<PAGE> 1
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 March 31, 1996
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
of incorporation or organization) Identification No.)
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 May 7, 1996 there were 7,965,218 shares
outstanding of the issuer's Common Stock, $.01 par value.
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HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of March 31, 1996
(unaudited) and December 31, 1995 3
Statements of Operations for the three
month periods ended March 31, 1996 and
1995 (unaudited) 4
Statement of Changes in Stockholders' Equity
for the three month period ended March 31, 1996
(unaudited) 5
Statements of Cash Flows for the three month periods
ended March 31, 1996 and 1995 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 -9
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE> 3
HOWTEK, INC
<TABLE>
BALANCE SHEETS
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 153,703 $ 574,647
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $307,920 in 1996 and $290,710 in 1995 4,907,043 6,474,144
Inventory 7,276,769 6,840,823
Prepaid and other 296,070 247,590
------------ ------------
Total current assets 12,633,585 14,137,204
------------ ------------
Property and equipment:
Equipment 10,428,783 10,281,296
Leasehold improvements 371,535 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ ------------
10,991,932 10,844,445
Less accumulated depreciation and amortization 8,194,173 7,815,236
------------ ------------
Net property and equipment 2,797,759 3,029,209
------------ ------------
Other assets:
Software development costs, net 1,092,044 1,191,265
Debt issuance costs, net 113,666 118,756
Patents, net 17,159 18,806
------------ ------------
Total other assets 1,222,869 1,328,827
------------ ------------
Total assets $ 16,654,213 $ 18,495,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,941,977 $ 3,712,416
Accrued expenses 712,771 490,752
------------ ------------
Total current liabilities 4,654,748 4,203,168
Loan payable to principal stockholder 3,578,604 3,578,604
Convertible subordinated debentures 2,181,000 2,181,000
------------ ------------
Total liabilities 10,414,352 9,962,772
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 8,033,094 in 1996
and 8,022,594 shares in 1995; outstanding
7,965,218 in 1996 and 7,954,718 shares in 1995 80,331 80,225
Additional paid-in capital 44,014,963 43,966,282
Accumulated deficit (36,905,169) (34,563,775)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 6,239,861 8,532,468
------------ ------------
Total liabilities and stockholders' equity $ 16,654,213 $ 18,495,240
============ ============
</TABLE>
See accompanying notes to financial statements
3
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HOWTEK, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS THREE MONTHS
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Sales $ 2,023,157 $ 5,851,750
Cost of Sales 2,295,836 3,623,628
----------- -----------
Gross Margin (272,679) 2,228,122
----------- -----------
Operating expenses:
Engineering and product development 545,289 775,744
General and administrative 623,721 507,805
Marketing and sales 759,596 696,582
----------- -----------
Total operating expenses 1,928,606 1,980,131
----------- -----------
Income (loss) from operations (2,201,285) 247,991
----------- -----------
Interest expense - net 140,109 82,058
----------- -----------
Income (loss) before tax provision (2,341,394) 165,933
Provision for income taxes -- 13,275
----------- -----------
Net income (loss) $(2,341,394) $ 152,658
=========== ===========
Net income (loss) per share $ (0.29) $ 0.02
Weighted average number of shares used in
computing earnings per share 7,963,199 7,973,393
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
HOWTEK, INC.
<TABLE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<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, 1995 8,022,594 $80,225 $43,966,282 $(34,563,775) $(950,264) $ 8,532,468
January through March, 1996
Issuance of common stock
pursuant to incentive stock
option plan. 10,500 106 48,681 48,787
Net loss - - - (2,341,394) - (2,341,394)
--------- ------- ----------- ------------ --------- -----------
Balance at March 31, 1996 8,033,094 $80,331 $44,014,963 $(36,905,169) $(950,264) $ 6,239,861
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
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HOWTEK, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS THREE MONTHS
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,341,394) $ 152,658
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 378,937 323,512
Amortization 155,609 122,208
(Increase) decrease:
Accounts receivable 1,567,101 535,526
Inventory (435,946) (957,365)
Other current assets (48,480) (244,430)
Increase (decrease):
Accounts payable 229,561 (7,605)
Accrued expenses 222,019 (97,944)
----------- -----------
Total adjustments 2,068,801 (326,098)
----------- -----------
Net cash provided by (used for)
operating activities (272,593) (173,440)
----------- -----------
Cash flows from investing activities:
Patents, software development and other (49,651) (140,061)
Additions to property and equipment (147,487) (452,194)
----------- -----------
Net cash used for investing activities (197,138) (592,255)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 48,787 30,200
Proceed of loan payable to principal stockholder -- 578,604
----------- -----------
Net cash provided by financing activities 48,787 608,804
----------- -----------
Increase (decrease) in cash and equivalents (420,944) (156,891)
Cash and equivalents, beginning of period 574,647 649,455
----------- -----------
Cash and equivalents, end of period $ 153,703 $ 492,564
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 20,892
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
HOWTEK, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(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 most recent Annual Report on Form 10-K for the year ended December
31, 1995 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) SUBSEQUENT EVENTS
On April 4, 1996, the Company borrowed $1,000,000 from Dr.
