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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9341
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HOWTEK, INC.
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(Exact name of registrant as specified in its charter)
Delaware 02-0377419
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 882-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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9% Convertible Subordinated Philadelphia Stock Exchange
Debentures due 2001
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant as required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO___.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price for the registrant's Common Stock
on February 4, 1997 was $15,568,545.
As of February 4, 1997 the Registrant had 9,031,854 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III (Items 10, 11, 12, and 13) of this
Annual Report on Form 10-K is hereby incorporated by reference from the
Company's definitive Proxy Statement with respect to its 1997 Annual
Stockholders' meeting to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A.
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PART I
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ITEM 1. BUSINESS.
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GENERAL
Howtek, Inc. (the "Company"), a Delaware corporation located in Hudson, New
Hampshire, was organized in February 1984. The Company designs, engineers,
develops and manufactures digital image scanners, densitometers, film digitizers
and related software for applications in the graphic arts, medical imaging and
life sciences markets. The Company sells its products throughout the world
through various distributors, resellers, systems integrators and OEM's.
GENERAL DEVELOPMENTS OVER THE PAST FIVE YEARS
During the past five years the Company has expanded its product offering
and the markets into which it sells. In the graphic arts market, which includes
printers, publishers, trade shops, service bureaus, desktop publishers and photo
retouchers, the Company sells the Scanmaster(TM) 7500 and 4500 pmt
(photo-multiplier tube) drum scanners, the Scanmaster 2500 ccd (charge coupled
device) array flatbed scanner, and Trident(TM), Aurora(TM) and Polaris(TM)
software applications. None of these products existed five years ago and they
service a broader range of the graphic arts market than the Company's preceding
product line. The Company has also expanded into the medical imaging and life
sciences markets. With the Scanmaster DX film digitizer and Scanmaster Pro-G
densitometer, the Company is able to address the demand for reliable, fast, high
quality and affordable methods of capturing data from X-Rays and DNA sequences.
SCANNER TECHNOLOGY
The Company's scanner products are based on charge coupled device ("ccd")
array technology and photomultiplier tube ("pmt") technology. CCD scanners use a
flatbed design and focus an array of light sensors across the width of the scan
area while pmt scanners focus a single scanning beam on a rotating drum.
CCD ARRAY SCANNERS
The Company's family of desktop ccd array scanners consists of the
Scanmaster 2500, the Scanmaster Pro-G, and the Scanmaster DX.
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The Scanmaster 2500, which is targeted at the graphic arts market, is a
flatbed scanner that utilizes a tri-linear array, the latest in ccd technology.
This array allows for greater accuracy and less noise than previous generation
ccd technology. The tri-linear array makes the 2500 a faster scanner. The
Scanmaster 2500 has the ability to scan both reflective and transmissive
(positive and negative) originals up to 13 x 18 inches. Additional features
include a 3.4 optical density, single pass scanning and a resolution of 600 x
1200 dpi native, with interpolation from 50 to 1800 total range. The Scanmaster
2500 is suitable for scanning artboards, large maps, full size books, sketches,
and negatives or halftones. Shipment of the Scanmaster 2500 commenced in April
of 1995. In September 1995, the Scanmaster 2500 was selected as a winner of
Publish magazine's "Impact" award for innovation in the field of electronic
publishing.
The Scanmaster Pro-G and DX are targeted at the life sciences and medical
imaging markets, respectively. Features of both scanners include: scanning areas
up to 13 x 18 inches, optical density of up to 3.4 and standard SCSI-2
interface. The Pro-G captures images over a resolution range of 64 to 1024 dpi.
The DX can digitize films with a 50 micron spot size. The Pro-G is used for
reproducing DNA/RNA protein samples captured in gels, radiographs and
photographs for applications ranging from forensics to genetic research. The DX
is an X-Ray film digitizer and is also used for digitally reproducing
radiographs. This digitizer is ideal for PACS (Picture Archiving and
Communication System), clinical diagnosis and teleradiology. The DX received FDA
clearance to market at the end of January 1996 and the Company commenced
marketing the DX immediately thereafter.
PMT SCANNERS
PMT scanner products offered by the Company consist of the Scanmaster 7500
Pro large format drum scanner and the Scanmaster 4500. The Scanmaster 7500 Pro
and the 4500 are sold under the Howtek label and are also sold to OEM's which
sell the scanner under their own names.
The Scanmaster 7500 Pro is a large format, high volume, production scanner.
Features include a scanning area of up to 18.5 x 24 inches, and reflective,
transparent, positive and negative image scanning. The 7500 is targeted at large
volume color separators, trade shops and commercial printers. Native resolution
is 5000 dpi and can be interpolated up to 15,000 dpi.
The Scanmaster 4500 features a scanning area of 11.0 x 11.8 inches, the
ability to scan line art, grayscale and color on reflective or transparent
images, in both positives and negatives. Additional features include enlargement
capabilities up to 1800%, auto and manual focus with 12 aperture settings, 12
bits of data per color, 4096 levels of grayscale, drum speed of 300 to 1200
rpm's, SCSI-2 interface, optical density of 0 to 3.8, and it operates on
Macintosh(R), Windows(TM) and UNIX(TM) operating systems.
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Macintosh is a trademark of Apple Computer Inc. Windows is a trademark of
Microsoft Corporation. UNIX is a trademark of AT&T Corporation. Scanmaster is a
trademark of Howtek, Inc.
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SOURCES AND AVAILABILITY OF MATERIALS
The electronics industry is subject to periodic fluctuations in the
production capacity of integrated circuit manufacturers and other key suppliers.
Currently, the Company believes that there are adequate sources and availability
of the components necessary to manufacture its products.
COMPETITION
The Company faces competition in the graphic arts markets for CCD array and
PMT scanner markets as well as in the medical imaging and life sciences markets
for X-Ray digitizers and densitometers. Among its competitors are numerous
foreign and domestic digital scanner companies. Many of these competitors are
well established, have financial, engineering, manufacturing and distribution
resources substantially greater than those of the Company, and have established
reputations for success in the development, sale and service of products that
will be competitive with those of the Company. The principal methods of
competition in these markets are price, performance, proprietary hardware and
software, and service. During 1996 the Company continued to experience
significant competition in these markets.
WORKING CAPITAL REQUIREMENTS
The principal working capital requirements of the Company are those
characteristic of any electronics manufacturing company with regard to the
management of the work in process and the inventory of finished goods arising
from such manufacturing activities. In addition, because a significant portion
of the Company's sales are derived from foreign sales (see Note 7 to Notes to
Financial Statements) the Company must carry the expense of the longer repayment
cycles accorded to foreign distributors and OEM's.
PATENTS
The Company has seventeen United States patents with respect to its
scanner, pre-press and phase change ink jet technology. Eleven of the patents
relate to the Company's ink jet technology which the Company is not currently
using in any of its products, but which it has licensed to a number of other
companies. Six patents relate to the Company's scanner and pre-press technology
which is the basis of its current business. These patents help the Company
maintain a proprietary position in the scanner market, but because of the pace
of innovation in that market it is difficult to determine the overall importance
of these patents to the Company.
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The Company has filed foreign patent applications on some of these patents
and plans to file additional domestic and foreign applications when it believes
such protection will benefit the Company.
There is no assurance that additional patents will be obtained either in
the United States or in foreign countries or that existing or future patents or
copyrights will provide substantial protection or commercial benefit to the
Company.
There is rapid technological development in the Company's markets with
concurrent extensive patent filings and a rapid rate of issuance of new patents.
Although the Company believes that its technologies have been independently
developed and do not infringe the patents of others, certain components of the
Company's products could infringe patents, either existing or which may be
issued in the future, in which event the Company may be required to modify its
designs or obtain a license. No assurance can be given that the Company will be
able to do so in a timely manner or upon acceptable terms and conditions; and
the failure to do either of the foregoing could have a material adverse effect
upon the Company's business.
In addition to protecting its technology and products by seeking patent
protection when deemed appropriate, the Company also relies on trade secrets,
proprietary know-how and continuing technological innovation to develop and
maintain its competitive position. The Company requires all of its employees to
execute confidentiality agreements. Insofar as the Company relies on
confidentiality arrangements, there is no assurance that others will not
independently develop similar technology or that the Company's confidentiality
agreements will not be breached.
All key officers and employees have agreed to assign to the Company certain
technical and other information and patent rights, if any, acquired by them
during their employment with the Company and after any termination of their
employment with the Company (if such information or rights arose out of
information obtained by them during their employment).
