-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXkPkX2B5RmGNsLjErFNf/kZCXpXUl+r0DUx5NJ/kf2G/w6vUlbPILMzLRLDbPMI tMpWAZ4C9rRuWbm8nrrTbw== 0000950135-96-001490.txt : 19960327 0000950135-96-001490.hdr.sgml : 19960327 ACCESSION NUMBER: 0000950135-96-001490 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOWTEK INC CENTRAL INDEX KEY: 0000749660 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 020377419 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09341 FILM NUMBER: 96538290 BUSINESS ADDRESS: STREET 1: 21 PARK AVE CITY: HUDSON STATE: NH ZIP: 03051 BUSINESS PHONE: 6038825200 10-K405 1 HOWTEK, INC. 1 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 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 WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- 2 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 stock on December 29, 1995 was $47,348,284. As of March 5, 1996 the Registrant had 7,964,218 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III (Items 10, 11, 12, and 13) of this Annual Report on Form 10-K is hereby incorporated by reference from the Company's definitive Proxy Statement with respect to its 1996 Annual Stockholders' meeting to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. 2 3 PART I ------ ITEM 1. BUSINESS. - ------ -------- GENERAL Howtek, Inc. (the "Company"), a Delaware corporation located in Hudson, New Hampshire, was formed in February 1984. The Company designs, engineers, develops and manufactures digital image scanners, densitometers, film digitizers and related software for applications in the graphic arts, medical imaging and life sciences markets. The Company sells its products throughout the world through various distributors, resellers, systems integrators and OEM's. GENERAL DEVELOPMENTS OVER THE PAST FIVE YEARS During the past five years the Company has expanded its product offering and the markets into which it sells. In the graphic arts market, which includes printers, publishers, trade shops, service bureaus, desktop publishers and photo retouchers, the Company sells the Scanmaster 7500 and 4500 pmt (photo-multiplier tube) drum scanners, the Scanmaster 2500 ccd (charge coupled device) array flatbed scanner, and Trident[TRADEMARK], Aurora[TRADEMARK] and Polaris[TRADEMARK] software applications. None of these products existed five years ago and they service a broader range of the graphic arts market than the Company's preceding product line. The Company has also expanded into the medical imaging and life sciences markets. With the Scanmaster DX film digitizer and Scanmaster Pro-G densitometer, the Company is able to address the demand for reliable, fast, high quality and affordable methods of capturing data from x-rays and DNA sequences. SCANNER TECHNOLOGY The Company's scanner products are based on charge coupled device ("ccd") array technology and photomultiplier tube ("pmt") technology. CCD scanners use a flatbed design and focus an array of light sensors across the width of the scan area while pmt scanners focus a single scanning beam on a rotating drum. CCD ARRAY SCANNERS In 1995 the Company added to its family of desktop scanners with the announcement of the Scanmaster[TRADEMARK] 2500 ccd flatbed scanner and commenced customer shipments of the Scanmaster Pro-G ccd flatbed scanner. The Scanmaster 2500, which is targeted at the graphic arts market, is a flatbed scanner that utilizes a tri-linear array, the latest in ccd technology. This array allows for greater accuracy and less noise as well as making the 2500 a faster 3 4 scanner. The Scanmaster 2500 has the ability to scan both reflective and transmissive, positive and negative, originals up to 13 x 18 inches. Additional features include a 3.4 optical density, single pass scanning and a resolution of 600 x 1200 dpi native, with interpolation from 50 to 4800 total range. The Scanmaster 2500 is suitable for scanning artboards, large maps, full size books, sketches, and negatives or halftones. Shipment of the Scanmaster 2500 commenced in April of 1995. In September 1995, the Scanmaster 2500 was selected as a winner of Publish magazine's "Impact" award for innovation in the field of electronic publishing. The Scanmaster Pro-G and DX are targeted at the life sciences and medical imaging markets respectively. Features of both scanners include: scanning areas up to 13 x 18 inches, optical density of up to 3.4 and standard SCSI-2 interface. The Pro-G captures images over a resolution range of 64 to 1024 dpi. The DX can digitize films with a 50 micron spot size. The Pro-G is used for reproducing DNA/RNA protein samples captured in gels, radiographs and photographs for applications ranging from forensics to genetic research. The DX is an X-ray film digitizer and is also used for digitally reproducing radiographs. This digitizer is ideal for PACS (Picture Archiving and Communication System), clinical diagnosis and teleradiology. The DX received FDA clearance to market at the end of January 1996. PMT SCANNERS PMT scanner products of the Company consist of the Scanmaster 7500 Pro large format drum scanner and the Scanmaster 4500. The Scanmaster 7500 Pro and the 4500 are sold under the Howtek label and are also sold to OEM's which sell the scanner under their own names. The Scanmaster 7500 Pro is a large format, high volume, production scanner. Features include a scanning area of up to 18.5 x 24 inches, reflective, transparent, positive and negative image scanning and enlargement capabilities from 10% to 10.667%. The 7500 is targeted at large volume color separators, trade shops and commercial printers. The Scanmaster 4500 features a scanning area of 11.0 x 11.8 inches, the ability to scan line art, grayscale and color on reflective or transparent images, in both positives and negatives. Additional features include enlargement capabilities ranging from 10% to 2400%, auto and manual focus with 12 aperture settings, 12 bits of data per color, 4096 levels of grayscale, drum speed of 300 to 1200 rpm's, SCSI-2 interface, optical density of 0 to 3.8, operating on Macintosh [registered trademark], Windows [trademark] and UNIX [trademark] operating systems. - ---------- Macintosh is a trademark of Apple Computer, Inc. Windows is a trademark of Microsoft Corporation. UNIX is a trademark of AT&T Corporation. Scanmaster is a trademark of Howtek, Inc. 4 5 MATERIAL CONTRACTS In early 1995 the Company entered