SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-9341
HOWTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
(603) 882-5200
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES __X__ NO_____.
As of the close of business on August 10, 1998 there were 10,760,206 shares
outstanding of the issuer's Common Stock, $.01 par value.
<PAGE>
HOWTEK, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Statements of Operations for the three
month periods ended June 30, 1998 and
1997 (unaudited) and for the six month
periods ended June 30, 1998 and 1997
(unaudited) 4
Statement of Changes in Stockholders' Equity
for the six month period ended June 30, 1998
(unaudited) 5
Statements of Cash Flows for the six month periods
ended June 30, 1998 and 1997 (unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
HOWTEK, INC.
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------ ------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 634,768 $ 235,326
Accounts receivable:
Trade-net of allowance for doubtful accounts
of $89,806 in 1998 and $70,000 in 1997 961,371 1,475,952
Inventory 3,263,405 3,515,993
Prepaid and other 165,558 105,275
------------ ------------
Total current assets 5,025,102 5,332,546
------------ ------------
Property and equipment:
Equipment 2,359,239 2,288,687
Leasehold improvements 26,377 --
Motor vehicles 6,050 6,050
------------ ------------
2,391,666 2,294,737
Less accumulated depreciation and amortization 1,470,028 1,255,317
------------ ------------
Net property and equipment 921,638 1,039,420
------------ ------------
Other assets:
Software development costs, net 584,424 593,879
Debt issuance costs, net 67,860 78,040
Patents, net 22,495 27,409
------------ ------------
Total other assets 674,779 699,328
------------ ------------
Total assets $ 6,621,519 $ 7,071,294
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 948,997 $ 1,200,871
Accrued interest 16,358 16,903
Accrued expenses 287,724 322,448
------------ ------------
Total current liabilities 1,253,079 1,540,222
Convertible subordinated debentures 2,181,000 2,181,000
------------ ------------
Total liabilities 3,434,079 3,721,222
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 10,828,082 in 1998
and 9,128,082 shares in 1997; outstanding
10,760,206 in 1998 and 9,060,206 shares in 1997 108,281 91,281
Additional paid-in capital 47,357,588 45,665,122
Accumulated deficit (43,328,165) (41,456,067)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 3,187,440 3,350,072
------------ ------------
Total liabilities and stockholders' equity $ 6,621,519 $ 7,071,294
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
HOWTEK, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 1,171,625 $ 2,015,307 $ 2,125,882 $ 3,445,407
Cost of Sales 1,017,521 1,381,122 1,893,832 2,590,152
----------- ----------- ----------- -----------
Gross Margin 154,104 634,185 232,050 855,255
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 254,186 350,019 509,365 693,718
General and administrative 327,198 443,105 689,618 937,861
Marketing and sales 336,963 473,188 801,156 818,123
Unusual charges -- 2,996,971 -- 2,996,971
----------- ----------- ----------- -----------
Total operating expenses 918,347 4,263,283 2,000,139 5,446,673
----------- ----------- ----------- -----------
Loss from operations (764,243) (3,629,098) (1,768,089) (4,591,418)
Interest expense - net 54,673 65,526 104,009 168,346
Income from legal settlement -- (6,000,000) -- (6,000,000)
----------- ----------- ----------- -----------
Income (loss) before tax provision (818,916) 2,305,376 (1,872,098) 1,240,236
Provision for income taxes -- 120,000 -- 120,000
----------- ----------- ----------- -----------
Net income (loss) $ (818,916) $ 2,185,376 $(1,872,098) $ 1,120,236
=========== =========== =========== ===========
Net income (loss) per share
Basic $ (0.08) $ 0.24 $ (0.20) $ 0.12
Weighted average number of shares used
in computing earnings per share
Basic 9,961,305 9,031,856 9,513,245 9,031,856
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HOWTEK, INC.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional
Number of Paid-in Accumulated Treasury Stockholders'
Shares Issued Par Value Capital Deficit Stock Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 9,128,082 $ 91,281 $ 45,665,122 $(41,456,067) $ (950,264) $ 3,350,072
Issuance of common stock 1,700,000 17,000 1,692,466 1,709,466
for cash
Net loss -- -- -- (1,872,098) -- (1,872,098)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 10,828,082 $ 108,281 $ 47,357,588 $(43,328,165) $ (950,264) $ 3,187,440
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
HOWTEK, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Six Months
June 30, 1998 June 30, 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,872,098) $ 1,120,236
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 214,711 535,071
Amortization 110,582 212,858
Asset writedown and reserve increases -- 2,996,971
(Increase) decrease:
Accounts receivable 514,581 1,179,876
Inventory 252,588 (692,174)
Other current assets (60,283) (52,397)
Increase (decrease):
Accounts payable (251,874) (1,307,899)
Accrued expenses (35,269) 150,544
----------- -----------
Total adjustments 745,036 3,022,850
----------- -----------
Net cash provided by (used for)
operating activities (1,127,062) 4,143,086
----------- -----------
Cash flows from investing activities:
Patents, software development and other (86,033) (193,310)
Additions to property and equipment (96,929) (330,620)
----------- -----------
Net cash used for investing activities (182,962) (523,930)
----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 1,709,466 --
Proceeds (repayment) of loan from principal
stockholder -- (3,478,604)
----------- -----------
Net cash provided by financing activities 1,709,466 (3,478,604)
----------- -----------
Increase (decrease) in cash and equivalents 399,442 140,552
Cash and equivalents, beginning of period 235,326 235,143
----------- -----------
Cash and equivalents, end of period $ 634,768 $ 375,695
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 107,611 $ 885,326
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
HOWTEK, INC.
Notes to Financial Statements
June 30, 1998
(1) Accounting Policies
In the opinion of management all adjustments and accruals (consisting
only of normal recurring adjustments) which are necessary for a fair
presentation of operating results are reflected in the accompanying
financial statements. Reference should be made to Howtek, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997 for a summary of
significant accounting policies. Interim period amounts are not necessarily
indicative of the results of operations for the full fiscal year.
(2) Loan Payable to Related Party
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Company, under which
Mr. Howard has agreed to advance funds, or to provide guarantees of
advances made by third parties in an amount up to $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%. The
Convertible Note entitles Mr. Howard to convert outstanding advances into
shares of the Company's common stock at any time based on the outstanding
closing market price of the Company's common stock at the time each advance
is made.
As of June 30, 1998, the Company had $8,000,000 available for future
borrowings under the Loan Agreement.
