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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 1-9341
HOWTEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0377419
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Park Avenue, Hudson, New Hampshire 03051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 882-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ----------------
9% Convertible Subordinated Philadelphia Stock Exchange
Debentures due 2001
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class
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 [ ].
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 March 15, 1999 was $8,193,633.
As of March 15, 1999, the registrant had 12,511,206 shares of Common Stock
outstanding.
2
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Certain information included in this report on Form 10-K that are not historical
facts contain forward looking statements that involve a number of known and
unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievement expressed or implied by such
forward looking statements. These risks and uncertainties include, but are not
limited to, uncertainty of future sales levels, protection of patents and other
proprietary rights, the impact of supply and manufacturing constraints or
difficulties, possible technological obsolescence of products, competition and
other risks detailed in the Company's Securities and Exchange Commission
filings. The words "believe", "expect", "anticipate" and "seek" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
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 considers itself a single
reportable business segment. The Company develops, manufactures, and markets
digitizing systems, or "scanners", which convert printed, photographic and other
"hard copy" images to digital form, for use in the medical, prepress,
photographic, electronic printing and publishing industries. The Company focuses
on the "high-end" of the scanning marketplace, targeting corporate customers
with a need for high resolution and high fidelity in their reproduction
requirements. The Company marketed originally to businesses in prepress,
including advertising, corporate, service bureau and other printing and
publishing customers. Recently the Company expanded its product offerings for
the medical and photographic printing businesses. The Company sells its products
throughout the world through various distributors, resellers, and systems
integrators.
Medical Imaging Products
Scanners are used in medical imaging to convert radiological films to digital
records, for computer analysis, transmission or storage. The new economics of
managed care, coupled with revised federally-mandated health care practices have
strongly encouraged the decentralization of patient care, with specialized
services available in fewer locations, on a consultative, remote basis. Film
scanners provide the digital gateway to this evolving health care system.
The Company's radiological film digitizers utilize flatbed scanning technology
to capture monochrome medical images, including X-rays and mammograms, and
convert them to digital form. In digital form such images may be analyzed
through computer-based software applications, 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.
3
The Company introduced the Scanmaster(TM) DX, its first medical film scanner,
based on an existing graphic arts product, in 1997. A new model, designed
specifically for the medical imaging market was introduced in the first quarter
of 1998. In an effort to accelerate acceptance of the Company's products,
management revised product specifications and pricing in the second quarter of
1998, to create the Company's MultiRAD(TM) line of film scanners. The Company
believes that the newly released products are less expensive than existing
competitive products with comparable capabilities, and superior in performance
to products previously available at comparable prices.
The Company's MultiRad medical digitizers are distinguished competitively by a
proprietary, solid state "red light' illumination system, which provides
enhanced accuracy and detail in film scans. The MultiRAD product line includes:
o the MultiRAD 450, which offers up to 4K (or 292 dots per inch) resolution
(competitive with current industry standards), and a 50 film batch feeder,
aimed at telemedicine and archiving applications.
o the MultiRAD 850 product, which offers superior 8K (or 584 dots per inch)
resolution and a 50 film batch feeder. The Company believes that the
product is uniquely positioned to service an increasing market for computer
aided mammography. The MultiRAD 850 was recently chosen by the
Massachusetts General Hospital for use in the US National Mammography
Study.
Medical Imaging Products
--------------------------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/98
--------------------------------------------------------------------------------------------
Scanmaster(TM)DX o Flatbed Scanner $12,995
o High definition CCD array
o Digitizing area 14" x 17"
o Maximum film size 15" x 18"
o 1k - 8k resolution
o Optical density 001-3.4
o 12 bit grayscale
o SCSI-2 interface
--------------------------------------------------------------------------------------------
MultiRAD(TM)450 o Multi-feed compact scanner $15,995
o Solid state, red-light illumination system
o High definition CCD array
o Digitizing area 14" x 36"
o Maximum film size 15" x 36"
o 1k - 4k resolution
o Minimum 87 micron pixel size
o Optical density 001-3.5
o 12 bit grayscale
o SCSI-2 interface
--------------------------------------------------------------------------------------------
4
Medical Imaging Products (continued)
--------------------------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/98
--------------------------------------------------------------------------------------------
MultiRAD(TM)850 o Multi-feed compact scanner $18,995
o Solid state, red-light illumination system
o High definition CCD array
o Digitizing area 14" x 36"
o Maximum film size 15" x 36"
o 1k - 8k resolution
o Minimum 43.5 micron pixel size
o Optical density 001-3.5
o 12 bit grayscale
o SCSI-2 interface
--------------------------------------------------------------------------------------------
Photographic Products
In an effort to reduce its reliance on its traditional prepress markets, the
Company recently introduced two new products for the photographic market. The
first of these is Digital PhotoLab(TM), which combines an innovative software
application designed for the photographic printing market and secured by the
Company on an exclusive basis from a third party with the Company's existing
drum scanner lines. Photographic printers are distinguished historically from
graphic arts printers in several respects. Using photographic film as the output
media, they can achieve substantially higher levels of quality than conventional
printing presses. Output quality has been limited, however, because prepress
scanner products fail, in many cases, to capture the enhanced level and range of
color achievable by photographic process.
The Company's new product is designed specifically for this market. It is
distinguished by support for negative scanning and separation, using a
patent-pending "negative analyzer" to establish settings for film and grain. In
February 1999, the Company commenced offering:
o Digital PhotoLab 8000, combining the new software with the Company's
HiResolve 8000 Scanner, at a current retail price of $29,995 and,
o Digital PhotoLab 4500, using the Company's Scanmaster(TM)4500 drum scanner
as the base, at a current retail price of $21,995.
The Company has also previewed a new class of product, its new Digital
Lightning(TM) product. Digital Lightning is a compact, batch-fed photographic
print scanner which the Company expects will be marketed primarily by OEM
customers, to photo labs, print shops and retailers interested in offering
customers a way to convert shoe boxes full of old photographs to digital form,
for use electronically and storage on diskette and CD-ROM. The Company also
anticipates exploring other markets for the product, including real estate and
law enforcement. Digital Lightning, using application software developed by a
third party is expected to be released commercially in the third quarter of
1999. The product has a tentative retail price of $5,500.
5
Prepress Products
Scanning technology digitizes a graphic image in order to permit its
manipulation and reproduction in traditional print media. In its sophisticated
form it is the central link between the producer of an image (a photographer or
graphic artist) and the publisher who manipulates, edits, and reproduces the
image in print form.
The Company pioneered a scanning technology that utilizes photo-multiplier tube
("PMT"), or "drum scanner" technology to capture and digitize an image. This
technology is characterized by a high degree of accuracy and fidelity in the
acquisition and reproduction of complex images, and is used extensively where
high quality printing (magazine and catalog work, for example) is required.
Professional quality, or high-end products offer large format imaging areas,
resolutions in excess of 2,400 dots per inch, and dynamic range (a measure of
the ability to distinguish detail in very light or very dark areas) in excess of
3.2. The Company's products, are typically positioned to offer superior
performance and a lower price than competitors. Historically, the Company
competed in the market for drum scanners on the basis of compact design,
comparatively low price and value.
The Company's new HiResolve drum scanners offer "true" optical resolution up to
8,000 dots per inch. As a result, they are superior in image capture resolution
to many competitive desktop drum scanners, and significantly more extensive in
imaging range and fidelity, when compared to competing flatbed scanners.
The Company's HiResolve scanners permit full resolution scans across the entire
imaging area, an important advantage over many competitive scanner products. The
Company has positioned its HiResolve products to support large format
photo-realistic printing, as well as addressing today's requirement for five,
six and eight-color printing technologies. For any original size, HiResolve
scanning supports accurate, high fidelity output on photo realistic large format
printers.
In addition to its newly released products, the Company maintains sales of its
Scanmaster(TM) 4500 drum scanner, which has enjoyed renewed sales at a reduced
price. This product, offering 4000-dpi resolution at scanning speeds below that
of the HiResolve 8000, is offered as the Company's "value" product.