ENGINEERING AND PRODUCT AND SOFTWARE DEVELOPMENT
For the years ended December 31, 1996, 1995 and 1994 the Company spent
$2,353,354, $2,788,281, and $2,890,182, respectively, on engineering and product
development. In addition, for the years ended December 31, 1996, 1995 and 1994
the Company spent $350,674, $445,106, and $709,505 respectively, on software
development.
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MANUFACTURING
The Company manufactures all of its hardware products at its Hudson, New
Hampshire facilities and sublicenses some of its software products from third
parties.
EMPLOYEES
On December 31, 1996 the Company had 70 full-time employees.
CUSTOMERS
During 1996, 17% of the Company's sales were made to Techexport, Inc., a
foreign distributor of the Company's scanner product and 29% of sales were made
to Crosfield Electronics Limited, an original equipment manufacturer ("OEM")
which sells the Scanmaster 4500 under its own label. A reduction in purchases by
either company could have a material impact on the Company's sales, however,
although there can be no assurance, the Company believes there are other
channels of distribution and potential OEM customers available.
BACKLOG
The dollar amount of the Company's backlog, or orders believed to be firm,
as of December 31, 1996 was approximately $107,000 as compared to approximately
$740,000 on the corresponding date in 1995.
ENVIRONMENTAL PROTECTION
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had a material
effect upon the capital expenditures, earnings (losses) and competitive position
of the company.
EXPORT SALES
Certain financial information about export sales is set forth in Note 7 to
Notes to Financial Statements accompanying this Report on Form 10-K.
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EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position
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David R. Bothwell 48 President, Chief Executive Officer, Director
M. Russell Leonard 51 Executive Vice President, Chief Operating Officer
Drew E. Woodworth 46 Vice President, Operations
Robert J. Lungo 49 Vice President, Chief Financial Officer
Richard Lehman 58 Vice President , Engineering
David R. Bothwell joined the Company in June 1988, as President and Chief
Operating Officer. He was named a director and Chief Financial Officer of the
Company in August of 1988. On February 26, 1993, he resigned for health reasons
and rejoined the Company on December 8, 1993, as Chief Executive Officer and
Acting President. In April 1994, he relinquished the position of President and
was reappointed to that position on May 30, 1995. From October 1985, to June
1988, Mr. Bothwell served as Executive Vice President and Chief Operating
Officer of Daymarc Corporation, a manufacturer of automatic test handlers for
the semiconductor industry.
M. Russell Leonard joined the Company in April 1990 as Vice President
Programs & Administration. In December 1991 he was named Vice President
Operations and Programs, in February 1993 he was named Executive Vice President
and in May 1995 he was named Chief Operating Officer. From November 1987 to
April 1990 he operated his own business in the water treatment industry. From
1985 to 1987 Mr. Leonard worked as the Director of Program Management for the
Serial Computer Printer Group, at Dataproducts Corp.
Drew E. Woodworth joined the Company in December 1995 as Vice President of
Operations. Previously he worked for Nashua Corp., a manufacturer of various
computer memory and office products, since 1977 where he served in many
capacities including; Operations Manager from December 1993 to December 1995,
Manufacturing Manager of Duct and Masking Tape Operations from October 1988 to
December 1993, Corporate Purchasing Manager, Industrial Tape Division from May
1987 to October 1988, and Finishing Manager of Duct and Masking Tape Division
from December 1985 to May 1987.
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Robert J. Lungo joined the Company on April 11, 1994 as Vice President,
Chief Financial Officer. From August of 1992 to April 1994 he was Vice
President, Chief Financial Officer of Juno Enterprises, Inc., an electronics
company, in Minneapolis, MN. From June 1991 to August 1992 he was Program
Director at the Company. From September 1985 to June 1991 he was Vice President,
Chief Financial Officer at Daymarc Corporation in Waltham, MA.
Richard Lehman joined the Company in July 1990, as Director of Scanner
Engineering. In December 1993, he was appointed Vice President of Scanner
Engineering and in October 1996, he was named Vice President Engineering.
Previously to joining the Company, Mr. Lehman was employed by Xerox Corporation
for 23 years where he served in various engineering and managerial capacities.
ITEM 2. PROPERTIES.
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The Company's principal executive offices and research and development
laboratory are located at 21 Park Avenue, Hudson, New Hampshire. The facility
consists of approximately 21,000 square feet of office and research and
development space and is leased by the Company from Mr. Robert Howard, Chairman
of the Board of Directors of the Company, pursuant to a lease which expires
September 30, 1997 at an annual rent of $78,500. Additionally, the Company is
required to pay real estate taxes, provide insurance and maintain the premises.
The Company leases, on a month to month basis, an additional 36,100 square
feet of office, manufacturing and warehouse space adjacent to its current
facility which it believes will be adequate to support its planned growth. If
the Company decides to seek additional or replacement facilities, it believes
there is adequate facilities available at commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
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On June 7, 1994 the company filed a complaint in the United States District
Court, District of New Hampshire against TECO Electric & Machinery Co. Ltd.
("TECO"), several TECO subsidiaries, a TECO employee, and a number of
distributors of TECO products. The Company claims, inter alia, that TECO
breached an exclusive manufacturing contract it entered into with the Company to
manufacture digital color scanners exclusively for the Company by selling
scanners under its own labels and those of other companies. The Company's claim
is based upon misappropriation of trade secrets, civil conspiracy, unfair
competition, and breach of contract. The Company initially sought damages in its
complaint in the amount of $17 million, however, an expert retained by the
Company to testify at the trial has subsequently concluded that the Company's
damages, as a result of TECO's actions and omissions,
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are substantially in excess of the amount alleged in the complaint. TECO has
answered the complaint and asserted various counterclaims, including
misrepresentation and breach of contract, and is claiming approximately
$3,000,000 in payment for past due services and breach of obligations by the
Company to allow TECO to manufacture other scanner products for the Company. The
court has instructed the parties to engage in alternative dispute resolution to
attempt to resolve the dispute. The trial is scheduled to commence on April 1,
1997. There can be no assurance that the Company will be successful in the
action, or if it is, as to the amount of damages, if any, it may be awarded.
ELTECH ELECTRONICS, INC. V. HOWTEK, INC.
In September 1996, Eltech Electronics, Inc., a contract manufacturer,
commenced an action against the Company in the Superior Court, Middlesex
County, Massachusetts, to recover an unspecified amount of damages alleged to
be "in excess of $50,000," due to the Company's alleged failure to pay for
goods sold, delivered and accepted by the Company and due to the Company's
alleged cancellation of purchase orders. The parties agreed to a settlement and
entered into a standstill agreement pending the performance of the settlement
agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
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Not applicable.
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS.
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The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "HOWT". Prior to July 13, 1995 the Company's Common Stock was traded
on the American Stock Exchange under the symbol "HTK". The following table sets
forth the range of high and low bid prices for each full quarterly period and
partial quarterly period during 1996 and 1995, while the Company's Common Stock
was traded on NASDAQ and also sets forth the high and low sales prices for each
full quarterly period and partial quarterly period in 1995, while the Company's
Common Stock was traded on the American Stock Exchange. The high and low bid
prices, reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
High Low
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Fiscal year ended
December 31, 1996
First Quarter 7-7/8 4-3/4
Second Quarter 6-3/4 3-3/8
Third Quarter 4-5/8 3
Fourth Quarter 3-3/8 1-11/16
Fiscal year ended
December 31, 1995
First Quarter 10-7/8 6-3/4
Second Quarter 10-5/8 8
Third Quarter (7/01-7/13/95) 10-3/8 7-5/8
Third Quarter (7/14-9/30/95) 11-1/2 7-1/2
Fourth Quarter 10-1/4 6-1/2
As of February 4, 1997 there were 324 holders of record of the Company's
Common Stock.
The Company has not paid any cash dividends on its Common Stock to date,
and the payment of cash dividends in the foreseeable future is not contemplated
by the Company. Future dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
to the Company's Board of Directors. There are no non-statutory restrictions on
the Company's present or future ability to pay dividends.