Lawrence Howard, son of the Company's Chairman, Robert Howard, pursuant
to a Convertible Promissory Note (the "Note"). The Note matures on
January 4, 1998 or, at the option of the holder upon the earlier closing
of a public offering of the Company's securities yielding at least $2
million in net proceeds. Under the terms of the Note the Company agreed
to pay interest monthly at the rate of Citibank's, prime rate plus two
percent. The Note is secured by substantially all of the assets of the
Company and allows the holder the right to convert all or a portion of
the principal amount plus accrued interest into the Company's Common
Stock at a conversion price of $3.00 per share. The shares issuable upon
conversion are subject to certain registration rights.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the first quarter of 1996 which ended March 31, 1996 were
$2,023,157, a decrease of 65% from 1995's first quarter sales of $5,851,750. The
Company attributed the decrease in sales during the three month period ended
March 31, 1996, to the continuing weakness in the graphic arts market and lower
than expected sales of its medical imaging product, as a result of delayed
governmental clearance to market the product, which was received at the end of
January, 1996. The Company anticipates that sales will improve over the
balance of the year.
The Company recorded a net loss of $2,341,394 for the three month period
ended March 31, 1996, as compared to a profit of $152,658 over the comparable
period in 1995.
The Company's gross margin decreased from 38% in the first quarter of
1995 to a loss in the comparable period in 1996. The decrease in the first
quarter of 1996, resulted primarily from lower overall sales and an increase in
the percentage of OEM sales which are generally made at a higher discount than
sales to other customers.
Engineering and product development costs in the first three months of
1996 were $545,289 which represents a $230,455 or 30%, decrease over the
comparable period in 1995. The decrease results mostly from a reduction in
staffing levels.
General and administrative expenses in the three month period ended March
31, 1996 were $115,916 or 23% higher than the comparable period in 1995. This
increase is attributable to increased legal expenses, primarily incurred in
prosecution of the Company's ongoing lawsuit against a former manufacturer of
its products, and changes in estimates in providing additional reserves for bad
debts.
Marketing and sales expenses in the first three months of 1996 increased
$63,014 or 9% over the comparable period in 1995. The increase results from
increases in promotional efforts for the medical imaging market. The level of
expenditures is expected to increase during the remainder of 1996.
Net interest expense for the first quarter of 1996 was $140,109 compared
to $82,058 for the first quarter of 1995. The increase results from the increase
in borrowings under the Revolving Loan Agreement with the Company's Chairman and
principal stockholder.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had current assets of $12,633,585, current
liabilities of $4,654,748 and working capital of $7,978,837. The ratio of
current assets to current liabilities was 2.7:1.
Accounts receivable decreased by $1,567,101 during the first quarter of
1996. This decrease is due primarily to lower revenues in the first quarter of
1996 as compared to the fourth quarter of 1995.
Inventory increased by $435,946 during the first quarter of 1996 as a
result of lower than anticipated revenues in the first quarter of 1996.
Pursuant to the exercise of employee stock options, the Company received
$48,787 during the first quarter of 1996 and $30,200 during the corresponding
period in 1995. The exercise of stock options depends upon the market price of
the Company's stock and the option exercise price for individual employees and
its effect on future liquidity cannot be anticipated.
Capital spending for equipment for the first three months of 1996
amounted to $147,487 compared to $452,194 during the comparable period in 1995.
The decrease is attributable to the reduction in spending related to equipment
used in the development of new products. The Company anticipates continuing the
same level of capital spending for the balance of the year.
On April 4, 1996, the Company borrowed $1,000,000 from Dr. Lawrence
Howard, son of the Company's Chairman, Robert Howard, pursuant to a Convertible
Promissory Note (the "Note"). The Note matures on January 4, 1998 or, at the
option of the holder upon the earlier closing of a public offering of the
Company's securities yielding at least $2 million in net proceeds. Under the
terms of the Note the Company agreed to pay interest monthly at the rate of
Citibank's, prime rate plus two percent. The Note is secured by substantially
all of the assets of the Company and allows the holder the right to convert all
or a portion of the principal amount plus accrued interest into the Company's
Common Stock at a conversion price of $3.00 per share. The shares issuable upon
conversion are subject to certain registration rights.
The Company believes it can adequately fund its working capital and
capital equipment requirements based upon its anticipated level of sales for
1996 and the line of credit available under the Revolving Loan Agreement with
its Chairman of which $4,421,396 was available as of March 31, 1996.
9
<PAGE> 10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 (i) Convertible Promissory Note between the Company and Dr. Lawrence
Howard.
10 (ii) Security Agreement between the Company and Dr. Lawrence Howard.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
10
<PAGE> 11
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: By: /s/ David R. Bothwell
-------------------- ---------------------
David R. Bothwell
President, Chief Executive Officer
Date: By: /s/ Robert J. Lungo
-------------------- ---------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
11
<PAGE> 1
NEITHER THIS NOTE NOR ANY SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
NONE OF SUCH SECURITIES MAY BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO SUCH SECURITIES UNDER SUCH ACT UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OF SUCH ACT.
HOWTEK, INC.
CONVERTIBLE PROMISSORY NOTE
$1,000,000 Hudson, New Hampshire
April 4, 1996
Howtek, Inc., a Delaware corporation (the "Company"), the principal
office of which is located at 21 Park Avenue, Hudson, New Hampshire, for value
received, hereby promises to pay to the order of Dr. Lawrence Howard the
principal sum of One Million Dollars ($l,000,000), or such lesser amount as then
equals the outstanding principal amount hereof, together with any unpaid accrued
interest hereon, as set forth below, on January 4, 1998. Payment of all amounts
due hereunder shall be made in lawful currency of the United States of America,
at Dr. Lawrence Howard's address at 660 Madison Avenue, New York, New York
10022, or at such other address as the Holder specifies.