Over the last several quarters, a competitive scanning technology that uses a
charge coupled device ("CCD"), or "flatbed" technology, has improved
significantly in image and scanning quality. These devices are easier to use
than drum scanners, are often less expensive, and have captured a significant
portion of the market formerly held by the Company and other drum scanner
manufacturers. To complement the Company's proprietary HiResolve drum scanner
line, the Company entered into an agreement, in January 1999, to act as the US
and Canadian scanner distributor for Scanview, A/S, a privately held Danish
firm. The Company will distribute Scanview's flatbed scanner line in the US and
Canada, on an exclusive basis. In addition to exclusive rights to the Scanview
line in the US and Canada, the Company has the non-exclusive right to distribute
Scanview products in Mexico, Latin America and South America. The Company
expects that its initial shipment of Scanview sourced products will occur at the
end of the first quarter of 1999.
6
Products acquired in the agreement include:
o Scanview F6 scanner, with a suggested retail price of $19,995;
o Scanview F8+ scanner, with a suggested retail price of $31,995 and
o Scanview F10 scanner, priced at $39,995.
The products are distinguished by increasing scanning speed and resolution, and
in the case of the F10 scanner, the ability to scan using X-Y technology,
focusing at high resolutions on "tiles" across the imaging plate. This X-Y
technology is currently the most innovative approach to flatbed scanning. The
Company will be releasing the Scanview product line through its own distribution
channels, bundled with a choice of Scanview's application software or the
Company's proprietary software.
The Company believes that the unique benefit of its scanners is the availability
of a "Common Workflow Interface", which ensures that the same control software
can be used to operate its entire range of scanners. Whether it's a highly
productive flatbed scanner designed to streamline workflow or an oversized very
high resolution drum scanner developed to meet the requirements of the most
discriminating customers, the Company's Trident scanning and color management
software provides a powerful prepress tool. In a production environment, this
reduces learning time and promotes increased flexibility and applications
diversity. The Company's Trident scanning solution allows users to process,
correct and color separate a scan in less than 30 seconds. Because most of the
process is automatic, the professional can achieve device independent color
files and accurate separations faster than ever before. More scans, less
operator time and less rework translates into higher productivity and
profitability for the photographic and prepress professional. The Company is now
extending its Trident software to the new Scanview product line.
Prepress Products
-----------------------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/98
-----------------------------------------------------------------------------------------
Scanmaster(TM)2500 o Flatbed Scanner $15,900
o Tri-linear 8,000 element CCD array
o Scanning area 13" x 18"
o 600 x 1200 dpi optical resolution
o Optical density 0-3.4
o 12 bit color or grayscale
o Macintosh, Windows and UNIX
operating systems
-----------------------------------------------------------------------------------------
7
Prepress Products (continued)
-----------------------------------------------------------------------------------------
Product Distinguishing Features Suggested Retail
Price at 12/31/98
-----------------------------------------------------------------------------------------
Scanmaster(TM)4500 o PMT Drum Scanner $23,995(1)
o Scanning area 11" x 11.8"
o 32 - 4,000 dpi optical resolution
o Optical density 0-3.8
o 12 bit color or grayscale
o Macintosh, Windows and UNIX
operating systems
-----------------------------------------------------------------------------------------
HiResolve(TM)Grand o PMT Drum Scanner $35,995(2)
o Scanning area to 24" x 18.5"
o 50 - 5,000 dpi optical resolution
o 10% to 1,667% enlargement
o Optical density 0-3.8
o 12 bit color or grayscale
o Macintosh, Windows and UNIX
operating systems
-----------------------------------------------------------------------------------------
HiResolve(TM)8000 o PMT Drum Scanner $28,995
o Maximum 1,600 RPM drum speed
o Scanning area to 11.5" x 12"
o 200 - 8,000 dpi optical resolution
o Optical density 0-4
o 12 bit log mode A/D conversion
o Macintosh, Windows and UNIX
operating systems
-----------------------------------------------------------------------------------------
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.
- ----------
(1) Effective January 1999 the suggested retail price of the Scanmaster(TM)
4500 will be reduced to $19,995 in an effort to improve its competitive
positioning.
(2) The HiResolve(TM) Grand was previously offered as the Scanmaster(TM) 6500,
at a higher price.
8
Competition
Competition for the various product categories is as follows:
Medical Imaging Products
The Company has two principal competitors in the radiological film digitizers
market, VIDAR Systems and Lumisys, Inc. The Company uses its proprietary solid
state, red-light illumination system and image quality to compete with VIDAR on
the basis of superior image quality, and to compete with Lumisys on the basis of
comparable or better image quality and at a significantly lower price.
Photographic Products
Competition for the Company's Digital PhotoLab product will come from the same
vendors the Company encounters in the prepress market. The Company believes its
software design, which was created to meet the specific needs of the
photographic printer, will provide a competitive advantage.
In undertaking market research prior to development of its Digital Lightning
product, the Company determined that competition currently focuses on single
image photo scanning, or on multiple image negative scanning. No current
competitor has been identified which possesses batch photo scanning
capabilities.
Prepress Products
The prepress market is divided between "office quality" and "professional
quality" scanners. Office quality scanners, generally manufactured in Taiwan or
China, have become commodity items, offered through discount and electronic
retailers at prices from $100 (or below) to $1,000. This is a highly competitive
market in which it is doubtful any manufacturer can operate profitably on
scanner products alone.
The Company competes in the professional portion of the market. Professional
quality, or high-end, products offer large format imaging areas, resolutions in
excess of 2,400 dots per inch, and dynamic range (a measure of the ability to
distinguish detail in very light or very dark areas) in excess of 3.2. The
Company's products are positioned to offer superior performance and a lower
price than competitors.
The professional portion of the prepress marketplace is further divided between
drum scanners which use a laser imaging device to capture maximum image accuracy
and detail, and flatbed scanners, which offer ease of use advantages at a modest
compromise in imaging quality. Historically, the Company has competed in the
drum scanner market with Linotype, Agfa and Scanview A/S, as well as several
smaller manufacturers. The Company's drum scanner products, with competitive
features and lower prices, have been gaining market share in this area, while
drum scanners as a whole has lost market share to flatbed scanning products. The
recent agreement to become Scanview's exclusive US distributor adds several
flatbed products to the Company's product line. In the prepress market, the
Company could be at a competitive disadvantage with other scanner manufacturers
that offer consumable printing products, as well as, scanner products. These
competitors may offer scanner products at substantially reduced prices as an
incentive to customers to secure long term supply orders of the competitors
consumables.
9
Patents The Company has seven patents covering its scanner and prepress
technology in the US and certain foreign countries, 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 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.
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, 1998, 1997 and 1996 the Company spent
$1,075,620 (or 20% of sales), $1,401,989 (or 18% of sales) and $2,353,354 (or
21% of sales), respectively, on engineering and product development. In
addition, for the years ended December 31, 1998, 1997 and 1996 the Company spent
$190,720 (or 4% of sales), $355,465 (or 5% of sales) and $350,674 (or 3% of
sales), respectively, on software development.
10
Manufacturing
The Company operates an ISO 9001 and FDA-certified manufacturing facility in
Hudson, NH. Historically the Company has undertaken final assembly of all its
scanners and digitizers 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.
During the first calendar quarter of 1999, the Company shifted assembly of its
MultiRAD medical film digitizer to a local manufacturing company, which has
demonstrated a high level of quality in previous work performed for the Company.
On the basis of an evaluation of this outsourcing process, assembly of
additional products may be outsourced to this or comparable vendors.
Employees
In January 1998, the Company had 63 full time employees. On December 31, 1998
the Company had 42 full-time and 2 part-time or temporary employees.
Customers
During 1998, 11% of the Company's sales were made to Techex, Inc., a foreign
distributor of the Company's scanner products. International sales in 1998 were
adversely affected by, among other factors, economic weakness in Asia. In the
event of a reduction in purchases by Techex, Inc., the Company believes other
channels of distribution are available.
Backlog
The dollar amount of the Company's backlog, or orders believed to be firm, as of
December 31, 1998 was approximately $121,000 as compared to approximately
$74,000 on the corresponding date in 1997.
Environmental Protection
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect
upon the capital expenditures, earnings (losses) and competitive position of the
Company.