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RECENT SALES OF UNREGISTERED SECURITIES
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") due January 4, 1998 and related Security Agreement
of even date. The maturity date of the Note has been extended to January 4,
1999. The holder of the Note has the right at any time prior to repayment in
full of the principal, to convert the principal balance of the Note to the
Company's Common Stock at a conversion price of $3.00 per share, which
represents the estimated fair market value of the shares on the date of the
Note. In addition, at the Note holder's option, (a) the entire outstanding
principal amount of the Note and all accrued interest, may be converted into
shares of Common Stock at the Conversion Price then in effect, prior to the
closing of a firmly underwritten public offering, pursuant to a registration
statement filed by the Company under the Securities Act of 1933 with aggregate
net proceeds to the Company of $2,000,000 and a price of not less than $5.00
per share, subject to adjustments of the stock (an "Offering"), (b) the entire
principal amount of the Note and all interest accrued under the 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. Under the terms of the
Note interest accrues monthly at the rate of Citibank's prime rate plus two
percent (10.25% on December 31, 1996) and is payable on demand or not later
than the maturity date of the Note. The Note is secured by substantially all of
the assets of the Company. The shares issuable upon conversion are subject to
certain registration rights. As of December 31, 1996, the Company owed Dr.
Lawrence Howard $400,000 pursuant to the Loan Agreement.
On October 15, 1996, the Company sold 243,191 shares of its Common Stock
($.01 per share par value), at $2.056 per share, the estimated fair market value
of the unregistered stock, in a private placement pursuant to Section 4(2) of
the Securities Act of 1933, to Robert Howard, the Company's Chairman.
On December 13, 1996, the Company sold 403,362 shares of its Common Stock
($.01 per share par value), at $1.4875 per share, the estimated fair market
value of the unregistered stock, in a private placement pursuant to Section 4(2)
of the Securities Act of 1933, to Dr. Lawrence Howard.
On December 23, 1996, the Company sold 415,585 shares of its Common Stock
($.01 per share par value), at $1.2031 per share, the estimated fair market
value of the unregistered stock, in a private placement, pursuant to Section
4(2) of the Securities Act of 1933, to Robert Howard, the Company's Chairman.
The transactions described above were private sales to accredited investors
and were carried out to maintain compliance with NASDAQ's net tangible asset
value listing criteria for companies trading on the NASDAQ National Market. The
purchase price per share was 30% less than the then current market price. The
securities were not issued pursuant to a registration statement and may only be
resold pursuant to a registration statement or an exemption from registration
pursuant to the securities laws and regulations of the United States.
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ITEM 6. SELECTED FINANCIAL DATA.
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<TABLE>
SELECTED STATEMENT OF OPERATIONS DATA
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Sales $11,263,253 $20,603,654 $24,370,329 $20,550,105 $23,008,565
Gross margin 1,918,798 6,619,835 9,237,115 7,506,127 11,374,615
Other income - net 0 0 0 (570,025) 0
Restructuring charge 0 2,662,632 0 0 0
Total operating expenses 7,355,481 11,441,837 8,020,468 7,961,622 7,197,291
Income (loss) from operations (5,436,683) (4,822,002) 1,216,647 (455,495) 4,177,324
Interest expense - net 623,537 433,045 259,227 329,461 369,653
Pre-tax income (loss) (6,060,220) (5,255,047) 957,420 (784,956) 3,807,671
Provision for income taxes 0 0 77,000 4,903 35,000
Net Income (loss) (6,060,220) (5,255,047) 880,420 (789,859) 3,772,671
Net Income (loss) per share (0.76) (0.66) 0.11 (0.10) 0.49
</TABLE>
<TABLE>
SELECTED BALANCE SHEET DATA
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<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total current assets $ 9,697,890 $14,137,204 $16,891,438 $13,834,468 $15,987,231
Total assets 12,795,467 18,495,240 21,573,849 18,120,557 19,611,320
Total current liabilities 3,002,453 4,203,168 4,811,528 2,467,054 2,635,878
Loans payable to related parties 3,478,604 3,578,604 1,000,000 1,000,000 2,100,000
Convertible Subordinated Debentures 2,181,000 2,181,000 2,181,000 2,181,000 2,181,000
Stockholders' equity 4,133,410 8,532,468 13,581,321 12,472,503 12,694,442
</TABLE>
<TABLE>
SELECTED QUARTERLY DATA
- -----------------------
<CAPTION>
EARNINGS
GROSS ----------------------------------
SALES MARGIN EARNINGS(LOSS) PER SHARE PRIMARY
---------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
1995 Quarter ended:
-------------------
March 31 $5,851,750 $2,228,122 $ 152,658 $ 0.02
June 30 5,356,900 1,976,828 (2,821,001) (0.36)
September 30 4,303,024 1,363,434 (1,161,569) (0.15)
December 31 5,091,980 1,051,451 (1,425,135) (0.18)
1996 Quarter ended:
-------------------
March 31 $2,023,157 $ (272,679) $(2,341,394) $(0.29)
June 30 3,286,867 824,931 (1,223,492) (0.15)
September 30 2,850,507 566,977 (1,749,740) (0.22)
December 31 3,102,722 799,570 (745,594) (0.09)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
- ---------------------------------------------------------------------
Sales for the year ended December 31, 1996 were $11,263,253 a decrease of
45% from sales during the year ended December 31, 1995 of $20,603,654. The
decrease in sales is due primarily to the continuing weakness of the graphic
arts market and lower than expected sales in the medical imaging market. The
Company encountered longer sales cycles than anticipated with prospective
medical customers due to the lengthy product evaluation periods characteristic
of that market. The Company expects overall sales to increase in 1997 based upon
anticipated increases in sales in the graphic arts and medical imaging markets.
The Company's gross margin decreased from 32% in 1995 to 17% in 1996. This
decrease resulted primarily from the lower level of sales and higher discounts
to OEM and international resellers.
Engineering and product development costs (net of capitalized software
development costs of $350,674 and $445,106 for 1996 and 1995 respectively)
decreased slightly from $2,788,281 in 1995 to $2,353,354 in 1996. The level of
engineering and product development spending is expected to decrease in 1997
principally as a result of reductions in personnel and other steps taken to
control costs.
General and administrative expense decreased 11% from $2,651,905 in 1995 to
$2,357,560 in 1996. This decrease was due primarily to the decrease in legal
fees in connection with a lawsuit against a former contract manufacturer. See
Note 9 of Notes to Financial Statements.
Marketing and sales expenses during 1996 were $2,644,567 which represents a
21% decrease from $3,339,019 for 1995. The decrease results from reductions in
salaries, advertising, promotional and trade show expenses. Since the major
portion of these reductions occurred in the fourth quarter of 1996, it is
expected that overall expenses in this area will be lower in 1997, as these
reductions take effect.
Net interest expense increased 44% from $433,045 in 1995 to $623,537 in
1996 due to the increase in the amount of the Company's loan from Robert Howard,
its Chairman and principal stockholder and Dr. Lawrence Howard, the Chairman's
son. See Note 3 of Notes to Financial Statements.
The Company reported a net loss of $6,060,220 for the year ended December
31, 1996 as compared to net loss of $5,255,047 for the year ended December 31,
1995, which included a restructuring charge of $2,662,632 in the 1995 period.
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See Note 2 of Notes to Financial Statements. During the fourth quarter of 1996,
the Company significantly reduced operating costs. The full impact of this
reduction will not be fully realized until 1997.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------
Sales for the year ended December 31, 1995 were $20,603,654 a decrease of
15% from sales during the year ended December 31, 1994 of $24,370,329. The
decrease in sales was due primarily to the general weakness of the graphic arts
market in North America which resulted in a lower level of sales of the
Scanmaster 7500. In an effort to increase demand of the Scanmaster 7500 in 1996,
the Company entered into agreements with third party software vendors during the
fourth quarter of 1995 to make additional software options available to
customers.
The Company's gross margin decreased from 38% in 1994 to 32% in 1995. This
decrease resulted primarily from the increased percentage of OEM and
international sales at higher discounts causing lower overall gross margins.
Engineering and product development costs (net of capitalized software
development costs of $445,106 and $709,505 for 1995 and 1994 respectively)
decreased slightly from $2,890,182 in 1994 to $2,788,281 in 1995.
General and administrative expense increased 20% from $2,210,204 in 1994 to
$2,651,905 in 1995. This increase was due primarily to the increase in legal
fees, of about $450,000 in 1995, in connection with a lawsuit against a former
contract manufacturer. See Note 9 of Notes to Financial Statements.
Marketing and sales expenses during 1995 were $3,339,019 which represents a
14% increase from $2,920,082 for 1994. The increase resulted from increases in
salaries, advertising, promotional and trade show expenses.
Net interest expense increased 67% from $259,227 in 1994 to $433,045 in
1995 due to the increase in the amount of the Company's loan from Robert Howard,
its Chairman and principal stockholder. See Note 3 of Notes to Financial
Statements.
