SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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)
(603) 882-5200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES __X__ NO _____.
As of the close of business on November 8, 1999 there were 13,019,296
shares outstanding of the issuer's Common Stock, $.01 par value.
<PAGE>
HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Statements of Operations for the three
month periods ended September 30, 1999 and
1998 (unaudited) and for the nine month
periods ended September 30, 1999 and 1998
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the nine month period ended September 30, 1999
(unaudited) 5
Statements of Cash Flows for the nine month periods
ended September 30, 1999 and 1998 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II OTHER INFORMATION
Item 2 Changes in Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13-14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
HOWTEK, INC.
Balance Sheets
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 225,989 $ 182,724
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $88,000 in 1999 and $118,000 in 1998 1,936,925 1,570,081
Inventory 2,747,417 2,927,082
Prepaid and other 76,618 118,689
------------ ------------
Total current assets 4,986,949 4,798,576
------------ ------------
Property and equipment:
Equipment 2,677,777 2,534,635
Leasehold improvements 33,321 27,765
Motor vehicles 6,050 6,050
------------ ------------
2,717,148 2,568,450
Less accumulated depreciation and amortization 2,028,028 1,717,445
------------ ------------
Net property and equipment 689,120 851,005
------------ ------------
Other assets:
Software development costs, net 488,762 626,577
Debt issuance costs, net 42,413 57,682
Patents, net 13,971 17,581
------------ ------------
Total other assets 545,146 701,840
------------ ------------
Total assets $ 6,221,215 $ 6,351,421
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,413,439 $ 1,086,775
Accrued interest 162,471 37,641
Accrued vacation pay 85,821 84,875
Accrued expenses 197,252 224,704
Loan payable to related parties 700,000 765,000
------------ ------------
Total current liabilities 2,558,983 2,198,995
Loan payable to related parties 590,000 --
Loan payable to unrelated parties 660,000 --
Convertible subordinated debentures 117,000 1,881,000
------------ ------------
Total liabilities 3,925,983 4,079,995
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 13,087,172 in 1999
and 11,128,082 shares in 1998; outstanding
13,019,296 in 1999 and 11,060,206 shares in 1998 130,871 111,281
Additional paid-in capital 51,543,551 47,938,799
Accumulated deficit (48,428,926) (44,828,390)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,295,232 2,271,426
------------ ------------
Total liabilities and stockholders' equity $ 6,221,215 $ 6,351,421
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
HOWTEK, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Nine Months
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 1,614,930 $ 1,231,519 $ 5,078,671 $ 3,357,401
Cost of Sales 1,176,456 929,690 3,897,695 2,823,522
------------ ------------ ------------ ------------
Gross Margin 438,474 301,829 1,180,976 533,879
------------ ------------ ------------ ------------
Operating expenses:
Engineering and product development 205,127 299,442 632,726 808,807
General and administrative 293,066 316,279 1,059,610 1,005,897
Marketing and sales 460,735 450,496 1,322,037 1,251,652
------------ ------------ ------------ ------------
Total operating expenses 958,928 1,066,217 3,014,373 3,066,356
------------ ------------ ------------ ------------
Loss from operations (520,454) (764,388) (1,833,397) (2,532,477)
Interest expense - net 38,926 47,169 1,767,139 151,178
------------ ------------ ------------ ------------
Net loss $ (559,380) $ (811,557) $ (3,600,536) $ (2,683,655)
============ ============ ============ ============
Net loss per share
Basic and diluted $ (0.04) $ (0.08) $ (0.29) $ (0.27)
Weighted average number of shares used
in computing earnings per share
Basic and diluted 12,923,644 10,760,206 12,473,746 9,933,466
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HOWTEK, INC.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
---------------------------- Additional
Number of Paid-in Accumulated Treasury Stockholders'
Shares Issued Par Value Capital Deficit Stock Equity
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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 1,764,000 17,639 3,417,519 3,435,158
Issuance of common stock
for payment of debt 195,090 1,951 187,233 189,184
Net loss -- -- -- (3,600,536) -- (3,600,536)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1999 13,087,172 $ 130,871 $ 51,543,551 $(48,428,926) $ (950,264) $ 2,295,232
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
HOWTEK, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Nine Months
September 30, 1999 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,600,537) $(2,683,655)
----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 310,583 331,691
Amortization 225,880 165,873
Interest relative to conversion of Convertible 1,671,158 --
(Increase) decrease:
Accounts receivable (366,844) 346,969
Inventory 179,665 307,337
Other current assets 42,071 (28,168)
Increase (decrease):
Accounts payable 326,664 (256,224)
Accrued expenses 98,324 165,526
----------- -----------
Total adjustments 2,487,501 1,033,004
----------- -----------
Net cash provided by (used for)
operating activities (1,113,036) (1,650,651)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (69,186) (157,875)
Additions to property and equipment (148,697) (206,280)
----------- -----------
Net cash used for investing activities (217,883) (364,155)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 189,184 1,709,466
Proceeds of loan from related parties 525,000 300,000
Proceeds of loan from unrelated parties 660,000 --
----------- -----------
Net cash provided by financing activities 1,374,184 2,009,466
----------- -----------
Increase (decrease) in cash and equivalents 43,265 (5,340)
Cash and equivalents, beginning of period 182,724 235,326
----------- -----------
Cash and equivalents, end of period $ 225,989 $ 229,986
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 5,265 $ 107,611
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
HOWTEK, INC.