During the first five months of 1998, the Company borrowed, (i)
$400,000 from Mr. Robert Howard, the Company's Chairman, and (ii) $300,000
from Dr. Lawrence Howard, the son of Mr. Robert Howard, pursuant to Secured
Demand Notes and Security Agreements (the "Notes"). Principal on these
Notes are due and payable in full, together with interest accrued and any
penalties provided for, on demand. Under the terms of the Notes the Company
agreed to pay interest at the lower rate of (a) 12% per annum, compounded
monthly or (b) the maximum rate permitted by applicable law.
In May 1998, the Company consummated an agreement with Mr. Robert
Howard and Dr. Lawrence Howard to convert the Notes into shares of
restricted common stock, par value $.01 per share, of the Company (the
"Common Stock"). The conversions of the Notes were on the same terms as the
Company's $1,000,000 private offering of Common Stock to an unaffiliated
individual, which was also consummated in May 1998.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this Item 2. and elsewhere in this Form 10-Q
that are not historical facts contain forward looking statements that involve a
number of known and unknown risks, uncertainties and other factors that could
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward looking statements. These risks and
uncertainties include, but are not limited to, uncertainty of future sales
levels, protection of patents and other proprietary rights, the impact of supply
and manufacturing constraints or difficulties, possible technological
obsolescence of products, competition and other risks detailed in the Company's
Securities and Exchange Commission filings. The words "believe", "expect",
"anticipate" and "seek" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made.
Results of Operations
Current Events
In January 1998 the Company commenced a reorganization of its management
and business. The Company developed a three-point plan to improve business and
financial performance. The Company's three point plan is to (1) reduce
breakeven; (2) accelerate the sale of the Company's new MultiRad medical film
scanners; and (3) enhance graphic arts scanner products. Through May 1998, $1.7
million in additional capital was obtained by the Company to support its revised
operating plan.
Since January 1998 the Company has significantly reduced its overhead,
while maintaining its investment in product development and engineering. The
number of employees has been reduced from 71 in January to 42 in July. Payroll
expense has been reduced 37%. Facilities consolidation in May 1998 contributed
to a 44% reduction in fixed expenses. Other expenses have been reduced 26% since
January. The Company has also begun to outsource functions including training,
software support, selected manufacturing, components, accessory manufacture and
documentation.
The Company has taken steps designed to accelerate medical product sales
growth by reducing prices and concentrating on OEM and system integrator sales
channels. The Company believes that it is well positioned to take advantage of
growth in medical technologies. Progress is also being made in enhancement of
the Company's traditional graphic arts product line. The Company's line of drum
scanner products will be updated over the next two quarters to offer increased
scanning speed and resolution. The Company has also announced plans to acquire
one or more flatbed scanner products from other manufacturers, to re-market
under the Howtek brand.
8
<PAGE>
The Company has recently entered into its first OEM agreement with Imacon
ApS of Copenhagen, Denmark to market a CCD scanner. The Company is expected to
release this product during a fall trade show.
In May the Company released a new version of its Trident scanning, color
management and color separation software which the Company believes provides a
competitive benefit and distinction for the Company's graphic arts scanner
products. Among other benefits, the Company's Trident software operates under
Windows NT as well as the Macintosh computer environment typically associated
with graphic arts users in the United States.
Quarter Ended June 30, 1998 compared to Quarter Ended June 30, 1997
Sales for the three months ended June 30, 1998 were $1,171,625, a decrease
of $843,682 or 42% from the comparable period in 1997. Sales for the six months
ended June 30, 1998 were $2,125,882, a decrease of $1,319,525 or 38% from the
comparable period in 1997. The Company attributes the decrease in sales
primarily to increased competition for drum scanners from high-end flatbed
scanners, the maturing of its Scanmaster 2500 product and the economic crisis in
Asia. OEM sales of the Company's graphic arts products were significantly
impacted by a reduction in purchases from a major European customer. The Company
is currently working with that customer to improve sales.
Gross margin for the three and six month periods ended June 30, 1998
decreased to 13% and 11%, respectively, from 31% and 25%, respectively, in the
comparable periods in 1997. Gross margins were adversely effected by reductions
in sales. Since indirect production costs are comparatively fixed, margins are
disproportionately reduced at lower sales volumes. The Company is seeking to
reverse this trend by increasing sales, better managing indirect production
costs, and emphasizing sales of products with higher gross profit margins.
Engineering and product development costs for the three month period ended
June 30, 1998 decreased 27% from $350,019 (or 17% of sales) in 1997 to $254,186
(or 22% of sales) in 1998. Engineering and product development costs for the six
month period ended June 30, 1998 decreased 27% from $693,718 (or 20% of sales)
in 1997 to $509,365 (or 24% of sales). The overall decrease in engineering and
product development costs results primarily from planned reductions in manpower
and anticipated depreciation expense.
General and administrative expenses in the three month period ended June
30, 1998 decreased 26% from $443,105 (or 22% of sales) in 1997 to $327,198 (or
28% of sales) in 1998. General and administrative expenses in the six month
period ended June 30, 1998 decrease 26% from $937,861 (or 27% of sales) in 1997
to $689,618 (or 32% of sales) in 1998. The decrease results primarily from the
reduction in personnel, salaries, and legal fees in connection with a lawsuit
against a former contract manufacturer.
9
<PAGE>
Marketing and sales expenses in the three month period ended June 30, 1998
decreased 29% from $473,188 (or 23% of sales) in 1997 to $336,963 (or 29% of
sales) in 1998. Marketing and sales expenses in the six month period ended June
30, 1998 decreased slightly from $818,123 (or 24% of sales) to $801,156 (or 38%
or sales). The decrease results primarily from a reduction in trade show
expenses. The Company made a decision to delay its investments in trade shows
until later in the year when it would be prepared to introduce its new product
lines to the marketplace.
Net interest expense for the three and six month periods ended June 30,
1998 was $54,673 and $104,009, respectively, compared to $65,526 and $168,346,
respectively, for the comparable period in 1997. The decrease resulted from the
repayment of the notes payable, including interest, of $4,265,784 on April 25,
1997 to Mr. Robert Howard, its Chairman and principal stockholder and Dr.
Lawrence Howard, the Chairman's son.
In comparing the Company's performance to that for the quarter ended June
30, 1997 a $6,000,000 legal settlement granted to Howtek in April, 1997, coupled
with $2,996,971 in unusual charges taken during the second quarter of 1997,
makes comparison difficult. After giving effect to extraordinary income and
unusual charges, Howtek earned $2,185,376 or $0.24 per share for the quarter
ended June 30, 1997 on sales of $2,015,307 compared to net loss of $818,916 or
$0.08 per share for the quarter ended June 30, 1998 on sales of $1,171,625.