Export Sales
Certain financial information about export sales is set forth in Note 7 to Notes
to Financial Statements accompanying this Report on Form 10-K.
11
Item 2. Properties
The Company's principal executive offices, manufacturing facility and research
and development laboratory are located at 21 Park Avenue, Hudson, New Hampshire.
The facility consists of approximately 21,000 square feet of manufacturing,
research and development and office 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, 1999 at an annual rent of $78,500.
Additionally, the Company is required to pay real estate taxes, provide
insurance and maintain the premises. If the Company is required to seek
additional or replacement facilities, it believes there are adequate facilities
available at commercially reasonable rates.
Item 3. Legal Proceedings.
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
Not applicable.
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 SmallCap Market
under the symbol "HOWT". The following table sets forth the range of high and
low bid prices for each quarterly period during 1998 and 1997, while the
Company's Common Stock was traded on NASDAQ SmallCap Market beginning July 16,
1998. 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.
Fiscal year ended High Low
---- ---
December 31, 1998
First Quarter $2-7/16 $1-5/16
Second Quarter 2 1-1/32
Third Quarter 1-9/16 15/16
Fourth Quarter 1-9/16 15/16
Fiscal year ended
December 31, 1997
First Quarter $2-7/16 $1-5/16
Second Quarter 2-3/8 1-5/16
Third Quarter 3-5/8 1-1/2
Fourth Quarter 3-3/8 1
As of March 15, 1999 there were 313 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.
12
Item 6. Selected Financial Data
Selected Statement of Operations Data
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Sales $5,323,601 $7,874,813 $11,263,253 $20,603,654 $24,370,329
Gross margin 1,223,135 1,663,317 1,918,798 6,619,835 9,237,115
Restructuring charge -- -- -- (2,662,632) --
Unusual charges (3,394,406) -- -- --
Total operating expenses (4,096,944) (8,236,477) (7,355,481) (11,441,837) (8,020,468)
Income (loss) from operations (2,873,809) (6,573,160) (5,436,683) (4,822,002) 1,216,647
Interest expense - net (498,514) (258,912) (623,537) (433,045) (259,227)
Income from legal settlement -- 6,000,000 -- -- --
Pre-tax income (loss) (3,372,323) (832,072) (6,060,220) (5,255,047) 957,420
Provision for income taxes -- -- -- -- 77,000
Net Income (loss) (3,372,323) (832,072) (6,060,220) (5,255,047) 880,420
Net Income (loss) per share (0.33) (0.09) (0.76) (0.66) 0.11
Selected Balance Sheet Data
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total current assets $4,798,576 $5,332,546 $ 9,697,890 $14,137,204 $16,891,438
Total assets 6,351,421 7,071,294 12,795,467 18,495,240 21,573,849
Total current liabilities 1,433,995 1,540,222 3,002,453 4,203,168 4,811,528
Loans payable to related parties 765,000 -- 3,478,604 3,578,604 1,000,000
Convertible Subordinated Debentures 1,881,000 2,181,000 2,181,000 2,181,000 2,181,000
Stockholders' equity 2,271,426 3,350,072 4,133,410 8,532,468 13,581,321
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
General
The Company has incurred significant operating losses in each of its past three
fiscal years. The new management team introduced in January 1998 was charged
with developing a complete turnaround strategy. Based on an objective analysis
of the Company's operations, channels, products and markets, the Company has
developed a plan aimed at achieving and maintaining profitability. The Company
defined a three-point plan to improve business and financial performance by (1)
reducing the breakeven level of sales; (2) accelerating sales growth in each
business area, beginning with the Company's new MultiRad medical film scanners;
and (3) reducing reliance on traditional prepress market.
The new management team first addressed the cost structure of the Company with
the goal of reducing overhead and improving gross margin. The Company targeted
three main areas for improvement in order to reduce overhead as follows: (1)
personnel reductions; (2) expense reductions; and (3) outsourcing.
In January 1998, the Company had 63 full time employees. As of the end of June
1998, only 35 of those people remained, with seven new staff members added. On
December 31, 1998 the Company had 42 full-time and 2 part-time or temporary
employees. In addition to personnel reduction, expenses in every aspect of the
business were examined and reduced where appropriate. Of particular benefit, two
separate Company facilities were consolidated in May 1998 resulting in a
significant reduction in fixed expenses and improving internal communication.
Part of the reduction in personnel and fixed expenses is attributable to a
successful effort to begin outsourcing functions which can be discharged more
efficiently by specialized outside resources. By implementation of this
strategy, the Company has been able to reduce breakeven levels and improve both
performance and flexibility. The outsourcing process is expected to continue,
with the pending shift of a significant portion of the Company's manufacturing
to outside manufacturing resources, on a product by product basis.
As a result of these steps, the Company was successful in achieving cost
reductions through the course of 1998. The Company reduced breakeven from
approximately $1,400,000 per month in 1997 to approximately $840,000 per month
in the fourth quarter of 1998, by reducing overhead and expenses approximately
$730,000 (35%) per quarter and increasing actual product gross margins from 21%
in 1997 to 35% in the fourth quarter of 1998. Gross margin as a percentage of
sales increased to 35% in the fourth quarter of 1998 from 25% in the third
quarter, 13% in the second quarter and 8% in the first quarter of 1998.
14
During 1998, the Company also took actions designed to accelerate sales growth.
In the medical imaging market the Company replaced a batch-fed film digitizer
with two new, lower priced products. The new MultiRAD(TM) 850 offers superior 8K
(or 584 dots per inch) resolution and a 50 film batch feeder, and the new
MultiRAD 450 offers a lower 4K (or 292 dots per inch) resolution (competitive
with current industry standards), with the same 50 film batch feeder. For the
year ended December 31, 1998 the Company's medical product sales were
$1,245,000, compared to $472,000 in 1997. The Company expects sales of medical
products to continue to increase during 1999.
The Company's primary prepress scanner products utilized photo-multiplier tub
("PMT"), or "drum scanner" technology to capture and digitize an image. This
technology is characterized by a high degree of accuracy and fidelity in the
acquisition and reproduction of complex images, and is used extensively where
high quality printing (magazine and catalog work, for example) is required. Over
the last several quarters competitive scanning products which use a charge
coupled device ("CCD"), or "flatbed" technology, have improved significantly in
image and scanning quality. The Company's sales of drum scanner products
declined significantly as it competed for business with newer, less expensive
flatbed scanner products.
The Company has now updated and repositioned its drum scanner line and acquired
flatbed scanners for distribution. In September 1998 the Company introduced the
HiResolve(TM) 8000 drum scanner, the Company's first new drum scanner product in
two years.
The HiResolve(TM) 8000 is a compact desktop drum scanner that offers `true' 8000
dpi (dots per inch) optical resolution, which is sold with the Company's power
color management and color separation software, Trident 3.0. HiResolve scanners
permit full resolution scans across the entire imaging area. The Company
believes that this new generation of high resolution desktop scanners will allow
it to focus on the special requirements of large format color printing, as well
as addressing today's requirement of five, six and eight-color printing
technologies.
In January 1999 the Company entered into an agreement with Scanview, A/S, a
privately held Danish firm, to distribute Scanview's flatbed scanner line on an
exclusive basis in the US and Canada. The Company believes it can increase
historic sales of Scanview products by introducing the Scanview line to its
existing distribution channels, and by providing US-based support. In addition
to exclusive rights to the Scanview line in the US and Canada, the Company has
the non-exclusive right to distribute Scanview products in Mexico, Latin America
and South America.
In February 1999 the Company, as part of a strategy to reduce dependency on
traditional prepress markets and channels, introduced a new line of Digital
PhotoLab(TM) products. These software and scanner products tailor Company
offerings to support photographic printing and scanning markets, where digital
scanning and imaging are emerging technologies.
The Company believes that these new products provide it with a foundation for
improved performance in 1999. The Company expects to better utilize its
marketing expenses by an increased reliance on direct mail and telemarketing to
support its sales efforts. It is the Company's intention to continue outsourcing
its manufacturing to outside manufacturing resources and to closely monitor
operating expenditures against actual sales levels.
