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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, 1997
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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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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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 10, 1998 was $10,707,423.
As of February 10, 1998 the Registrant had 9,060,206 shares of Common
Stock outstanding.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements which are not historical facts contained in this report on Form
10-K are forward looking statements that involve a number of risks and
uncertainties, including but not limited to, the risks of uncertainty of patent
protection, the impact of supply and manufacturing constraints or difficulties,
possible technological obsolescence of the Company's products, increased
competition, and other risks detailed in the Company's Securities and Exchange
Commission filings.
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PART I
ITEM 1. BUSINESS.
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, film digitizers and related
software for applications in the graphic arts and medical imaging markets. The
Company's scanner products utilize two different scanning technologies.
Photomultiplier tube ("PMT") scanners focus a single scanning beam on a rotating
drum to capture a color image and convert it to digital form. For this reason,
PMT scanners are commonly referred to as "drum scanners". Charge coupled device
("CCD") scanners focus an array of light sensors across a flat surface, and are
commonly referred to as "flatbed scanners". Flatbed scanners may digitize color
images or monochrome X-ray films. The Company sells its products throughout the
world through various distributors, resellers, systems integrators and OEM's.
GRAPHIC ARTS COLOR SCANNERS
The Company offers drum and flatbed scanner products, and related
software, for use in the graphic arts market, which includes printers,
publishers, trade shops, service bureaus, desktop publishers and photo
retouchers. Drum scanner products offered by the Company consist of the large
format Scanmaster(TM) 7500, the Scanmaster 6500 and the Scanmaster 4500. The
Scanmaster 7500 and 6500 offer a larger scanning area and higher resolution
scanning than the more compact Scanmaster 4500. The Scanmaster 6500, introduced
during 1997, differs from the 7500 model in its manner of processing colors. The
7500 uses specialized circuit boards installed in the scanner, while the 6500
takes greater advantage of color processing software installed on the host
computer.
The Company's Scanmaster 2500 is a color flatbed scanner suitable for
scanning art boards, large maps, full size books, sketches, and negatives or
halftones. It offers the ability to digitize and process images at a resolution
sufficient for many graphic arts applications, at a cost substantially lower
than the Company's higher resolution drum scanner products.
During 1997, the Company released enhanced versions of its Trident(TM),
Aurora(TM) and Polaris(TM) software applications, used with its scanner products
to manage and control the processes of image digitization, image processing and
color separation.
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<TABLE>
<CAPTION>
Graphic Arts Products
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Suggested Retail
Product Distinguishing Features Price at 12/31/97
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<S> <C> <C>
Scanmaster 2500 - Flatbed Scanner $15,900(1)
- Tri-linear 8,000 element CCD array
- Scanning area 13" x 18"
- 600 x 1200 dpi optical resolution
- Optical density 0-3.4
- 12 bit color or grayscale
- Macintosh, Windows and UNIX
operating systems
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Scanmaster 4500 - PMT Drum Scanner $24,950
- Scanning area 11" x 11.8"
- 32 - 4,000 dpi optical resolution
- Optical density 0-3.8
- 12 bit color or grayscale
- Macintosh, Windows and UNIX
operating systems
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Scanmaster 6500 - PMT Drum Scanner $44,900
- Scanning area to 24" x 18.5"
- 50 - 5,000 dpi optical resolution
- 10% to 1,667% enlargement
- Optical density 0-3.8
- 12 bit color or grayscale
- Macintosh, Windows and UNIX
operating systems
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Scanmaster 7500 - PMT Drum Scanner $52,900
- Integrated color computer
- On-the-fly CMYK separation
- Scanning area to 24" x 18.5"
- 50 - 5,000 dpi optical resolution
- 10% to 1,667% enlargement
- Optical density 0-3.8
- 12 bit color or grayscale
- Macintosh, Windows and UNIX
operating systems
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</TABLE>
X-RAY FILM SCANNERS
The Company's X-ray film digitizers utilize flatbed scanning technology
to capture monochrome X-ray images and convert them to digital form. In digital
form such images may be stored, transmitted within hospital archiving and
communication systems or transmitted to remote viewing sites (a process called
"teleradiology") where they can be reproduced in hard copy or displayed on
computer monitors.
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(1) Effective April, 1998 the suggested retail price of the Scanmaster 2500 will
be reduced to $9,900, to improve its competitive positioning.
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The Scanmaster DX, derived from the Company's Scanmaster 2500 color
flatbed scanner, was the Company's first X-ray film digitizer. During 1997 the
Company demonstrated a new product, the Howtek 960(TM) X-Ray film digitizer,
designed specifically for medical applications. The 960 can capture images from
radiographic films at a higher resolution than the DX product, and with greater
ability to resolve detail in very light and very dark areas (this is sometimes
called "dynamic range"). The 960 is further distinguished by a built-in
adjustable sheet feeder, which accommodates film sizes ranging from 14" x 17" to
8" x 10". Up to eight films may be stacked at a time and are fed automatically.
During 1997 the Company also released Digitizer Director(TM), a
software application which supports X-ray digitization on the 960 and the
Scanmaster DX.
Medical Imaging Products
<TABLE>
<CAPTION>
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Suggested Retail
Product Distinguishing Features Price at 12/31/97
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<S> <C> <C>
Scanmaster DX - Flatbed Scanner $15,900
- High definition CCD array
- Digitizing area 14" x 17"
- Maximum film size 15" x 18"
- 1k - 8k resolution
- Optical density 001-3.4
- 12 bit grayscale
- SCSI-2 interface
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Howtek 960 - Multi-feed compact scanner $21,995(2)
- High definition CCD array
- Digitizing area 14" x 36"
- Maximum film size 15" x 36"
- 1k - 8k resolution
- Optical density 001-3.5
- 12 bit grayscale
- SCSI-2 interface
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</TABLE>
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.
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(2) Effective March 24, 1998, the suggested retail price of the Howtek 960 was
reduced to $18,995, to improve its competitive positioning.
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COMPETITION
The Company faces strong competition in the graphic and medical imaging
markets. 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, reliability, proprietary hardware and software, and service.
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 8 to Notes to
Financial Statements) the Company must carry the expense of the longer repayment
cycles generally accorded to foreign distributors and OEM's.
PATENTS
The Company has seven patents relating to its 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. Additionally, the Company has twelve
patents relating 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.
The Company has current patent applications pending, has filed foreign
patent applications on some of its 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 or intellectual property rights 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.
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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 agreements, 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, 1997, 1996 and 1995 the Company spent
$1,401,989 (or 18% of sales), $2,353,354 (or 21% of sales) and $2,788,281 (or
14% of sales), respectively, on engineering and product development. In
addition, for the years ended December 31, 1997, 1996 and 1995 the Company spent
$355,465 (or 5% of sales), $350,674 (or 3% of sales) and $445,106 (or 2% of
sales), respectively, on software development.
MANUFACTURING
The Company assembles all its scanners and digitizers at its Hudson,
New Hampshire facilities, from components and subassemblies purchased from
various suppliers. The software applications which are sold with the Company's
products are either developed in-house or licensed from third parties.
EMPLOYEES
On December 31, 1997 the Company had 63 full-time and 2 part-time or
temporary employees. On January 30, 1998, the Company reduced the number of its
continuing employees, including part-time and temporary employees, to 54. The
Company also initiated a program to reduce expenditures and control costs. (See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations".)