The Company reported a net loss of $5,255,047, which included a
restructuring charge of $2,662,632, for the year ended December 31, 1995 as
compared to net income of $880,420 for the year ended December 31, 1994.
Additional reserves totaling $500,000, for inventory and accounts receivable,
were recorded in the fourth quarter of 1995. See Note 2 of Notes to Financial
Statements
15
<PAGE> 16
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 the $8,000,000
credit line under the Revolving Loan Agreement with its Chairman, of which
$4,921,396 was available at December 31, 1996. The current payment date for
loans made pursuant to the Revolving Loan Agreement is January 4, 1999. The
Company believes that these sources are sufficient to satisfy its cash
requirements for the foreseeable future.
Working capital decreased $3,238,599 from $9,934,036 at December 31, 1995
to $6,695,437 at December 31, 1996. The ratio of current assets to current
liabilities decreased slightly from 3.4 at December 31, 1995 to 3.2 at December
31, 1996.
In 1996 the Company spent $3,295,924 for tooling and new product
development of which $942,570 was capitalized as additions to property and
equipment and software development with the balance expensed. The Company does
not expect the level of its capital spending to change in 1997. The cash
position decreased from $574,647 on December 31, 1995 to $235,143 on December
31, 1996.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value. This policy is in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of," which is effective for 1996. No write-downs were necessary through December
31, 1996.
Stock-Based Compensation
The Company has not adopted the optional fair value based method for
accounting for stock compensation plans, as permitted by Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," which is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. See note 5 of Notes to Financial Statements.
16
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
See Financial Statements and Schedule attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
Not applicable.
PART III
--------
The information required by Part III (Items 10, 11, 12, and 13) of this Report
on Form 10-K is hereby incorporated by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
- ------- ----------------------------------------------------
ON FORM 8-K.
------------
a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements - See Index on page 21.
2. Financial Statement Schedule - See Index on page 21. All
other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange are not required under the related instructions or
are not applicable and, therefore, have been omitted.
3. The following documents are filed as exhibits to this Annual
Report on Form 10-K:
3(a) Certificate of Incorporation of the Registrant filed with
the Secretary of State of the State of Delaware on February
24, 1984 [incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-18 (Commission
File No. 2-94097 NY), filed on October 31, 1984]
3(b) Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed with the Secretary of State of the
17
<PAGE> 18
State of Delaware on May 31, 1984 [incorporated by reference
to Exhibit 3.1(a) to the Registrant's Registration Statement
on Form S-18 (Commission File No. 2-94097-NY), filed on
October 31, 1984].
3(c) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed with the Secretary of State of the
State of Delaware on August 22, 1984 [incorporated by
reference to Exhibit 3.1(b) to the Registrant's Registration
Statement on Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984].
3(d) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed with the Secretary of State of the
State of Delaware on October 22, 1987 [incorporated by
reference to Exhibit 3(d) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1988].
3(e) By-laws of Registrant [incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-18
(Commission File No. 2-94097-NY), filed on October 31,
1984].
4(a) Form of Common Stock Certificate [incorporated by reference
to the Registrant's Form 8-A, filed on March 13, 1985].
4(b) Form of Indenture dated as of December 1, 1986 between
Registrant and Continental Stock Transfer and Trust Company,
including Form of Debenture [incorporated by reference to
Exhibit 4(c) to the Registrant's Registration Statement on
Form S-1 (Commission File No. 33-8971), filed on 10/31/84].
10(a)Lease Agreement between the Registrant and its Chairman
with respect to premises located at 21 Park Avenue, Hudson,
New Hampshire, dated October 1, 1984, [incorporated by
reference to Exhibit 10.2 to the Registrant's Registration
Statement to Form S-18 (Commission File No. 2-94097-NY),
filed on October 31, 1984].
10(b)Form of Lease Renewal between the Registrant and its
Chairman with respect to premises located at 21 Park Avenue,
Hudson, New Hampshire.
18
<PAGE> 19
10(c)Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and
Registrant dated October 26, 1987 (the "Loan Agreement")
[incorporated by reference to Exhibit 10 to the Registrant's
Report on Form 10-Q for the quarter ended 9/30/87].
10(d)Letter Agreement dated February 14, 1997, amending the
Revolving Loan and Security Agreement, and Convertible
Revolving Credit Promissory Note between Robert Howard and
Registrant dated October 26, 1987.
10(e)Convertible Promissory Note and Security Agreement, dated
April 4, 1996, between the Registrant and Dr. Lawrence
Howard [incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10-Q for the quarter ended March
31, 1996].
10(f)Letter Agreement dated February 14, 1997, amending the
Convertible Promissory Note and Security Agreement, dated
April 4, 1996, between the Registrant and Dr. Lawrence
Howard.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule (For SEC use only)
(b) During the last quarter of the period covered by this Annual
Report on Form 10-K the Company filed no reports on Form
8-K.
(c) Exhibits - See (a) 3 above.
(d) Financial Statement Schedule - See (a) 2 above.
19
<PAGE> 20
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOWTEK, INC.
Date: March 13, 1997
By:/s/ David R. Bothwell
------------------------------
David R. Bothwell,
President, Chief Executive
Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert Howard Chairman of the March 13, 1997
- ---------------------- Board, Director
Robert Howard
/s/ David R. Bothwell Chief Executive March 13, 1997
- ---------------------- Officer, Director
David R. Bothwell
/s/ Robert J. Lungo Vice President, Chief March 13, 1997
- ---------------------- Financial Officer, Principal
Robert J. Lungo Accounting Officer
/s/ Ivan Gati Director March 13, 1997
- ----------------------
Ivan Gati
/s/ Sheila Horwitz Director March 13, 1997
- ----------------------
Sheila Horwitz
/s/ Nat Rothenberg Director March 13, 1997
- ----------------------
Nat Rothenberg
/s/ Harvey Teich Director March 13, 1997
- ----------------------
Harvey Teich
20
<PAGE> 21
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 22
Balance Sheets
As of December 31, 1996 and 1995 23
Statements of Operations
For the years ended December 31, 1996,
1995 and 1994. 24
Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996,
1995 and 1994. 25
Statements of Cash Flows
For the years ended December 31, 1996,
1995 and 1994. 26
Notes to Financial Statements 27-42
Schedule II - Valuation and Qualifying
Accounts and Reserves 43
21
<PAGE> 22
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Howtek, Inc.
Hudson, New Hampshire
We have audited the accompanying balance sheets of HOWTECK, INC. as of December
31, 1996 and 1995 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HOWTEK, INC. at December 31,
1996 and 1995, and the results of its operations and cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
New York, New York
February 14, 1997
22
<PAGE> 23
HOWTEK, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995
------------ ------------
Assets
------
<S> <C> <C>
Current assets:
Cash and equivalents $ 235,143 $ 574,647
Trade accounts receivable net of allowance
for doubtful accounts of $537,748 in 1996
and $290,710 in 1995 (note 7) 3,469,275 6,474,144
Inventory (note 1) 5,762,657 6,840,823
Prepaid and other (note 3) 230,815 247,590
------------ ------------
Total current assets 9,697,890 14,137,204
------------ ------------
Property and equipment: (note 1)
Equipment 10,873,192 10,281,296
Leasehold improvements 371,535 371,535
Furniture and fixtures 185,564 185,564
Motor vehicles 6,050 6,050
------------ ------------
11,436,341 10,844,445
Less accumulated depreciation and amortization 9,391,369 7,815,236
------------ ------------
Net property and equipment 2,044,972 3,029,209
------------ ------------
Other assets: (note 1)
Software development costs, net 941,989 1,191,265
Debt issuance costs, net 98,398 118,756
Patents, net 12,218 18,806
------------ ------------
Total other assets 1,052,605 1,328,827
------------ ------------
Total assets $ 12,795,467 $ 18,495,240
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,969,342 $ 3,495,698
Accrued interest 689,434 238,840
Accrued expenses 343,677 468,630
------------ ------------
Total current liabilities 3,002,453 4,203,168
Loans payable to related parties (note 3) 3,478,604 3,578,604
Convertible subordinated debentures (note 4) 2,181,000 2,181,000
------------ ------------
Total liabilities 8,662,057 9,962,772
------------ ------------
Commitments and contingencies (notes 3 and 8)
Stockholders' equity: (notes 3, 4 and 5)
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 9,099,732 in 1996
and 8,022,594 shares in 1995; outstanding
9,031,856 in 1996 and 7,954,718 shares in 1995 90,997 80,225
Additional paid-in capital 45,616,672 43,966,282
Accumulated deficit (40,623,995) (34,563,775)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 4,133,410 8,532,468
------------ ------------
Total liabilities and stockholders' equity $ 12,795,467 $ 18,495,240
============ ============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 24
HOWTEK, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales (note 7) $11,263,253 $20,603,654 $24,370,329
Cost of sales 9,344,455 13,983,819 15,133,214
----------- ----------- -----------
Gross margin 1,918,798 6,619,835 9,237,115
----------- ----------- -----------
Operating expenses:
Engineering and product development 2,353,354 2,788,281 2,890,182
General and administrative 2,357,560 2,651,905 2,210,204
Marketing and sales 2,644,567 3,339,019 2,920,082
Restructuring charge (note 2) - 2,662,632 -
----------- ----------- -----------
Total operating expenses 7,355,481 11,441,837 8,020,468
----------- ----------- -----------
Income (loss) from operations (5,436,683) (4,822,002) 1,216,647
Interest expense - net (includes $450,594,
$259,732 and 92,729 respectively, to
related parties) 623,537 433,045 259,227
----------- ----------- -----------
Pre-tax income (loss) (6,060,220) (5,255,047) 957,420
Provision for income taxes (note 6) - - 77,000
----------- ----------- -----------
Net income (loss) $(6,060,220) $(5,255,047) $ 880,420
=========== =========== ===========
Net income (loss) per share (note 1)
Primary $ (0.76) $ (0.66) $ 0.11
Weighted average number of shares used in
computing earnings per share
Primary 8,022,256 7,934,654 7,934,525
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 25
HOWTEK, INC.