Notes to Financial Statements
September 30, 1999
(1) Accounting Policies
In the opinion of management all adjustments and accruals (consisting only
of normal recurring adjustments) which are necessary for a fair
presentation of operating results are reflected in the accompanying
financial statements. Reference should be made to Howtek, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998 for a summary of
significant accounting policies. Interim period amounts are not necessarily
indicative of the results of operations for the full fiscal year.
(2) Loan Payable to Related Party
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000. Outstanding advances are collateralized by substantially all of
the assets of the Company and bear interest at prime interest rate plus 2%.
The Convertible Note entitles Mr. Howard to convert outstanding advances
into shares of the Company's common stock at any time based on the
outstanding closing market price of the Company's common stock at the time
each advance is made.
As of September 30, 1999, the Company had $2,750,000 available for future
borrowings under the Loan Agreement.
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 the 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. As of September 30, 1999, the Company owed (i)
$500,000 to Mr. Robert Howard, and (ii) $200,000 to Dr. Lawrence Howard.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this Item 2. and elsewhere in this Form 10-Q
that are not historical facts contain forward looking statements that involve a
number of known and unknown risks, uncertainties and other factors that could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, possible technological
obsolescence of products, competition, the failure of the Company or key third
parties with which the Company does business to achieve year 2000 compliance and
other risks detailed in the Company's Securities and Exchange Commission
filings. The words "believe", "expect", "anticipate" and "seek" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
Results of Operations
Overview
Since beginning a turn-around program in early 1998, Howtek has become more
focused on medical product opportunities and has demonstrated consistent year to
year growth in medical product sales. The Company believes its MultiRAD(TM)
radiological film digitizers are distinguished in markets for computer assisted
mammography, teleradiology and medical image archiving on the basis of
proprietary, solid state "Red LED" illumination systems, elimination of
fluorescent tubes, superior image quality and value. The Company's medical
business operates at higher gross margins than Howtek's traditional graphic arts
business. Further, because the Company works primarily with systems integrators
in the sale of Howtek medical film digitizers, operating costs associated with
support of the medical product business are lower than comparable costs in the
Company's traditional graphic arts segment. For these reasons, increased medical
sales are expected to be a continuing and increasingly important factor in
Howtek's plan to improve its overall financial performance.
Howtek has now completed updating all key graphic arts hardware and
software product lines. The Company introduced its new HiResolveTM line of
exceptionally high-resolution drum scanners during the fourth quarter of 1998.
During the first quarter of 1999, Howtek secured rights to market and sell the
award winning Scanview flatbed scanner line in the United States and Canada,
with the first sales of Scanview products occurring at the end of March 1999. In
February 1999, Howtek introduced the Digital PhotoLabTM software system,
acquired on an exclusive basis from a third party. Digital PhotoLab is used
together with Howtek drum scanners to meet the needs of photo professionals
using negative original images, producing final images on high-speed
photographic paper, and printing on a new generation of wide format color inkjet
printers.
8
<PAGE>
An additional element in the Company's improved performance has been a
rethinking and a restructuring of the way Howtek operates, to achieve more
productivity while reducing costs. In manufacturing, the Company is now working
with a series of high-value manufacturing resources to outsource key
manufacturing tasks and components. This process is substantially complete. This
outsourcing has permitted a substantial reduction in direct and indirect
manufacturing costs and expenses. In other operating areas, the Company has
achieved overall expense reductions while increasing sales and while increasing
its investments in marketing and sales activities.
Quarter Ended September 30, 1999 compared to Quarter Ended September 30, 1998
and Nine Months Ended September 30, 1999 compared to Nine Months Ended September
30, 1998
Sales. Sales for the three months ended September 30, 1999 were $1,614,930, an
increase of $383,411 or 31% from the comparable period in 1998. Sales for the
nine months ended September 30, 1999 were $5,078,671, an increase of $1,721,270
or 51% from the comparable period in 1998.