CUSTOMERS
During 1997, 23% of the Company's sales were made to Techexport, Inc.,
a foreign distributor of the Company's scanner products and 18% of sales were
made to Fujifilm Electronics Imaging ("FFEI"), formerly Crosfield Electronics
Limited, an original equipment manufacturer ("OEM") which sells the Scanmaster
2500 and Scanmaster 4500 under its own
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label. International sales in 1997 were adversely affected by, among other
factors, economic weakness in Asia. In the event of a reduction in purchases by
either customer, the Company believes other channels of distribution and
potential OEM customers are available. In the event the Company failed to
identify alternative customers, a reduction in purchases by Techexport or FFEI
would have a material adverse impact on the Company's sales.
BACKLOG
The dollar amount of the Company's backlog, or orders believed to be
firm, as of December 31, 1997 was approximately $74,000 as compared to
approximately $107,000 on the corresponding date in 1996.
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 8
to Notes to Financial Statements accompanying this Report on Form 10-K.
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ITEM 2. PROPERTIES
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, 1998 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 an additional 22,500 square feet of office,
manufacturing and warehouse space adjacent to its current facility. If the
Company decides to seek additional or replacement facilities, it believes there
are adequate facilities available at commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
As previously reported in the Company's 1996 Annual Report on Form
10-K, on June 7, 1994, the Company filed a complaint in the United States
District Court, District of New Hampshire, against TECO Electric and Machinery
Co. Ltd. TECO Information Systems Co., Ltd., Relisys (a TECO subsidiary) and
Herman Hsu. The Company claimed, inter alia, breach of contract,
misappropriation of trade secrets, and breach of exclusive dealing. On April 24,
1997, the Company announced that the lawsuit had been settled. All existing
agreements between the companies have been terminated. The Company has released
the TECO companies, Relisys and Mr. Hsu from all covenants not to compete and
from any claims relating to the scanner technology involved in the case. TECO,
in turn, made a one-time payment of $6,000,000 to the Company on April 23, 1997,
and has released the Company from any obligation to manufacture scanner products
through TECO. Neither party admitted to any breach of contract or other
wrong-doing in connection with the settlement of this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is currently traded on the Nasdaq National
Market under the symbol "HOWT". (See "Modification to Nasdaq Listing", below).
The following table sets forth the range of high and low bid prices for each
quarterly period during 1997 and 1996, while the Company's Common Stock was
traded on NASDAQ. 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.
<TABLE>
<CAPTION>
Fiscal year ended HIGH LOW
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<S> <C> <C>
December 31, 1997
First Quarter 2-7/16 1-5/16
Second Quarter 2-3/8 15/16
Third Quarter 3-5/8 1-1/2
Fourth Quarter 3-3/8 1
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
</TABLE>
As of February 17, 1998 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.
MODIFICATION TO NASDAQ LISTING
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 intends to apply for modification in its Nasdaq
listing, to the Nasdaq SmallCap Market. The Company believes that it qualifies
for listing on the SmallCap Market under the new standards.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended December 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Sales $7,874,813 $11,263,253 $20,603,654 $24,370,329 $20,550,105
Gross margin 1,663,317 1,918,798 6,619,835 9,237,115 7,506,127
Other income - net 0 0 0 0 (570,025)
Restructuring charge 0 0 2,662,632 0 0
Unusual charges 3,394,406 0 0 0 0
Total operating expenses 8,236,477 7,355,481 11,441,837 8,020,468 7,961,622
Income (loss) from operations (6,573,160) (5,436,683) (4,822,002) 1,216,647 (455,495)
Interest expense - net 258,912 623,537 433,045 259,227 329,461
Income from legal settlement (6,000,000) 0 0 0 0
Pre-tax income (loss) (832,072) (6,060,220) (5,255,047) 957,420 (784,956)
Provision for income taxes 0 0 0 77,000 4,903
Net Income (loss) (832,072) (6,060,220) (5,255,047) 880,420 (789,859)
Net Income (loss) per share (0.09) (0.76) (0.66) 0.11 (0.10)
</TABLE>
SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Total current assets $5,332,546 $9,697,890 $14,137,204 $16,891,438 $13,834,468
Total assets 7,071,294 12,795,467 18,495,240 21,573,849 18,120,557
Total current liabilities 1,540,222 3,002,453 4,203,168 4,811,528 2,467,054
Loans payable to related parties 0 3,478,604 3,578,604 1,000,000 1,000,000
Convertible Subordinated Debentures 2,181,000 2,181,000 2,181,000 2,181,000 2,181,000
Stockholders' equity 3,350,072 4,133,410 8,532,468 13,581,321 12,472,503
</TABLE>
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
Earnings
Gross ------------------------------------
Sales Margin Earnings(loss) Per Share Basic
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<S> <C> <C> <C> <C>
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)
1997 Quarter ended:
March 31 $1,430,100 $221,070 ($1,065,140) ($0.12)
June 30 2,015,307 634,185 2,185,376 0.24
September 30 2,371,615 587,420 (603,430) (0.07)
December 31 2,057,791 220,642 (1,348,878) (0.14)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SUBSEQUENT EVENTS
The Company has demonstrated significant operating losses in each of
its past three fiscal years. Subsequent to December 31, 1997, the Company began
a series of actions aimed at improved profitability and performance. On January
20, 1998, W. Scott Parr was named President, Chief Executive Officer and
Director of the Company. He replaced David R. Bothwell who resigned as
President, Chief Executive Officer and a member of the Company's Board of
Directors on the same date. On January 27, 1998, M. Russell Leonard resigned as
Executive Vice President and Chief Operating Officer of the Company.
To address declining sales levels, the Company has developed an
operating plan which it believes will allow it to operate profitably at lower
revenue levels than previous plans. The current operating plan includes
identification of new scanner and related products which can be secured by the
Company and offered to its traditional graphic arts customer base. Management
believes such products, offered under the Company's brand, can complement the
results of the Company's own research and development and product development
efforts and contribute materially to revenues. In the interim, the Company
intends to reduce prices on its Scanmaster 2500 flatbed scanner to improve the
competitive position of this product. In the near term, a price reduction will
contribute to reduced gross profit margins.
The Company continues to emphasize growth into the medical imaging
market, which it believes can contribute to sales complementing those in graphic
arts and more traditional Company markets. Additional complementary products and
markets are under evaluation. Failure of the Company to identify additional
products, and to successfully continue expansion into medical markets would
adversely effect the Company's performance and require revision to its operating
plan.
Sale of products sourced from other manufacturers and aimed at
increasing overall sales, will occur at lower gross profit margins than sale of
products manufactured and sold by the Company directly. The Company believes a
reduction in gross profit margins will be offset, in part, by reduced Company
development and support costs associated with products manufactured by others,
and reduced discounts to the sales channel.
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On January 30, 1998, to reduce break-even levels and bring operating
expenditures more in line with projected sales levels, the Company significantly
reduced the number of its continuing employees. Subsequent to these reductions,
the Company had 54 employees, including part-time and temporary workers. The
Company also reduced certain operating expenditures and instituted improved
budgeting and cost controls. In the future, the Company expects to better
utilize its marketing expenses by an increased reliance on direct mail and
telemarketing to support its sales efforts, and reduced trade show expenditures.
The Company is also evaluating opportunities to outsourcing appropriate portions
of the assembly and manufacturing process, focusing internal efforts on final
assembly, testing and quality assurance. It is the Company's intention to
closely monitor operating expenditures against actual sales levels, and make
further adjustments as deemed necessary.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales for the year ended December 31, 1997 were $7,874,813 a decrease
of 30% from sales during the year ended December 31, 1996 of $11,263,253. The
Company believes the decrease in sales is due primarily to increased competition
for drum scanners from high-end flatbed scanners, the maturing Scanmaster 2500
product and the economic crisis in Asia.