into a Standard Configuration OEM Agreement with Crosfield Electronics Limited. The effective date of the Agreement was December 22, 1994 and has an initial term of 18 months with automatic 12 month renewal terms. Under the Agreement the Company agreed to sell its Scanmaster 4500 drum scanner to Crosfield for resale by Crosfield under its own label. The Agreement is set forth as Exhibit 10(e) to this Report on Form 10-K. SOURCES AND AVAILABILITY OF MATERIALS The electronics industry is subject to periodic fluctuations in the production capacity of integrated circuit manufacturers and other key suppliers. Currently, the Company believes that there are adequate sources and availability of the components necessary to manufacture its products. COMPETITION The Company faces competition in the graphic arts markets for CCD array and PMT scanner markets as well as in the medical imaging and life sciences markets for x-ray digitizers and densitometers. Among its competitors are numerous foreign and domestic digital scanner companies. Many of these competitors are well established, have financial, engineering, manufacturing and distribution resources substantially greater than those of the Company, and have established reputations for success in the development, sale and service of products that will be competitive with those of the Company. The principal methods of competition in these markets are price, performance, proprietary hardware and software, and service. During 1995 the Company continued to experience significant competition in these markets. WORKING CAPITAL REQUIREMENTS The principal working capital requirements of the Company are those characteristic of any electronics manufacturing company with regard to the management of the work in process and the inventory of finished goods arising from such manufacturing activities. In addition, because a significant portion of the Company's sales are derived from foreign sales (see Note 8 to Notes to Financial Statements) the Company must carry the expense of the longer repayment cycles accorded to foreign distributors and OEM's. PATENTS The Company has seventeen United States patents with respect to its scanner, pre-press and phase change ink jet technology. Eleven of the patents relate to the Company's ink jet 5 6 technology which the Company is not currently using in any of its products, but which it has licensed to a number of other companies. Six patents relate to the Company's scanner and pre-press technology which is the basis of its current business. These patents help the Company maintain a proprietary position in the scanner market, but because of the pace of innovation in that market it is difficult to determine the overall importance of these patents to the Company. The Company has filed foreign patent applications on some of these patents and plans to file additional domestic and foreign applications when it believes such protection will benefit the Company. There is no assurance that additional patents will be obtained either in the United States or in foreign countries or that existing or future patents or copyrights will provide substantial protection or commercial benefit to the Company. There is rapid technological development in the Company's markets with concurrent extensive patent filings and a rapid rate of issuance of new patents. Although the Company believes that its technologies have been independently developed and do not infringe the patents of others, certain components of the Company's products could infringe patents, either existing or which may be issued in the future, in which event the Company may be required to modify its designs or obtain a license. No assurance can be given that the Company will be able to do so in a timely manner or upon acceptable terms and conditions; and the failure to do either of the foregoing could have a material adverse effect upon the Company's business. In addition to protecting its technology and products by seeking patent protection when deemed appropriate, the Company also relies on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. The Company requires all of its employees to execute confidentiality agreements. Insofar as the Company relies on confidentiality arrangements, there is no assurance that others will not independently develop similar technology or that the Company's confidentiality agreements will not be breached. All key officers and employees have agreed to assign to the Company certain technical and other information and patent rights, if any, acquired by them during their employment with the Company and after any termination of their employment with the Company (if such information or rights arose out of information obtained by them during their employment). ENGINEERING AND PRODUCT AND SOFTWARE DEVELOPMENT For the years ended December 31, 1995, 1994 and 1993 the 6 7 Company spent $2,788,281, $2,890,182, and $3,162,252, respectively, on engineering and product development. In addition, for the years ended December 31, 1995, 1994 and 1993 the Company spent $445,106, $709,505, and $839,829 respectively, on software development. MANUFACTURING The Company manufactures all of its hardware products at its Hudson, New Hampshire facilities and sublicenses some of its software products from third parties. EMPLOYEES On December 31,1995 the Company had 116 full-time employees. CUSTOMERS During 1995, 36% of the Company's sales were made to Techexport, Inc., a foreign distributor of the Company's scanner product and 20% of sales were made to Crosfield Electronics Limited, an original equipment manufacturer ("OEM") which sells the Scanmaster 4500 under its own label. A reduction in purchases by either company could have a material impact on the Company's sales, however, the Company believes there are other channels of distribution and potential OEM customers available. BACKLOG The dollar amount of the Company's backlog, or orders believed to be firm, as of December 31, 1995 was approximately $740,000 as compared to approximately $20,000 on the corresponding date in 1994. ENVIRONMENTAL PROTECTION Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings (losses) and competitive position of the company. EXPORT SALES Certain financial information about export sales is set forth in Note 8 to Notes to Financial Statements accompanying this Report on Form 10-K. 7 8 EXECUTIVE OFFICERS OF THE COMPANY.