<TABLE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<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, 1993 7,940,594 $79,406 $43,552,445 $(30,189,148) $(970,200) $12,472,503
Issuance of common stock
pursuant to incentive stock
option plan. 45,200 452 208,010 - - 208,462
Issuance of treasury stock - - - - 19,936 19,936
Net income - - - 880,420 - 880,420
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1994 7,985,794 $79,858 $43,760,455 $(29,308,728) $(950,264) $13,581,321
========= ======= =========== ============ ========= ===========
<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, 1994 7,985,794 $79,858 $43,760,455 $(29,308,728) $(950,264) $13,581,321
Issuance of common stock
pursuant to incentive stock
option plan. 36,800 367 205,827 - - 206,194
Net loss - - - (5,255,047) - (5,255,047)
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1995 8,022,594 $80,225 $43,966,282 $(34,563,775) $(950,264) $ 8,532,468
========= ======= =========== ============ ========= ===========
<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
Issuance of common stock
pursuant to incentive stock
option plan. 15,000 151 61,011 - - 61,162
Sale of common stock (note 3 (f)) 1,062,138 10,621 1,589,379 - - 1,600,000
Net loss - - - (6,060,220) - (6,060,220)
--------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1996 9,099,732 $90,997 $45,616,672 $(40,623,995) $(950,264) $ 4,133,410
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 26
HOWTEK, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,060,220) $(5,255,047) $ 880,420
----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation 1,576,133 1,446,044 1,179,233
Amortization 626,896 524,901 392,768
Restructuring charge - 2,662,632 -
Asset writedowns and reserve increases - 500,000 -
Issuance of stock in exchange for services - - 19,936
(Increase) decrease:
Accounts receivable 3,004,869 1,376,572 (3,518,346)
Inventory 1,078,166 (1,990,443) (581,824)
Other current assets 16,775 130,665 (63,929)
Increase (decrease):
Accounts payable (1,526,356) (490,632) 2,193,939
Accrued interest 450,594 238,840 -
Accrued expenses (124,953) (356,568) 150,536
----------- ----------- -----------
Total adjustments 5,102,124 4,042,011 (227,687)
----------- ----------- -----------
Net cash provided (used) by
operating activities (958,096) (1,213,036) 652,733
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (350,674) (445,106) (716,007)
Additions to property and equipment (591,896) (1,201,464) (1,252,317)
----------- ----------- -----------
Net cash used for investing activities (942,570) (1,646,570) (1,968,324)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 1,661,162 206,194 208,462
Proceeds of loans payable to related parties 1,000,000 2,578,604 -
Repayment of loans payable to related parties (1,100,000) - -
----------- ----------- -----------
Net cash provided by financing activities 1,561,162 2,784,798 208,462
----------- ----------- -----------
Decrease in cash and equivalents (339,504) (74,808) (1,107,129)
Cash and equivalents, beginning of year 574,647 649,455 1,756,584
----------- ----------- -----------
Cash and equivalents, end of year $ 235,143 $ 574,647 $ 649,455
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 196,290 $ 218,079 $ 210,415
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 27
HOWTEK, INC.
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS AND USE OF ESTIMATES
Howtek, Inc. (the "Company") designs, engineers, develops and
manufactures digital image scanners, densitometers, film digitizers and
related software for applications in the graphic arts, medical imaging
and life sciences markets. The Company sells its products throughout
the world through various distributors, resellers, systems integrator
and OEM's. See Note 7 for geographical and major customer information.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Many of the Company's estimates and assumptions
used in the preparation of the financial statements relate to the
Company's products, which are subject to rapid technological change. It
is reasonably possible that changes may occur in the near term that
would affect management's estimates with respect to inventories,
equipment and software development cost.
(B) INVENTORY
Inventory is valued at the lower of cost or market, with cost
determined by the first-in, first-out method. At December 31, inventory
consisted of raw material and finished goods of $3,926,000 and
$1,837,000, respectively, for 1996 and raw material and finished goods
of $4,096,000 and $2,745,000, respectively, for 1995.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method for financial reporting purposes (and accelerated
methods for income tax purposes) over the estimated useful lives of the
various classes of assets (ranging from 3 to 5 years).
27
<PAGE> 28
HOWTEK, INC.
Notes to Financial Statements (continued)
(D) DEBT ISSUANCE COSTS
Debt issuance costs, related to the outstanding Convertible
Subordinated Debentures, are being amortized over the 15-year term of
the Debentures using the straight-line method.
(E) PATENTS
The costs for patents are being amortized over the estimated useful
life of the respective assets using the straight-line method.
(F) SOFTWARE DEVELOPMENT COSTS
Software development costs for application software and application
software enhancements are capitalized subsequent to the establishment
of their technological feasibility (as defined in Statement of
Financial Accounting Standards No. 86). The Company capitalized
$350,674, $445,106, and $709,505 of internally developed and externally
purchased software costs during fiscal 1996, 1995 and 1994,
respectively.
The capitalized software balances are presented net of accumulated
amortization, which was $1,808,836, and $1,208,886 at December 31,
1996, and 1995, respectively. Capitalized software costs are amortized
using the straight-line method over their estimated economic life,
principally 3 years, commencing when each product is available for
general release.
(G) REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped.
(H) COST OF SALES
Cost of sales consists of the costs of products purchased for resale,
any associated freight and duty, any costs associated with
manufacturing, warehousing, material movement and inspection,
amortization of any license rights, and amortization of capitalized
software.
28
<PAGE> 29
HOWTEK, INC.
Notes to Financial Statements (continued)
(I) WARRANTY COSTS
The Company's products are generally under warranty against defects in
material and workmanship from a 90 to 365 day period, depending on the
product. Warranty costs are not material.
(J) ENGINEERING AND PRODUCT DEVELOPMENT
These costs relate to research and development costs which are expensed
as incurred, except for amounts related to software development costs
incurred after the establishment of technological feasibility (see (f)
above) which are capitalized.
(K) NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the daily weighted
average number of common shares outstanding during the period. The
conversion of the subordinated debentures and assumed exercise of
options have not been considered in the computation, since the effects
on earnings per share were determined to be anti-dilutive.
(L) CASH FLOW INFORMATION
For purposes of reporting cash flows, the Company defines cash and
equivalents as all bank transaction accounts, certificates of deposit,
money market funds and deposits, and other money market instruments
maturing in less than 90 days, which are unrestricted as to withdrawal.
(M) INCOME TAXES
The Company follows the liability method under Statement of Financial
Accounting Standards No. 109 (SFAS 109). The primary objectives of
accounting for taxes under SFAS 109 are to (a) recognize the amount of
tax payable for the current year and (b) recognize the amount of
deferred tax liability or asset for the future tax consequences of
events that have been reflected in the Company's financial statements
or tax returns.
29
<PAGE> 30
HOWTEK, INC.
Notes to Financial Statements (continued)
(N) LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, are evaluated for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets are written down to
fair value. This policy is in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of,". No
write-downs have been necessary through December 31, 1996.