The Company continues to emphasize its medical business opportunities. Sales of
the Company's medical imaging products increased 30% from $336,370 in the
quarter ended September 30, 1998 to $436,237 over the comparable period in 1999,
and increased 51% from $761,764 in the nine month period ended September 30,
1998 to $1,150,360 for the nine month period ended September 30, 1999. Sales of
the Company's prepress and graphic arts products increased 17%, from $568,455 in
the quarter ended September 30, 1998 to $665,460 over the comparable period in
1999, and increased 36% from $1,943,657 in the nine month period ended September
30, 1998 to $2,644,782 for the nine month period ended September 30, 1999.
Increased sales are due to the introduction of its new HiResolve(TM) drum
scanner product during the fourth quarter of 1998, the introduction of its new
Digital PhotoLab(TM) products in the first quarter of 1999, and increased
marketing and advertising investments. Also, during the first quarter of 1999,
the Company completed its exclusive agreement to market and sell the award
winning Scanview flatbed scanner line in the United States and Canada, with its
first sales occurring at the end of March 1999.
Gross Margins. Gross margins for the three and nine month periods ended
September 30, 1999 increased to 27% and 23%, respectively, from 25% and 16%,
respectively, in the comparable periods in 1998. Gross margins have improved,
and are expected to further improve during 1999, 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. Production
overhead and indirect production costs have declined in absolute terms, and are
expected to continue to decline over the immediate future; at the same time,
sales have increased, decreasing such production costs as a percentage of sales.
Both factors continue to contribute to improved margins.
Engineering and Product Development. Engineering and product development costs
for the three month period ended September 30, 1999 decreased 31% from $299,442
in 1998 to $205,127 in 1999. Engineering and product development costs for the
nine month period ended September 30, 1999 decreased 22% from $808,807 in 1998
to $632,726 in 1999. The decrease results primarily
9
<PAGE>
from reductions in personnel expenses. The Company expects to continue reducing
costs and overhead associated with engineering and product development, in
absolute terms and as a percentage of sales, 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 expenses in the three
month period ended September 30, 1999 decreased slightly from $316,279 in 1998
to $293,066 in 1999. General and administrative expenses in the nine month
period ended September 30, 1999 increased due to the $186,662 returns reserve
established in the first quarter of 1999 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 nine month period ended September
30, 1999, decreased 15% from $1,005,897 in 1998 to $851,806 in 1999. This
decrease is due primarily to reductions in personnel expenses. Giving effect to
the HiDemand 400 reserve and write downs, the general and administrative
expenses for the nine month period ended September 30, 1999 were $1,059,610 in
1999. The Company expects general and administrative expenses to decline during
the balance of 1999 as compared to 1998, as a percentage of sales and in
absolute terms.
Marketing and Sales Expenses. Marketing and sales expenses in the three month
period ended September 30, 1999 increased slightly from $450,496 in 1998 to
$460,735 in 1999. Marketing and sales expense in the nine month period ended
September 30, 1999 increased 6% from $1,251,652 in 1998 to $1,322,037 in 1999.
The increase results primarily from increases in advertising, promotional and
trade show expenses. Commissions payable to inside sales representatives
increased as a result of increased sales. Effective in April of 1999, the
Company changed its sales compensation structure to provide compensation on the
basis of gross margins, rather than net sales. The Company expects marketing and
sales expenses to increase in 1999 as compared to 1998, while remaining
relatively constant as a percentage of sales.
Interest Expense. Net interest expense of $1,767,139 for the nine month period
ended September 30, 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 accounting 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".
10
<PAGE>
As a result of the foregoing, the Company recorded a net loss of $559,380 or
$0.04 per share for the quarter ended September 30, 1999 on sales of $1,614,930
compared to a net loss of $811,557 or $0.08 per share for the same period in
1998 on sales of $1,231,519.
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 $2,750,000 was available at September 30, 1999.
At September 30, 1999 the Company had current assets of $4,986,949, current
liabilities of $2,558,983 and working capital of $2,427,966. The ratio of
current assets to current liabilities was 2:1
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. As of
September 30, 1999, the Company owed (i) $500,000 to Mr. Robert Howard, and (ii)
$200,000 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 1999 and the line of credit available under the Revolving
Loan Agreement with its Chairman.
As of December 31, 1998, the Company's outstanding balance on its $8,000,000, 9%
Convertible Subordinated Debentures (the "Debentures"), which come due 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
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".
