HOWTEK INC
10-Q, 1999-08-13
COMPUTER PERIPHERAL EQUIPMENT, NEC
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended June 30, 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 August 4, 1999 there were 12,919,296  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 June 30, 1999
             (unaudited) and December 31, 1998                              3

            Statements  of  Operations  for the three month  periods
            ended June 30, 1999 and 1998 (unaudited) and for the six
            month periods ended June 30, 1999 and 1998
            (unaudited)                                                     4

            Statement of Changes in Stockholders' Equity
            for the six month period ended June 30, 1999
            (unaudited)                                                     5

            Statements of Cash Flows for the six month periods
            ended June 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 5    Other Information                                               13

  Item 6    Exhibits and Reports on Form 8-K                                14


Signatures                                                                  15


                                       2

<PAGE>


                                  HOWTEK, INC.

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                        June 30, 1999    December 31, 1998
                                                        -------------    -----------------
                                                         (unaudited)
<S>                                                      <C>               <C>
Assets
Current assets:
  Cash and equivalents                                   $    260,944      $    182,724
  Accounts receivable:
    Trade-net of allowance for doubtful accounts
     of $91,000 in 1999 and $118,000 in 1998                1,759,799         1,570,081
  Inventory                                                 2,850,916         2,927,082
  Prepaid and other                                           114,881           118,689
                                                         ------------      ------------
      Total current assets                                  4,986,540         4,798,576
                                                         ------------      ------------
Property and equipment:
  Equipment                                                 2,601,603         2,534,635
  Leasehold improvements                                       31,565            27,765
  Motor vehicles                                                6,050             6,050
                                                         ------------      ------------
                                                            2,639,218         2,568,450
  Less accumulated depreciation and amortization            1,921,303         1,717,445
                                                         ------------      ------------
      Net property and equipment                              717,915           851,005
                                                         ------------      ------------
Other assets:
  Software development costs, net                             540,187           626,577
  Debt issuance costs, net                                     47,503            57,682
  Patents, net                                                 15,174            17,581
                                                         ------------      ------------
      Total other assets                                      602,864           701,840
                                                         ------------      ------------
      Total assets                                       $  6,307,319      $  6,351,421
                                                         ============      ============

         Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                       $  1,454,622      $  1,086,775
  Accrued interest                                             91,462            37,641
  Accrued vacation pay                                         91,657            84,875
  Accrued expenses                                            157,966           224,704
  Loan payable to related parties                             700,000           765,000
                                                         ------------      ------------
      Total current liabilities                             2,495,707         2,198,995

Loan payable to related parties                               280,000              --
Loan payable to unrelated parties                             660,000              --
Convertible subordinated debentures                           117,000         1,881,000
                                                         ------------      ------------
      Total liabilities                                     3,552,707         4,079,995
                                                         ------------      ------------
Commitments and contingencies

Stockholders' equity:
  Common stock, $ .01 par value:  authorized
    25,000,000 shares; issued 12,987,172 in 1999
    and 11,128,082 shares in 1998; outstanding
    12,919,296 in 1999 and 11,060,206 shares in 1998          129,871           111,281
  Additional paid-in capital                               51,444,551        47,938,799
  Accumulated deficit                                     (47,869,546)      (44,828,390)
  Treasury stock at cost (67,876 shares)                     (950,264)         (950,264)
                                                         ------------      ------------
      Stockholders' equity                                  2,754,612         2,271,426
                                                         ------------      ------------
      Total liabilities and stockholders' equity         $  6,307,319      $  6,351,421
                                                         ============      ============
</TABLE>

See accompanying notes to financial statements.


                                       3

<PAGE>


                                  HOWTEK, INC.