15
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Sales for the year ended December 31, 1998 were $5,323,601, a decrease of 32%
from sales during the year ended December 31, 1997 of $7,874,813. The Company
attributes the decrease in sales primarily to increased competition for drum
scanners from high-end flatbed scanners, the maturing of the Company's
Scanmaster(TM) 2500 product and the economic crisis in Asia.
The Company's gross margin, as a percentage of sales, for the year ended
December 31, 1998 increased to 23% from 21% in 1997. During 1998, gross margins
increased from 8% in the first quarter, to 13% in the second quarter, 25% in the
third quarter and 35% in the fourth quarter. The improvement in gross margin is
primarily due to better management of indirect production costs and to the
increased sales of products which have higher gross margins.
Engineering and product development costs for the year ended December 31, 1998
decreased 23% from $1,401,989 in 1997 to $1,075,620 in 1998. The overall
decrease in engineering and product development costs results primarily from
planned reductions in manpower and anticipated depreciation expenses.
General and administrative expense decreased 23% from $1,716,199 in 1997 to
$1,319,062 in 1998. The decrease in general and administrative expenses results
primarily from the reduction in personnel, salaries, and legal fees in
connection with a lawsuit, against a former contract manufacturer, that was
settled in April 1997.
Marketing and sales expenses for the year ended December 31, 1998 decreased
slightly from $1,723,883 in 1997 to $1,702,262 in 1998. The change results from
reductions in trade show expenses. The Company increased its reliance on direct
mail and telemarketing to support its sales efforts, and reduced trade show
expenditures.
Net interest expense of $498,514 includes interest expense of $284,211 relative
to the conversion of Convertible Subordinated Debentures as required in terms of
Statement of Financial Accounting Standards No. 84, "Induced Conversions of
Convertible Debt". This charge is wholly offset by a corresponding account
increase of $284,211 in additional paid-in capital. The charge and corresponding
benefit relate to the conversion to equity during 1998 of $300,000 of the
Company's previously outstanding 9% Convertible Subordinated Debentures, due
2001 (the "9% Debenture"). In December 1998, the Company provided for a
temporary reduction in the conversion price of the 9% Debenture to encourage
conversion to common stock, and thereby reduce cash interest expenses, and
sinking fund payments associated with the 9% debenture. See "Liquidity and
Capital Resources".
In comparing the Company's performance to that for the year ended December 31,
1997 a $6,000,000 legal settlement granted to the Company in April 1997 (See
Note 9 of Notes to Financial Statements), offset by $3,394,406 in unusual
charges taken during 1997, makes comparison difficult. After giving effect to
legal settlement income and unusual charges, the Company's loss was $832,072 or
$0.09 per share for the year ended December 31, 1997 on sales of $7,874,813
compared to net loss of $3,372,323 or $0.33 per share for the year ended
December 31,1998 on sales of $5,323,601.
16
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 decrease
in sales was 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 resulted 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 resulted
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
contrasted with $2,644,567 (or 23% of sales) for 1996. The change resulted 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 3 of
Notes to Financial Statements.
The Company reported a net loss of $832,072 for the year ended December 31, 1997
which represented an 86% decrease from a net loss of $6,060,220 for the year
ended December 31, 1996. The decrease was attributable to the reduction of
spending levels and included the receipt of $6,000,000 from the settlement of
the Teco lawsuit on April 23, 1997 (See Note 9 of Notes to Financial
Statements). In addition, the results included 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 consisted 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.
17
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, 1998. Subsequent to
December 31, 1998, reflecting the generally improving condition of the Company's
financial performance, the credit line was reduced from $8,000,000 to
$3,000,000. 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 $427,743 from $3,792,324 at December 31, 1997 to
$3,364,581 at December 31, 1998. The ratio of current assets to current
liabilities decreased from 3.5 at December 31, 1997 to 3.4 at December 31, 1998.
During the first five months of 1998, the Company borrowed, (i) $400,000 from
Mr. Robert Howard, the Company's Chairman, and (ii) $300,000 from Dr. Lawrence
Howard, the son of Mr. Robert Howard, pursuant to Secured Demand Notes and
Security Agreements (The "Notes"). Principal on these Notes were due and payable
in full, together with interest accrued and any penalties provided for, on
demand. In May 1998, the Company consummated an agreement with Mr. Robert Howard
and Dr. Lawrence Howard to convert the Notes into shares of restricted common
stock, par value $.01 per share, of the Company (the "Common Stock").
In May 1998, the Company consummated a private offering of 1,000,000 shares of
Common Stock, to an unaffiliated individual, for gross proceeds of $1,000,000.
During the third quarter of 1998, the Company borrowed, (i) $565,000 from Mr.
Robert Howard and (ii) $200,000 from Dr. Lawrence Howard, pursuant to Secured
Demand Notes and Security Agreements (The "New Notes"). Principal on these New
Notes are due and payable in full, together with interest accrued and any
penalties provided for, on demand. Under the terms of the New Notes the Company
agreed to pay interest at the lower rate of (a) 12% per annum, compounded
monthly or (b) the maximum rate permitted by applicable law. The New Notes
currently bear interest at 12%. Payment of the New Notes is secured by a
security interest in certain assets of the Company.
The Company believes it can adequately fund its working capital and capital
equipment requirements based upon its anticipated level of sales for 1999 and
the line of credit available under the Revolving Loan Agreement with its
Chairman.
As of December 31, 1998 and 1997, the Company's outstanding balance on its
$8,000,000, 9% Convertible Subordinated Debentures (the "Debentures"), which
come due 2001, was $1,881,000 and $2,181,000, respectively. Interest on the
Debentures is payable semi-annually on June 1 and December 1. The Debentures
were convertible into common stock of the Company at the conversion price of
$19.00 per share, subject to adjustment in certain events. No Debentures were
converted in 1997 and 1996.
18
On December 31, 1998, the Company and the Trustee of the Debentures entered into
a Second Supplemental Indenture (the "Agreement"). The purpose of the Agreement
was to reduce the conversion price for the Debentures from $19.00 per share to
$1.00 per share, subject to adjustment as set forth in the Indenture, during the
period from December 31, 1998 through March 23, 1999. Under the Agreement,
Debentures owned by related parties in the principal amount of $300,000 were
converted into 300,000 shares of Common Stock, at the conversion price of $1.00
per share on December 31, 1998. Interest expense and corresponding credit to
additional paid-in capital of $284,211 were recorded relative to the conversion
of Convertible Subordinated Debentures as required in terms of Statement of
Financial Accounting Standards No. 84, ("SFAS No. 84") "Induced Conversions of
Convertible Debt".
During the period from January 1, 1999 through March 23, 1999 Debentures in the
principal amount of $1,764,000 were converted into 1,764,000 shares of Common
Stock, at the conversion price of $1.00 per share. Interest expense and
corresponding credit to additional paid-in capital of $1,671,158 will be
recorded relative to the conversion of Convertible Subordinated Debentures as
required in terms of SFAS No. 84. As of March 23, 1999 the Company's outstanding
balance of its Convertible Subordinated Debentures (the "Debentures"), was
$117,000.
In February 1999, the Company borrowed, (i) $250,000 from unrelated parties, and
(ii) $30,000 from Mr. W. Scott Parr, the Company's President, Chief Executive
Officer, pursuant to Convertible Promissory Notes (the "Promissory Notes").
Principal on these Promissory Notes are payable in equal payments based on the
borrowed amount at the end of each quarter starting March 31, 2003 through
December 31, 2006. Under the terms of the Promissory Notes the Company agreed to
pay interest at a fixed rated of 7% per annum, beginning on December 31, 1999
and each succeeding year during the terms hereof. At the Company's option it may
pay the interest in either cash or in restricted shares of the Company's common
stock, par value $.01 per share, or in any combination thereof. Interest paid in
shares of the Company's commons stock will be paid at the greater of $1.00 per
share or the average per share closing market price at the time each interest
payment is due. The Promissory Notes entitles the payees to convert outstanding
principal due into shares of the Company's Common Stock at $1.00 per share .
Impact of the Year 2000
Many currently installed computer systems and software programs were designed to
use only a two-digit date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are updated, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century. This
potential problem is referred to as the "Year 2000" or "Y2K" issue.