Liquidity and Capital Resources
At June 30, 1998 the Company had current assets of $5,025,102, current
liabilities of $1,253,079 and working capital of $3,772,023. The ratio of
current assets to current liabilities was 4:1.
Accounts receivable decreased by $514,581 during the first six months of
1998. This decrease is due primarily to the effect of aggressive collections and
reduced sales in the first six months of 1998.
During the first five months of 1998, the Company borrowed, (i) $400,000
from Mr. Robert Howard, the Company's Chairman, and (ii) $300,000 from Dr.
Lawrence Howard, the son of Mr. Robert Howard, pursuant to Secured Demand Notes
and Security Agreements (The "Notes"). Principal on these Notes are due and
payable in full, together with interest accrued and any penalties provided for,
on demand. Under the terms of the Notes the Company agreed to pay interest at
the lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate
permitted by applicable law.
In May 1998, the Company consummated an agreement with Mr. Robert Howard
and Dr. Lawrence Howard to convert the Notes into shares of restricted common
stock, par value $.01 per share, of the Company (the "Common Stock").
Also, in May 1998, the Company consummated a private offering of 1,000,000
shares of Common Stock, to an unaffiliated individual, for gross proceeds of
$1,000,000.
10
<PAGE>
The Company believes it can adequately fund its working capital and capital
equipment requirements based upon its anticipated level of sales for 1998 and
the line of credit available under the Revolving Loan Agreement with its
Chairman, of which $8,000,000 was available as of June 30, 1998.
Effective February 23, 1998, the Nasdaq Stock Market adopted New Listing
and Continued Listing requirements for companies listed on the Nasdaq National
Market and Nasdaq SmallCap Market. As a result of these new requirements the
Company applied for modification in its Nasdaq listing, to the Nasdaq SmallCap
Market. On July 16, 1998 the Company transferred from the Nasdaq National Market
System to the Nasdaq SmallCap Market.
Impact of the Year 2000
Many currently installed computer systems and software programs were
designed to use only a two-digit date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. The Company
relies on computer applications to manage and monitor its accounting and
administrative functions. Failure of the Company's software could have a
material, adverse impact on the its business, financial condition and results of
operations and on its ability to achieve sufficient cash flow to service its
indebtedness. The Company is currently assessing alternative manufacturing and
financial control systems, and expects to correct and revise the system prior to
it becoming an issue. The Company's products are not date aware and do not
present a year 2000 problem to its customers.
11
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
(c) During the quarter ended June 30,1998 the Company issued 400,000 and
300,000 shares of restricted Common Stock, respectively, to Mr. Robert Howard,
the Chairman of the Board, and Dr. Lawrence Howard, the son of the Chairman of
the Board, in connection with the conversion of indebtedness of $400,000 and
$300,000, respectively. The Company also sold 1,000,000 shares of restricted
Common Stock to an individual investor for $1,000,000. The shares issued to Mr.
Robert Howard and Dr. Lawrence Howard were issued in reliance upon the exemption
from registration provided by Section 3 (a) (9) of the Securities Act of 1933
(the "Act"). The 1,000,000 shares issued to the individual investor were issued
in reliance upon the private offering exemption from registration provided by
Section 4 (2) of the Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Secured Demand Note and Security Agreement between the Company and Mr.
Robert Howard dated April 15, 1998.
10.2 Secured Demand Note and Security Agreement between the Company and
Lawrence A. Howard dated April 28, 1998.
10.3 Secured Demand Note and Security Agreement between the Company and Mr.
Robert Howard dated May 11, 1998.
27 Financial Data Schedule
(b) On June 16, 1998 the Company filed a Report on Form 8-K under Item 5
Other Events, with the Securities and Exchange Commission. The Report disclosed
the agreement with Mr. Robert Howard, the Chairman of the Board, and Dr.
Lawrence Howard, the son of the Chairman of the Board, to convert Company
indebtedness of $400,000 and $300,000, respectively, into shares of restricted
Common Stock, par value $.01 per share. The Report also disclosed the private
offering of 1,000,000 share of Common Stock for gross proceeds of $1,000,000.
12
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Howtek, Inc.
----------------------------------
(Company)
Date: August 14, 1998 By: /s/ W. Scott Parr
----------------------------------
W. Scott Parr
President, Chief Executive Officer,
Director
Date: August 14, 1998 By: /s/ Robert J. Lungo
----------------------------------
Robert J. Lungo
Vice President Finance,
Chief Financial Officer
13
EXHIBIT 10.1
SECURED DEMAND NOTE
PRIVATE
$100,000.00 April 15, 1998
For value received, Howtek, Inc., a Delaware company with a principal place of
business at 21 Park Avenue, Hudson, New Hampshire 03051 (the "Company") promises
to pay to the order of Robert Howard, at 303 East 57th Street, New York, NY (the
"Payee"), the principal amount of one hundred thousand dollars ($100,000).
Principal on this Note shall be due and payable in full, together with interest
accrued and any penalties provided for herein, on five (5) day's written notice.
Payments will be made by certified check delivered to the Payee or the holder at
the address furnished to the Borrower for that purpose. Principal on this note
shall bear interest at the rate of 12% per annum, compounded monthly.
The Borrower may pay this Note in whole or in part without penalty or premium at
anytime prior to maturity.
The principal on this Note is secured by a security interest in certain assets
of the Company granted pursuant to a certain Security Agreement between the
Borrower and the Payee of even date hereof. This Note is entitled to all of the
benefits and obligations of said Security Agreement. Upon any Event of Default,
as defined in the Security Agreement, this Note shall be forthwith accelerated
and due and payable for an amount equal to the principal then outstanding. The
Borrower hereby agrees to execute and make all appropriate filings of any
financing statements or other filings which shall evidence the Borrower's grant
of a security interest to the Payee in order to secure the performance of the
obligations of the Borrower pursuant to this Note.
The Borrower and all endorsers and guarantors of the Note hereby waive
presentment (other than on maturity), demand, notice of nonpayment, protest and
all other demands and notices in connection with the delivery acceptance,
performance or enforcement of this Note and agree to pay upon demand all costs,
charges and expenses of collecting amounts due under the Note or the Agreements,
including attorney's fees and expenses, court costs and other disbursements
incurred or paid by the Payee in connection therewith. This Note shall be
binding upon and inure to the benefit of the Borrower and the Payee and their
respective successors and assigns.