The following is a statement of certain rights of the Holder of this
Note, to which the Holder hereof, by the acceptance of this Note, agrees:
1. Definitions. As used in this Note, the following terms,
unless the context otherwise requires, have the following meanings:
(i) "Company" includes the Company and any other
corporation or entity that succeeds to or assumes the obligations of the Company
under this Note.
(ii) "Holder" means any person who shall at the time be
the holder of this Note.
2. Interest.
2.1 Accrual. This Note shall bear, and the Company shall
pay, interest on the principal amount hereof outstanding from time to time at a
variable rate per annum equal to (a) the rate publicly announced from time to
time by Citibank, N.A. at its principal office in New York, New York, as its
"base" rate (the "Base Rate"), plus two percent (2%), or (b) if less, the
maximum rate permitted by law. Each change in the interest rate hereunder shall
take effect simultaneously with the corresponding change in the Base Rate.
<PAGE> 2
2.2 Payment. Accrued and unpaid interest shall be due and
payable (a) monthly on the third day of the month, (b) at any time that the
outstanding principal hereof is due and payable, (c) upon any conversion of the
outstanding principal hereof pursuant to Section 5 (to the extent such interest
is not converted pursuant to such Section 5) and (d) to the extent provided in
Section 3 hereof, upon any prepayment pursuant to said Section 3.
2.3 Security. The principal amount of and all interest
accrued under this Note shall be secured pursuant to a security agreement (the
"Security Agreement") dated the date hereof between the Company and the Holder.
3. Prepayment. Upon twenty (20) days' prior written notice to
the Holder, the Company may at any time prepay, in whole or in part (but, if in
part only, then not less than $25,000 in principal amount or an integral
multiple thereof), the principal amount of this Note, without penalty or
premium. Each notice of prepayment under this Section 3 shall specify the date
fixed for such prepayment, the principal amount hereof to be prepaid on such
date, the amount of unpaid interest that will have accrued to such date on such
principal amount and the then effective Conversion Price (as defined in Section
5) and shall state that the Holder may, in lieu of accepting such payment,
convert all or any part of such principal amount and accrued interest pursuant
to Section 5 hereof at any time prior to the date so fixed for such prepayment.
On the date so fixed for such prepayment, the principal amount specified in such
notice of prepayment, together with all unpaid interest on such principal amount
accrued to such date, shall become due and payable.
4. Events of Default. If any Event of Default, as defined in
Section 4.1, occurs and is continuing, the entire principal amount of and unpaid
accrued interest on this Note may be declared immediately due and payable.
4.1 The occurrence of any one of the following shall
constitute an Event of Default under this Note:
(a) Failure to pay any amount of principal or interest
under this Note when due.
(b) The Company makes an assignment for the benefit of
creditors, becomes insolvent, dissolves, or commences or becomes subject to any
proceeding under the United States Bankruptcy Code or any other insolvency,
receivership, reorganization, or debtors relief law.
(c) The Company shall enter into any merger or
consolidation, or liquidate, wind-up or dissolve, or convey, sell, lease or
otherwise transfer all or substantially all of its assets.
(d) The Company shall breach any provision of this Note
or of the Security Agreement.
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<PAGE> 3
4.2 The Company shall pay all costs and expenses,
including reasonable attorneys' fees, paid or incurred by Holder to enforce this
Note whether upon maturity or acceleration.
5. Conversion.
5.1 Voluntary Conversion. The Holder of this Note has the
right, at the Holder's option, at any time prior to payment in full of the
principal balance of this Note, to convert this Note, in accordance with the
provisions of Section 5.3 hereof, in whole or in part, into fully paid and
non-assessable shares of Common Stock, $0.01 per share par value, of the Company
(the "Common Stock"). The number of shares of Common Stock into which this Note
may be converted ("Conversion Shares") shall be determined by dividing the
aggregate principal amount together with all accrued interest to the date of
conversion by the Conversion Price (as defined below) in effect at the time of
such conversion. The price at which shares of Common Stock shall be delivered
upon conversion shall be $3.00 per share of Common Stock, which price represents
a 20% discount off the closing bid price of the Company's Common Stock as quoted
on the NASDAQ National Market as of the close of business on the date next
preceding the date of this Note.
5.2 Optional Conversion Upon Consummation of Offering. At
the option of the Holder, (a) the entire principal amount of this Note and, at
the option of the Holder, all interest accrued under this Note shall be
converted into shares of Common Stock at the Conversion Price at the time in
effect immediately prior to the closing of a firmly underwritten public offering
(an "Offering") pursuant to a registration statement filed by the Company under
the Securities Act of 1933, as amended (the "Act"), with aggregate net proceeds
to the Company of at least $2,000,000 and at a price of not less than $5.00 per
share of Common Stock (as presently constituted, subject to proportionate
adjustment in the event of any stock split, stock dividend, reverse stock split,
combination, consolidation, reclassification or similar event), or (b) the
entire principal amount of this Note and all interest accrued under this Note
shall be paid to the Holder upon the closing of an Offering, or (c) the Note
shall remain outstanding after the closing of an Offering.