                            Statements of Operations

<TABLE>
<CAPTION>
                                                  Three Months                     Six Months
                                                    June 30,                        June 30,
                                         ----------------------------    ----------------------------
                                             1999            1998           1999             1998
                                         ------------    ------------    ------------    ------------
                                                 (unaudited)                      (unaudited)
<S>                                      <C>             <C>             <C>             <C>
Sales                                    $  1,902,608    $  1,171,625    $  3,463,741    $  2,125,882
Cost of Sales                               1,416,882       1,017,521       2,721,239       1,893,832
                                         ------------    ------------    ------------    ------------
Gross Margin                                  485,726         154,104         742,502         232,050
                                         ------------    ------------    ------------    ------------
Operating expenses:
  Engineering and product development         177,166         254,186         427,599         509,365
  General and administrative                  212,238         327,198         766,544         689,618
  Marketing and sales                         406,411         336,963         861,302         801,156
                                         ------------    ------------    ------------    ------------
      Total operating expenses                795,815         918,347       2,055,445       2,000,139

                                         ------------    ------------    ------------    ------------
Loss from operations                         (310,089)       (764,243)     (1,312,943)     (1,768,089)

Interest expense - net                         33,619          54,673       1,728,213         104,009
                                         ------------    ------------    ------------    ------------

Net loss                                 $   (343,708)   $   (818,916)   $ (3,041,156)   $ (1,872,098)
                                         ============    ============    ============    ============

Net loss per share
     Basic and diluted                   $      (0.03)   $      (0.08)   $      (0.25)   $      (0.20)

Weighted average number of shares used
  in computing earnings per share
     Basic and diluted                     12,826,296       9,961,305      12,245,069       9,513,245
</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                        95,090            951          88,233                                          89,184

Net loss                                       --             --              --         (3,041,156)         --        (3,041,156)
                                         ----------       --------     -----------     ------------     ---------     -----------

Balance at June 30, 1999                 12,987,172       $129,871     $51,444,551     $(47,869,546)    $(950,264)    $ 2,754,612
                                         ==========       ========     ===========     ============     =========     ===========
</TABLE>

See accompanying notes to financial statements.


                                       5

<PAGE>


                                  HOWTEK, INC.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                       Six Months      Six Months
                                                     June 30, 1999    June 30, 1998
                                                     -------------    -------------
                                                      (unaudited)      (unaudited)
<S>                                                   <C>              <C>
Cash flows from operating activities:
  Net loss                                            $(3,041,156)     $(1,872,098)
  Adjustments to reconcile net loss
  to net cash provided by
  operating activities:
  Depreciation                                            203,858          214,711
  Amortization                                            150,587          110,582
  Interest relative to conversion of Convertible        1,671,158             --
    Subordinated Debentures
 (Increase) decrease:
    Accounts receivable                                  (189,718)         514,581
    Inventory                                              76,166          252,588
    Other current assets                                    3,808          (60,283)
  Increase (decrease):
    Accounts payable                                      367,847         (251,874)
    Accrued expenses                                       (6,135)         (35,269)
                                                      -----------      -----------
      Total adjustments                                 2,277,571          745,036
                                                      -----------      -----------

      Net cash used for  operating activities            (763,585)      (1,127,062)
                                                      -----------      -----------

Cash flows from investing activities:
  Patents, software development and other                 (51,611)         (86,033)
  Additions to property and equipment                     (70,768)         (96,929)
                                                      -----------      -----------
      Net cash used for investing activities             (122,379)        (182,962)
                                                      -----------      -----------

Cash flows from financing activities:
  Issuance of common stock for cash                        89,184        1,709,466
  Proceeds of loan from related parties                   215,000             --
                                                                       -----------
  Proceeds of loan from unrelated parties                 660,000             --
                                                      -----------      -----------
      Net cash provided by financing activities           964,184        1,709,466
                                                      -----------      -----------

    Increase (decrease) in cash and equivalents            78,220          399,442
    Cash and equivalents, beginning of period             182,724          235,326
                                                      -----------      -----------
    Cash and equivalents, end of period               $   260,944      $   634,768
                                                      ===========      ===========