This Note shall be governed by and construed in accordance with the internal
laws of the State of New Hampshire.
IN WITNESS WHEREOF, Borrower has caused its duly authorized officer to execute
this Note as an instrument under seal as of the date first written above.
HOWTEK, INC.
/s/ W. Scott Parr
- ------------------------------------
By: W. Scott Parr, President & CEO
Witness: /s/ Constance Webster
- ------------------------------------
14
<PAGE>
SECURITY AGREEMENT
Howtek, Inc. a Delaware corporation with a principal place of business at 21
Park Ave. (hereinafter called the "debtor"), subject to the terms and conditions
hereof, hereby assigns, mortgages, pledges, transfers and grants a continuing
security interest to Robert Howard (hereinafter called the "Secured Party"), in
all of the Debtor's right and interest in and to all accounts, contract rights,
rights to payment, inventory, equipment, intangible property, patents and other
property or rights of any kind. The property described above shall hereafter be
collectively referred to as the "Collateral."
The Collateral is pledged and mortgaged and a security interest therein is
granted to the Secured Party, as security for payment of all sums due under
certain Secured Term Note (the "Note") of the Debtor in the original aggregate
principal amount of $100,000. (hereinafter referred to as the "obligations")
issued by the Debtor to Robert Howard, dated as of April 15, 1998.
1. Covenants Re Collateral.
(a) The Debtor will join with the Secured Party in executing appropriate
financing statements under the Uniform Commercial Code (the "Code") and will at
all times and from time to time, at the request of the Secured Party, do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, instruments and financing statements as the Secured Party may
require, to vest more completely and assure to the Secured Party its rights
hereunder in or to the Collateral, including without limitation, the
preparation, execution and delivery of any additional financing statements and
security agreements extending to any Collateral which is, or may subsequently
become located outside the State of New Hampshire. The Debtor hereby appoints
the Secured Party as its authorized agent and attorney-in-fact to execute and
file appropriate financing statements, continuation statements and termination
statements in each and every jurisdiction in which the Collateral is or may be
located, now or in the future.
(b) The Secured Party shall be under no obligation to take steps necessary
to preserve its rights in any Collateral against other parties but may do so at
its option and at the expense of the Debtor. At its option and upon prior
written notice to the Debtor, the Secured Party may discharge any taxes, liens,
security interests or other encumbrances to which any Collateral is at any time
subject, and may, upon the failure of the Debtor so to do, purchase insurance on
any Collateral and pay for the preservation thereof, and the Debtor agrees to
reimburse the Secured Party on demand for any payments made or expenses incurred
by the Secured Party pursuant to the foregoing authorization. The Secured Party
may, at any time after default hereunder, take control of the Collateral to
which the Secured Party is entitled hereunder or under applicable law.
2. Events of Default.
If any of the following circumstances or events shall occur and be continuing
(individually, an "Event of Default"):
(a) failure by the Debtor to pay the principal on the Note when due by its
terms, or any installment thereof, for ten (10) after notice of any default in
payment has been made in writing to the Debtor by the Secured Party; or
(b) the cessation of the business of the Debtor as a going concern; or
(c) the failure of the Debtor to perform or observe any other term,
covenant or agreement contained in this Agreement, or the Note on its part to be
performed or observed and any such failure remains unremedied for thirty (30)
days after notice of such breach has been provided to the Debtor; or
(d) the Debtor's ability to pay the Obligations shall be impaired because
the Debtor shall be involved in financial difficulties as evidenced (i) by its
admitting in writing its inability to pay its debts generally as they become
due; (ii) by its commencement of a voluntary case under Title 11 of the United
States Code, the Federal Bankruptcy Code, as from time to time in effect, or by
its authorizing, by appropriate proceedings of its
15
<PAGE>
Board of Directors or other government body, the commencement of such voluntary
case; (iii) by its filing an answer or other pleading admitting or failing to
deny the material allegations of a petition filed against it commencing
provided, or by its failing to controvert timely the material allegations of any
such petition; (iv) by the entry of an order of relief in any involuntary case
commenced under such laws, except that the Debtor shall have a reasonable
period, not to exceed ninety (90) days, to have such order revoked; (v) by its
otherwise seeking relief as a debtor under any applicable law, of any
jurisdiction relating to the liquidation or reorganization of debtors or to the
modification or alteration of the rights of creditors, or by its consenting to
or acquiescing in such relief; (vi) by the entry of an order by a court of
competent jurisdiction (a) finding it to be bankrupt or insolvent; (b) ordering
or approving its liquidation, reorganization or any modification or alteration
of the rights of its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property or
assets; or (vii) by its making an assignment for the benefit of, or entering
into a composition with, its creditors, or appointing or consenting to the
appointment of a receiver or other custodian for all or a substantial part of
its property;
then, and in any such event, the Secured Party may, by notice to the Debtor,
declare the entire unpaid principal amount of the Note, all interest accrued and
unpaid thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Note, all such accrued interest shall
become and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Debtor.
3. Annulment of Defaults.
Section 2 above is subject to the condition that, if at any time after the
principal of any of the Note or the Obligations shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due,
or any thereof, shall have been entered, all arrears of interest upon all the
Note and all other sums payable under the Note or this Agreement (except the
principal of the Note which by such declaration shall have become payable) shall
have been duly paid, and every other default shall have been made good or cured,
then and in every such case the Secured Party shall, by written instrument filed
with the Debtor, rescind and annul such declaration and its consequences; but no
such rescission or annulment shall extend to or affect any subsequent default or
Event of Default or impair any right consequent thereon.
4. Rights and Remedies on Default.
Upon the occurrence of any event of Default, and at any time thereafter, the
Secured Party shall have the rights and remedies of a secured party under the
Code in addition to the rights and remedies provided herein or in any other
instrument or agreement executed by Debtor. Wherever notification with respect
to the sale or other disposition of Collateral is required by law, such
notification of the time and place of public sale, or of the date after which a
private sale or other intended disposition is to be made, shall be deemed
reasonable if given to the Debtor at least twenty (20) days before the time of
such public sale, or the date after which any such private sale or other
intended disposition is to be made, as the case may be. Expenses of retaking,
holding, preparing for sale, selling or the like with respect to the Collateral,
shall include the Secured Party's reasonable attorneys' fees and the legal
expenses.
16
<PAGE>
5. General Intangibles and Names.
Upon the occurrence of any Event of Default or at any time thereafter, on
request of the Secured Party, the Debtor shall execute and deliver to such
Secured Party any and all instruments as may be required to further vest in the
Secured Party the right to the Collateral.