5.3 Conversion Procedure.
5.3.1 Notice of Conversion Pursuant to Section 5.1.
To exercise its conversion right pursuant to Section 5.1, the Holder shall
surrender this Note to the office of the Company and shall give written notice
by mail, postage prepaid, to the Company at its principal corporate office, of
the election to convert the same pursuant to Section 5.1, which notice shall
specify the principal amount of the Note to be converted, the amount of accrued
interest to be converted, and the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Company shall, as
soon as practicable thereafter, issue and deliver at such office to the Holder
of this Note a certificate or certificates for the number of shares of Common
Stock issuable upon such conversion. Such conversion shall be deemed to have
been made
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<PAGE> 4
immediately prior to the close of business on the date of such surrender of this
Note or on such subsequent date as the holder specifies in the notice of
conversion as the date upon which such conversion is to be effected, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
5.3.2 Notice of Conversion Pursuant to Section 5.2.
If an Offering described in Section 5.2 is to be consummated, not less than ten
days' prior written notice shall be delivered to the Holder of this Note at the
address last shown on the records of the Company for the Holder or given by the
Holder to the Company for the purpose of notice or, if no such address appears
or is given, at the place where the principal executive office of the Company is
located, notifying the Holder of the Offering to be consummated and the Holder's
options pursuant to Section 5.2, specifying the Conversion Price, the date on
which such conversion would occur if the Holder chooses to convert and
instructing such Holder as to where to surrender this Note to the Company, in
the manner and at the place designated if the Holder chooses to convert pursuant
to Section 5.2(a) or (b).
5.4 Delivery of Stock Certificates. As promptly as
practicable after the conversion of this Note, the Company at its expense will
issue and deliver to the Holder of this Note a certificate or certificates for
the number of full shares of Common Stock issuable upon such conversion.
5.5 Mechanics and Effect of Conversion. No fractional
shares of Common Stock shall be issued upon conversion of this Note. In lieu of
the Company issuing any fractional shares to the Holder upon the conversion of
this Note, the Company shall pay to the holder, the amount of outstanding
principal that is not so converted such payment to be in the form as provided
below. Upon the conversion of this Note pursuant to Section 5.1 above, the
Holder shall surrender this Note, duly endorsed, at the principal office of the
Company. At its expense, the Company shall, as soon as practicable thereafter,
issue and deliver to such Holder at such principal office a certificate or
certificates for the number of shares of such Common Stock which the Holder
shall be entitled to upon such conversion (bearing such legends as are required
by applicable state and federal securities laws in the opinion of counsel to the
Company), together with any other securities and property to which the Holder is
entitled upon such conversion under the terms of this Note, including a check
payable to the Holder for any cash amounts payable as described above. In the
event of any conversion of this Note pursuant to Section 5.2 above, such
conversion shall be deemed to have been made immediately prior to the closing of
the public offering referred to therein and on such date the Holder of this Note
shall be treated for all purposes as the record Holder of the shares of Common
Stock issuable upon such conversion. The Company shall pay the Holder, upon the
date of such conversion, any interest accrued and unpaid or unconverted to and
including the date of such conversion.
6. Conversion Price Adjustments.
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<PAGE> 5
6.1 Adjustments for Stock Splits and Subdivisions. If the
Company at any time or from time to time after the date hereof fixes a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to receive
a dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of this Note shall be appropriately decreased so that the
number of shares of Common Stock issuable upon conversion of this Note shall be
increased in proportion to such increase of outstanding shares.
6.2 Adjustments for Other Distributions. If the Company
declares a distribution payable in securities of other persons, evidences of
indebtedness issued by the Company or other persons, assets (excluding cash
dividends payable out of earned surplus at the same rate as that of the last
such cash dividend theretofore paid) or options or rights not referred to in
subsection 6.1, then, in each such case the Holder hereof shall be entitled,
upon conversion of all or part of this Note, to a proportionate share of any
such distribution as though such Holder was the holder of the number of shares
of Common Stock of the Company into which this Note is convertible as of the
record date fixed for the determination of the holders of Common Stock of the
Company entitled to receive such distribution.
6.3 Adjustments for Reverse Stock Splits. If the number
of shares of Common Stock outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the Conversion Price for this
Note shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion hereof shall be decreased in proportion to such
decrease in outstanding shares.
6.4 Notices of Record Date, etc. In the event of:
(a) any taking by the Company of a record of the
holders of any class of securities of the Company for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend payable out of earned surplus at the same rate as that of the last such
cash dividend theretofore paid) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of
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<PAGE> 6
all or substantially all of the assets of the Company to any other person or any
consolidation or merger involving the Company; or
(c) any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
the Company will mail to the holder of this Note at least ten (10) days prior to
the earliest date specified therein, a notice specifying (i) the date on which
any such record is to be taken for the purpose of the dividend, distribution or
right, and the amount and character of such dividend, distribution or right, and
(ii) the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding-up is expected to
become effective and the record date for determining stockholders entitled to
vote thereon.
6.5 Reservation of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of this Note such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of the Note; and if at any
time the number of authorized but unissued shares of Common Stock is not
sufficient to effect the conversion of the entire outstanding principal amount
of this Note, in addition to such other remedies as are available to the Holder
of this Note, the Company shall use its best efforts to take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares Common Stock to such number of shares as shall be
sufficient for such purposes.
7. Registration. The Company shall, promptly after request by
the Holder, file a registration statement on Form S-3 (or, if at the time, the
Company shall not be eligible for use of such form, such other form as the
Company shall then be eligible to use) with the Securities and Exchange
Commission and use its best efforts to cause such registration statement to
become effective as soon as practicable thereafter, covering the shares of
Common Stock issued and/or issuable upon conversion of this Note. The expenses
associated with the registration statement shall be borne by the Company. The
Company agrees to indemnify the Holder against losses arising from any
misstatements contained in the registration statement other than those based on
written information supplied to the Company by the Holder.