Name Age Position ---- --- -------- David R. Bothwell 47 President, Chief Executive Officer, Director M. Russell Leonard 50 Executive Vice President, Chief Operating Officer Drew E. Woodworth 45 Vice President Operations Robert A. Dusseault 58 Vice President, Sales and Marketing Randal L. Herring 47 Vice President Sales and Marketing, Medical Imaging Group Robert J. Lungo 48 Vice President, Chief Financial Officer Michael Varanka 42 Senior Vice President, Technology Anthony Finizio (1) 52 President, Chief Operating Officer - ---------- (1) Mr. Finizio resigned on May 30, 1995.
David R. Bothwell rejoined the Company on December 8, 1993, as Chief Executive Officer and Acting President after having left on February 26, 1993, for health reasons. In April of 1994, he relinquished the position of President to Mr. Finizio, and then, on May 30, 1995, he resumed the position of President. Prior to his departure in 1993, Mr. Bothwell had served as President and Chief Operating Officer of the Company since June 1988, and Director and Chief Financial Officer since August 1988. From October 1985, to June 1988, Mr. Bothwell served as Executive Vice President and Chief Operating Officer of Daymarc Corporation, a manufacturer of automatic test handlers for the semiconductor industry. M. Russell Leonard joined the Company in April 1990 as Vice President Programs & Administration. In December 1991 he was named Vice President, Operations and Programs in February 1993 he was named Executive Vice President and in May of 1995 he was named Chief Operating Officer. From November 1987 to April 1990 he operated his own business in the water treatment industry. From 1985 to 1987 Mr. Leonard worked as the Director of Program Management for the Serial Computer Printer Group, at Dataproducts Corp. Drew E. Woodworth joined the Company in December 1995 as Vice President of Operations. Previously he worked for Nashua Corp., a manufacturer of various computer memory and office products, since 1977 where he served in many capacities including; Operations Manager from December 1993 to December 1995, Manufacturing Manager 8 9 of Duct and Masking Tape Operations from October 1988 to December 1993, Corporate Purchasing Manager, Industrial Tape Division from May 1987 to October 1988, and Finishing Manager of Duct and Masking Tape Division from December 1985 to May 1987 Robert A. Dusseault joined the Company in August 1995 as Vice President of Sales and Marketing. From August 1993 to May 1995 he was Vice President of Sales and Customer Support for Iris Graphics, Inc., a high-end digital inkjet company. From September 1992, to July 1993, Mr. Dusseault was Senior Director of Reseller Operations for Iris Graphics. From 1988 to 1992 he was Director of Strategy and Business Planning for Asia Operations of the Bull Worldwide Informations Systems Inc., International Division. Randal L. Herring joined the Company in January of 1996 as Vice President Sales and Marketing, Medical Imaging Group. Previously he had spent 25 years at General Electric Company in various positions, including from December 1994 until joining Howtek as Regional Product Manager of x-ray products, from June 1993 to June 1994 as Strategic Accounts Manager, from February 1992 to May 1993 as Regional Product Manager, CT products, and from April 1983 to February 1993 as Full Line Sales Representative, CT sales. Robert J. Lungo joined the Company on April 11, 1994 as Vice President, Chief Financial Officer. From August of 1992 to April 1994 he was Vice President, Chief Financial Officer of Juno Enterprises, Inc., an electronics company, in Minneapolis, MN. From June 1991 to August 1992 he was Program Director at the Company. From September 1985 to June 1991 he was Vice President, Chief Financial Officer at Daymarc Corporation in Waltham, MA. Michael Varanka joined the Company in June 1989 and was appointed Vice President, Engineering in January 1990. In December 1993 he was appointed Senior Vice President, Technology. Previously he spent six years at Dataproducts Corp., a manufacturer of serial impact, thermal transfer and solid ink printers where he held several key engineering positions including Director of Engineering and Director of Solid Ink Engineering. Mr. Anthony Finizio joined the Company as an employee in March 1994, and in April 1994 was named President, Chief Operating Officer. He resigned on May 30, 1995. From June 1992 to the date of his joining the Company, he served as a consultant to various companies. From January 1991 to June 1992 Mr. Finizio was President of Houston Instrument which designed, manufactured and sold plotters and computer aided design ("CAD") scanners. From 1980 to January 1991 he was a Vice President of Howmet Corporation. ITEM 2. PROPERTIES - ------ ---------- The Company's principal executive offices and research and development laboratory are located at 21 Park Avenue, Hudson, New Hampshire. The facility consists of approximately 21,000 square feet of office and research and development space and is 9 10 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, 1996 at an annual rent of $78,500. Additionally, the Company is required to pay real estate taxes, provide insurance and maintain the premises. The Company leases an additional 36,100 square feet of office, manufacturing and warehouse space adjacent to its current facility which it believes will be adequate to support its planned growth. If the Company decides to seek additional or replacement facilities, it believes there is adequate facilities available at commercially reasonable rates. ITEM 3. LEGAL PROCEEDINGS. - ------ ----------------- On June 7, 1994 the company filed a complaint in the United States District Court, District of New Hampshire against TECO Electric & Machinery Co. Ltd. ("TECO"), several TECO subsidiaries, a TECO employee, and a number of distributors of TECO products. The Company claims, inter alia, that TECO breached an exclusive manufacturing contract it entered into with the Company to manufacture digital color scanners exclusively for the Company by selling scanners under its own labels and those of other companies. The Company's claim is based upon misappropriation of trade secrets, civil conspiracy, unfair competition, and breach of contract. The Company initially sought damages in its complaint in the amount of $17 million, however, an expert retained by the Company to testify at the trial has subsequently concluded that the Company's damages, as a result of TECO's actions and omissions, are substantially in excess of the amount alleged in the complaint. TECO has answered the complaint and asserted various counterclaims, including misrepresentation and breach of contract, and is claiming approximately $3,000,000 in payment for past due services and breach of obligations by the Company to allow TECO to manufacture other scanner products for the Company. The court has instructed the parties to engage in alternative dispute resolution to attempt to resolve the dispute. A date for trial has not been set. There can be no assurance that the Company will be successful in the action, or if it is, as to the amount of damages it may be awarded. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. - ------ --------------------------------------------------- Not applicable. 10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------ --------------------------------------------------------------------- The Company's Common Stock is traded on the NASDAQ National Market under the symbol "HOWT". Prior to July 13, 1995 the Company's Common Stock was traded on the American Stock Exchange under the symbol "HTK". The following table sets forth the range of high and low bid prices for each full quarterly period and partial quarterly period during 1995, while the Company's Common Stock was traded on NASDAQ and also sets forth the high and low sales prices for each full quarterly period and partial quarterly period in 1995 and 1994, while the Company's Common Stock was traded on the American Stock Exchange.