6. Waiver of Demand.
DEBTOR WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO NOTICE OF JUDICIAL HEARING
IN ADVANCE OF THE ENFORCEMENT OF ANY OF THE SECURED PARTY'S RIGHTS HEREUNDER,
INCLUDING, WITHOUT LIMITATION THE SECURED PARTY'S RIGHTS FOLLOWING AN EVENT OF
DEFAULT TO TAKE IMMEDIATE POSSESSION OF THE COLLATERAL AND EXERCISE ITS RIGHTS
WITH RESPECT THERETO. With respect both to the Obligations and the Collateral,
the Debtor assents to any extension or postponement of the time of payment of
any other indulgence, to any substitution, exchange or release of any
collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising, adjusting or discharge of any thereof, all in such
manner and at such time or times as the Secured Party may deem advisable.
7. General.
Any condition or restriction hereinabove imposed with respect to the Debtor may
be waived, modified or suspended by the Secured Party but only on the Secured
Party's consent in writing and only as so expressed in such writing and not
otherwise. The Secured Party shall not be deemed to have waived any of its other
rights hereunder or under any other agreement, instrument or paper signed by
Debtor unless such waiver be in writing and signed by the Secured Party. No
delay or omission on the part of the Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to, or waiver of, any right or remedy
on any future occasion. The Secured Party's rights and remedies, whether
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised separately or concurrently. Any demand upon, or
notice to, Debtor that the Secured Party may elect to give shall be effective
when deposited in the mails by first class mail, postage prepaid, addressed to
Debtor at the address shown at the beginning of this Security Agreement or as
modified by any notice given after the date hereof. If any term or condition
hereof shall be invalid or unenforceable to any extent or in any application,
then the remainder hereof shall not be affected thereby, and each and every term
and condition hereof shall be void and enforced to the fullest extent and in the
broadest application permitted by law. Whenever there are no Obligations
outstanding hereunder and no commitment on the part of any Secured Party under
any agreement which might give rise to any Obligation, the Debtor may then
terminate this Agreement upon written notice to the Secured Party. This
Agreement and all rights and obligation hereunder, including matters of
construction, validity and performance, shall be governed by the internal laws
of the State of New Hampshire.
IN WITNESS WHEREOF, this Security Agreement is executed as an instrument under
seal by each of the undersigned Debtor and Secured Party as of this 15th day of
April, 1998.
Howtek, Inc.
/s/ W. Scott Parr
- -----------------------------------
By: W. Scott Parr, President & CEO Witness: /s/ Constance Webster
------------------------
/s/ Robert Howard
- -----------------------------------
Robert Howard Witness: /s/
------------------------
17
EXHIBIT 10.2
SECURED DEMAND NOTE
PRIVATE
$100,000.00 April 28, 1998
For value received, Howtek, Inc., a Delaware company with a principal place of
business at 21 Park Avenue, Hudson, New Hampshire 03051 (the "Company") promises
to pay to the order of Lawrence A. Howard, at 660 Madison Ave., 14th Floor, New
York, NY 10021 (the "Payee"), the principal amount of one hundred thousand
dollars ($100,000). Principal on this Note shall be due and payable in full,
together with interest accrued and any penalties provided for herein, on five
(5) day's written notice. Payments will be made by certified check delivered to
the Payee or the holder at the address furnished to the Borrower for that
purpose. Principal on this note shall bear interest at the rate of 12% per
annum, compounded monthly.
The Borrower may pay this Note in whole or in part without penalty or premium at
anytime prior to maturity.
The principal on this Note is secured by a security interest in certain assets
of the Company granted pursuant to a certain Security Agreement between the
Borrower and the Payee of even date hereof. This Note is entitled to all of the
benefits and obligations of said Security Agreement. Upon any Event of Default,
as defined in the Security Agreement, this Note shall be forthwith accelerated
and due and payable for an amount equal to the principal then outstanding. The
Borrower hereby agrees to execute and make all appropriate filings of any
financing statements or other filings which shall evidence the Borrower's grant
of a security interest to the Payee in order to secure the performance of the
obligations of the Borrower pursuant to this Note.
The Borrower and all endorsers and guarantors of the Note hereby waive
presentment (other than on maturity), demand, notice of nonpayment, protest and
all other demands and notices in connection with the delivery acceptance,
performance or enforcement of this Note and agree to pay upon demand all costs,
charges and expenses of collecting amounts due under the Note or the Agreements,
including attorney's fees and expenses, court costs and other disbursements
incurred or paid by the Payee in connection therewith. This Note shall be
binding upon and inure to the benefit of the Borrower and the Payee and their
respective successors and assigns.
This Note shall be governed by and construed in accordance with the internal
laws of the State of New Hampshire.
IN WITNESS WHEREOF, Borrower has caused its duly authorized officer to execute
this Note as an instrument under seal as of the date first written above.
HOWTEK, INC.
/s/ W. Scott Parr
- -----------------------------------
By: W. Scott Parr, President & CEO
Witness: /s/ Constance Webster
- -----------------------------------
18
<PAGE>
SECURITY AGREEMENT
Howtek, Inc. a Delaware corporation with a principal place of business at 21
Park Ave. (hereinafter called the "debtor"), subject to the terms and conditions
hereof, hereby assigns, mortgages, pledges, transfers and grants a continuing
security interest to Lawrence A. Howard (hereinafter called the "Secured
Party"), in all of the Debtor's right and interest in and to all accounts,
contract rights, rights to payment, inventory, equipment, intangible property,
patents and other property or rights of any kind. The property described above
shall hereafter be collectively referred to as the "Collateral."
The Collateral is pledged and mortgaged and a security interest therein is
granted to the Secured Party, as security for payment of all sums due under
certain Secured Term Note (the "Note") of the Debtor in the original aggregate
principal amount of $100,000. (hereinafter referred to as the "obligations")
issued by the Debtor to Lawrence A. Howard, dated as of April 28, 1998.
1. Covenants Re Collateral.
(a) The Debtor will join with the Secured Party in executing appropriate
financing statements under the Uniform Commercial Code (the "Code") and will at
all times and from time to time, at the request of the Secured Party, do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, instruments and financing statements as the Secured Party may
require, to vest more completely and assure to the Secured Party its rights
hereunder in or to the Collateral, including without limitation, the
preparation, execution and delivery of any additional financing statements and
security agreements extending to any Collateral which is, or may subsequently
become located outside the State of New Hampshire. The Debtor hereby appoints
the Secured Party as its authorized agent and attorney-in-fact to execute and
file appropriate financing statements, continuation statements and termination
statements in each and every jurisdiction in which the Collateral is or may be
located, now or in the future.