In 1998, the Company established a review program to address the Year 2000
issue. The effort encompasses hardware, software, networks, personal computers,
manufacturing and other facilities, and suppliers. The target date to correct
and revise its system problems is September 30, 1999. The Company is currently
assessing alternative manufacturing and financial control systems. The Company's
products are not date aware and do not present a Year 2000 problem to its
customers.
19
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of the Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. The Company believes that, with the completion
of its review program as scheduled and the implementation of new business
systems, the possibility of significant interruptions of normal operations
should be reduced.
Costs related to the Year 2000 issue are expensed as incurred and are funded
through operating cash flows. The total cost associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. The estimated total cost of the Year 2000
program is approximately $40,000. Through 1998, the Company expensed
approximately $4,500 related to the cost of upgrading non-compliant hardware.
Time and cost estimates are based on currently available information and could
be affected by the ability to correct all relevant computer codes and equipment.
Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on October 1, 1999 to affect its
financial statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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.
20
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
Director
Name Age Position Since
- ---- --- -------- -----
Robert Howard....... 75 Chairman of the Board, and Director 1984
W. Scott Parr....... 48 President, Chief Executive Officer
and Director 1998
Ivan Gati........... 51 Director 1989
Sheila Horwitz...... 62 Director 1996
Nat Rothenberg...... 68 Director 1988
Harvey Teich........ 79 Director, Chairman Audit Committee 1988
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.
21
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 Virtual Fund.Com, 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.
Executive Officers and Management
Name Age Position
- ---- --- --------
W. Scott Parr 48 President, Chief Executive Officer, Director
Richard F. Lehman 61 Vice President, Engineering
Robert J. Lungo 51 Vice President, Chief Financial Officer
22
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 in 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.
Item 11. Executive Compensation.
The following table provides information on the compensation provided by the
Company during fiscal years 1998, 1997 and 1996 to the persons serving as the
Company's Chief Executive Officer during fiscal 1998 and the Company's most
highly compensated executive officers, serving at the end of the 1998 fiscal
year. Included in this list are only those executive officers whose total annual
salary and bonus exceeded $100,000 during the 1998 fiscal year.
SUMMARY COMPENSATION TABLE
Securities
Underlying
Name and Principal Position Year Salary($) Options(#)
- --------------------------- ---- --------- ----------
W. Scott Parr
Chief Executive Officer .................. 1998 131,502 277,431
1997 -0- -0-
1996 -0- -0-
David Bothwell (1)
Chief Executive Officer .................. 1998 17,395 -0-
1997 83,210 -0-
1996 151,303 61,585(2)
David Myers (3)
Vice President, Sales .................... 1998 143,323 26,562
1997 -0- -0-
1996 -0- -0-
Richard Lehman
Vice President, Engineering .............. 1998 101,976 19,128
1997 113,698 5,000
1996 102,082 26,500(2)(4)
- --------------
1) Resigned on January 20, 1998.
2) 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.
3) Mr. Myers and the Company have entered into an agreement whereby Mr. Myers
will cease employment with the Company on or before April 30, 1999.
4) 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 $1.72 per share. See
note 2 above.
23
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential
---------------------------- Realizable Value at
Number of Percent of Assumed Annual
Securities Total Options Rates of Stock
underlying Granted to Exercise of Price Appreciation
Options Employees Base Price Expiration for Option Term
Name Granted in Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---- ------- -------------- ------ ---- ----- ------
W. Scott Parr 275,181 1.13 05/12/2008 409,397 540,403
1,125 1.00 09/11/2008 1,485 1,980
1,125 41 1.00 12/23/2008 1,485 1,980
David Myers 25,000 1.13 05/12/2008 37,500 49,500
1,562 4 1.00 12/23/2008 2,062 2,749
Richard Lehman 16,376 1.13 05/12/2008 24,564 32,424
1,376 1.00 09/11/2008 1,816 2,422
1,376 3 1.00 12/23/2008 1,816 2,422
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.
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
- ---- ------------ -------- ------------- -------------
W. Scott Parr (2) 0 0 3,375/271,806 703/33,976
David Myers (2) 0 0 1,562/25,000 391/3,125
Richard Lehman (2) 0 0 41,628/4,000 2,735/0
- --------------
(1) Based upon the closing price of the Common Stock on December 31, 1998, of
$1.25 per share.
(2) Options granted pursuant to the Company's 1993 Stock Option Plan, as
amended.
24
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 1998 was Robert Howard, Chairman of the Board under the direction of
the Board of Directors. W. Scott Parr, 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the Common Stock
owned on March 15, 1999, 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,
(iii) each director of the Company, and (iv) all current executive officers and
directors as a group.
Number of
Shares
Name and Address of Beneficially Percentage
Beneficial Owner(1) Owned(1)(2) of Class
- ------------------- ------------ ----------
Robert Howard ........................ 2,008,982 (3) 16.04%
303 East 57th Street
New York, New York 10022
Donald Chapman ....................... 1,180,000 (4) 9.43%
8650 South Ocean Drive
Jenson Beach, FL 34957
Dr. Lawrence Howard .................. 826,962 6.61%
660 Madison Avenue
New York, NY 10021
W. Scott Parr ........................ 93,327 (5) *
Sheila Horwitz ....................... 41,500 (6) *
Richard Lehman ....................... 47,628 (7) *
Nat Rothenberg ....................... 33,000 (8) *
Harvey Teich ......................... 32,500 (9) *
Ivan Gati ............................ 27,500 (10) *
All current executive officers and
directors as a group (10 persons) .... 2,331,773 (3)&(5) 18.22%
through (10)
- ----------
* Less than one percent.
25
1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 15, 1999, 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 March 15, 1999, have been exercised.
2) 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.
3) Includes 7,000 shares owned by Mr. Howard's wife. Also includes options to
purchase 10,000 shares of the Company's Common stock at $1.72 per share.
4) Includes 15,000 shares owned by Mr. Chapman's wife and 150,000 owned by a
revocable trust.
5) Includes 11,000 shares owned by Mr. Parr's wife. Also includes options to
purchase 69,077 shares of the Company's Common Stock at $1.13 per share and
2,250 shares at $1.00 per share.
6) 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.
7) 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, 16,376
shares at $1.13 per share and 2,752 shares at $1.00 per share.
8) 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.
9) 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.
10) 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.
26
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 $3,000,000. The Loan Agreement expires January 4, 2000. Prior to
January 4, 1999, the Loan Agreement provided for up to $8,000,000 in advances or
guarantees by Mr. Howard. 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, 1998 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, 1999.
27
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 32.
2. Financial Statement Schedule - See Index on page 32. 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].
28
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 December 30, 1998, 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, 1998].
10(e) Form of Secured Demand Notes between the Registrant and Mr.
Robert Howard and Dr. Lawrence Howard.
10(f) Form of Security Agreements between the Registrant and Mr.
Robert Howard and Dr. Lawrence Howard.
10(g) Form of Convertible Promissory Note between unrelated
investtors and the Registrant dated February __, 1999.
10(h) Second Supplemental Indenture dated as of December 31, 1998,
between the Registrant and Continental Stock Transfer and
Trust Company.
29
10(i) Convertible Promissory Note between Mr. W. Scott Parr and the
Company dated February 26, 1999.
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.
30
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 31, 1999
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.
Signature Title Date
- --------- ----- ----
/s/ Robert Howard Chairman of the
- ---------------------- Board, Director March 31, 1999
Robert Howard
/s/ W. Scott Parr President, Chief Executive
- ---------------------- Officer, Director March 31, 1999
W. Scott Parr
/s/ Robert J. Lungo Vice President, Chief
- ---------------------- Financial Officer, Principal
Robert J. Lungo Accounting Officer March 31, 1999
/s/ Ivan Gati Director March 31, 1999
- ----------------------
Ivan Gati
/s/ Sheila Horwitz Director March 31, 1999
- ----------------------
Sheila Horwitz
/s/ Nat Rothenberg Director March 31, 1999
- ----------------------
Nat Rothenberg
/s/ Harvey Teich Director March 31, 1999
- ----------------------
Harvey Teich
31
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Report of Independent Certified Public Accountants 33
Balance Sheets
As of December 31, 1998 and 1997 34
Statements of Operations
For the years ended December 31, 1998,
1997 and 1996 35
Statements of Stockholders' Equity
For the years ended December 31, 1998,
1997 and 1996. 36
Statements of Cash Flows
For the years ended December 31, 1998,
1997 and 1996. 37
Notes to Financial Statements 38-54
Schedule II - Valuation and Qualifying
Accounts and Reserves 55
32
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, 1998 and 1997 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, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 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 12, 1999
except for Note 4 for which the date is March 23, 1999.