The Company's gross margin increased from 17% in 1996 to 21% in 1997
primarily because service revenues, which have higher gross margins, increased
as an overall percentage of the Company's total sales, in light of overall sales
decreases.
Engineering and product development costs decreased from 21% of sales
in 1996 to 18% of sales in 1997. Such costs (net of capitalized software
development costs of $355,465 and $350,674 for 1997 and 1996 respectively)
decreased from $2,353,354 in 1996 to $1,401,989 in 1997. The decrease results
primarily from reductions in manpower and depreciation expense during the year.
General and administrative expense decreased 27% from $2,357,560 (or
21% of sales) in 1996 to $1,716,199 (or 22% of sales) in 1997. This change
results from reductions in bad debt provisions, legal fees in connection with a
lawsuit against a former contract manufacturer, salaries and overall expenses as
a result of reduced sales and a cost reduction program.
Marketing and sales expenses during 1997 were $1,723,883 (or 22% of
sales) which contrasts with $2,644,567 (or 23% of sales) for 1996. The change
results from reductions in salaries, advertising, and promotional expenses.
Net interest expense decreased 58% from $623,537 in 1996 to $258,912 in
1997. The decrease resulted from the repayment of the notes payable, including
interest, of $4,265,784 on April 25, 1997 to Robert Howard, its Chairman and
principal stockholder and Dr. Lawrence Howard, the Chairman's son. See Note 4 of
Notes to Financial Statements.
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The Company reported a net loss of $832,072 for the year ended
December 31, 1997 which represents an 86% decrease from a net loss of $6,060,220
for the year ended December 31, 1996. The decrease is attributable to the
reduction of spending levels and includes the receipt of $6,000,000 from the
settlement of the Teco lawsuit on April 23, 1997 (See Note 10 of Notes to
Financial Statements). In addition, the results includes unusual charges of
$2,996,971 recorded in the second quarter of 1997 and $397,435 recorded in the
fourth quarter of 1997.
The unusual charges referenced above consist of the following: (i) an
inventory reserve of $1,750,000 resulting from management's decision in the
second quarter of 1997 to discontinue support of certain products which had
reached end of life; (ii) a bad debt reserve of $750,000 prompted by the
bankruptcy filing of a major European distributor in the second quarter of 1997;
(iii) a write-off of test equipment for non-current products with a net book
value of $224,610 in the second quarter of 1997 and $239,885 in the fourth
quarter of 1997; and (iv) a write-off of software development for non-current
products with a net book value of $272,361 in the second quarter of 1997 and
$157,550 in the fourth quarter of 1997.
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.
Management believes the decrease in sales was due to increased competition and
to a general weakness in its segments of the graphic arts market.
The Company's gross margin decreased from 32% in 1995 to 17% in 1996.
This decrease resulted primarily from excess manufacturing capacity.
Engineering and product development costs increased from 13% of sales
in 1995 to 21% of sales in 1996. Such 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.
General and administrative expense decreased 11% from $2,651,905 (or
13% of sales) in 1995 to $2,357,560 (or 21% of sales) 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 10 of Notes to Financial Statements.
Marketing and sales expenses during 1996 were $2,644,567 (or 23% of
sales) which represented a 21% decrease from $3,339,019 (or 16% of sales) for
1995. The decrease resulted from reductions in salaries, advertising,
promotional and trade show expenses.
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 4 of Notes to Financial Statements.
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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. See Note 2 of Notes to Financial Statements.
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 an
$8,000,000 credit line under a Convertible Note and Revolving Loan and Security
Agreement with its Chairman, of which $8,000,000 was available at December 31,
1997. The Company believes that these sources are sufficient to satisfy its cash
requirements for the foreseeable future. (See Item 13 - "Certain Relationships
and Related Transactions".)
Working capital decreased $2,903,113 from $6,695,437 at December 31,
1996 to $3,792,324 at December 31, 1997. The ratio of current assets to current
liabilities increased from 3.2 at December 31, 1996 to 3.5 at December 31, 1997.
As noted above, the Company received $6,000,000 from the settlement of
a lawsuit during the second quarter of 1997. Approximately $4,266,000 of the
proceeds were used to pay off loans to related parties. See Note 4 of Notes to
Financial Statements.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Net Loss Per Common Share
In the last quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which requires
the presentation of both basic and diluted earning per share on the face of the
Statements of Operations and the restatement of all prior period earnings per
share amounts. Conversion of the subordinated debentures and assumed exercise of
options are not included in the calculation of diluted earnings per share since
the effect would be antidilutive. Accordingly, basic and diluted net loss per
share do not differ for any period presented.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distribution to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
15
<PAGE> 16
SFAS No. 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. This standard is not expected to have any impact
on the Company.
Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. This standard is not expected to have any impact
on the Company.
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132), which revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement of recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful.
SFAS 132 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures.
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.
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
<S> <C> <C>
Robert Howard............ 74 Chairman of the Board, and Director 1984
W. Scott Parr............ 47 President, Chief Executive Officer
and Director 1998
Ivan Gati................ 50 Director 1989
Sheila Horwitz........... 61 Director 1996
Nat Rothenberg........... 67 Director 1988
Harvey Teich............. 78 Director, Chairman Audit Committee 1988
</TABLE>
All persons listed above are currently serving a term of office as
directors which continues until the next annual meeting of stockholders.
Robert Howard is the founder and Chairman of the Board of Directors of
the Company. He is the inventor of many products including the impact dot matrix
printer, the desktop laser printer and an early digital computer together with
Dr. An Wang. He has been the founder or a principal in many public companies
since the 1960's. Mr. Howard was Chief Executive Officer of the Company from its
establishment in 1984 until December of 1993. He was the founder, and from 1969
to April 1980 he served as President and Chairman of the Board, of Centronics
Data Computer Corp. ("Centronics"), a manufacturer of a variety of computer
printers. He resigned from Centronics' Board of Directors in 1983. From April
1980 until 1983, Mr. Howard was principally engaged in the management of his
investments. Commencing in mid-1982, Mr. Howard, doing business as R.H.
Research, developed the ink jet technology upon which the Company was initially
based. Mr. Howard contributed this technology, without compensation, to the
Company. Mr. Howard serves as Chairman of the Board of Presstek, Inc.
("Presstek"), a public company which has developed proprietary imaging and
consumables technologies for the printing and graphic arts industries. In
February 1994 Mr. Howard entered into a settlement agreement in the form of a
consent decree with the Securities and Exchange Commission (the "Commission").
Mr. Howard, without admitting or denying the Commission's allegations of
securities laws violations, agreed to pay a fine and to the entry of a permanent
injunction against future violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934. In December of 1997, Mr. Howard entered into a
settlement agreement in the form of a consent decree with the Securities and
Exchange Commission (the "Commission") in connection with the Commission's
investigation into trading in the securities of Presstek Inc. Mr. Howard,
without admitting or denying the Commission's allegations of securities laws
violations, agreed to pay a civil penalty and to the entry of a permanent
injunction against future violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934.