11
<PAGE>
During the period from January 1, 1999 through March 23, 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 September 30, 1999 there was $117,000 in principal
amount of Debentures outstanding.
During the first nine months of 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.
Subsequent Events
In October 1999, the Company borrowed an additional $80,000 from Mr. Robert
Howard under the Convertible Note and Revolving Loan and Security Agreement, of
which $2,670,000 was available at October 31, 1999.
Impact of the Year 2000
Many currently installed computer systems and software programs were designed to
use only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are updated, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. This
potential problem is referred to as the "Year 2000" or "Y2K" issue.
In 1998, the Company established a review program to address the Year 2000
issue. The effort encompasses hardware, software, networks, personal computers,
manufacturing and other facilities, and suppliers. The Company is currently
assessing alternative manufacturing and implementing a new financial control
system which is Y2K compliant, and expects implementation to be complete prior
to the end of December, 1999. The Company's products are not date aware and do
not present a Year 2000 problem to its customers.
12
<PAGE>
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of the Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition.
Costs related to the Year 2000 issue are expensed as incurred and are funded
through operating cash flows. The total cost associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The estimated total cost of the Year 2000
program is now approximately $20,000. The Company expensed approximately $10,000
related to the cost of upgrading non-compliant hardware and software. Time and
cost estimates are based on currently available information and could be
affected by the ability to correct all relevant computer codes and equipment.
The Company has not developed a contingency plan in the event that it or its
third party suppliers experience Y2K difficulties.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II OTHER INFORMATION
Item 2. Changes in Securities
During the third quarter of 1999, the Company entered into an agreement to
borrow an additional $60,000 pursuant to Promissory Notes. See "Liquidity and
Capital Resources". These notes were issued in a private offering pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933
and; or Regulation D thereunder.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 28, 1999, the Company held an Annual Meeting of Stockholders at
which (i) the election of directors, (ii) amendment of 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 and (iii) authorize a
class of 1,000,000 shares of preferred stock were voted on by common
stockholders of the Company. The results of the vote were as follows:
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i. Election of Directors
Robert Howard, W. Scott Parr, Ivan Gati, Sheila Horwitz, Kit Howard and
Harvey Teich were elected to serve as members of the Company's Board of
Directors for the ensuing year and until the election and qualification of their
successors.
The votes cast by stockholders with respect to the election of Directors were as
follows:
Number of
Names of Nominees Number of Votes For Votes Withheld
- ----------------- ------------------- --------------
Robert Howard 11,653,328 344,905
W. Scott Parr 11,656,503 341,730
Ivan Gati 11,652,003 346,230
Sheila Horwitz 11,655,403 342,830
Kit Howard 11,651,803 346,430
Harvey Teich 11,651,753 346,480
ii. Amendment to 1993 Stock Option Plan
Votes Votes Cast Votes Broker
Cast For Against Abstaining Non-Votes
- -------- ------- ---------- ---------
10,506,190 532,485 79,935 879,623
iii. Amendment to Certificate of Incorporation to Authorize Preferred Stock
Votes Votes Cast Votes Broker
Cast For Against Abstaining Non-Votes
- -------- ------- ---------- ---------
6,420,196 690,320 68,085 4,819,632
Item 5. Other Information
During the second quarter 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 has been notified by Nasdaq that the required bid levels have been
achieved and the Company's common stock will continued to be traded on the
Nasdaq Market.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Howtek, Inc.
(Company)
Date: November 12, 1999 By: /s/ W. Scott Parr
--------------------------------- --------------------------------
W. Scott Parr
President, Chief Executive
Officer, Director
Date: November 12, 1999 By: /s/ Annette L. Heroux
--------------------------------- --------------------------------
Annette L. Heroux
Vice President Finance,
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10Q at
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 225,989
<SECURITIES> 0
<RECEIVABLES> 1,848,925
<ALLOWANCES> 88,000
<INVENTORY> 2,747,417
<CURRENT-ASSETS> 4,986,949
<PP&E> 2,717,148
<DEPRECIATION> 2,028,028
<TOTAL-ASSETS> 6,221,215
<CURRENT-LIABILITIES> 2,558,983
<BONDS> 117,000
0
0
<COMMON> 130,871
<OTHER-SE> 2,164,361
<TOTAL-LIABILITY-AND-EQUITY> 6,221,215
<SALES> 5,078,671
<TOTAL-REVENUES> 5,078,671
<CGS> 3,897,695
<TOTAL-COSTS> 3,897,695
<OTHER-EXPENSES> 632,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,767,139
<INCOME-PRETAX> (3,600,536)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,600,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,600,536)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