High Low Fiscal year ended December 31, 1994 First Quarter $ 9-1/8 $6-1/4 Second Quarter 8-1/2 6 Third Quarter 11-3/8 6-5/8 Fourth Quarter 10-3/8 8 Fiscal year ended December 31, 1995 First Quarter 10-7/8 6-3/4 Second Quarter 10-5/8 8 Third Quarter (7/01-7/13/95) 10-3/8 7-5/8 Third Quarter (7/14-9/30/95) 11-1/2 7-1/2 Fourth Quarter 10-1/4 6-1/2
As of February 12, 1996 there were approximately 357 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. 11 12 ITEM 6. SELECTED FINANCIAL DATA - ------ ----------------------- SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 Sales $20,603,654 $24,370,329 $20,550,105 $23,008,565 $11,877,999 Gross margin 6,619,835 9,237,115 7,506,127 11,374,615 4,257,628 Other expenses (income) - net 0 0 (570,025) 0 0 Restructuring charge 2,662,632 0 0 0 0 Total operating expenses 11,441,837 8,020,469 7,961,622 7,197,291 8,819,308 Income (loss) from operations (4,822,002) 1,216,647 (455,495) 4,177,324 (4,561,680) Interest expense - net 433,045 259,227 329,461 369,653 474,864 Pre-tax income (loss) (5,255,047) 957,420 (784,956) 3,807,671 (5,036,544) Provision for income taxes 0 77,000 4,903 35,000 0 Net Income (loss) (5,255,047) 880,420 (789,859) 3,772,671 (5,036,544) Net Income (loss) per share (0.66) 0.11 (0.10) 0.49 (0.67)
SELECTED BALANCE SHEET DATA
AS OF ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1994 1993 1992 1995 Total current assets $14,137,204 $16,891,438 $13,834,468 $15,987,231 $11,941,542 Total assets 18,495,240 21,573,849 18,120,557 19,611,320 15,073,869 Total current liabilities 4,203,168 4,811,528 2,467,054 2,635,878 2,720,023 Loan payable to principal stockholder 3,578,604 1,000,000 1,000,000 2,100,000 2,000,000 Convertible Subordinated Debentures 2,181,000 2,181,000 2,181,000 2,181,000 2,181,000 Stockholders' equity 8,532,468 13,581,321 12,472,503 12,694,442 8,172,846
SELECTED QUARTERLY DATA
EARNINGS GROSS ------------------------------------------ SALES MARGIN EARNINGS (LOSS) PER SHARE PRIMARY ----- ------ --------------- ----------------- 1994 QUARTER ENDED: - ------------------- March 31 $4,724,218 $1,606,100 ($480,414) $(0.06) June 30 6,092,770 2,137,452 183,595 0.02 September 30 6,416,661 2,451,407 408,920 0.05 December 31 7,136,679 3,042,154 768,318 0.10 1995 QUARTER ENDED: - ------------------- March 31 $5,851,750 $2,228,122 $152,658 $0.02 June 30 5,356,900 1,976,828 (2,821,001) (0.36) September 30 4,303,024 1,363,434 (1,161,569) (0.15) December 31 5,091,980 1,051,451 (1,425,135) (0.18)
12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------ ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ----------------------------------- RESULTS OF OPERATIONS Year Ended December 31, 1995 compared to Year Ended December 31, 1994 - --------------------------------------------------------------------- Sales for the year ended December 31, 1995 were $20,603,654 a decrease of 15% from sales during the year ended December 31, 1994 of $24,370,329. The decrease in sales is due primarily to the general weakness of the graphic arts market in North America which resulted in a lower level of sales of the Scanmaster 7500. In an effort to increase demand of the Scanmaster 7500 in 1996, the Company entered into agreements with third party software vendors during the fourth quarter of 1995 to make additional software options available to customers. The Company's gross margin decreased from 38% in 1994 to 32% in 1995. This decrease resulted primarily from the increased percentage of OEM and international sales at higher discounts causing lower overall gross margins. Engineering and product development costs (net of capitalized software development costs of $445,106 and $709,505 for 1995 and 1994 respectively) decreased slightly from $2,890,182 in 1994 to $2,788,281 in 1995. The level of engineering and product development spending is expected to decrease slightly in 1996. General and administrative expense increased 20% from $2,210,204 in 1994 to $2,651,905 in 1995. This increase was due primarily to the increase in legal fees, of about $450,000 in 1995, in connection with a lawsuit against a former contract manufacturer. See Note 11 of Notes to Financial Statements. Marketing and sales expenses during 1995 were $3,339,019 which represents a 14% increase from $2,920,082 for 1994. The increase results from increases in salaries, advertising, promotional and trade show expenses. Net interest expense increased 67% from $259,227 in 1994 to $433,045 in 1995 due to the increase in the Company's loan with Robert Howard, its Chairman and principal stockholder. See Note 4 of Notes to Financial Statements. The Company reported a net loss of $5,255,047 for the year ended December 31, 1995 as compared to net income of $880,420 for the year ended December 31, 1994, which included a restructuring charge of $2,662,632. Additional reserves totalling $500,000, for inventory and accounts receivable, were recorded in 13 14 the fourth quarter of 1995. See Note 3 of Notes to Financial Statements. Year Ended December 31, 1994 compared to Year Ended December 31, 1993 - --------------------------------------------------------------------- Sales for the year ended December 31, 1994 were $24,370,329 an increase of 19% from sales during