33
HOWTEK, INC.
Balance Sheets
December 31, December 31,
1998 1997
------------ ------------
Assets (note 3)
Current assets:
Cash and equivalents $ 182,724 $ 235,326
Trade accounts receivable net of allowance
for doubtful accounts of $118,000 in 1998
and $70,000 in 1997 (note 7) 1,570,081 1,475,952
Inventory (note 1) 2,927,082 3,515,993
Prepaid and other 118,689 105,275
------------ ------------
Total current assets 4,798,576 5,332,546
------------ ------------
Property and equipment (note 1):
Equipment 2,534,635 2,288,687
Leasehold improvements 27,765 --
Motor vehicles 6,050 6,050
------------ ------------
2,568,450 2,294,737
Less accumulated depreciation and amortization 1,717,445 1,255,317
------------ ------------
Net property and equipment 851,005 1,039,420
------------ ------------
Other assets (note 1):
Software development costs, net 626,577 593,879
Debt issuance costs, net 57,682 78,040
Patents, net 17,581 27,409
------------ ------------
Total other assets 701,840 699,328
------------ ------------
Total assets $ 6,351,421 $ 7,071,294
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,086,775 $ 1,200,871
Accrued interest 37,641 16,903
Accrued rent expense 78,500 --
Accrued vacation pay 84,875 132,610
Accrued expenses 146,204 189,838
Loans payable to related parties (note 3) 765,000 --
------------ ------------
Total current liabilities 2,198,995 1,540,222
Convertible subordinated debentures (note 4) 1,881,000 2,181,000
------------ ------------
Total liabilities 4,079,995 3,721,222
------------ ------------
Commitments and contingencies (notes 3 and 8)
Stockholders' equity (notes 3, 4 and 5):
Common stock, $ .01 par value: authorized
25,000,000 shares; issued 11,128,082 in 1998
and 9,128,082 shares in 1997; outstanding
11,060,206 in 1998 and 9,060,206 shares in 1997 111,281 91,281
Additional paid-in capital 47,938,799 45,665,122
Accumulated deficit (44,828,390) (41,456,067)
Treasury stock at cost (67,876 shares) (950,264) (950,264)
------------ ------------
Stockholders' equity 2,271,426 3,350,072
------------ ------------
Total liabilities and stockholders' equity $ 6,351,421 $ 7,071,294
============ ============
See accompanying notes to financial statements.
34
HOWTEK, INC.
Statements of Operations
For the Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Sales (note 7) $ 5,323,601 $ 7,874,813 $ 11,263,253
Cost of sales 4,100,466 6,211,496 9,344,455
------------ ------------ ------------
Gross margin 1,223,135 1,663,317 1,918,798
------------ ------------ ------------
Operating expenses:
Engineering and product development 1,075,620 1,401,989 2,353,354
General and administrative 1,319,062 1,716,199 2,357,560
Marketing and sales 1,702,262 1,723,883 2,644,567
Unusual charges (note 2) -- 3,394,406 --
------------ ------------ ------------
Total operating expenses 4,096,944 8,236,477 7,355,481
------------ ------------ ------------
Loss from operations (2,873,809) (6,573,160) (5,436,683)
Interest expense - net (includes $30,205,
$114,649 and $450,594, respectively,
to related parties) (498,514) (258,912) (623,537)
Income from legal settlement (note 9) -- 6,000,000 --
------------ ------------ ------------
Net loss $ (3,372,323) $ (832,072) $ (6,060,220)
============ ============ ============
Net loss per share (note 5)
Basic and diluted $ (0.33) $ (0.09) $ (0.76)
Weighted average number of shares used in
computing earnings per share
Basic and diluted 10,142,672 9,038,632 8,022,256
See accompanying notes to financial statements.
35
HOWTEK, INC.
Statements of Stockholders' Equity
Common Stock
--------------------------- Additional
Number of Paid-in Accumulated Treasury Stockholders'
Shares Issued Par Value Capital Deficit Stock Equity
------------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 8,022,594 $ 80,225 $ 43,966,282 $(34,563,775) $ (950,264) $ 8,532,468
Issuance of common stock
pursuant to incentive stock
option plan 15,000 151 61,011 -- -- 61,162
Sale of common stock (note 3 (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
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
Sale of common stock 1,000,000 10,000 990,000 1,000,000
Issuance of comon stock relative
conversion of loans payable to
related parties (note 3 (a) & (b)) 700,000 7,000 702,466 709,466
Issuance of common stock relative
to conversion of Convertible
Subordinated Debentures (note 4) 300,000 3,000 581,211 584,211
Net loss -- -- -- (3,372,323) -- (3,372,323)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 11,128,082 $ 111,281 $ 47,938,799 $(44,828,390) $ (950,264) $ 2,271,426
============ ============ ============ ============ ============ ============
See accompanying notes to financial statements.
36
HOWTEK, INC.
Statements of Cash Flows
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(3,372,323) $ (832,072) $(6,060,220)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 462,128 1,048,865 1,576,133
Amortization 188,208 301,360 626,896
Interest relative to conversion of Convertible
Subordinated Debentures 284,211 -- --
Asset writedowns and reserve increases (note 2) -- 3,394,406 --
Changes in operating assets and liabilities:
Accounts receivable (94,129) 1,243,323 3,004,869
Inventory 588,911 496,664 1,078,166
Other current assets (13,414) 125,540 16,775
Accounts payable (114,096) (768,471) (1,526,356)
Accrued interest 20,738 (672,531) 450,594
Accrued expenses (12,869) (21,229) (124,953)
----------- ----------- -----------
Total adjustments 1,309,688 5,147,927 5,102,124
----------- ----------- -----------
Net cash provided (used) by
operating activities (2,062,635) 4,315,855 (958,096)
----------- ----------- -----------
Cash flows from investing activities:
Patents, software development and other (190,720) (377,995) (350,674)
Additions to property and equipment (273,713) (507,807) (591,896)
----------- ----------- -----------
Net cash used by investing activities (464,433) (885,802) (942,570)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock for cash 1,000,000 48,734 1,661,162
Proceeds of loans payable to related parties 1,474,466 -- 1,000,000
Repayment of loans payable to related parties -- (3,478,604) (1,100,000)
----------- ----------- -----------
Net cash provided (used) by financing activities 2,474,466 (3,429,870) 1,561,162
----------- ----------- -----------
Increase (decrease) in cash and equivalents (52,602) 183 (339,504)
Cash and equivalents, beginning of year 235,326 235,143 574,647
----------- ----------- -----------
Cash and equivalents, end of year $ 182,724 $ 235,326 $ 235,143
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash flows from financing activities:
Interest paid $ 188,854 $ 983,471 $ 196,290
=========== =========== ===========
Non-cash items from financing activities:
Conversion of loans payable to related parties
into Common Stock (note 3) $ 709,466 $ -- $ --
=========== =========== ===========
Issuance of common stock relative to conversion
of Convertible Subordinated Debentures (note 4) $ 584,211 $ -- $ --
=========== =========== ===========
See accompanying notes to financial statements.
37
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 medical imaging, prepress and photographic markets. The
Company considers itself a single reportable business segment. The Company
sells its products throughout the world through various distributors,
resellers, systems integrator and OEM's. See Note 7 for geographical and
major customer information.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Many of the Company's estimates and assumptions used in the
preparation of the financial statements relate to the Company's products,
which are subject to rapid technological change. It is reasonably possible
that changes may occur in the near term that would affect management's
estimates with respect to inventories, equipment and software development
costs.
(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 $2,387,000 and $540,000,
respectively, for 1998 and raw material and finished goods of approximately
$2,691,000 and $825,000, respectively, for 1997.