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

                                  June 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 June 30,  1999,  the  Company  had  $3,000,000  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 June 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  HiResolve(TM)  line of
exceptionally  high-resolution  drum scanners during the fourth quarter of 1998.
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 the first sales of Scanview products occurring at the end of March
1999. In February  1999,  Howtek  introduced the Digital  PhotoLab(TM)  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 for
the  Company's  medical  products,  and is  expected  to be  completed  for  the
Company's  graphic arts  products,  with limited  exceptions,  by the end of the
third quarter of 1999. 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 June 30, 1999 compared to Quarter Ended June 30, 1998

Sales.  Sales for the three  months  ended  June 30,  1999 were  $1,902,608,  an
increase of $730,983 or 62% from the  comparable  period in 1998.  Sales for the
six months ended June 30, 1999 were $3,463,741, an increase of $1,337,859 or 63%
from the comparable period in 1998.

The Company continues to emphasize its medical business opportunities.  Sales of
the  Company's  medical  imaging  products  increased  65% from  $253,870 in the
quarter ended June 30, 1998 to $419,469 over the comparable  period in 1999, and
increased  66% from  $429,174  in the six month  period  ended June 30,  1998 to
$714,123 for the six month period  ended June 30, 1999.  Sales of the  Company's
prepress and graphic arts products  increased  52%, from $712,514 in the quarter
ended  June 30,  1998 to  $1,081,043  over the  comparable  period in 1999,  and
increased  63% from  $1,211,270  in the six month  period ended June 30, 1998 to
$1,979,322  for the six month period ended June 30,  1999.  Increased  sales are
attributed by management to the  introduction  of its new HiResolve drum scanner
product during the fourth quarter of 1998, the  introduction  of its new Digital
PhotoLab  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.

During the second quarter of 1999 the Company revised its domestic  graphic arts
sales   program,   with  an  increased   emphasis  on  direct  mail,   telephone
identification,  screening and qualification of prospects, and a balance between
dealer driven and direct sales  efforts.  Contribution  to overall sales through
this direct sales channel is expected to increase in future periods.

Gross Margins.  Gross margins for the three and six month periods ended June 30,
1999 increased to 26% and 21%, respectively,  from 13% and 11%, 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.


                                       9

<PAGE>


Engineering and Product  Development.  Engineering and product development costs
for the three month period ended June 30, 1999  decreased  30% from  $254,186 in
1998 to $177,166 in 1999.  Engineering and product development costs for the six
month period ended June 30, 1999 decreased 16% from $509,365 in 1998 to $427,599
in 1999. The decrease results  primarily from reductions in personnel  expenses.
The Company  expects to continue  reducing  costs and overhead  associated  with
engineering and product development, in absolute terms 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 June 30, 1999 decreased 35% from $327,198 in 1998 to $212,238
in 1999. General and administrative  expenses in the six month period ended June
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 six month  period  ended  June 30,  1999,  decreased  19% from
$689,618  in 1998 to  $558,740  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 six month period
ended June 30, 1999 were  $766,544  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 June 30, 1999  increased  21% from  $336,963 in 1998 to $406,411 in
1999.  Marketing  and sales  expense in the six month period ended June 30, 1999
increased  slightly  from  $801,156 in 1998 to $861,302  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 $1,728,213 for the six month period
ended June 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 $343,708 or
$0.03 per share  for the  quarter  ended  June 30,  1999 on sales of  $1,902,608
compared  to a net loss of  $818,916  or $0.08 per share for the same  period in
1998 on sales of $1,171,625.

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 $3,000,000 was available at June 30, 1999.

At June  30,  1999  the  Company  had  current  assets  of  $4,986,540,  current
liabilities  of  $2,495,707  and  working  capital of  $2,490,833.  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 June
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 June 30, 1999 there was $117,000 in principal amount
of Debentures outstanding.

During the first six 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)  $250,000  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 rated 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 entitles the payees to convert  outstanding  principal
due into shares of the Company's common stock at $1.00 per share.

Subsequent Events

In July 1999, the Company borrowed an additional  $60,000 from Mr. Robert Howard
and issued an equal principal amount of Promissory Notes.