8. Waiver. Borrower waives presentment, demand, protest,
notice of protest, notice of dishonor, notice of nonpayment, and any and all
other notices and demands in connection with the delivery, acceptance,
performance, default or enforcement of this Note, except only to the extent any
such notice or demand is expressly required by the terms hereof. No delay by the
Holder hereof in exercising any power or right hereunder shall operate as a
waiver of any power or right.
9. Application of Payments. All payments hereunder shall be
applied first, toward the payment or reimbursement of any fees, costs or
expenses payable or
-6-
<PAGE> 7
reimbursable by the Company hereunder; second, toward the payment of accrued and
unpaid interest hereunder; and third, toward the repayment of outstanding
principal.
10. Assignment. The rights and obligations of the Company and
the Holder of this Note shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties.
11. Amendment. Any provision of this Note may be amended,
waived or modified only by a writing signed by the Company and the Holder.
12. No Stockholder Rights. Nothing contained in this Note
shall be construed as conferring upon the Holder or any other person the right
to vote or to consent or to receive notice as a stockholder in respect of
meetings of stockholders for the election of directors of the Company or any
other matters or any rights whatsoever as a stockholder of the Company; and no
dividends or interest shall be payable or accrued in respect of this Note or the
interest represented hereby or the Conversion Shares obtainable hereunder until,
and only to the extent that, this Note has been converted.
13. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New Hampshire, excluding
that body of law relating to conflict of laws, except that the provisions of
Sections 5 and 6 shall be governed by and construed in accordance with the laws
of the State of Delaware.
14. Headings, References. All headings used herein are used
for convenience only and shall not be used to construe or interpret this Note.
Except where otherwise indicated, all references herein to Sections refer to
Sections hereof.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as
of the date first above written.
HOWTEK, INC.
By: /s/ David Bothwell
-----------------------
David Bothwell
President
-7-
<PAGE> 1
SECURITY AGREEMENT
This Security Agreement is made and entered into as of April
4, 1996 by and between Howtek, Inc., a Delaware corporation (hereinafter
referred to as "Debtor") with offices located at 21 Park Avenue, Hudson, New
Hampshire and Dr. Lawrence Howard (hereinafter referred to as "Secured Party"),
with an address at 660 Madison Avenue, 20th Floor, New York, New York 10021.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Secured Party has loaned Debtor the sum of
$1,000,000;
WHEREAS, to evidence such loan Debtor has delivered to Secured
Party a Promissory Note, of even date herewith (the "Note"), made by Debtor to
Secured Party in the initial principal amount of $1,000,000;
WHEREAS, it is a condition of Secured Party's accepting the
Note that Debtor grants a security interest in certain collateral to Secured
Party.
NOW THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
-----------
All terms used herein and not otherwise defined herein that
are defined under the Uniform Commercial Code of the State of New York (the
"UCC") shall have the meanings ascribed to such terms under the UCC.
2. SECURITY INTERESTS. To secure the payment of all amounts of
principal and interest due under the Note and other obligations of the Debtor to
the Secured Party under the Note (collectively referred to herein as the
"Obligations"), the Debtor hereby assigns, mortgages, pledges, hypothecates,
transfers, sets over and grants to the Secured Party a lien upon and a security
interest in the following properties and assets (whether currently owned or
hereafter acquired by it) (the "Collateral"):
(a) all Accounts including, without limiting the
generality of the foregoing, acceptances, accounts receivable, chattel paper,
checks, drafts, instruments, notes and other forms of obligations for the
payment of money, all sums of money or other proceeds due or becoming due
thereon, all guaranties and securities therefor, all of Debtor's right, title
and interest in and to the goods, if any, which gave rise thereto, including the
right of stoppage in transit, and also all such goods subsequently reacquired by
Debtor whether by way of substitution, replacement, return, repossession or
otherwise;
<PAGE> 2
(b) all Inventory including, without limiting the
generality of the foregoing, all goods, wares, merchandise and other tangible
personal property, including raw materials, work in process, supplies,
components and finished goods whether held for sale, lease or other disposition,
and also including any and all returned or repossessed Inventory and any and all
documents of title, whether negotiable or non-negotiable, representing any of
the foregoing, and as otherwise described in the Uniform Commercial Code;
(c) all Chattel Paper;
(d) all Equipment, including, without limiting the
generality of the foregoing, all motor vehicles;
(e) all Fixtures;
(f) all General Intangibles including, without
limiting the generality of the foregoing, all of Debtor's interest in any
patents issued by the United States or any other jurisdiction whatsoever and all
applications for such patents, Debtor's trade names, trademarks, trade secrets,
customer lists and good will;
(g) all accessions, additions, substitutions or
replacements to or for any of the foregoing;
(h) all products and proceeds of any of the
foregoing; and
(i) all after-acquired property of the same kinds,
types or description as enumerated in clauses (a) - (h).