(c) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method 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 2 -
Unusual Charges.
(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. The debt issuance costs balances are
presented net of accumulated amortization, which was $276,290, and $255,931
at December 31, 1998, and 1997, respectively.
38
HOWTEK, INC.
Notes to Financial Statements (continued)
(e) Patents
The costs for patents are being amortized over the estimated useful life of
the respective assets using the straight-line method. The patents balances
are presented net of accumulated amortization, which was $93,960, and
$84,132 at December 31, 1998, and 1997, respectively.
(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 $190,720, $355,465,
and $350,674 of internally developed and externally purchased software
costs during fiscal 1998, 1997 and 1996, 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 2 - Unusual Charges.
The capitalized software balances are presented net of accumulated
amortization, which was $208,214, and $50,191 at December 31, 1998, and
1997, 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.
(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 were not material in any period presented.
39
HOWTEK, INC.
Notes to Financial Statements (continued)
(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 5 -
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.
(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, 1998 except as noted in Note 2.
40
HOWTEK, INC.
Notes to Financial Statements (continued)
(o) Stock-Based Compensation
The Company has not adopted the optional fair value based method for
accounting for stock compensation plans, as permitted by Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation". See Note 5 - Stockholders' Equity.
(p) Advertising
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1998, 1997 and 1996 were $135,000, $45,000 and
$82,000, respectively.
(2) 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.
(3) Related Party Transactions
(a) Loan Payable to Principal Stockholder
The Company has a Convertible Revolving Credit Promissory Note ("the
Convertible Note") and Revolving Loan and Security Agreement (the "Loan
Agreement") with Mr. Robert Howard, Chairman of the Board of Directors of
the Company, under which Mr. Howard has agreed to advance funds, or to
provide guarantees of advances made by third parties in an amount up to
$3,000,000. The Loan agreement expires January 4, 2000. Prior to January 4,
1999, the Loan Agreement provided for up to $8,000,000 in advances or
guarantees by Mr. Howard. 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.
41
HOWTEK, INC.
Notes to Financial Statements (continued)
(3) Related Party Transactions (continued)
(a) Loan Payable to Principal Stockholder (continued)
During the first five months of 1998, the Company borrowed $400,000 from
Mr. Robert Howard, pursuant to Secured Demand Notes and Security Agreements
(the "Notes"). Principal on these Notes were due and payable in full,
together with interest accrued and any penalties provided for, on demand.
Under the terms of the Notes the Company agreed to pay interest at the
lower rate of (a) 12% per annum, compounded monthly or (b) the maximum rate
permitted by applicable law. In May 1998, the Company consummated an
agreement with Mr. Howard to convert the Notes into 400,000 shares of
restricted common stock, par value $.01 per share, of the Company (the
"Common Stock").
As of December 31, 1998, the Company owed Mr. Robert Howard $565,000,
pursuant to Secured Demand Notes and Security Agreements (The "New Notes").
Principal of these notes are due and payable in full, together with
interest accrued and any penalties provided for, on demand. Under the terms
of the Notes the Company agreed to pay interest at the lower rate of (a)
12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. The New Notes currently bear interest at 12%. Payment of
the New Notes is secured by a security interest in certain assets of the
Company.
(b) Loan Payable to Related Party
During the first five months of 1998, the Company borrowed $300,000 from
Dr. Lawrence Howard, son of the Company's Chairman, Robert Howard, pursuant
to Secured Demand Notes and Security Agreements (The "Notes"). Principal on
these Notes were due and payable in full, together with interest accrued
and any penalties provided for, on demand. Under the terms of the Notes the
Company agreed to pay interest at the lower rate of (a) 12% per annum,
compounded monthly or (b) the maximum rate permitted by applicable law. In
May 1998, the Company consummated an agreement with Dr. Howard to convert
the Notes into 300,000 shares of restricted common stock, par value $.01
per share, of the Company (the "Common Stock").
As of December 31, 1998, the Company owed Dr. Lawrence Howard $200,000,
pursuant to Secured Demand Notes and Security Agreements (The "New Notes").
Principal of these notes are due and payable in full, together with
interest accrued and any penalties provided for, on demand. Under the terms
of the Notes the Company agreed to pay interest at the lower rate of (a)
12% per annum, compounded monthly or (b) the maximum rate permitted by
applicable law. The New Notes currently bear interest at 12%. Payment of
the New Notes is secured by a security interest in certain assets of the
Company.
42
HOWTEK, INC.
Notes to Financial Statements (continued)
(3) Related Party Transactions (continued)
(c) Premises Lease and Other Expenses
The Company conducts its operations in premises owned by Mr. Robert Howard,
pursuant to a lease which expires September 30, 1999. As of December 31,
1998, future minimum lease payments under this lease is $78,500 for 1999.
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 $53,721 to Presstek, Inc., which Mr. Howard is the
Chairman of the Board and a principal stockholder. There were no sales to
Presstek, Inc. in 1998 and 1997.
(e) Sales and Issues of Securities
On October 15, 1996, the Company sold 243,191 shares of its Common Stock
($.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.
During 1998, Mr. Robert Howard and Dr. Lawrence Howard converted their
Convertible Subordinated Debentures into Common Stock (see Note 4).
43
HOWTEK, INC.
Notes to Financial Statements (continued)
(4) Convertible Subordinated Debentures
As of December 31, 1998 and 1997, the Company's outstanding balance on its
$8,000,000, 9% Convertible Subordinated Debentures (the "Debentures"),
which come due 2001, was $1,881,000 and $2,181,000, respectively. Interest
on the Debentures is payable semi-annually on June 1 and December 1. The
Debentures were convertible into common stock of the Company at the
conversion price of $19.00 per share, subject to adjustment in certain
events. No Debentures were converted in 1997 and 1996.
On December 31, 1998, the Company and the Trustee of the Debentures entered
into a Second Supplemental Indenture (the "Agreement"). The purpose of the
Agreement was to reduce the conversion price for the Debentures from $19.00
per share to $1.00 per share, subject to adjustment as set forth in the
Indenture, during the period from December 31, 1998 through March 23, 1999.
Under the Agreement, Debentures owned by related parties in the principal
amount of $300,000 were converted into 300,000 shares of Common Stock, at
the conversion price of $1.00 per share on December 31, 1998. Interest
expense and corresponding credit to additional paid-in capital of $284,211
were recorded relative to the conversion of Convertible Subordinated
Debentures as required in terms of Statement of Financial Accounting
Standards No. 84, ("SFAS No. 84") "Induced Conversions of Convertible
Debt".
During the period from January 1, 1999 through March 23, 1999 Debentures in
the principal amount of $1,764,000 were converted into 1,764,000 shares of
Common Stock, at the conversion price of $1.00 per share. Interest expense
and corresponding credit to additional paid-in capital of $1,671,158 will
be recorded relative to the conversion of Convertible Subordinated
Debentures as required in terms of SFAS No. 84. As of March 23, 1999 the
Company's outstanding balance on its Convertible Subordinated Debentures
(the "Debentures"), was $117,000.
44
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity
(a) Stock Options
The Company has three stock option plans, which are described below. The
Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for the plans. Under APB Opinion
25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
Statement of Financial Accounting Standards No.123, "Accounting for
Stock-Based Compensation," ("SFAS No.123") 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 SFAS No. 123.
The Company estimates the fair value of each granting of options at the
grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998: no dividends paid;
expected volatility of 40%; risk-free interest rates of 5%; and expected
lives of 5 years. The following weighted-average assumptions were used for
grants in 1997 and 1996: no dividends paid; expected volatility of 40%;
risk-free interest rates of 6.7%; and expected lives of 1 year. Under the
accounting provisions of SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below.
Net loss 1998 1997 1996
---- ---- ----
As reported $(3,372,323) $ (832,072) $(6,060,220)
Pro forma $(3,450,229) $ (938,783) $(6,162,428)
Basic loss per share
As reported $ (.33) $ (.09) $ (.76)
Pro forma $ (.34) $ (.10) $ (.77)
45
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) 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.