(b) The Secured Party shall be under no obligation to take steps necessary
to preserve its rights in any Collateral against other parties but may do so at
its option and at the expense of the Debtor. At its option and upon prior
written notice to the Debtor, the Secured Party may discharge any taxes, liens,
security interests or other encumbrances to which any Collateral is at any time
subject, and may, upon the failure of the Debtor so to do, purchase insurance on
any Collateral and pay for the preservation thereof, and the Debtor agrees to
reimburse the Secured Party on demand for any payments made or expenses incurred
by the Secured Party pursuant to the foregoing authorization. The Secured Party
may, at any time after default hereunder, take control of the Collateral to
which the Secured Party is entitled hereunder or under applicable law.
2. Events of Default
If any of the following circumstances or events shall occur and be continuing
(individually, an "Event of Default"):
(a) failure by the Debtor to pay the principal on the Note when due by its
terms, or any installment thereof, for ten (10) after notice of any default in
payment has been made in writing to the Debtor by the Secured Party; or
(b) the cessation of the business of the Debtor as a going concern; or
(c) the failure of the Debtor to perform or observe any other term,
covenant or agreement contained in this Agreement, or the Note on its part to be
performed or observed and any such failure remains unremedied for thirty (30)
days after notice of such breach has been provided to the Debtor; or
(d) the Debtor's ability to pay the Obligations shall be impaired because
the Debtor shall be involved in financial difficulties as evidenced (i) by its
admitting in writing its inability to pay its debts generally as they become
due; (ii) by its commencement of a voluntary case under Title 11 of the United
States Code, the
19
<PAGE>
Federal Bankruptcy Code, as from time to time in effect, or by its authorizing,
by appropriate proceedings of its Board of Directors or other government body,
the commencement of such voluntary case; (iii) by its filing an answer or other
pleading admitting or failing to deny the material allegations of a petition
filed against it commencing provided, or by its failing to controvert timely the
material allegations of any such petition; (iv) by the entry of an order of
relief in any involuntary case commenced under such laws, except that the Debtor
shall have a reasonable period, not to exceed ninety (90) days, to have such
order revoked; (v) by its otherwise seeking relief as a debtor under any
applicable law, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the rights of
creditors, or by its consenting to or acquiescing in such relief; (vi) by the
entry of an order by a court of competent jurisdiction (a) finding it to be
bankrupt or insolvent; (b) ordering or approving its liquidation, reorganization
or any modification or alteration of the rights of its creditors, or (c)
assuming custody of, or appointing a receiver or other custodian for, all or a
substantial part of its property or assets; or (vii) by its making an assignment
for the benefit of, or entering into a composition with, its creditors, or
appointing or consenting to the appointment of a receiver or other custodian for
all or a substantial part of its property;
then, and in any such event, the Secured Party may, by notice to the Debtor,
declare the entire unpaid principal amount of the Note, all interest accrued and
unpaid thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Note, all such accrued interest shall
become and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Debtor.
3. Annulment of Defaults.
Section 2 above is subject to the condition that, if at any time after the
principal of any of the Note or the Obligations shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due,
or any thereof, shall have been entered, all arrears of interest upon all the
Note and all other sums payable under the Note or this Agreement (except the
principal of the Note which by such declaration shall have become payable) shall
have been duly paid, and every other default shall have been made good or cured,
then and in every such case the Secured Party shall, by written instrument filed
with the Debtor, rescind and annul such declaration and its consequences; but no
such rescission or annulment shall extend to or affect any subsequent default or
Event of Default or impair any right consequent thereon.
4. Rights and Remedies on Default.
Upon the occurrence of any event of Default, and at any time thereafter, the
Secured Party shall have the rights and remedies of a secured party under the
Code in addition to the rights and remedies provided herein or in any other
instrument or agreement executed by Debtor. Wherever notification with respect
to the sale or other disposition of Collateral is required by law, such
notification of the time and place of public sale, or of the date after which a
private sale or other intended disposition is to be made, shall be deemed
reasonable if given to the Debtor at least twenty (20) days before the time of
such public sale, or the date after which any such private sale or other
intended disposition is to be made, as the case may be. Expenses of retaking,
holding, preparing for sale, selling or the like with respect to the Collateral,
shall include the Secured Party's reasonable attorneys' fees and the legal
expenses.
20
<PAGE>
5. General Intangibles and Names.
Upon the occurrence of any Event of Default or at any time thereafter, on
request of the Secured Party, the Debtor shall execute and deliver to such
Secured Party any and all instruments as may be required to further vest in the
Secured Party the right to the Collateral.
6. Waiver of Demand.
DEBTOR WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO NOTICE OF JUDICIAL HEARING
IN ADVANCE OF THE ENFORCEMENT OF ANY OF THE SECURED PARTY'S RIGHTS HEREUNDER,
INCLUDING, WITHOUT LIMITATION THE SECURED PARTY'S RIGHTS FOLLOWING AN EVENT OF
DEFAULT TO TAKE IMMEDIATE POSSESSION OF THE COLLATERAL AND EXERCISE ITS RIGHTS
WITH RESPECT THERETO. With respect both to the Obligations and the Collateral,
the Debtor assents to any extension or postponement of the time of payment of
any other indulgence, to any substitution, exchange or release of any
collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising, adjusting or discharge of any thereof, all in such
manner and at such time or times as the Secured Party may deem advisable.
7. General.
Any condition or restriction hereinabove imposed with respect to the Debtor may
be waived, modified or suspended by the Secured Party but only on the Secured
Party's consent in writing and only as so expressed in such writing and not
otherwise. The Secured Party shall not be deemed to have waived any of its other
rights hereunder or under any other agreement, instrument or paper signed by
Debtor unless such waiver be in writing and signed by the Secured Party. No
delay or omission on the part of the Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to, or waiver of, any right or remedy
on any future occasion. The Secured Party's rights and remedies, whether
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised separately or concurrently. Any demand upon, or
notice to, Debtor that the Secured Party may elect to give shall be effective
when deposited in the mails by first class mail, postage prepaid, addressed to
Debtor at the address shown at the beginning of this Security Agreement or as
modified by any notice given after the date hereof. If any term or condition
hereof shall be invalid or unenforceable to any extent or in any application,
then the remainder hereof shall not be affected thereby, and each and every term
and condition hereof shall be void and enforced to the fullest extent and in the
broadest application permitted by law. Whenever there are no Obligations
outstanding hereunder and no commitment on the part of any Secured Party under
any agreement which might give rise to any Obligation, the Debtor may then
terminate this Agreement upon written notice to the Secured Party. This
Agreement and all rights and obligation hereunder, including matters of
construction, validity and performance, shall be governed by the internal laws
of the State of New Hampshire.