3. TITLE, LIENS AND ENCUMBRANCES. The Debtor represents and
warrants that other than the grant of a security interest to Robert Howard
pursuant to the Revolving Loan and Security Agreement dated October 26, 1987
between Robert Howard and the Debtor (the "R. Howard Agreement"), Debtor has not
heretofore given or granted any other security interests in or assigned or
otherwise disposed of any of the Collateral or any other of its rights to the
Collateral and the Debtor is, or, in the case of any Collateral to be acquired
after the date hereof, will be, the owner of the Collateral. The Debtor shall
not, without the prior written consent of the Secured Party, grant or permit to
exist any security interest or other lien or encumbrance whatsoever on any of
the Collateral that has a senior position to that of the Secured Party other
than pursuant to the R. Howard Agreement. The Debtor shall promptly notify the
Secured Party of any claim, lien, security interest or other encumbrance made or
asserted against the Collateral and will
-2-
<PAGE> 3
defend the Collateral against any such claim, lien, security interest or other
encumbrance.
4. PERFECTION AND DEFENSE OF SECURITY INTEREST. The Debtor
shall take, at its own expense, all actions which, in the reasonable judgment of
the Secured Party, are necessary or desirable to defend the security interest
hereby created and granted to the Secured Party against any and all claims,
demands or interests of others, whether or not allegedly arising prior to the
security interest created and granted hereby. Without limiting the generality of
the foregoing, the Debtor shall join with the Secured Party in executing such
financing and continuation statements pursuant to the UCC as enacted in any
jurisdiction applicable to the creation and perfection of a security interest in
any of the Collateral or other notices appropriate under applicable law, as the
Secured Party may reasonably request, and shall cause each such financing and
continuation statements or notices to be filed or recorded in such manner and in
such places as may be required by applicable law for the purpose of perfecting
and fully protecting the security interest created and granted hereby. All costs
of filing or recording such financing and continuation statements or notices or
any other instrument, agreement or document executed pursuant to this Security
Agreement shall be paid by the Debtor. The Debtor shall furnish the Secured
Party from time to time (not to exceed once a year) at the Secured Party's
request written statements and schedules further identifying and describing the
Collateral in such detail as the Secured Party shall request and promptly
execute and deliver to the Secured Party such further deeds, mortgages,
assignments, security agreements and other instruments, documents, certificates
and assurances and take such further action as the Secured Party may from time
to time reasonably deem necessary to perfect, protect or enforce its security
interest in the Collateral.
5. AFFIRMATIVE COVENANTS. The Debtor covenants and agrees with
the Secured Party that, from the date hereof until the Note has been paid in
full in accordance with its terms and all other Obligations have been discharged
in accordance with the terms thereof, it will:
5.1 Do or cause to be done all things necessary
to preserve, renew or keep in full force and effect its existence, rights, and
other licenses, leases, permits and franchises and comply with all laws and
regulations applicable to it and conduct and operate its business in
substantially the manner in which it is currently conducted and operated
(subject to changes in the ordinary course of business), and at all times
maintain, preserve and protect all patents, trade names and other property used
or useful in the conduct of its business and keep such property in good repair,
working order and condition, and
-3-
<PAGE> 4
from time to time make, or cause to be made, all needful and proper repairs,
renewals and replacements, betterments and improvements thereto so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times.
5.2 Maintain with financially sound and reputable
insurers such insurance, to such extent and against such risks, as is customary
with companies in the same or similar businesses, and maintain in full force and
effect public liability insurance against claims for personal injury or death or
property damage occurring upon, in, about or in connection with the use of any
properties owned, occupied or controlled by the Debtor in such amounts as the
Debtor shall reasonably deem necessary, and maintain such other insurance as may
be required by law, or as may be reasonably requested in writing by the Secured
Party; all of such insurance shall name the Secured Party as an additional
insured as its interests may appear.
5.3 Pay indebtedness and obligations in
accordance with terms and arrangements customary in the ordinary course of its
business as heretofore conducted, and pay and discharge all taxes, assessments
and governmental charges or levies imposed upon it or in respect of its
property, before the same shall become in default, as well as all lawful claims
for labor, materials and supplies or otherwise which, if unpaid, might become a
lien or charge upon such property or any part thereof; , that
the Debtor shall not be required to pay and discharge or cause to be paid or
discharged any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings,
and the Debtor shall set aside on its books adequate reserves with respect to
any such tax, assessment, charge, levy or claim so contested.