46
HOWTEK, INC
Notes to Financial Statements (continued)
(5) 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
Exercise Weighted
Option price range average
Shares per share exercise price
---------------------------------------------------------------
Outstanding, January 1, 1996 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-
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
---------------------------------------------------------------
Outstanding, December 31, 1998 -0- -0- -0-
===============================================================
Exercisable at year-end
1996 -0- -0- -0-
1997 -0- -0- -0-
1998 -0- -0- -0-
Available for future grants
1998 -0-
47
HOWTEK, INC
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(a) Stock Options (continued)
1993 STOCK OPTION PLAN
Exercise Weighted
Option price range average
Shares per share exercise price
---------------------------------------------------------------
Outstanding, January 1, 1996 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-$3.63 $2.68
---------------------------------------------------------------
Outstanding, December 31, 1997 455,785 $1.00-$1.81 $1.44
Granted 675,924 $1.00-$1.25 $1.08
Exercised -0- -0- -0-
Cancelled (289,593) $1.00-$1.81 $1.43
---------------------------------------------------------------
Outstanding, December 31, 1998 842,116 $1.00-$1.81 $1.27
===============================================================
Exercisable at year-end
1996 43,200 $3.63 $3.63
1997 308,635 $1.72 $1.72
1998 244,793 $1.00-$1.72 $1.27
Available for future grants
1998 122,084
The weighted-average fair value of options granted during the year was $0.63 per
share for 1998, and $0.32 per share for 1997 and 1996.
48
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) Stockholders' Equity (continued)
(a) Stock Options (continued)
DIRECTOR INCENTIVE PLAN
Exercise Weighted
Option price range average
Shares per share exercise price
-----------------------------------------------------
Outstanding, January 1, 1996 80,000 $6.75 $6.75
Granted 200,000 $1.72-$4.88 $3.61
Exercised -0- -0- -0-
Cancelled (155,000) $4.25-$6.75 $5.21
-----------------------------------------------------
Outstanding, December 31, 1996 125,000 $1.50-$1.72 $1.61
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled -0- -0- -0-
-----------------------------------------------------
Outstanding, December 31, 1997 125,000 $1.50-$1.72 $1.61
Granted -0- -0- -0-
Exercised -0- -0- -0-
Cancelled (10,000) $1.72 $1.72
-----------------------------------------------------
Outstanding, December 31, 1998 115,000 $1.50-$1.72 $1.61
=====================================================
Exercisable at year-end
1996 -0- -0- -0-
1997 125,000 $1.50-$1.72 $1.61
1998 115,000 $1.50-$1.72 $1.61
Available for future grants
1998 135,000
The weighted-average remaining contractual life of stock options outstanding for
all plans at December 31, 1998 was 8.8 years.
49
HOWTEK, INC.
Notes to Financial Statements (continued)
(5) 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 the common stock equivalent of securities
that were outstanding as of December 31, 1998, 1997 and 1996, but not
included in the calculation of diluted net loss per share because such
shares are antidilutive:
December 31,
1998 1997 1996
---- ---- ----
Stock options 957,116 555,785 532,335
Convertible Subordinated Debentures 99,000 114,789 114,789
Convertible Revolving Promissory Note -- -- 495,447
(6) Income Taxes
As a result of the 1998, 1997 and 1996 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:
1998 1997
------------ ------------
Inventory (Section 263A) $ (429,000) $ (396,000)
Inventory reserves (35,000) (81,000)
Receivable reserves (40,000) (24,000)
Other accruals (29,000) (45,000)
Tax credits (2,383,000) (2,282,000)
NOL carryforward (14,215,000) (12,742,000)
------------ ------------
Gross deferred tax asset $(17,131,000) $(15,570,000)
------------ ------------
50
HOWTEK, INC.
Notes to Financial Statements (continued)
(6) Income Taxes (continued)
1998 1997
------------ ------------
Accumulated depreciation 34,000 401,000
------------ ------------
Gross deferred tax liabilities 34,000 401,000
Net tax assets $(17,097,000) $(15,169,000)
============ ============
Deferred tax assets valuation
allowance $ 17,097,000 $ 15,169,000
============ ============
Net deferred tax assets $ -0- $ -0-
============ ============
As of December 31, 1998, the Company has net operating loss carryforwards
totaling approximately $41,800,000. The amount of the net operating loss
carryforwards which may be utilized in any future period may be subject to
certain limitations, based upon changes in the ownership of the Company's
common stock. The following is a breakdown of the net operating loss
expiration period:
Expiration date Amount of remaining NOL
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 2,300,000
2018 3,200,000
In addition the Company has available tax credit carryforwards (adjusted to
reflect provisions of the Tax Reform Act of 1986) of approximately
$2,383,000, which are available to offset future taxable income and income
tax liabilities, when earned or incurred. These amounts expire in various
years through 2018.
51
HOWTEK, INC.
Notes to Financial Statements (continued)
(7) Sales Information
(a) Geographic Information
The Company's sales are made to U.S. distributors, dealers and end users
and to 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 $1,252,000 or 23% of total sales in
1998, $4,362,000 or 55% of total sales in 1997 and $7,275,000 or 65% of
total sales in 1996.
The Company's principal concentration of export sales has been in Europe
which accounted for 47% of 1998 export sales, 69% in 1997 and 74% in 1996.
The balance of the export sales were into the Far East, Mexico, Central
America, and Canada.
As of December 31, 1998 and 1997 the Company had outstanding receivables of
$281,000 and $838,000, respectively, from distributors of its products who
are located outside of the United States.
(b) Major Customers
During the year ended December 31,1998 the Company had one major customer
which operated as a U.S. based international distributor of computer and
related products. For the years ended December 31, 1997 and 1996 the
Company had two major customers, one of which operated 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:
1998 1997 1996
Sales Amount % Amount % Amount %
----- --------------- ---------------- ---------------
Customer 1 $ 572,836 11 $1,832,000 23 $1,939,000 17
Customer 2 $ -- $1,388,000 18 $3,313,000 29
Accounts Receivable
Customer 1 $ 52,000 $ 254,000 $ 535,000
Customer 2 $ -- $ 201,000 $ 536,000
52
HOWTEK, INC.
Notes to Financial Statements (continued)
(8) Commitments and Contingencies
As of December 31, 1998, the Company had one lease obligation related to
its facility. The lease obligation for 1999 is approximately $78,500. 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, 1999.
The Company leases additional manufacturing and warehouse space pursuant to
a monthly lease. Rental expense for the years ended December 31, 1998, 1997
and 1996 was $161,425, $243,343 and $240,967 respectively.
(9) 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 had 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 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.
(10) Financial instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, demand notes payable to
related parties and convertible debentures approximated fair value as of
December 31, 1998 and 1997, due to either short maturity or terms similar
to those available to similar companies in the open market.
53
HOWTEK, INC.
Notes to Financial Statements (continued)
(11) Subsequent Events
In February 1999, the Company borrowed, (i) $250,000 from unrelated
parties, and (ii) $30,000 from Mr. W. Scott Parr, the Company's President,
Chief Executive Officer, pursuant to Convertible Promissory Notes (the
"Promissory Notes"). Principal on these Promissory Notes are payable in
equal payments based on the borrowed amount at the end of each quarter
starting March 31, 2003 through December 31, 2006. Under the terms of the
Promissory Notes the Company agreed to pay interest at a fixed rated of 7%
per annum, beginning on December 31, 1999 and each succeeding year during
the terms thereof. At the Company's option it may pay the interest in
either cash or in restricted shares of the Company's common stock, par
value $.01 per share, or in any combination thereof. Interest paid in
shares of the Company's common stock will be paid at the greater of $1.00
per share or the average per share closing market price at the time each
interest payment is due. The Promissory Notes entitles the payees to
convert outstanding principal due into shares of the Company's common stock
at $1.00 per share.
54
HOWTEK, INC.
Schedule II - Valuation and Qualifying Accounts and Reserves
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
- -------------------------------------------------------------------------------------------------
Year End December 31, 1998:
Allowance for Doubtful Accounts $ 70,000 $ 53,064 $ 4,715 (1) $118,349
Inventory Reserve $ 236,658 $ 69,166 $ 204,271 (2) $101,553
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
(1) Represents the amount of accounts charged off.
(2) Represents inventory written off and disposed of.
55