(O) STOCK-BASED COMPENSATION
The Company has not adopted the optional fair value based method for
accounting for stock compensation plans, as permitted by Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation". See note 5 of Notes to Financial Statements.
(2) RESTRUCTURING CHARGE AND CHANGE IN ESTIMATES
During the second quarter of 1995 the Company recorded a restructuring
charge of $2,662,632 as a result of management's decision to exit
certain markets in the graphic arts industry. The restructuring charge
represented losses on inventories disposed of which related to the
markets exited. In the fourth quarter of 1995, a $500,000 adjustment to
inventory and accounts receivable reserves was recorded. The adjustment
to inventory reflected a change in estimates in providing additional
reserves for out-of-production products.
(3) RELATED PARTY TRANSACTIONS
(A) LOAN PAYABLE TO PRINCIPAL STOCKHOLDER
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Company, under
which Mr. Howard has agreed to advance funds, or to provide guarantees
of advances
30
<PAGE> 31
HOWTEK, INC.
Notes to Financial Statements (continued)
(A) LOAN PAYABLE TO PRINCIPAL STOCKHOLDER (continued)
made by third parties in an amount up to $8,000,000. Such outstanding
advances are collateralized by substantially all of the assets of the
Company and bear interest at prime interest rate plus 2% (10.25% on
December 31, 1996). 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 December 31, 1996 and 1995, the Company owed Mr. Howard
$3,078,604 and $3,578,604, respectively, pursuant to the Loan
Agreement, which is due for repayment on January 4, 1999. The Company
has $4,921,396 available for future borrowings under the Loan
Agreement.
(B) LOAN PAYABLE TO RELATED PARTY
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") due January 4, 1998 and
related Security Agreement of even date. The maturity date of the Note
has been extended to January 4, 1999. The holder of the Note has the
right at any time prior to repayment in full of the principal, to
convert the principal balance of the Note to the Company's Common Stock
at a conversion price of $3.00 per share, which represents the
estimated fair market value of the shares on the date of the Note. In
addition, at the Note holder's option, (a) the entire outstanding
principal amount of the Note and all accrued interest, may be
converted into shares of Common Stock at the Conversion Price then in
effect, prior to the closing of firmly underwritten public
offering, pursuant to a registration statement filed by the Company
under the Securities Act of 1933 with aggregate net proceeds to the
Company of $2,000,000 and a price of not less than $5.00 per share,
subject to adjustments of the stock (an "Offering"), (b) the entire
principal amount of the Note and all interest accrued under the 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.
Under the terms of the Note interest accrues monthly at the rate of
Citibank's prime rate plus two percent (10.25% on December 31, 1996)
and is payable on demand or not later than the maturity date of the
Note. The Note is secured by substantially all of the assets of the
Company. The shares issuable upon conversion are subject to certain
registration rights. As of December 31, 1996, the Company owed Dr.
Lawrence Howard $400,000 pursuant to the Loan Agreement.
31
<PAGE> 32
HOWTEK, INC.
Notes to Financial Statements (continued)
(C) PREMISES LEASE AND OTHER EXPENSES
The Company conducts its operations in premises owned by Mr. Howard,
covered by a lease which expires September 30, 1997. As of December 31,
1996, future minimum lease payments under this lease are $78,500 for
1997.
(D) RELATED PARTY SALES
During the year ended December 31, 1996 and 1994 the Company sold
equipment and services totaling $53,721 and $51,752, respectively, to
Presstek, Inc., which Mr. Howard is the Chairman of the Board and a
principal stockholder. There were no sales to Presstek in 1995.
(E) OTHER ASSETS - LOANS TO OFFICERS
As of December 31, 1996 and 1995, the Company had outstanding loans to
its officers in the aggregate amount of $48,760. This amount is
included in Prepaid and other.
(F) SALES OF SECURITIES
On October 15, 1996, the Company sold 243,191 shares of its Common
Stock ($.01 per share par value), at $2.056 per share, the estimated
fair market value of the unregistered stock, in a private placement
pursuant to Section 4(2) of the Securities Act of 1933, to Robert
Howard, the Company's Chairman.
On December 13, 1996, the Company sold 403,362 shares of its Common
Stock ($.01 per share par value), at $1.4875 per share, the estimated
fair market value of the unregistered stock, in a private placement
pursuant to Section 4(2) of the Securities Act of 1933, to Dr. Lawrence
Howard.
On December 23, 1996, the Company sold 415,585 shares of its Common
Stock ($.01 per share par value), at $1.2031 per share, the estimated
fair market value of the unregistered stock, in a private placement,
pursuant to Section 4(2) of the Securities Act of 1933, to Robert
Howard, the Company's Chairman.
32
<PAGE> 33
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) CONVERTIBLE SUBORDINATED DEBENTURES
As of December 31, 1996 and 1995, the Company's outstanding balance on
its $8,000,000, 9% Convertible Subordinated Debentures (the
"Debentures"), which come due 2001, was $2,181,000. Interest on the
Debentures is payable semi-annually on June 1 and December 1. The
Debentures are convertible into common stock of the Company at the
conversion price of $19.00 per share, subject to adjustment in certain
events. No Debentures were converted during 1996 or 1995.
(5) STOCKHOLDERS' EQUITY
(A) STOCK OPTIONS
The Company has three stock option plans, which are described below.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the plans.
Under APB Opinion 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the
date of grant, no compensation cost is recognized.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock
option plans had been determined in accordance with the fair
value-based method prescribed in FASB Statement 123. The Company
estimates the fair value of each options at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: no dividends paid;
expected volatility of 40%; risk-free interest rates of 6.7%; and
expected lives of 1 year. Under the accounting provisions of FASB
Statement 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss
As reported $6,060,220 $5,255,047
Pro forma $6,162,428 $5,386,334
Primary loss per share
As reported $ .76 $ .66
Pro forma $ .77 $ .68
</TABLE>
33
<PAGE> 34
HOWTEK, INC.
Notes to Financial Statements (continued)
(A) STOCK OPTIONS (continued)
THE HOWTEK, INC. 1984 STOCK OPTION PLAN, AS AMENDED, ("THE 1984 PLAN")
AND THE HOWTEK, INC. 1993 STOCK OPTION PLAN, ("THE 1993 PLAN").
The Company has reserved 1,000,000 shares of common stock for issuance
under the 1984 Plan and 1,000,000 shares for issuance under the 1993
Plan. The 1993 Plan was adopted in November 1993 to replace the 1984
Plan which had no further stock available for grant. The 1984 and 1993
Plans are hereinafter referred to as the "Plans". Each of the Plans
provide for the granting of non-qualifying and incentive stock options
to employees and other persons to purchase up to an aggregate of
1,000,000 shares of the Company's common stock. The purchase price of
each share for which an option is granted shall be within the
discretion of the Board of Directors or the Committee appointed by the
Board of Directors provided that the purchase price of each share for
which an incentive option is granted shall not be less than the fair
market value of the Company's common stock on the date of grant,
except for options granted to 10% holders for whom the exercise price
shall not be less than 110% of the market price. Incentive options
granted under the Plan vest 100% over periods extending from six
months to five years from the date of grant and expire ten years
after the date of grant, except for 10% holders whose options shall
expire five years after the date of grant. Non-qualifying options
granted under the Plan are generally exercisable over a ten year
period, vesting 1/3 each on the first, second, and third
anniversaries of the date of grant.
THE HOWTEK, INC. DIRECTOR INCENTIVE PLAN
On September 21, 1993 the Company's Board of Directors adopted the
Director Incentive Plan (the "Director Plan"). The Company has reserved
for issuance 250,000 shares under the Director Plan. The Director Plan
provides for the award of (i) restricted and unrestricted stock, (ii)
qualified stock options, and (iii) non-qualified stock options. The
Director Plan is administered by a committee of at least one director
or non-director appointed by the Board. The term of the Director Plan
is ten years and the term of individual grants of stock options
thereunder is ten years. Vesting periods for exercise of options and
restrictions on the transferability of stock awards is determined by
the committee administering the Director Plan.