6. RIGHTS AND REMEDIES UPON DEFAULT. For purposes of this
Security Agreement, the term "Event of Default" shall have the meaning set forth
in Section 4 of the Note. If any Event of Default shall have occurred and be
continuing, then, in addition to having the right to exercise all rights and
remedies available to a Secured Party upon default under the UCC or otherwise
with respect to the Collateral, the Secured Party may, in its sole discretion:
(a) institute legal proceedings for the sale,
under the judgment or decree of any court of competent jurisdiction, of any of
the Collateral, or for the appointment of a receiver or receivers pending
foreclosure hereunder or the sale of any of the Collateral;
-4-
<PAGE> 5
(b) institute legal proceedings to foreclose upon
and against the security interest created and granted by this Security
Agreement, to recover judgment for all portions of the Obligations then due and
payable and to collect the same out of any of the Collateral;
(c) without limiting the generality of any of the
foregoing, and notwithstanding the availability of any statutory or judicial
right or remedy and without resort thereto, to the fullest extent permitted by
law, the Secured Party may, upon 20 days' prior written notice to the Debtor, as
to any or all of the Collateral, by any available judicial procedure or without
judicial process, take possession of the Collateral and without liability for
trespass enter any premises where the Collateral may be located for the purposes
of taking possession of or removing the Collateral, and may require the Debtor
to assemble the Collateral and make the Collateral available to the Secured
Party at a place designated by the Secured Party which is reasonably convenient
to both parties; and
(d) without limiting the generality of the
foregoing, the Debtor agrees that the Secured Party shall have the right to
sell, lease or otherwise dispose of all or any part of the Collateral whether in
its then condition or after further preparation or processing, upon such terms
and conditions as may be commercially reasonable and demand, collect, retain and
apply against the Obligations then due and payable all earnings and other sums
due and to become due in respect of the same from any person whatsoever; or sell
or dispose of all or any part of the same, at one or more public or private
sales, at such place or places, at such time or times and upon such terms and
conditions as may be commercially reasonable in the circumstances (subject in
all cases to the last paragraph of this Section 6). For purposes of the
foregoing, the Secured Party will give the Debtor written notice of the time and
place of any public or private sale hereunder no less than 20 days prior to the
date of such public or private sale stating, in the case of a public sale, the
time and place of such sale; except that no such notice shall be required with
respect to any of the Collateral that is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market. The
Debtor hereby agrees that such notice as is provided for herein is reasonable
and hereby waives all other demands, advertisements and notices relating to any
such sale. Upon consummation of any such sale of Collateral, the Secured Party
shall have the right to assign, transfer and deliver to the purchaser or
purchasers thereof the Collateral so sold. Each purchaser at any such sale shall
hold the property sold absolutely, free from any claim or right on the part of
the Debtor, and the Debtor hereby waives (to the extent permitted by law) all
rights of redemption, stay and/or appraisal which it now has or may at any time
in the future have under any
-5-
<PAGE> 6
rule of law or statute now existing or hereafter enacted. Any public sale shall
be held at such time or times within ordinary business hours and at such place
or places as the Secured Party may fix in the notice of such sale. At any public
or private sale, the Collateral, or portion thereof, to be sold may be sold in
one lot as an entirety or in separate parcels, as the Secured Party may (in its
sole discretion) determine (subject to the last paragraph of this Section 6).
The Secured Party may bid for and purchase for itself the whole or any part of
the Collateral (subject to the last paragraph of this Section 6). In any such
sale to the Secured Party, the Secured Party, may for the purpose of making
payment for the Collateral or any part thereof so purchased, use the full amount
of any claim for the Obligations then due and payable to it as a credit against
the purchase price. The Secured Party shall not be obligated to make any sale of
Collateral if it shall determine not to do so, regardless of the fact that
notice of sale of Collateral may have been given. The Secured Party may, without
notice or publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, upon ten days' notice, be made at the time and place to
which the same was adjourned. In the case the sale of all or part of the
Collateral is made on credit or for future delivery, the Collateral so sold may
be retained by the Secured Party until the sale price is paid by the purchaser
or purchasers thereof, but the Secured Party shall not incur any liability in
case any such purchaser or purchasers shall fail to take up and pay for the
Collateral so sold and, in the case of any such failure, such Collateral may be
sold again upon like notice. No sale or other disposition of all or any part of
the Collateral by the Secured Party shall be deemed to relieve the Debtor of its
liability for any deficiency after cash proceeds thereof are applied as provided
in Section 7 hereof. The Debtor shall pay the Secured Party on demand any and
all expenses, including, without limitation, all attorneys' fees and expenses,
which may be incurred by the Secured Party in the pursuit of any remedy granted
by this Section 6 or the prosecution or defense of any action or proceeding
concerning any of the Secured Party's right or interest in or to the Collateral.
The Debtor hereby waives (to the extent permitted by law) any
right it may have under Section 9-505 of the UCC to cause the Secured Party to
dispose of any of the Collateral pursuant to Section 9-504 of the UCC.
7. APPLICATION OF PROCEEDS. The proceeds of any sale,
payment on or collection of the Collateral sold pursuant to
Section 6 hereof shall be applied by the Secured Party as
follows:
-6-
<PAGE> 7
FIRST: to the payment of the costs and expenses
of such sale, payment or collection, including the out-of-pocket expenses of the
Secured Party and the reasonable fees and out-of-pocket expenses of counsel
employed in connection therewith, and the payment of all advances made by the
Secured Party for the account of the Debtor hereunder and the payment of all
costs and expenses incurred by the Secured Party in connection with the
administration and enforcement of this Security Agreement, to the extent that
such advances, costs and expenses shall not have been reimbursed to the Secured
Party;
SECOND: to the payment in full of the amounts of
the principal and interest due under the Note;
THIRD: to the payment in full of all other
Obligations; and
FOURTH: the surplus (if any) then remaining from
such proceeds shall be paid to the Debtor, its permitted successors or assigns,
or as a court of competent jurisdiction may direct.
8. POWER OF ATTORNEY. Effective upon the occurrence of an
Event of Default and so long as the same shall be continuing, the Debtor
authorizes the Secured Party and does hereby appoint the Secured Party, and any
officer or authorized agent of the Secured Party, with full power of
substitution, as its true and lawful attorney-in-fact, with the power to act, in
the name of the Secured Party or in the name of the Debtor, as follows: to
endorse any notes, checks, drafts, money orders or other instruments of payment
(including payments payable under or in respect of any policy of insurance) in
respect of the Collateral that may come into possession of the Secured Party; to
pay or discharge taxes, liens, security interests or other encumbrances at any
time levied or placed on or threatened against the Collateral; to demand,
collect, receipt for, compromise, settle and sue for monies due in respect of
the Collateral; and to take any action which the Secured Party may deem
necessary or advisable to effectuate the purposes of this Security Agreement.