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 target date to correct
and revise its system  problems is September 30, 1999.  The Company is currently
assessing alternative manufacturing and financial control systems. The Company's
products  are not date  aware  and do not  present a Year  2000  problem  to its
customers.

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


                                       12

<PAGE>


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.  The Company believes that, with
the completion of its review program as scheduled and the  implementation of new
business  systems,  the  possibility  of  significant  interruptions  of  normal
operations should be reduced.

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  approximately  $40,000.  The Company expensed  approximately  $5,000
related to the cost of upgrading non-compliant hardware. 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.


Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Not applicable.


PART II OTHER INFORMATION

Item 2. Changes in Securities

     During the first six months of 1999, the Company  entered into an agreement
to borrow  $940,000  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 5. Other Information

     The bid price for the Company's  common stock has recently fallen below the
$1 bid level required for continued trading of the Company's common stock on the
Nasdaq  Small Cap  Market.  The  Company  has been  notified  by Nasdaq that its
listing  will be reviewed  by Nasdaq in  October,  1999,  to  determine  whether
required bid levels have been achieved.  If the bid price  continues to be below
the level  required by Nasdaq the Company may seek an  extension of time to take
corrective  actions,  which may consist of or include  effecting a reverse stock
split of its common stock.  The Company cannot assure that its common stock will
continue to be traded on the Nasdaq Market.


                                       13

<PAGE>


Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

     10.1 Form of Convertible Promissory Note between investors and the Company.


     27   Financial Data Schedule


     (b)  No reports on Form 8-K were filed  during the  quarter  for which this
          report is filed.


                                       14

<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:  August 13, 1999                  By:  /s/ W. Scott Parr
                                             -----------------------------------
                                             W. Scott Parr
                                             President, Chief Executive Officer,
                                             Director


Date:  August 13, 1999                  By:  /s/ Annette L. Heroux
                                             -----------------------------------
                                             Annette L. Heroux
                                             Vice President Finance,
                                             Chief Financial Officer


                                       15



                                  EXHIBIT 10.1

     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. The
interest rate hereunder shall be a fixed rate equal to seven percent (7.0%) per
annum.


                                       16

<PAGE>


     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
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


                                       17

<PAGE>


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. All
rights and remedies of the Payee, whether granted herein or otherwise, shall be
cumulative and may be exercised singularly or concurrently.


                                       18

<PAGE>


     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


                                       19


<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
     This schedule contains summary financial information extracted from Form
     10Q at June 30, 1999 and is qualified in its entirety by reference to such
     financial statements.
</LEGEND>

<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                              DEC-31-1999
<PERIOD-START>                                 JAN-01-1999
<PERIOD-END>                                   JUN-30-1999
<CASH>                                            260,944
<SECURITIES>                                            0
<RECEIVABLES>                                   1,850,799
<ALLOWANCES>                                       91,000
<INVENTORY>                                     2,850,916
<CURRENT-ASSETS>                                4,986,540
<PP&E>                                          2,639,218
<DEPRECIATION>                                  1,921,303
<TOTAL-ASSETS>                                  6,307,319
<CURRENT-LIABILITIES>                           2,495,707
<BONDS>                                           117,000
                                   0
                                             0
<COMMON>                                          129,871
<OTHER-SE>                                      2,624,741
<TOTAL-LIABILITY-AND-EQUITY>                    6,307,319
<SALES>                                         3,463,741
<TOTAL-REVENUES>                                3,463,741
<CGS>                                           2,721,239
<TOTAL-COSTS>                                   2,721,239
<OTHER-EXPENSES>                                  427,599
<LOSS-PROVISION>                                        0
<INTEREST-EXPENSE>                              1,728,213
<INCOME-PRETAX>                                (3,041,156)
<INCOME-TAX>                                            0
<INCOME-CONTINUING>                            (3,041,156)
<DISCONTINUED>                                          0
<EXTRAORDINARY>                                         0
<CHANGES>                                               0
<NET-INCOME>                                   (3,041,156)
<EPS-BASIC>                                         (0.25)
<EPS-DILUTED>                                       (0.25)



</TABLE>


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