall have been paid or declared and set apart for payment. (e) The holders of shares of Series A Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. In addition to any voting rights provided in the Corporation's Certificate of Incorporation or By-Laws, the 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 Corporation. 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 of Series A Preferred Stock shall be entitled to notice of any stockholder's meeting in accordance with the By-Laws of the Corporation. 66 Section 4. Redemption at the Option of the Corporation. (a) Provided the Corporation has not received a notice of conversion pursuant to Section 7 hereof, 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 A Preferred Stock by paying in cash therefor a sum equal to $100 per share, together with any accrued and unpaid dividends thereon (the "Redemption Price"). The Redemption Price 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 shares of Series A Preferred Stock or reverse split or similar combination of the Series A Preferred Stock. At least fifteen (15) but no more than thirty (30) days prior to the Redemption Date (as hereinafter defined) set forth therein, written notice 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 A Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the date of such redemption (the "Redemption Date"), the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Any redemption effected pursuant to this Section 4 shall be made on a pro rata basis among the holders of the Series A Preferred Stock in proportion to the number of shares of Series A Preferred Stock then held by them. Each holder of Series A Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. (b) From and after the applicable Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series A Preferred Stock designated for redemption in the Redemption Notice as holders of Series A Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock converted, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof and shall upon cancellation be restored to the status of authorized but unissued shares of preferred stock, subject to reissuance by the Board of Directors as shares of preferred stock of one or more other series but not as shares of Series A Preferred Stock. Section 6. Liquidation, Dissolution or Winding Up. (a) 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 A Preferred Stock shall have received $100 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. 67 (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other person or persons 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. Section 7. Conversion. The holders of the Series A Preferred Stock shall have conversion rights as follows: (a) Each share of Series A 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 A Preferred Stock being converted by $1.00 (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 reverse split or similar combination of the Common Stock prior to conversion. (b) Before any holder of Series A 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 A Preferred Stock together with such other documents and evidence of payment of any required taxes on the part of the holder as the Corporation may request, 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, issue and deliver at such office to such holder of Series A 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 A 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. (c) In case any shares of Series A Preferred Stock are to be redeemed pursuant to Section 4, such right of conversion shall cease and terminate as to the shares of Series A 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. (d) Upon conversion, the holder of shares of Series A Preferred Stock shall be entitled to receive any accrued and unpaid dividends on the shares of Series A Preferred Stock surrendered for conversion to the date of such conversion. Such dividends 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. In the event of payment of dividends in shares of Common Stock no fractional shares shall be issued but cash shall be paid in lieu of the issuance of the fractional shares based upon the Fair Market Value of such fractional shares. (e) 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 A Preferred Stock shall terminate. (f) The Corporation will pay any and all issue or other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of the Series A Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of Common Stock in a name other than that of the holder of Series A Preferred Stock, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 68 (g) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Series A 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 A 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 A Preferred Stock. Section 8. Certain Covenants. Any registered holder of Series A 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 22nd day of December, 1999. HOWTEK, INC. By: /s/ W. Scott Parr --------------------- Name:W. Scott Parr Title:President 69 EX-23.(A) 6 CONSENT OF INDEPENDENT ACCOUNTANTS 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 18, 2000, appearing in this Annual Report on Form 10-K of Howtek, Inc. for the year ended December 31, 1999. We also consent to the references to us under the caption "Experts" in the Prospectuses. /s/ BDO SEIDMAN, LLP New York, New York March 28, 2000 70 EX-27 7 FDS --
5 This schedule contains summary financial information extracted from Form 10K at December 31, 1999 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 263,073 0 1,551,987 151,000 2,649,460 4,457,910 2,774,916 2,058,734 5,696,609 2,019,340 117,000 133,305 0 69 2,786,895 5,696,609 6,663,230 6,663,230 5,069,106 5,069,106 799,960 0 1,801,646 (3,996,828) 0 (3,996,828) 0 0 0 (3,996,828) (0.32) (0.32)
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