34
<PAGE> 35
HOWTEK, INC
Notes to Financial Statements (continued)
<TABLE>
A summary of stock option (incentive and non-qualifying) activity is as follows:
1984 STOCK OPTION PLAN AS AMENDED
- ---------------------------------
<CAPTION>
Exercise Weighted
Option price range average
shares per share exercise price
--------------------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1994 445,685 $2.75-$14.00 $8.37
Granted 87,000 $6.50 $6.50
Exercised (45,200) $3.25-$6.13 $5.02
Cancelled (78,500) $3.25-$13.88 $8.86
--------------------------------------------------------
Outstanding, December 31, 1994 408,985 $2.75-$14.00 $8.09
Granted -0- -0- -0-
Exercised (29,350) $3.25-$8.75 $5.77
Cancelled (101,500) $5.25-$13.88 $9.04
--------------------------------------------------------
Outstanding, December 31, 1995 278,135 $2.75-$14.00 $8.39
Granted -0- -0- -0-
Exercised (15,000) $2.75- $5.25 $4.15
Cancelled (263,135) $3.25-$14.00 $8.60
--------------------------------------------------------
Outstanding, December 31, 1996 -0- -0- -0-
========================================================
Exercisable at year-end
1994 155,233 $2.75-$14.00 $8.04
1995 188,885 $2.75-$14.00 $8.39
1996 -0- -0- -0-
Available for future grants
1996 -0-
</TABLE>
35
<PAGE> 36
HOWTEK, INC
Notes to Financial Statements (continued)
<TABLE>
1993 STOCK OPTION PLAN
- ----------------------
<CAPTION>
Exercise Weighted
Option price range average
shares per share exercise price
--------------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1994 -0- -0- -0-
Granted 180,700 $6.50-$8.25 $7.13
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
--------------------------------------------------
Outstanding, December 31, 1994 180,700 $6.50-$8.25 $7.13
Granted 233,500 $6.75-$7.63 $7.09
Exercised (7,450) $6.63-$8.25 $7.33
Cancelled (81,100) $6.63-$8.25 $7.33
--------------------------------------------------
Outstanding, December 31, 1995 325,650 $6.63-$8.25 $7.33
Granted 923,720 $1.72-$3.63 $2.55
Exercised -0- -0- -0-
Cancelled (817,035) $3.63-$8.25 $4.94
--------------------------------------------------
Outstanding, December 31, 1996 432,335 $1.72-$3.63 $2.55
==================================================
Exercisable at year-end
1994 -0- -0- -0-
1995 35,150 $6.63 - $8.25 $7.33
1996 43,200 $3.63 $3.63
Available for future grants
1996 561,215
</TABLE>
36
<PAGE> 37
HOWTEK, INC.
Notes to Financial Statements (continued)
<TABLE>
DIRECTOR INCENTIVE PLAN
- -----------------------
<CAPTION>
Exercise Weighted
Option price range average
shares per share exercise price
--------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1994 80,000 $6.75 $6.75
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
-------------------------------------------------------------
Outstanding, December 31, 1994 80,000 $6.75 $6.75
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
--------------------------------------------------------------
Outstanding, December 31, 1995 80,000 $6.75 $6.75
Granted 200,000 $1.72-$4.88 $3.61
Exercised -0- -0- -0-
Cancelled (180,000) $4.25-$6.75 $5.21
--------------------------------------------------------------
Outstanding, December 31, 1996 100,000 $1.72 $1.72
==============================================================
Exercisable at year-end
1994 80,000 -0- -0-
1995 80,000 $6.75 $6.75
1996 -0- -0- -0-
Available for future grants
1996 150,000
</TABLE>
37
<PAGE> 38
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) INCOME TAXES
<TABLE>
The 1994 provision for income taxes charged was as follows:
<S> <C>
Current Tax Expense
U.S. federal $325,000
State and local 82,000
--------
Total Current $407,000
========
Deferred Tax Expense
U.S. federal $ - 0 -
State and local - 0 -
--------
Total Deferred $ - 0 -
========
Benefit of NOL's
U.S. federal $310,000
State and local 20,000
--------
Total Benefit of NOL's $330,000
========
Total provision $ 77,000
========
</TABLE>
As a result of the 1996 and 1995 losses, no income tax expense was
incurred for these years.
<TABLE>
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
Deferred tax liabilities (assets) are comprised of the following at
December 31:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Inventory (Section 263A) $ (508,000) $ (195,000)
Inventory reserves (170,000) (167,000)
Receivable reserves (183,000) (99,000)
Other accruals (62,000) (68,000)
Tax credits (2,006,000) (1,815,000)
NOL carryforward (12,335,000) (10,829,000)
Tax overpayment ( -0- ) (22,500)
------------ ------------
Gross deferred tax assets $(15,264,000) $(13,195,500)
------------ ------------
</TABLE>
38
<PAGE> 39
HOWTEK, INC.
Notes to Financial Statements (continued)
<TABLE>
(6) INCOME TAXES (continued)
<S> <C> <C>
Accumulated depreciation 400,000 270,000
------------ ------------
Gross deferred tax liabilities 400,000 270,000
------------ ------------
Total tax(assets)liabilities $(14,864,000) $(12,925,500)
Deferred tax assets valuation
allowance $(14,864,000) $(12,925,500)
============ ============
Net deferred tax assets $ - 0 - $ - 0 -
</TABLE>
<TABLE>
As of December 31, 1996 the Company has net operating loss carryforwards
totaling approximately $36,800,000. The amount of the net operating loss
carryforwards which may be utilized in any future period may be subject to
certain limitations, based upon changes in the ownership of the Company's common
stock. The following is a breakdown of the net operating loss expiration period:
<CAPTION>
Expiration date Amount of remaining NOL
<C> <C>
2000 1,200,000
2001 5,000,000
2002 8,900,000
2003 3,300,000
2004 4,200,000
2005 2,200,000
2006 2,200,000
2007 200,000
2008 600,000
2010 4,000,000
2011 5,000,000
</TABLE>
In addition the Company has available tax credit carryforwards
(adjusted to reflect provisions of the Tax Reform Act of 1986) of
approximately $2,006,000, which are available to offset future taxable
income and income tax liabilities, when earned or incurred. These
amounts expire in various years through 2011.
39
<PAGE> 40
HOWTEK, INC.
Notes to Financial Statements (continued)
(7) SALES INFORMATION
(A) GEOGRAPHIC INFORMATION
The Company's sales are made to U.S. and foreign distributors of
computer and related products. Total export sales, which includes sales
made to a U.S. based international distributor of computer and related
products, were $7,275,000 or 65% of total sales in 1996, $14,090,000 or
69% of total sales in 1995 and $11,656,000 or 48% of total sales in
1994.
The Company's principal concentration of export sales has been in
Europe which accounted for 74% of 1996 export sales, 67% in 1995 and
69% in 1994. The balance of the export sales were into the Far East,
Mexico, Central America, and Canada.
As of December 31, 1996 and 1995 the Company had outstanding
receivables of $2,603,000 and $4,191,000, respectively, from
distributors of its products outside of the United States.
(B) MAJOR CUSTOMERS
<TABLE>
During the years ended December 31, 1996, 1995 and 1994 the Company had
two major customers, one of which operates as a U.S. based
international distributor of computer and related products and the
other as an OEM. The following represents the comparative sales and
accounts receivable:
<CAPTION>
1996 1995 1994
Sales Amount % Amount % Amount %
----- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Customer 1 $1,939,000 17 $7,340,000 36 $5,260,000 22
Customer 2 $3,313,000 29 $4,179,000 20 $2,759,000 11
Accounts Receivable
-------------------
Customer 1 $ 535,000 $1,946,000 $1,522,000
Customer 2 $ 536,000 $ 826,000 $ 783,000
</TABLE>
40
<PAGE> 41
HOWTEK, INC.
Notes to Financial Statements (continued)
(8) COMMITMENTS AND CONTINGENCIES
As of December 31, 1996 the Company had two lease obligations for
facilities. The lease obligations for 1997 will be approximately
$233,000. One lease expires on September 30, 1997 and the other is a
monthly lease. Rental expense for the years ended December 31, 1996,
1995 and 1994 was $240,967, $248,969 and $241,778 respectively.
(9) LEGAL PROCEEDINGS
Howtek, Inc. v. TECO et al
--------------------------
On June 7, 1994 the company filed a complaint in the United States
District Court, District of New Hampshire against TECO Electric &
Machinery Co. Ltd. ("TECO"), several TECO subsidiaries, a TECO
employee, and a number of distributors of TECO products. The Company
claims, inter alia, that TECO breached an exclusive manufacturing
contract it entered into with the Company to manufacture digital color
scanners exclusively for the Company by selling scanners under its own
labels and those of other companies. The Company's claim is based upon
misappropriation of trade secrets, civil conspiracy, unfair
competition, and breach of contract. The Company initially sought
damages in its complaint in the amount of $17 million, however, an
expert retained by the Company to testify at the trial has subsequently
concluded that the Company's damages, as a result of TECO's actions and
omissions, are substantially in excess of the amount alleged in the
complaint. TECO has answered the complaint and asserted various
counterclaims, including misrepresentation and breach of contract, and
is claiming approximately $3,000,000 in payment for past due services
and breach of obligations by the Company to allow TECO to manufacture
other scanner products for the Company. The court has instructed the
parties to engage in alternative dispute resolution to attempt to
resolve the dispute. The trial is scheduled to commence on April 1,
1997. There can be no assurance that the Company will be successful in
the action, or if it is, as to the amount of damages it may be awarded.