the year ended December 31, 1993 of $20,550,105. The increase in sales in 1994 resulted from the shipment of the Scanmaster 7500 beginning in the first quarter of 1994 and the introduction and shipment of the Scanmaster 4500 beginning in the third quarter of 1994, combined with continuing shipments of the Company's ccd array flatbed scanner products. The Company's gross margin increased slightly from 37% in 1993 to 38% in 1994 as a result of the Company bringing in-house the manufacture of all its products. The Company recorded a 43% gross margin in the fourth quarter of 1994 resulting primarily from a cost reduction program on both the Scanmaster 7500 and Scanmaster 4500 product lines. Engineering and product development costs (net of capitalized software development costs of $709,505 and $839,829 for 1994 and 1993 respectively) decreased 9% from $3,162,252 in 1993 to $2,890,182 in 1994. General and administrative expense decreased slightly from $2,394,528 in 1993 to $2,210,204 in 1994. This decrease was due primarily to decreases in bad debt provisions and legal fees. Marketing and sales expenses during 1994 were $2,920,082 which represents a 2% decrease from $2,974,867 for 1993. The reason the Company was able to increase sales by 19% without increasing marketing and selling expenses was primarily because it used its promotional resources more efficiently by cutting back on trade show expenditures and spending more on selective advertising. Net interest expense decreased 21% from $329,461 in 1993 to $259,227 in 1994 due to the reduction in the Company's loan with Robert Howard, its Chairman and principle stockholder. See Note 3 of Notes to Financial Statements. The Company reported net profit of $880,420 for the year ended December 31, 1994 as compared to a net loss of $789,859 for the year ended December 31, 1993. 14 15 LIQUIDITY AND CAPITAL RESOURCES The Company's ability to generate cash adequate to meet its requirements depends primarily on operating cash flow and the availability of the $8,000,000 credit line under the Revolving Loan Agreement with its Chairman, of which $4,421,396 was available at December 31, 1995. The Company believes that these sources are sufficient to satisfy its cash requirements for the foreseeable future. Working capital decreased $2,145,874 from $12,079,910 at December 31, 1994 to $9,934,036 at December 31, 1995. The ratio of current assets to current liabilities decreased slightly from 3.5 at December 31, 1994 to 3.4 at December 31, 1995. In 1995 the Company spent in excess of $4,400,000 for tooling and new product development of which $1,646,570 was capitalized as additions to property and equipment and software development with the balance expensed. Depending upon the level of business as the year develops, the Company expects its capital spending to increase moderately in 1996. The cash position decreased slightly from $649,455 on December 31, 1994 to $574,647 on December 31, 1995 to support growth of the Company. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS Long-Lived Assets Long-lived assets, such as property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. This policy is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is effective for fiscal years beginning after December 15, 1995. No write-downs have been necessary through December 31, 1995. Stock-Based Compensation The Company does not presently intend to adopt the fair value based method for accounting for stock compensation plans, as permitted by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," which is effective for transactions entered into in fiscal years that begin after December 15, 1995. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------ ------------------------------------------- See Financial Statements and Schedule attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------ ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ----------------------------------- Not applicable. PART III -------- The information required by Part III (Items 10, 11, 12, and 13) of this Report on Form 10-K is hereby incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - ------- ---------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements - See Index on page 20. 2. Financial Statement Schedule - See Index on page 20. 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]. 16 17 3(c) Certificate of Amendment of Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on August 22, 1984 [incorporated by reference to Exhibit 3.1(b) to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 3(d) Certificate of Amendment of Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on October 22, 1987 [incorporated by reference to Exhibit 3(d) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988]. 3(e) By-laws of Registrant [incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 4(a) Form of Common Stock Certificate [incorporated by reference to the Registrant's Form 8-A, filed on March 13, 1985]. 4(b) Form of Indenture dated as of December 1, 1986 between Registrant and Continental Stock Transfer and Trust Company, including Form of Debenture [incorporated by reference to Exhibit 4(c) to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-8971), filed on 10/31/84]. 