17
<PAGE> 18
W. Scott Parr joined the Company in January 1998, as President and
Chief Executive Officer. He was appointed to the Company's Board of Directors on
February 4, 1998. Prior to joining Howtek, Mr. Parr served as Divisional
Director and a member of the Board of Directors of SABi International Ventures,
Inc., responsible for restructuring and upgrading certain US companies owned by
foreign and venture investors. From 1995 to 1997, Mr. Parr was Chief Executive
Officer, General Counsel, and Director of Allied Logic Corporation, a start-up
venture specializing in proprietary molding and manufacturing technologies. From
1990 to 1995 Mr. Parr was General Counsel and a Director of LaserMaster
Technologies, Inc. (now ColorSpan, Inc.).
Ivan Gati has served as Chairman of Turner Management, Inc. since 1983.
Turner Management, Inc. is a vertically integrated real estate investment
company with offices located in New York, Texas and Tennessee, and whose
subsidiary companies provide property management and finance services. Mr. Gati
is a member of the Board of Directors of Universal Automation Systems, Inc.
Sheila Horwitz is a Senior Vice President of Schroder Wertheim & Co.,
Inc., a broker dealer firm. She has an extensive background in the securities
brokerage industry, having worked at her current firm, formerly known as
Wertheim, Schroder & Co., since 1990. Previously Ms. Horwitz worked for
Oppenheimer & Co. from 1988 to 1990, and for L. F. Rothschild & Co. from 1978 to
1988, in similar capacities.
Nat Rothenberg is President of Micro Management Ltd. and has served in
such capacity since he founded that company in 1978. Micro Management Ltd. is a
supplier of computer hardware, software, training, service and support to the
real estate industry. Previously, he was President of Drum Research &
Development Corp., an affiliate of Fidelity Corp. of Virginia that provided
computer services to that company.
Harvey Teich is a practicing certified public accountant. On January 1,
1992, the accounting firm of Merman & Teich, where Mr. Teich had been a
principal for the previous seventeen years, ceased to operate as a partnership.
He is a member of the New York and Florida State Societies for Certified Public
Accountants.
18
<PAGE> 19
EXECUTIVE OFFICERS AND MANAGEMENT
NAME AGE POSITION
- ---- --- --------
W. Scott Parr1 47 President, Chief Executive Officer, Director
David R. Bothwell2 49 President, Chief Executive Officer, Director
M. Russell Leonard3 52 Executive Vice President, Chief Operating Officer
Michael L. Demers 43 Vice President, Marketing
Richard F. Lehman 60 Vice President, Engineering
Robert J. Lungo 50 Vice President, Chief Financial Officer
David G. Myers 45 Vice President, Sales
Drew E. Woodworth 47 Vice President, Operations
- ---------------------------
1. Mr. Parr joined the Company on January 20, 1998.
2. Mr. Bothwell resigned as President, Chief Executive Officer, and
Director, effective January 20, 1998.
3. Mr. Leonard resigned as Executive Vice President, effective January 27,
1998.
Michael L. Demers joined the Company on July 1,1997, as Vice President
of Marketing. From January 1997 to June 1997, he was OEM Sales Manager for
Picture Works Technology, a software developer for managing and enhancing
digital images. From January 1994 to December 1996, he was employed by Polaroid
Corporation and worked in various capacities, including Senior Marketing
Manager, New Business Development and Program Management. From June 1984 to
December 1993, Mr. Demers was employed by the Company in various capacities
including Scanner Product Manager.
Richard F. 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 of
Engineering. Prior to joining the Company, Mr. Lehman was employed by Xerox
Corporation for 23 years where he served in various engineering and managerial
capacities.
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.
19
<PAGE> 20
David G. Myers joined the Company on January 5, 1998 as Vice President
of Sales. From August 1995 to October 1997, Mr. Myers was Director of Sales for
Gerber Systems Corporation, a computer to plate ("CTP") systems company. From
June 1990 to August 1995 he was Director of International Sales for the EPS
Division of AGFA Corporation.
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.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information on the compensation provided
by the Company during fiscal years 1997, 1996 and 1995 to the person serving as
the Company's Chief Executive Officer during fiscal 1997 and the Company's four
most highly compensated executive officers, serving at the end of the 1997
fiscal year. Included in this list are only those executive officers whose total
annual salary and bonus exceeded $100,000 during the 1997 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) OPTIONS(#)
- --------------------------- ---- --------- ----------
<S> <C> <C> <C>
David Bothwell
Chief Executive Officer.......... 1997 83,210 - 0 -
1996 151,303 61,585(1)
1995 141,870 15,000(2)
M. Russell Leonard
Executive Vice President,
Chief Operating Officer.......... 1997 130,674 10,000
1996 128,231 47,000(1)
1995 122,858 20,000(2)
Richard Lehman
Vice President, Engineering...... 1997 113,698 5,000
1996 102,082 26,500(1)(3)
1995 95,461 1,000(2)
</TABLE>
- --------------
(1) Represents options to purchase Common Stock which had been granted in
previous years pursuant to the 1993 Stock Option Plan and which were
relinquished by the optionee and canceled by the Company in exchange for an
equal number of new options granted in 1996 and exercisable at $1.72 per
share. See Ten Year Option Repricings Table.
(2) Options which were granted pursuant to the 1993 Stock Option Plan in 1995
and which were included in those options that were subsequently
relinquished by the optionee in 1996 in exchange for an equal number of new
options. See note 1 above and the Ten Year Option Repricings Table.
(3) Includes options to purchase 8,000 shares of Common Stock granted in 1996.
Mr. Lehman subsequently exchanged these options in 1996, along with options
to purchase 18,500 shares of Common Stock granted in prior years, for an
equal number of new options with an exercise price of $1.72 per share. See
note 1 above and the Ten Year Repricings Table.
20
<PAGE> 21
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------- REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OF PRICE APPRECIATION
OPTIONS EMPLOYEES BASE PRICE EXPIRATION FOR OPTION TERM
NAME GRANTED IN FISCAL YEAR ($/Sh) DATE 5%($) 10%($)
- ---- ------- -------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
M. Russell Leonard 10,000 8 1.00 12/16/2007 13,200 17,500
Richard Lehman 5,000 4 1.00 12/16/2007 6,600 8,750
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information on an aggregated basis
regarding each exercise of stock options during the Company's last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END($) (1)
SHARES -------------------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
David Bothwell (2) 0 0 61,585/0 0/0
M. Russell Leonard (2) 0 0 47,000/10,000 0/4,380
Richard Lehman (2) 0 0 20,500/11,000 0/2,190
- --------------
</TABLE>
(1) Based upon the closing price of the Common Stock on December 31, 1997,
of $1.438 per share.
(2) Options granted pursuant to the Company's 1993 Stock Option Plan, as
amended.