41
<PAGE> 42
HOWTEK, INC.
Notes to Financial Statements (continued)
(9) LEGAL PROCEEDINGS (continued)
Eltech Electronics, Inc. v. Howtek, Inc.
----------------------------------------
In September 1996, Eltech Electronics, Inc., a contract
manufacturer, commenced an action against the Company in the Superior
Court, Middlesex County, Massachusetts, to recover an unspecified
amount of damages alleged to be "in excess of $50,000," due to the
Company's alleged failure to pay for goods sold, delivered and accepted
by the Company and due to the Company's alleged cancellation of
purchase orders. The parties agreed to a settlement and entered into a
standstill agreement pending the performance of the settlement
agreement.
(10) FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, loan payable to
principal stockholder and convertible debentures approximated fair
value as of December 31, 1996 and 1995.
42
<PAGE> 43
HOWTEK, INC.
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Cost and Deductions at end
Description of Period Expenses Describe of Period
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year End December 31, 1996:
Allowance for Doubtful Accounts $290,710 $ 336,804 $ 89,766(1) $537,748
Inventory Reserve $490,456 $ 12,378 $ 2,834(3) $500,000
Year End December 31, 1995:
Allowance for Doubtful Accounts $130,000 $ 200,820 $ 40,110(1) $290,710
Inventory Reserve $289,463 $3,012,632 $2,811,639(3) $490,456
Year End December 31, 1994:
Allowance for Doubtful Accounts $116,563 $ 72,595 $ 59,158(1) $130,000
Warranty Reserve $ 96,287 - $ 96,287(2) -
Inventory Reserve $562,465 - $ 273,002(3) $289,463
<FN>
(1) Represents the net of accounts charged off and provisioned for future potential writeoff.
(2) Represents provision and cost of warranty expense.
(3) Represents inventory written off and disposed of.
</TABLE>
43
<PAGE> 1
EXHIBIT 10(b)
LEASE RENEWAL
Effective October 1, 1996, the Indenture of Lease (the "Lease") dated
October 1, 1984 between Robert Howard and Howtek, Inc. for the Premises located
at 21 Park Avenue, Hudson, New Hampshire is renewed for a term of one (1) year,
expiring September 30, 1997, at the base rent of $78,499.92 payable in twelve
(12) monthly installments of $6,541.66. All other terms and conditions of the
Lease remain in effect.
Dated: October 1, 1996 HOWTEK, INC.
By: /s/ David R. Bothwell
----------------------
Title:
/s/ Robert Howard
-------------------------
Robert Howard
<PAGE> 1
Exhibit 10(d)
Robert Howard
303 East 57th Street
New York, NY 10022
February 27, 1997
Howtek, Inc.
21 Park Avenue
Hudson, NH 03051
Gentlemen:
Reference is made to the Revolving Loan and Security Agreement dated
October 26, 1987 between the undersigned, Robert Howard (the "Creditor"), and
Howtek, Inc. ("Debtor"), as the same has been amended from time to time (the
"Credit Agreement"), and the $8 million Convertible Revolving Credit Note dated
October 26, 1987 issued by the Debtor to the Creditor, pursuant to the Credit
Agreement, as the same has been amended from time to time (the "Note").
Debtor is currently indebted to the Creditor under the Credit Agreement
and the Note in the aggregate amount of $3,708,582.24, of which $629,978.09
represents past due interest and $3,078,604.15 represents the outstanding
principal balance of the Note.
Creditor is willing to waive any and all defaults and events of
defaults under the Note provided Debtor agrees, by countersigning this letter
below, to pay on January 4, 1999, (or, with respect to accrued interest only,
on an earlier date if demanded by Creditor) the outstanding principal balance
of the Note at the time outstanding and all accrued past due interest as
of the date hereof and all interest which accrues on the principal amount of
the Note outstanding from time to time hereafter (collectively, the
"Liabilities").
Accordingly, Creditor hereby (1) waives all defaults and events of
defaults in the payment and/or performance by Debtor of the provisions of the
Credit Agreement and the Note from the date of issue of the Note through the
date of this letter and (2) extends the stated maturity of the Note to January
4, 1999, at which time the Liabilities will be due, unless, with respect to
accrued interest only, Creditor demands payment on an earlier date.
In consideration for such waiver, Debtor, by its signature appearing at
the foot of this letter and the enclosed counterpart hereof, agrees to pay the
Liabilities on January 4, 1999, or, with respect to accrued interest only, on
such earlier date as of which Creditor may demand payment of such accrued
interest.
Very truly yours,
/s/ Robert Howard
Robert Howard
Accepted and agreed as
of the above date
Howtek, Inc.
By: /s/ Mr. Russell Leonard
-------------------------------
<PAGE> 1
Exhibit 10(f)
Dr. Lawrence Howard
Apartment 6A
120 East End Avenue
New York, NY 10028
February 27, 1997
Howtek, Inc.
21 Park Avenue
Hudson, NH 03051
Gentlemen:
Reference is made to the $1 million Convertible Promissory Note dated
April 4, 1996 issued by the Debtor to the Creditor.
Debtor is currently indebted to the Creditor under the Note in the
aggregate amount of $482,170.85, of which $82,170.85 represents past due
interest and $400,000 represents the outstanding principal balance of the Note.
Creditor is willing to waive any and all defaults and events of
defaults under the Note provided Debtor agrees, by countersigning this letter
below, to pay on January 4, 1999, (or, with respect to accrued interest only,
on an earlier date if demanded by Creditor) the outstanding principal balance
of the Note at the time outstanding and all accrued past due interest as
of the date hereof and all interest which accrues on the principal amount of
the Note outstanding from time to time hereafter (collectively, the
"Liabilities").
Accordingly, Creditor hereby (1) waives all defaults and events of
defaults in the payment and/or performance by Debtor of the provisions of the
Note from the date of issue of the Note through the date of this letter and
(2) extends the stated maturity of the Note to January 4, 1999, at which time
the Liabilities will be due, unless, with respect to accrued interest only,
Creditor demands payment on an earlier date.
In consideration for such waiver, Debtor, by its signature appearing at
the foot of this letter and the enclosed counterpart hereof, agrees to pay the
Liabilities on January 4, 1999, or, with respect to accrued interest only, on
such earlier date as of which Creditor may demand payment of such accrued
interest.
Very truly yours,
/s/ Lawrence Howard
Lawrence Howard
Accepted and agreed as
of the above date
Howtek, Inc.
By: /s/ Mr. Russell Leonard
-------------------------------
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Howtek, Inc.
Hudson, New Hampshire
We hereby consent to the incorporation by reference in the respective
Prospectuses constituting part of the Registration Statements on Form S-8 (Nos.
33-14634 and 33-72534) of our report dated February 14, 1997, relating to the
consolidated financial statements and schedule of Howtek, Inc. appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
We also consent to the references to us under the caption "Experts" in the
Prospectuses.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
New York, New York
February 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 235,143
<SECURITIES> 0
<RECEIVABLES> 4,007,023
<ALLOWANCES> 537,748
<INVENTORY> 5,762,657
<CURRENT-ASSETS> 9,697,890<F1>
<PP&E> 11,436,341
<DEPRECIATION> 9,391,369
<TOTAL-ASSETS> 12,795,467
<CURRENT-LIABILITIES> 3,002,453
<BONDS> 2,181,000
0
0
<COMMON> 90,997
<OTHER-SE> 4,042,413
<TOTAL-LIABILITY-AND-EQUITY> 12,795,467
<SALES> 11,263,253
<TOTAL-REVENUES> 11,263,253
<CGS> 9,344,455
<TOTAL-COSTS> 9,344,455
<OTHER-EXPENSES> 7,355,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 623,537
<INCOME-PRETAX> (6,060,220)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,060,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,060,220)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> 0
<FN>
<F1>ADDITIONAL CURRENT ASSET PREPAID AND OTHER $230,815
OTHER ASSETS OF $1,052,605
LOANS PAYABLE TO RELATED PARTIES $3,478,604
</FN>
</TABLE>