10(a) Lease Agreement between the Registrant and its Chairman with respect to premises located at 21 Park Avenue, Hudson, New Hampshire, dated October 1, 1984, [incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement to Form S-18 (Commission File No. 2-94097-NY), filed on October 31, 1984]. 10(b) Renewal of Lease Agreement 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 9/30/87]. 17 18 10(d) Addendum No. 12 dated March 15, 1996 to the Revolving Loan and Security Agreement, and Convertible Revolving Credit Promissory Note between Robert Howard and Registrant dated October 26, 1987 (the "Loan Agreement"). [incorporated by reference to Exhibit 10 to the Registrant's Report on Form 10- Q for the quarter ended 9/30/87]. 10(e) Form of Standard Configuration OEM Agreement between Howtek,Inc. and Crosfield Electronics Limited, dated December 22, 1994. 23(a) Consent of BDO Seidman, LLP. (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. 18 19 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 25, 1996 By: /s/ David R. Bothwell ---------------------------------- David R. Bothwell, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/Robert Howard Chairman of the March 25, 1996 - -------------------- Board, Director Robert Howard /s/David R. Bothwell Chief Executive March 25, 1996 - -------------------- Officer, Director David R. Bothwell /s/Robert J. Lungo Vice President, Chief March 25, 1996 - -------------------- Financial Officer, Robert J. Lungo Principal Accounting Officer /s/Ivan Gati Director March 25, 1996 - -------------------- Ivan Gati /s/Nat Rothenberg Director March 25, 1996 - -------------------- Nat Rothenberg /s/Harvey Teich Director March 25, 1996 - -------------------- Harvey Teich
19 20 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page ---- Report of Independent Certified Public Accountants 21 Balance Sheets As of December 31, 1995 and 1994 22 Statements of Operations For the years ended December 31, 1995, 1994 and 1993. 23 Statements of Changes in Stockholders' Equity For the years ended December 31, 1995, 1994 and 1993. 24 Statements of Cash Flows For the years ended December 31, 1995, 1994 and 1993. 25 Notes to Financial Statements 26-39 Schedule II - Valuation and Qualifying Accounts and Reserves 40
20 21 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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP New York, New York February 16, 1996 21 22 HOWTEK, INC. BALANCE SHEETS
DECEMBER 31, DECEMBER 31, ------------ ------------ 1995 1994 ------------ ------------ ASSETS Current assets: Cash and equivalents $ 574,647 $ 649,455 Trade accounts receivable net of allowance for doubtful accounts of $290,710 in 1995 and $130,000 in 1994 (note 8) 6,474,144 8,000,716 Inventory (note 1) 6,840,823 7,863,012 Prepaid and other (note 4) 247,590 378,255 ------------ ------------ Total current assets 14,137,204 16,891,438 ------------ ------------ Property and equipment: (note 1) Equipment 10,281,296 9,094,067 Leasehold improvements 371,535 366,835 Furniture and fixtures 185,564 184,444 Motor vehicles 6,050 6,050 ------------ ------------ 10,844,445 9,651,396 Less accumulated depreciation and amortization 7,815,236 6,373,277 ------------ ------------ Net property and equipment 3,029,209 3,278,119 ------------ ------------ Other assets: (note 1) Software development costs, net 1,191,265 1,244,114 Debt issuance costs, net 118,756 139,114 Patents, net 18,806 21,064 ------------ ------------ Total other assets 1,328,827 1,404,292 ------------ ------------ Total assets $ 18,495,240 $ 21,573,849 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,712,416 $ 3,986,330 Accrued expenses 490,752 825,198 ------------ ------------ Total current liabilities 4,203,168 4,811,528 Loan payable to principal stockholder (note 4) 3,578,604 1,000,000 Convertible subordinated debentures (note 5) 2,181,000 2,181,000 ------------ ------------ Total liabilities 9,962,772 7,992,528 ------------ ------------ Commitments and contingencies (notes 4 and 9) Stockholders' equity: (notes 4, 5 and 6) common stock, $.01 par value: authorized 25,000,000 shares; issued 8,022,594 in 1995 and 7,985,794 shares in 1994; outstanding 7,954,718 in 1995 and 7,917,918 shares in 1994 80,225 79,858 Additional paid-in capital 43,966,282 43,760,455 Accumulated deficit (34,563,775) (29,308,728) Treasury stock at cost (67,876 shares) (950,264) (950,264) ------------ ------------ Stockholders' equity 8,532,468 13,581,321 ------------ ------------ Total liabilities and stockholders' equity $ 18,495,240 $ 21,573,849 ============ ============