21
<PAGE> 22
REPORT ON REPRICING OF OPTIONS
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET PRICE EXERCISE ORIGINAL
SECURITIES OF STOCK AT PRICE AT OPTION TERM
UNDERLYING TIME OF TIME OF REMAINING AT
OPTIONS REPRICING OR REPRICING OR NEW DATE OF
REPRICED OR AMENDMENT AMENDMENT EXERCISE REPRICING OR
NAME DATE AMENDED $ $ PRICE ($) AMENDMENT
- ---- ---- ------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David R. Bothwell 04/09/96 11,585 3.63 4.50 3.63 5 years
04/09/96 10,000 3.63 10.25 3.63 6 years
04/09/96 10,000 3.63 7.00 3.63 9 years
04/09/96 5,000 3.63 7.00 3.63 9 years
04/09/96 25,000 3.63 6.50 3.63 7 years
12/20/96 61,585 1.72 3.63 1.72 9.5 years
M. Russell Leonard 04/09/96 11,000 3.63 4.50 3.63 5 years
04/09/96 6,000 3.63 10.25 3.63 6 years
04/09/96 10,000 3.63 8.75 3.63 7 years
04/09/96 5,000 3.63 7.00 3.63 9 years
04/09/96 10,000 3.63 7.63 3.63 9 years
04/09/96 5,000 3.63 7.00 3.63 9 years
12/20/96 47,000 1.72 3.63 1.72 9.5 years
Richard Lehman 04/09/96 4,500 3.63 4.50 3.63 5 years
04/09/96 3,000 3.63 5.25 3.63 5 years
04/09/96 5,000 3.63 8.75 3.63 7 years
04/09/96 5,000 3.63 6.50 3.63 7 years
04/09/96 1,000 3.63 7.00 3.63 9 years
12/20/96 18,500 1.72 3.63 1.72 9.5 years
12/20/96 8,000 1.72 2.38 1.72 9.7 years
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
There is no Compensation Committee or other committee of the Company's
Board of Directors performing similar functions. The person who performed the
equivalent function in 1997 was Robert Howard, Chairman of the Board under the
direction of the Board of Directors. David R. Bothwell, Chief Executive Officer
and a director, participated in discussions with Mr. Howard during the past
completed fiscal year in his capacity as an executive officer in connection with
executive officer compensation.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
There is no Compensation Committee of the Board of Directors or other
committee of the Board of Directors performing an equivalent function. As noted
above, executive compensation in 1997 was determined by the Company's Chairman,
Robert Howard, in consultation with David Bothwell, the Company's Chief
Executive Officer. There is no formal compensation policy for either the Chief
Executive Officer or the other executive officers of the Company. Executive
compensation is based generally on performance and the Company's resources, but
not on specific objective criteria.
22
<PAGE> 23
Compensation for executive officers consists of a combination of salary
and stock options. In 1997 the Company recorded a loss of $832,072 on revenues
of $7,874,813 as compared to a loss of $6,060,220 in 1996 on revenues of
$11,263,253. During 1997 there were no increases in salaries to executive
officers.
During 1997, Mr. Bothwell's compensation was $83,210 which was a
decrease from the $151,303 he received in 1996.
<TABLE>
<S> <C> <C>
Robert Howard, Chairman Ivan Gati Nat Rothenberg
Sheila Horwitz Harvey Teich
</TABLE>
PERFORMANCE GRAPH
The following chart sets forth a line graph comparing the performance
of the Company's Common Stock, over the past five years. This graph assumes the
investment of $100 on December 31, 1992, in the Company's Common Stock, and
compares the performance with the NASDAQ Composite Index and the NASDAQ Computer
Manufacturer Index. Measurement points are at December 31 for each respective
year.
On July 13, 1995, the Company's Common Stock ceased trading on the
American Stock Exchange and commenced trading on the NASDAQ National Market.
Those companies which compete with the Company in its principal market,
image scanning, are either small subsidiaries or divisions of large United
States corporations or are foreign companies which are either not quoted on a
stock exchange or for which data is difficult to obtain. For this reason a more
generic index of NASDAQ technology stocks has been adopted. The Company pays no
dividends. The NASDAQ Composite Index and the NASDAQ Computer Manufacturer Index
reflect a cumulative total return based upon the reinvestment of dividends of
the stocks included in those indices.
[INSERT GRAPH HERE]
23
<PAGE> 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the Common
Stock owned on February 10, 1998, by (i) each person who is known to the Company
to own beneficially more than 5% of the outstanding shares of the Company's
Common Stock, (ii) each executive officer named in the Summary Compensation
Table below, (iii) each director of the Company, and (iv) all current executive
officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER(1) OWNED (2) (3) OF CLASS
- ------------------ ------------- --------
<S> <C> <C>
Robert Howard................ 1,516,982 (4) 16.74%
303 East 57th Street
New York, New York 10022
W. Scott Parr................. 11,000 (5) *
David R. Bothwell............ 63,585 (6) *
Sheila Horwitz............... 36,500 (7) *
Richard Lehman............... 28,500 (8) *
M. Russell Leonard........... 48,000 (9) *
Nat Rothenberg............... 33,000 (10) *
Harvey Teich.................. 32,500 (11) *
Ivan Gati.................... 27,500 (12) *
All current executive officers
and directors as a group
(10 persons)................ 1,826,567 (4)
through (12) 19.55%
</TABLE>
- -----------------------------------
* Less than one percent.
(1) The address of Messrs. Parr, Bothwell, Gati, Leonard, Lehman,
Rothenberg and Teich, and Ms. Horwitz is 21 Park Avenue, Hudson, New
Hampshire 03051.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from February 10, 1998, upon the
exercise of options, warrants or rights; through the conversion of a
security; pursuant to the power to revoke a trust, discretionary
account or similar arrangement; or pursuant to the automatic
termination of a trust, discretionary account or similar arrangement.
Each beneficial owner's percentage ownership is determined by assuming
that the options or other rights to acquire beneficial ownership as
described above, that are held by such person (but not those held by
any other person) and which are exercisable within 60 days from
February 10, 1998, have been exercised.
(3) Unless otherwise noted, the Company believes that the persons referred
to in the table have sole voting and investment power with respect to
all shares reflected as beneficially owned by them.
(4) Includes 23,000 shares owned by Mr. Howard's wife.
(5) Includes 5,500 shares owned by Mr. Parr's wife.
24
<PAGE> 25
6) Includes options to purchase 61,585 shares of the Company's Common
Stock at $1.72 per share.
7) Includes options to purchase 10,000 shares of the Company's Common
Stock at $1.72 per share, and 12,500 shares at $1.50 per share.
8) Includes 2,000 shares owned by Mr. Lehman's wife. Also includes options
to purchase 20,500 of the Company's Common Stock at $1.72 per share.
9) Includes options to purchase 47,000 of the Company's Common Stock at
$1,72 per share.
10) Includes options to purchase 20,000 of the Company's Common Stock at
$1.72 per share, and 12,500 shares at $1.50 per share.
11) Includes options to purchase 20,000 of the Company's Common Stock at
$1.72 per share, and 12,500 shares at $1.50 per share.
12) Includes options to purchase 15,000 of the Company's Common Stock at
$1.72 per share, and 12,500 shares at $1.50 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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. The Loan Agreement expires January
4, 1999. 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.
On April 25, 1997, The Company repaid the balance due, including
interest, on the Revolving Note and Security Agreement held by Mr. Howard in the
amount of $3,775,555. As of December 31, 1997 no moneys were owed and the
Company had $8,000,000 available for future borrowings under the Loan Agreement.
In February 1984, the Company entered into a lease of its Hudson, New
Hampshire facility with Mr. Howard, at an annual rent of $78,500, plus taxes and
operating expenses. The Company continues to renew this lease each year at the
same rent and the current lease term expires on September 30, 1998.
25
<PAGE> 26
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 29.
2. Financial Statement Schedule - See Index on page 29. 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 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].
26
<PAGE> 27
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 October 31, 1984].
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.
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 September 30, 1987].
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. [incorporated by
reference to Exhibit 10(d) to the Registrant's Report on
Form 10-K for the year ended December 31, 1996].
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.