Nothing herein contained shall be construed as requiring or obligating the
Secured Party to make any demand, or make any inquiry as to the nature or
sufficiency of any payment received by it, or to present or file any claim or
notice or to take any action with respect to any Collateral or the monies due or
to become due thereunder or to the property covered thereby or any related
document, and no action taken or omitted to be taken by the Secured Party with
respect to any Collateral shall give rise to any defense, counterclaim or offset
in favor of the Debtor or to any claim or action against the Secured Party.
-7-
<PAGE> 8
9. NO WAIVER. No failure on the part of the Secured Party to
exercise, and no delay in exercising, any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise by the
Secured Party of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies herein provided are cumulative and are not exclusive of any
remedies provided by law or otherwise.
10. TERMINATION. When the Note has been paid in full and all
other Obligations, incurred up through and including the date on which the Note
is paid in full, have been satisfied in full, this Security Agreement shall
terminate and the Secured Party shall forthwith assign, transfer and deliver to
the Debtor, against its receipt, any Collateral it may then have in its
possession as security hereunder
11. BINDING AGREEMENTS; ASSIGNMENT. This Security Agreement,
and the terms, covenants and conditions hereof, shall be binding upon and inure
to the benefit of the parties hereto, and their respective successors and
assigns, except that the Debtor shall not be permitted to (and covenant and
agree not to) assign this Security Agreement or any interest herein or in the
Collateral, or any part thereof, or sell, pledge, encumber, grant any option
with respect to or otherwise dispose of the Collateral in a manner inconsistent
with the terms hereof.
12. EXPENSES. The Debtor shall pay the Secured Party all
reasonable expenses (including expenses for legal services of every kind) of, or
incident to, the enforcement of any provision of this Security Agreement, or
actual or attempted sale of (in good faith), or any exchange, enforcement,
compromise or settlement in respect of any of the Collateral and in defending or
asserting any right or claim of the Secured Party in respect thereof, by
litigation or otherwise.
13. OTHER SECURITY. To the extent that the Obligations are now
or hereafter secured by (a) property other than the Collateral or (b) any
guarantee, then the Secured Party shall have the right in its sole discretion to
pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Party's
rights and remedies hereunder.
14. NOTICES. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given when delivered personally or mailed
first-class, postage prepaid by registered or certified mail, to the following
addresses, or to such other address as the Debtor or the Secured Party, as the
case may be, may furnish to the other in writing:
-8-
<PAGE> 9
If to the Secured Party:
Dr. Lawrence Howard
660 Madison Avenue, 20th Floor
New York, New York 10021
If to the Debtor:
Howtek, Inc.
21 Park Avenue
Hudson, New Hampshire 03051
15. GOVERNING LAW. This Security Agreement shall in
all respects be construed in accordance with and governed by the
laws of the State of New York applicable to contracts made and to
be performed entirely within such State.
16. MODIFICATION. Neither this Security Agreement nor any
provision hereof may be amended, modified, waived, discharged or terminated
orally nor may any of the Collateral be released or the security interest
created hereby extended, except by an instrument in writing duly signed by or on
behalf of the parties hereto.
17. SEVERABILITY. The provisions of this Security Agreement
are severable and if any part or parts of this Security Agreement shall be held
to be unenforceable to its or their full extent, then it is the intention of the
parties hereto that such part or parts be enforced to the full extent permitted
under law, and, in any event, that all other parts of this Security Agreement
shall remain valid and fully enforceable as if the unenforceable part or parts
had never been a part hereof.
18. SECTION HEADINGS. The section headings used herein are for
convenience or reference only and shall not define or limit the provisions of
this Security Agreement.
19. COUNTERPARTS. This Security Agreement may be executed in
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this
-9-
<PAGE> 10
Security Agreement to produce or account for more than one such counterpart.
IN WITNESS WHEREOF, the parties have duly caused this Security
Agreement to be duly executed on the day and year first above written.
HOWTEK, INC.
By: /s/ David Bothwell
---------------------------
Name: David Bothwell
Title: President
/s/ Dr. Lawrence Howard
-------------------------------
DR. LAWRENCE HOWARD
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 153,703
<SECURITIES> 0
<RECEIVABLES> 5,214,963
<ALLOWANCES> 307,920
<INVENTORY> 7,276,769
<CURRENT-ASSETS> 12,633,585
<PP&E> 10,991,932
<DEPRECIATION> 8,194,173
<TOTAL-ASSETS> 16,654,213
<CURRENT-LIABILITIES> 4,654,748
<BONDS> 2,181,000
<COMMON> 80,331
0
0
<OTHER-SE> 6,159,530
<TOTAL-LIABILITY-AND-EQUITY> 16,654,213
<SALES> 2,023,157
<TOTAL-REVENUES> 2,023,157
<CGS> 2,295,836
<TOTAL-COSTS> 2,295,836
<OTHER-EXPENSES> 1,928,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,109
<INCOME-PRETAX> (2,341,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,341,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,341,394)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0<F1>
<FN>
<F1>ADDITIONAL CURRENT ASSET PREPAID AND OTHER $296,070
OTHER ASSETS OF $1,222,869 LOAN PAYABLE TO PRINCIPAL
STOCKHOLDER $3,578,604.
</FN>
</TABLE>