See accompanying notes to financial statements. 22 23 HOWTEK, INC. STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------------------- 1995 1994 1993 ---- ---- ---- Sales (note 8) $20,603,654 $24,370,329 $20,550,105 Cost of sales 13,983,819 15,133,214 13,043,978 ----------- ----------- ----------- Gross margin 6,619,835 9,237,115 7,506,127 ----------- ----------- ----------- Operating expenses: Engineering and product development 2,788,281 2,890,182 3,162,252 General and administrative 2,651,905 2,210,204 2,394,528 Marketing and sales 3,339,019 2,920,082 2,974,867 Restructuring charge (note 3) 2,662,632 -- -- Other -- net (note 2) -- -- (570,025) ----------- ----------- ----------- Operating expenses 11,441,837 8,020,468 7,961,622 ----------- ----------- ----------- Income (loss) from operations (4,822,002) 1,216,647 (455,495) Interest expense -- net 433,045 259,227 329,461 ----------- ----------- ----------- Pre-tax income (loss) (5,255,047) 957,420 (784,956) Provision for income taxes (note 7) 0 77,000 4,903 ----------- ------------ ----------- Net income (loss) $(5,255,047) $ 880,420 $ (789,859) =========== =========== =========== Net income (loss) per share (note 1) Primary $ (0.66) $ 0.11 $ (0.10) Weighted average number of shares used in computing earnings per share Primary 7,934,654 7,934,525 7,830,168
See accompanying notes to financial statements. 23 24 HOWTEK, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock -------------------------- Additional Number of Paid-in Accumulated Treasury Stockholders' Shares Issued Par Value Capital Deficit Stock Equity ------------- --------- ---------- ----------- -------- ------------- Balance at December 31, 1992 7,822,885 $78,229 $42,985,702 $(29,399,289) $(970,200) $12,694,442 Issuance of common stock pursuant to incentive stock option plan 97,574 975 438,358 -- -- 439,333 Issuance of common stock for payment of litigation settlement (note 6(b) 20,135 202 128,385 -- -- 128,587 Net loss -- -- -- (789,859) -- (789,859) --------- ------- ----------- ------------ --------- ----------- Balance at December 31, 1993 7,940,594 $79,406 $43,552,445 $(30,189,148) $(970,200) $12,472,503 ========= ======= =========== ============ ========= =========== Common Stock -------------------------- Additional Number of Paid-in Accumulated Treasury Stockholders' Shares Issued Par Value Capital Deficit Stock Equity ------------- --------- ---------- ----------- -------- ------------- Balance at December 31, 1993 7,940,594 $79,406 $43,552,445 $(30,189,148) $(970,200) $12,472,503 Issuance of common stock pursuant to incentive stock option plan 45,200 452 208,010 -- -- 208,462 Issuance of treasury stock -- -- -- -- 19,936 19,936 Net income -- -- -- 880,420 -- 880,420 --------- ------- ----------- ------------ --------- ----------- Balance at December 31, 1994 7,985,794 $79,858 $43,760,455 $(29,308,728) $(950,264) $13,581,321 ========= ======= =========== ============ ========= =========== Common Stock -------------------------- Additional Number of Paid-in Accumulated Treasury Stockholders' Shares Issued Par Value Capital Deficit Stock Equity ------------- --------- ---------- ----------- -------- ------------- Balance at December 31, 1994 7,985,794 $79,858 $43,760,455 $(29,308,728) $(950,264) $13,581,321 Issuance of common stock pursuant to incentive stock option plan 36,800 367 205,827 -- -- 206,194 Net loss -- -- -- (5,255,047) -- (5,255,047) --------- ------- ----------- ------------ --------- ----------- Balance at December 31, 1995 8,022,594 $80,225 $43,966,282 $(34,563,775) $(950,264) $ 8,532,468 ========= ======= =========== ============ ========= ===========
See accompanying notes to financial statements. 24 25 HOWTEK, INC. STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) $(5,255,047) $ 880,420 $ (789,859) ----------- ------------ ----------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation 1,446,044 1,179,233 1,029,226 Amortization 524,901 392,768 347,775 Restructuring charge 2,662,632 -- -- Asset writedowns and reserve increases 500,000 -- 3,546,688 Issuance of stock in exchange for services -- 19,936 -- Litigation settlement with stock issue -- -- 125.000 (Increase) decrease: Accounts receivable 1,376,572 (3,518,346) 1,894,691 Inventory (1,990,443) (581,824) (1,511,679) Other current assets 130,665 (63,929) 18,909 Increase (decrease): Accounts payable (273,914) 2,193,939 (492,390) Accrued expenses (334,446) 150,536 277,164 ----------- ------------ ----------- Total adjustments 4,042,011 (227,687) 5,235,384 ----------- ------------ ----------- Net cash provided (used) by operating activities (1,213,036) 652,733 4,445,525 ----------- ------------ ----------- Cash flows from investing activities: Patents, software development and other (445,106) (716,007) (866,269) Additions to property and equipment (1,201,464) (1,252,317) (1,413,846) ----------- ------------ ----------- Net cash used for investing activities (1,646,570) (1,968,324) (2,280,115) ----------- ------------ ----------- Cash flows from financing activities: Issuance of common stock for cash 206,194 208,462 442,920 Proceeds of loan payable to principal stockholder 2,578,604 -- -- Repayment of loan payable to principal stockholder -- -- (1,100,000) ----------- ------------ ----------- Net cash provided (used) by financing activities 2,784,798 208,462 (657,080) ----------- ------------ ----------- Increase (decrease) in cash and equivalents (74,808) (1,107,129) 1,508,330 Cash and equivalents, beginning of year 649,455 1,756,584 248,254 ----------- ------------ ----------- Cash and equivalents, end of year $ 574,647 $ 649,455 $ 1,756,584 =========== ============ =========== Supplemental disclosure of cash flow information: Interest paid $ 218,079 $ 210,415 $ 353,000 =========== ============ =========== See accompanying notes to financial statements.