27
<PAGE> 28
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 26, 1998
By: /s/ W. Scott Parr
-----------------
W. Scott Parr
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert Howard Chairman of the
- ---------------------- Board, Director March 26, 1998
Robert Howard
/s/ W. Scott Parr Chief Executive
- ---------------------- Officer, Director March 26, 1998
W. Scott Parr
/s/ Robert J. Lungo Vice President, Chief
- ---------------------- Financial Officer,
Robert J. Lungo Principal Accounting
Officer March 26, 1998
/s/ Ivan Gati Director March 26, 1998
- ----------------------
Ivan Gati
/s/ Sheila Horwitz Director March 26, 1998
- ----------------------
Sheila Horwitz
/s/ Nat Rothenberg Director March 26, 1998
- ----------------------
Nat Rothenberg
/s/ Harvey Teich Director March 26, 1998
- ----------------------
Harvey Teich
</TABLE>
28
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 30
Balance Sheets
As of December 31, 1997 and 1996 31
Statements of Operations
For the years ended December 31, 1997,
1996 and 1995 32
Statements of Changes in Stockholders' Equity
For the years ended December 31,
1997, 1996 and 1995 33
Statements of Cash Flows
For the years ended December 31, 1997,
1996 and 1995 34
Notes to Financial Statements 35-49
Schedule II - Valuation and Qualifying
Accounts and Reserves 50
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Howtek, Inc.
Hudson, New Hampshire
We have audited the accompanying balance sheets of HOWTEK, INC. as of
December 31, 1997 and 1996 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, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
New York, New York
February 20, 1998
30
<PAGE> 31
HOWTEK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
Assets
------
<S> <C> <C>
Current assets:
Cash and equivalents $ 235,326 $ 235,143
Trade accounts receivable net of
allowance for doubtful accounts of
$70,000 in 1997 and $537,748 in 1996
(note 8) 1,475,952 3,469,275
Inventory (note 1) 3,515,993 5,762,657
Prepaid and other 105,275 230,815
------------ -------------
Total current assets 5,332,546 9,697,890
------------ -------------
Property and equipment (note 1):
Equipment 2,288,687 10,873,192
Leasehold improvements - 371,535
Furniture and fixtures - 185,564
Motor vehicles 6,050 6,050
------------ -------------
2,294,737 11,436,341
Less accumulated depreciation and
amortization 1,255,317 9,391,369
------------ -------------
Net property and equipment 1,039,420 2,044,972
------------ -------------
Other assets (note 1):
Software development costs, net 593,879 941,989
Debt issuance costs, net 78,040 98,398
Patents, net 27,409 12,218
------------ -------------
Total other assets 699,328 1,052,605
------------ -------------
Total assets (note 4) $ 7,071,294 $ 12,795,467
============ =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,200,871 $ 1,969,342
Accrued interest 16,903 689,434
Accrued expenses 322,448 343,677
------------ -------------
Total current liabilities 1,540,222 3,002,453
Loans payable to related parties (note 4) - 3,478,604
Convertible subordinated debentures
(note 5) 2,181,000 2,181,000
------------ -------------
Total liabilities 3,721,222 8,662,057
------------ -------------
Commitments and contingencies (notes 4 and 9)
Stockholders' equity (notes 4, 5 and 6):
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 9,128,082 in
1997 and 9,099,732 shares in 1996;
outstanding 9,060,206 in 1997
and 9,031,856 shares in 1996 91,281 90,997
Additional paid-in capital 45,665,122 45,616,672
Accumulated deficit (41,456,067) (40,623,995)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 3,350,072 4,133,410
------------ ------------
Total liabilities and stockholders'
equity $ 7,071,294 $ 12,795,467
============ =============
</TABLE>
See accompanying notes to financial statements.
31
<PAGE> 32
HOWTEK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Sales (note 8) $ 7,874,813 $ 11,263,253 $ 20,603,654
Cost of sales 6,211,496 9,344,455 13,983,819
------------ ------------ ------------
Gross margin 1,663,317 1,918,798 6,619,835
------------ ------------ ------------
Operating expenses:
Engineering and product development 1,401,989 2,353,354 2,788,281
General and administrative 1,716,199 2,357,560 2,651,905
Marketing and sales 1,723,883 2,644,567 3,339,019
Restructuring charge (note 2) - - 2,662,632
Unusual charges (note 3) 3,394,406 - -
------------ ------------ ------------
Total operating expenses 8,236,477 7,355,481 11,441,837
------------ ------------ ------------
Loss from operations (6,573,160) (5,436,683) (4,822,002)
Interest expense - net (includes $114,649,
$450,594 and $259,732, respectively,
to related parties) (258,912) (623,537) (433,045)
Income from legal settlement (note 10) 6,000,000 - -
------------ ------------ ------------
Net loss $ (832,072) $ (6,060,220) $ (5,255,047)
============ ============ ============
Net loss per share (notes 1 and 6)
Basic $ (0.09) $ (0.76) $ (0.66)
Weighted average number of shares used in
computing earnings per share
Basic 9,038,632 8,022,256 7,934,654
</TABLE>
See accompanying notes to financial statements.
32
<PAGE> 33
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, 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
========= ======= =========== ============ ========= ===========
</TABLE>
<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, 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 4 (e)) 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>
<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, 1996 9,099,732 $90,997 $45,616,672 $(40,623,995) $(950,264) $4,133,410
Issuance of common stock
pursuant to incentive stock
option plan 28,350 284 48,450 48,734
Net loss - - - (832,072) (832,072)
--------- ------- ----------- ------------ --------- ----------
Balance at December 31, 1997 9,128,082 $91,281 $45,665,122 $(41,456,067) $(950,264) $3,350,072
========= ======= =========== ============ ========= ==========
</TABLE>
See accompanying notes to financial statements.
33
<PAGE> 34
HOWTEK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (832,072) $(6,060,220) $(5,255,047)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 1,048,865 1,576,133 1,446,044
Amortization 301,360 626,896 524,901
Restructuring charge - - 2,662,632
Asset writedowns and reserve increases (note 3) 3,394,406 - 500,000
(Increase) decrease:
Accounts receivable 1,243,323 3,004,869 1,376,572
Inventory 496,664 1,078,166 (1,990,443)
Other current assets 125,540 16,775 130,665
Increase (decrease):
Accounts payable (768,471) (1,526,356) (490,632)
Accrued interest (672,531) 450,594 238,840
Accrued expenses (21,229) (124,953) (356,568)
----------- ----------- -----------
Total adjustments 5,147,927 5,102,124 4,042,011
----------- ----------- -----------
Net cash provided (used) by
operating activities 4,315,855 (958,096) (1,213,036)
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (377,995) (350,674) (445,106)
Additions to property and equipment (507,807) (591,896) (1,201,464)
----------- ----------- -----------
Net cash used by investing activities (885,802) (942,570) (1,646,570)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 48,734 1,661,162 206,194
Proceeds of loans payable to related parties - 1,000,000 2,578,604
Repayment of loans payable to related parties (3,478,604) (1,100,000) -
----------- ----------- -----------
Net cash provided (used) by financing activities (3,429,870) 1,561,162 2,784,798
----------- ----------- -----------
Increase (decrease) in cash and equivalents 183 (339,504) (74,808)
Cash and equivalents, beginning of year 235,143 574,647 649,455
----------- ----------- -----------
Cash and equivalents, end of year $ 235,326 $ 235,143 $ 574,647
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid $ 983,471 $ 196,290 $ 218,079
============ =========== ============
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 35
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, film digitizers and related software for
applications in the graphic arts and medical imaging markets. The Company
sells its products throughout the world through various distributors,
resellers, systems integrator and OEM's. See Note 8 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 approximately $2,691,000 and $825,000,
respectively, for 1997 and raw material and finished goods of
approximately $3,926,000 and $1,837,000, respectively, for 1996.
