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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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