IN WITNESS WHEREOF, this Security Agreement is executed as an instrument under
seal by each of the undersigned Debtor and Secured Party as of this 28th day of
April, 1998.
Howtek, Inc.
/s/ W. Scott Parr
- -----------------------------------
By: W. Scott Parr, President & CEO Witness: /s/ Constance Webster
-------------------------
/s/ Lawrence A. Howard
- -----------------------------------
Lawrence A. Howard Witness: /s/
-------------------------
21
EXHIBIT 10.3
SECURED DEMAND NOTE
PRIVATE
$100,000.00 May 11, 1998
For value received, Howtek, Inc., a Delaware company with a principal place of
business at 21 Park Avenue, Hudson, New Hampshire 03051 (the "Company") promises
to pay to the order of Robert Howard, at 303 East 57th Street, New York, NY (the
"Payee"), the principal amount of one hundred thousand dollars ($100,000).
Principal on this Note shall be due and payable in full, together with interest
accrued and any penalties provided for herein, on five (5) day's written notice.
Payments will be made by certified check delivered to the Payee or the holder at
the address furnished to the Borrower for that purpose. Principal on this note
shall bear interest at the rate of 12% per annum, compounded monthly.
The Borrower may pay this Note in whole or in part without penalty or premium at
anytime prior to maturity.
The principal on this Note is secured by a security interest in certain assets
of the Company granted pursuant to a certain Security Agreement between the
Borrower and the Payee of even date hereof. This Note is entitled to all of the
benefits and obligations of said Security Agreement. Upon any Event of Default,
as defined in the Security Agreement, this Note shall be forthwith accelerated
and due and payable for an amount equal to the principal then outstanding. The
Borrower hereby agrees to execute and make all appropriate filings of any
financing statements or other filings which shall evidence the Borrower's grant
of a security interest to the Payee in order to secure the performance of the
obligations of the Borrower pursuant to this Note.
The Borrower and all endorsers and guarantors of the Note hereby waive
presentment (other than on maturity), demand, notice of nonpayment, protest and
all other demands and notices in connection with the delivery acceptance,
performance or enforcement of this Note and agree to pay upon demand all costs,
charges and expenses of collecting amounts due under the Note or the Agreements,
including attorney's fees and expenses, court costs and other disbursements
incurred or paid by the Payee in connection therewith. This Note shall be
binding upon and inure to the benefit of the Borrower and the Payee and their
respective successors and assigns.
This Note shall be governed by and construed in accordance with the internal
laws of the State of New Hampshire.
IN WITNESS WHEREOF, Borrower has caused its duly authorized officer to execute
this Note as an instrument under seal as of the date first written above.
HOWTEK, INC.
/s/ W. Scott Parr
- -----------------------------------
By: W. Scott Parr, President & CEO
Witness: /s/ Constance Webster
--------------------------
22
<PAGE>
SECURITY AGREEMENT
Howtek, Inc. a Delaware corporation with a principal place of business at 21
Park Ave. (hereinafter called the "debtor"), subject to the terms and conditions
hereof, hereby assigns, mortgages, pledges, transfers and grants a continuing
security interest to Robert Howard (hereinafter called the "Secured Party"), in
all of the Debtor's right and interest in and to all accounts, contract rights,
rights to payment, inventory, equipment, intangible property, patents and other
property or rights of any kind. The property described above shall hereafter be
collectively referred to as the "Collateral."
The Collateral is pledged and mortgaged and a security interest therein is
granted to the Secured Party, as security for payment of all sums due under
certain Secured Term Note (the "Note") of the Debtor in the original aggregate
principal amount of $100,000. (hereinafter referred to as the "obligations")
issued by the Debtor to Robert Howard, dated as of May 11, 1998.
1. Covenants Re Collateral.
(a) The Debtor will join with the Secured Party in executing appropriate
financing statements under the Uniform Commercial Code (the "Code") and will at
all times and from time to time, at the request of the Secured Party, do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, instruments and financing statements as the Secured Party may
require, to vest more completely and assure to the Secured Party its rights
hereunder in or to the Collateral, including without limitation, the
preparation, execution and delivery of any additional financing statements and
security agreements extending to any Collateral which is, or may subsequently
become located outside the State of New Hampshire. The Debtor hereby appoints
the Secured Party as its authorized agent and attorney-in-fact to execute and
file appropriate financing statements, continuation statements and termination
statements in each and every jurisdiction in which the Collateral is or may be
located, now or in the future.
(b) The Secured Party shall be under no obligation to take steps necessary
to preserve its rights in any Collateral against other parties but may do so at
its option and at the expense of the Debtor. At its option and upon prior
written notice to the Debtor, the Secured Party may discharge any taxes, liens,
security interests or other encumbrances to which any Collateral is at any time
subject, and may, upon the failure of the Debtor so to do, purchase insurance on
any Collateral and pay for the preservation thereof, and the Debtor agrees to
reimburse the Secured Party on demand for any payments made or expenses incurred
by the Secured Party pursuant to the foregoing authorization. The Secured Party
may, at any time after default hereunder, take control of the Collateral to
which the Secured Party is entitled hereunder or under applicable law.