(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). During 1997 the
Company wrote-off test equipment for non-current products with a net book
value of $224,610 in the second quarter and $239,885 in the fourth
quarter. See Note 3 - Unusual Charges.
35
<PAGE> 36
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 $355,465, $350,674,
and $445,106 of internally developed and externally purchased software
costs during fiscal 1997, 1996 and 1995, respectively. During 1997 the
Company wrote-off previously capitalized software development costs for
non-current products with a net book value of $272,361 in the second
quarter and $157,550 in the fourth quarter. See Note 3 - Unusual Charges.
The capitalized software balances are presented net of accumulated
amortization, which was $50,191, and $1,808,836 at December 31, 1997, and
1996, 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.
36
<PAGE> 37
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 LOSS PER COMMON SHARE
Net loss per common share has been computed in accordance with
Financial Accounting Standards No. 128, "Earnings per Share". See Note
6 - Stockholders' Equity.
(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.
37
<PAGE> 38
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, 1997 other than disclosed in Note 3 - Unusual
Charges.
(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 6 - Stockholders' Equity.
(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) UNUSUAL CHARGES
During 1997 the Company recorded unusual charges of $3,394,406 consisting
of the following: (i) an inventory reserve of $1,750,000 resulting from
management's decision in the second quarter of 1997 to discontinue support
of certain products which had reached end of life; (ii) a bad debt reserve
of $750,000 prompted by the bankruptcy filing of a major European
distributor in the second quarter of 1997; (iii) a write-off of test
equipment for non-current products of $224,610 in the second quarter of
1997 and $239,885 in the fourth quarter of 1997; and (iv) a write-off of
software development for non-current products in the amount of $272,361 in
the second quarter of 1997 and $157,550 in the fourth quarter of 1997.
38
<PAGE> 39
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) 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 made by third parties in an amount up to $8,000,000. The Loan
agreement expires January 4, 1999. 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 December 31, 1996 the Company owed Mr. Howard $3,078,604 pursuant to
the Loan Agreement. On April 25, 1997, the Company repaid the balance due,
including interest, on the Revolving Note and Security Agreement held by
Mr. Howard in the amount of $3,775,555. As of December 31, 1997 no moneys
were owed and the Company had $8,000,000 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"). The Note matured on January 4,
1998 or, at the option of the holder, upon the earlier closing of a public
offering of the Company's securities yielding at least $2 million in net
proceeds. Under the terms of the Note the Company agreed to pay interest
monthly at the rate of Citibank's prime rate plus two percent. The Note
was secured by substantially all of the assets of the Company and allowed
the holder the right to convert all or a portion of the principal amount
plus accrued interest into the Company's Common Stock at a conversion
price of $3.00 per share. The shares issuable upon conversion were subject
to certain registration rights.
As of December 31, 1996, the Company owed Dr. Lawrence Howard $400,000
pursuant to the Note. On April 25, 1997, the Company repaid the balance
due, including interest, on the Note held by Dr. Lawrence Howard in the
amount of $490,229 and the Note was discharged. As of December 31, 1997 no
moneys were owed by the Company on the Note.
39
<PAGE> 40
HOWTEK, INC.
Notes to Financial Statements (continued)
(c) PREMISES LEASE AND OTHER EXPENSES
The Company conducts its operations in premises owned by Mr. Robert
Howard, Chairman of the Board of Directors of the Company, pursuant to a
lease which expires September 30, 1998. As of December 31, 1997, future
minimum lease payments under this lease was $78,500 for 1998. The Company
is required to pay real estate taxes, provide insurance and maintain the
premises
(d) RELATED PARTY SALES
During the year ended December 31, 1996 the Company sold equipment and
services totaling $53,721 to Presstek, Inc., which Mr. Howard is the
Chairman of the Board and a principal stockholder. There were no sales to
Presstek in 1997 and 1995.
In addition, during 1997 the Company made payments of $83,800 to Stewart
Hall, Secretary of the Company, in consideration for providing legal
services.
(e) SALES OF SECURITIES
On October 15, 1996, the Company sold 243,191 shares of its Common Stock
($.01 per share par value), at $2.056 per share, the estimated fair market
value of the unregistered stock, in a private placement pursuant to
Section 4(2) of the Securities Act of 1933, to Robert Howard.
On December 13, 1996, the Company sold 403,362 shares of its Common Stock
($.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.
40
<PAGE> 41
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) CONVERTIBLE SUBORDINATED DEBENTURES
As of December 31, 1997 and 1996, 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 1997 or 1996.
(6) 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
1997, 1996 and 1995: 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss
As reported $ 832,072 $6,060,220 $5,255,047
Pro forma $ 938,783 $6,162,428 $5,386,334
Basic loss per share
As reported $ .09 $ .76 $ .66
Pro forma $ .10 $ .77 $ .68
</TABLE>
41
<PAGE> 42
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) STOCKHOLDERS' EQUITY (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.
42
<PAGE> 43
HOWTEK, INC
Notes to Financial Statements (continued)
(6) STOCKHOLDERS' EQUITY (continued)
(a) STOCK OPTIONS (continued)
A summary of stock option (incentive and non-qualifying) activity is as
follows:
1984 STOCK OPTION PLAN AS AMENDED
- ---------------------------------
<TABLE>
<CAPTION>
Exercise Weighted
Option price range average
Shares per share exercise price
---------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 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-
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
-----------------------------------------
Outstanding, December 31, 1997 -0- -0- -0-
=========================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exercisable at year-end
1995 188,885 $2.75-$14.00 $8.39
1996 -0- -0- -0-
1997 -0- -0- -0-
Available for future grants
1997 -0-
</TABLE>
43
<PAGE> 44
HOWTEK, INC
Notes to Financial Statements (continued)
(6) STOCKHOLDERS' EQUITY (continued)
(a) STOCK OPTIONS (continued)
1993 STOCK OPTION PLAN
- ----------------------
<TABLE>
<CAPTION>
Exercise Weighted
Option price range average
Shares per share exercise price
-------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 180,700 $6.50-$8.25 $7.13
Granted 233,500 $6.75-$7.63 $7.09
Exercised (7,450) $6.63-$8.250) $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
Granted 124,000 $1.00-$1.81 $1.44
Exercised (28,350) $1.72 $1.72
Cancelled (72,200) $1.72-$3.6 $2.68
-------------------------------------------
Outstanding, December 31, 1997 455,785 $1.00-$1.81 $1.44
===========================================
Exercisable at year-end
1995 35,150 $6.63-$8.25 $7.33
1996 43,200 $3.63 $3.63
1997 308,635 $1.72 $1.72
Available for future grants
1997 508,415
</TABLE>
Weighted-average fair value of options granted during the year is $0.32 per
share for 1997, 1996 and 1995.
44
<PAGE> 45
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) STOCKHOLDERS' EQUITY (continued)
(a) STOCK OPTIONS (continued)
DIRECTOR INCENTIVE PLAN
- -----------------------
<TABLE>
<CAPTION>
Exercise Weighted
Option price range average
Shares per share exercise price
-------------------------------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 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
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
-------------------------------------------
Outstanding, December 31, 1997 100,000 $1.72 $1.72
===========================================
Exercisable at year-end
1995 80,000 $6.75 $6.75
1996 -0- -0- -0-
1997 100,000 $1.72 $1.72
Available for future grants
1997 150,000
</TABLE>
The weighted-average remaining contractual life of stock options outstanding for
all plans at December 31, 1997 is 9.2 years.
45
<PAGE> 46
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) STOCKHOLDERS' EQUITY (continued)
(b) EARNINGS PER SHARE
In the last quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which requires the
presentation of both basic and diluted earning per share on the face of the
Statements of Operations and the restatement of all prior periods earnings
per share amounts. Conversion of the subordinated debentures and assumed
exercise of options are not included in the calculation of diluted earnings
per share since the effect would be antidilutive. Accordingly, basic and
diluted net loss per share do not differ for any period presented.
The following table summarizes securities that were outstanding as of
December 31, 1997 and 1996, but not included in the calculation of diluted
net loss per share because such shares are antidilutive:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Stock options 555,785 532,335 683,785
Convertible Subordinated Debentures 114,789 114,789 114,789
Convertible Revolving Promissory Note - 495,447 548,780
</TABLE>
(7) INCOME TAXES
As a result of the 1997, 1996 and 1995 losses, no income tax expense was
incurred for these years.
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Inventory (Section 263A) $ (396,000) $ (508,000)
Inventory reserves (81,000) (170,000)
Receivable reserves (24,000) (183,000)
Other accruals (45,000) (62,000)
Tax credits (2,282,000) (2,006,000)
NOL carryforward (12,742,000) (12,335,000)
----------- ----------
Gross deferred tax asset $(15,570,000) $(15,264,000)
------------ ------------
</TABLE>
46
<PAGE> 47
HOWTEK, INC.
Notes to Financial Statements (continued)
(7) INCOME TAXES (continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated depreciation 401,000 400,000
------------ ------------
Gross deferred tax liabilities 401,000 400,000
------------ ------------
Total tax assets $(15,169,000) $(14,864,000)
Deferred tax assets valuation
allowance $ 15,169,000 $ 14,864,000
============ ============
Net deferred tax assets $ -0- $ -0-
============ ============
</TABLE>
As of December 31, 1997 the Company has net operating loss
carryforwards totaling approximately $37,476,000. 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:
<TABLE>
<CAPTION>
Expiration date Amount of remaining NOL
<S> <C>
2000 1,100,000
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 300,000
2008 600,000
2009 100,000
2010 4,000,000
2011 4,400,000
2012 1,176,000
</TABLE>
In addition the Company has available tax credit carryforwards
(adjusted to reflect provisions of the Tax Reform Act of 1986) of
approximately $2,282,000, which are available to offset future taxable
income and income tax liabilities, when earned or incurred. These
amounts expire in various years through 2012.
47
<PAGE> 48
HOWTEK, INC.
Notes to Financial Statements (continued)
(8) 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 $4,362,000 or 55% of total sales in 1997, $7,275,000 or 65% of total
sales in 1996 and $14,090,000 or 69% of total sales in 1995.
The Company's principal concentration of export sales has been in Europe
which accounted for 69% of 1997 export sales, 74% in 1996 and 67% in 1995.
The balance of the export sales were into the Far East, Mexico, Central
America, and Canada.
As of December 31, 1997 and 1996 the Company had outstanding receivables
of $838,000 and $2,603,000, respectively, from distributors of its
products outside of the United States.
(b) MAJOR CUSTOMERS
During the years ended December 31, 1997, 1996 and 1995 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:
<TABLE>
<CAPTION>
1997 1996 1995
Sales Amount % Amount % Amount %
----- ------ - ------ - ------ -
<S> <C> <C> <C>
Customer 1 $1,832,000 23 $1,939,000 17 $7,340,000 36
Customer 2 $1,388,000 18 $3,313,000 29 $4,179,000 20
Accounts Receivable
-------------------
Customer 1 $ 254,000 $ 535,000 $1,946,000
Customer 2 $ 201,000 $ 536,000 $ 826,000
</TABLE>
48
<PAGE> 49
HOWTEK, INC.
Notes to Financial Statements (continued)
(9) COMMITMENTS AND CONTINGENCIES
As of December 31, 1997 the Company had two lease obligations for
facilities. The lease obligations for 1998 will be approximately $148,800.
The Company's principal executive offices and research and development
laboratory is leased by the Company from Mr. Robert Howard, Chairman of
the Board of Directors pursuant to a lease which expires September 30,
1998. The Company leases additional office, manufacturing and warehouse
space pursuant to a lease which expires September 12, 1998. Rental expense
for the years ended December 31, 1997, 1996 and 1995 was $243,343,
$240,967 and $248,969 respectively.
(10) LEGAL PROCEEDINGS
HOWTEK, INC. V. TECO ET AL
As previously reported in the Company's 1996 Annual Report on Form 10-K,
on June 7, 1994, the Company filed a complaint in the United States
District Court, District of New Hampshire, against TECO Electric and
Machinery Co. Ltd. TECO Information Systems Co., Ltd., Relisys (a TECO
subsidiary) and Herman Hsu. The Company claimed, inter alia, breach of
contract, misappropriation of trade secrets, and breach of exclusive
dealing. On April 24, 1997, the Company announced that the lawsuit had
been settled. All existing agreements between the companies have been
terminated. The Company has released the TECO companies, Relisys and Mr.
Hsu from all covenants not to compete and from any claims relating to the
scanner technology involved in the case. TECO, in turn, made a one-time
payment of $6,000,000 to the Company on April 23, 1997, and has released
the Company from any obligation to manufacture scanner products through
TECO. Neither party admitted to any breach of contract or other
wrong-doing in connection with the settlement of this lawsuit.
(11) FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and convertible
debentures approximated fair value as of December 31, 1997 and 1996.
49
<PAGE> 50
HOWTEK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<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, 1997:
Allowance for Doubtful Accounts $ 537,748 $ 770,000 $1,237,748(1) $ 70,000
Inventory Reserve $ 500,000 $2,119,467 $2,382,809(2) $ 236,658
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(2) $ 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(2) $ 490,456
</TABLE>
(1) Represents the net of accounts charged off.
(2) Represents inventory written off and disposed of.
50
<PAGE> 1
EXHIBIT 10(b)
RENEWAL OF LEASE
Effective October 1, 1997, the Indenture of Lease (the "Lease") dated
October 1, 1984 between Robert Howard ("Lessor") and Howtek, Inc. ("Lessee"), of
the premises located at 21 Park Avenue, Hudson, NH, is renewed for a term of one
(1) year 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.
LESSOR LESSEE
HOWTEK, INC.
/s/ Robert Howard BY: /s/ W. Scott Parr
- --------------------- -------------------
ROBERT HOWARD PRESIDENT
<PAGE> 1
EXHIBIT 23 (a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-72534) of
our report dated February 20, 1998 appearing in this Annual Report on Form 10-K
of Howtek, Inc. for the year ended December 31, 1997.
BDO SEIDMAN, LLP
New York, New York
February 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 235,326
<SECURITIES> 0
<RECEIVABLES> 1,545,952
<ALLOWANCES> 70,000
<INVENTORY> 3,515,993
<CURRENT-ASSETS> 5,332,546
<PP&E> 2,294,737
<DEPRECIATION> 1,255,317
<TOTAL-ASSETS> 7,071,294
<CURRENT-LIABILITIES> 1,540,222
<BONDS> 2,181,000
0
0
<COMMON> 91,281
<OTHER-SE> 3,258,791
<TOTAL-LIABILITY-AND-EQUITY> 7,071,294
<SALES> 7,874,813
<TOTAL-REVENUES> 7,874,813
<CGS> 6,211,496
<TOTAL-COSTS> 6,211,496
<OTHER-EXPENSES> 1,401,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258,912
<INCOME-PRETAX> (832,072)
<INCOME-TAX> 0
<INCOME-CONTINUING> (832,072)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (832,072)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