2. Events of Default.
If any of the following circumstances or events shall occur and be continuing
(individually, an "Event of Default"):
(a) failure by the Debtor to pay the principal on the Note when due by its
terms, or any installment thereof, for ten (10) after notice of any default in
payment has been made in writing to the Debtor by the Secured Party; or
(b) the cessation of the business of the Debtor as a going concern; or
(c) the failure of the Debtor to perform or observe any other term,
covenant or agreement contained in this Agreement, or the Note on its part to be
performed or observed and any such failure remains unremedied for thirty (30)
days after notice of such breach has been provided to the Debtor; or
(d) the Debtor's ability to pay the Obligations shall be impaired because
the Debtor shall be involved in financial difficulties as evidenced (i) by its
admitting in writing its inability to pay its debts generally as they become
due; (ii) by its commencement of a voluntary case under Title 11 of the United
States Code, the
23
<PAGE>
Federal Bankruptcy Code, as from time to time in effect, or by its authorizing,
by appropriate proceedings of its Board of Directors or other government body,
the commencement of such voluntary case; (iii) by its filing an answer or other
pleading admitting or failing to deny the material allegations of a petition
filed against it commencing provided, or by its failing to controvert timely the
material allegations of any such petition; (iv) by the entry of an order of
relief in any involuntary case commenced under such laws, except that the Debtor
shall have a reasonable period, not to exceed ninety (90) days, to have such
order revoked; (v) by its otherwise seeking relief as a debtor under any
applicable law, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the rights of
creditors, or by its consenting to or acquiescing in such relief; (vi) by the
entry of an order by a court of competent jurisdiction (a) finding it to be
bankrupt or insolvent; (b) ordering or approving its liquidation, reorganization
or any modification or alteration of the rights of its creditors, or (c)
assuming custody of, or appointing a receiver or other custodian for, all or a
substantial part of its property or assets; or (vii) by its making an assignment
for the benefit of, or entering into a composition with, its creditors, or
appointing or consenting to the appointment of a receiver or other custodian for
all or a substantial part of its property;
then, and in any such event, the Secured Party may, by notice to the Debtor,
declare the entire unpaid principal amount of the Note, all interest accrued and
unpaid thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Note, all such accrued interest shall
become and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Debtor.
3. Annulment of Defaults.
Section 2 above is subject to the condition that, if at any time after the
principal of any of the Note or the Obligations shall have become due and
payable, and before any judgment or decree for the payment of the moneys so due,
or any thereof, shall have been entered, all arrears of interest upon all the
Note and all other sums payable under the Note or this Agreement (except the
principal of the Note which by such declaration shall have become payable) shall
have been duly paid, and every other default shall have been made good or cured,
then and in every such case the Secured Party shall, by written instrument filed
with the Debtor, rescind and annul such declaration and its consequences; but no
such rescission or annulment shall extend to or affect any subsequent default or
Event of Default or impair any right consequent thereon.
4. Rights and Remedies on Default.
Upon the occurrence of any event of Default, and at any time thereafter, the
Secured Party shall have the rights and remedies of a secured party under the
Code in addition to the rights and remedies provided herein or in any other
instrument or agreement executed by Debtor. Wherever notification with respect
to the sale or other disposition of Collateral is required by law, such
notification of the time and place of public sale, or of the date after which a
private sale or other intended disposition is to be made, shall be deemed
reasonable if given to the Debtor at least twenty (20) days before the time of
such public sale, or the date after which any such private sale or other
intended disposition is to be made, as the case may be. Expenses of retaking,
holding, preparing for sale, selling or the like with respect to the Collateral,
shall include the Secured Party's reasonable attorneys' fees and the legal
expenses.
24
<PAGE>
5. General Intangibles and Names.
Upon the occurrence of any Event of Default or at any time thereafter, on
request of the Secured Party, the Debtor shall execute and deliver to such
Secured Party any and all instruments as may be required to further vest in the
Secured Party the right to the Collateral.
6. Waiver of Demand.
DEBTOR WAIVES ANY AND ALL RIGHTS THAT IT MAY HAVE TO NOTICE OF JUDICIAL HEARING
IN ADVANCE OF THE ENFORCEMENT OF ANY OF THE SECURED PARTY'S RIGHTS HEREUNDER,
INCLUDING, WITHOUT LIMITATION THE SECURED PARTY'S RIGHTS FOLLOWING AN EVENT OF
DEFAULT TO TAKE IMMEDIATE POSSESSION OF THE COLLATERAL AND EXERCISE ITS RIGHTS
WITH RESPECT THERETO. With respect both to the Obligations and the Collateral,
the Debtor assents to any extension or postponement of the time of payment of
any other indulgence, to any substitution, exchange or release of any
collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising, adjusting or discharge of any thereof, all in such
manner and at such time or times as the Secured Party may deem advisable.
7. General.
Any condition or restriction hereinabove imposed with respect to the Debtor may
be waived, modified or suspended by the Secured Party but only on the Secured
Party's consent in writing and only as so expressed in such writing and not
otherwise. The Secured Party shall not be deemed to have waived any of its other
rights hereunder or under any other agreement, instrument or paper signed by
Debtor unless such waiver be in writing and signed by the Secured Party. No
delay or omission on the part of the Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to, or waiver of, any right or remedy
on any future occasion. The Secured Party's rights and remedies, whether
evidenced hereby or by any other agreement, instrument or paper, shall be
cumulative and may be exercised separately or concurrently. Any demand upon, or
notice to, Debtor that the Secured Party may elect to give shall be effective
when deposited in the mails by first class mail, postage prepaid, addressed to
Debtor at the address shown at the beginning of this Security Agreement or as
modified by any notice given after the date hereof. If any term or condition
hereof shall be invalid or unenforceable to any extent or in any application,
then the remainder hereof shall not be affected thereby, and each and every term
and condition hereof shall be void and enforced to the fullest extent and in the
broadest application permitted by law. Whenever there are no Obligations
outstanding hereunder and no commitment on the part of any Secured Party under
any agreement which might give rise to any Obligation, the Debtor may then
terminate this Agreement upon written notice to the Secured Party. This
Agreement and all rights and obligation hereunder, including matters of
construction, validity and performance, shall be governed by the internal laws
of the State of New Hampshire.
IN WITNESS WHEREOF, this Security Agreement is executed as an instrument under
seal by each of the undersigned Debtor and Secured Party as of this 11th day of
May, 1998.
Howtek, Inc.
/s/ W. Scott Parr
- -----------------------------------
By: W. Scott Parr, President & CEO Witness: /s/ Constance Webster
-------------------------
/s/ Robert Howard
- -----------------------------------
Robert Howard Witness: /s/
-------------------------
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10Q at June 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 634,768
<SECURITIES> 0
<RECEIVABLES> 1,051,177
<ALLOWANCES> 89,806
<INVENTORY> 3,263,405
<CURRENT-ASSETS> 5,025,102
<PP&E> 2,391,666
<DEPRECIATION> 1,470,028
<TOTAL-ASSETS> 6,621,519
<CURRENT-LIABILITIES> 1,253,079
<BONDS> 2,181,000
0
0
<COMMON> 108,281
<OTHER-SE> 3,079,159
<TOTAL-LIABILITY-AND-EQUITY> 6,621,519
<SALES> 2,125,882
<TOTAL-REVENUES> 2,125,882
<CGS> 1,893,832
<TOTAL-COSTS> 1,893,832
<OTHER-EXPENSES> 509,365
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,009
<INCOME-PRETAX> (1,872,098)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,872,098)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,872,098)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