25 26 HOWTEK, INC. Notes to Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) NATURE OF OPERATIONS AND USE OF ESTIMATES Howtek, Inc. (the "Company") designs, engineers, develops and manufactures digital image scanners, densitometers, film digitizers and related software for applications in the graphic arts, medical imaging and life sciences markets. The Company sells its products throughout the world through various distributors, resellers, systems integrator and OEM's. See Note 8 for geographical and major customer information The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the Company's estimates and assumptions used in the preparation of the financial statements relate to the Company's products, which are subject to rapid technological change. It is reasonably possible that changes may occur in the near term that would affect management's estimates with respect to inventories, equipment and software development cost. (b) INVENTORY Inventory is valued at the lower of cost or market, with cost determined by the first-in, first-out method. At December 31, inventory consisted of raw material and finished goods of $4,096,000 and $2,745,000 for 1995, and raw material and finished goods of $5,671,000 and $2,192,000 for 1994. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method for financial reporting purposes (and accelerated methods for income tax purposes) over the estimated useful lives of the various classes of assets (ranging from 3 to 5 years). 26 27 HOWTEK, INC. Notes to Financial Statements (continued) (d) DEBT ISSUANCE COSTS Debt issuance costs, related to the outstanding Convertible Subordinated Debentures, are being amortized over the 15-year term of the Debentures using the straight-line method. (e) PATENTS The costs of patents are being amortized over the estimated useful life of the respective assets using the straight-line method. (f) SOFTWARE DEVELOPMENT COSTS Software development costs for application software and application software enhancements are capitalized subsequent to the establishment of their technological feasibility (as defined in Statement of Financial Accounting Standards No. 86). The Company capitalized $445,106, $709,505, and $839,829 of internally developed and externally purchased software costs during fiscal 1995, 1994 and 1993, respectively. The capitalized software balances are presented net of accumulated amortization, which was $1,208,886, and $710,931 at December 31, 1995, and 1994, 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 costs, amortization of any license rights, and amortization of capitalized software. 27 28 HOWTEK, INC. Notes to Financial Statements (continued) (i) WARRANTY COSTS The Company's products are generally under warranty against defects in material and workmanship from a 90 to 365 day period, depending on the product. (j) ENGINEERING AND PRODUCT DEVELOPMENT These costs relate to research and development costs which are expensed as incurred, except for amounts related to software development costs incurred after the establishment of technological feasibility (see(f)above) which are capitalized. (k) NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the daily weighted average number of common shares outstanding during the period. The conversion of the subordinated debentures and assumed exercise of options have not been considered in the computation, since the effects on earnings per share were determined to be anti-dilutive. (l) CASH FLOW INFORMATION For purposes of reporting cash flows, the Company defines cash and equivalents as all bank transaction accounts, certificates of deposit, money market funds and deposits, and other money market instruments maturing in less than 90 days, which are unrestricted as to withdrawal. (m) INCOME TAXES The Company follows the liability method under Statement of Financial Accounting Standards No. 109 (SFAS 109). The primary objectives of accounting for taxes under SFAS 109 are to (a) recognize the amount of tax payable for the current year and (b) recognize the amount of deferred tax liability or asset for the future tax consequences of events that have been reflected in the Company's financial statements or tax returns. 28 29 HOWTEK, INC. Notes to Financial Statements (continued) (n) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS Long-Lived Assets Long-lived assets, such as property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. This policy is in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is effective for fiscal years beginning after December 15, 1995. No write-downs have been necessary through December 31, 1995. Stock-Based Compensation The Company does not presently intend to adopt the fair value based method for accounting for stock compensation plans, as permitted by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," which is effective for transactions entered into in fiscal years that begin after December 15, 1995. (2) OTHER - NET During 1993 the Company received proceeds net of legal costs incurred of $3,808,000 of which $2,975,000 was received and recorded in the fourth quarter of 1993, in settlement and license fee payments related to litigation. (See Note 11 to Notes to Financial Statements.) The Company wrote-down in 1993 certain unrealizable assets in the amount of $3,237,975, of which $2,490,769 was recorded in the fourth quarter of 1993, the majority of which consisted of inventories, lease and trade receivables. The inventory writedown resulted from discontinuation of the marketing of certain products, as well as a determination of excess and obsolete inventories. 29 30 HOWTEK, INC. Notes to Financial Statements (continued) (3) RESTRUCTURING CHARGE AND CHANGE IN ESTIMATES During the second quarter of 1995 the Company recorded a restructuring charge of $2,662,632 as a result of management's decision to exit certain markets in the graphic arts industry. Management intends to continue its efforts in other graphic arts markets as well as to enter new markets, including the medical imaging and life sciences markets. The restructuring charge represents losses on inventories disposed of which related to the markets exited. In the fourth quarter a $500,000 adjustment to inventory and accounts receivable reserves was recorded. The adjustment to inventory reflected a change in estimates in providing additional reserves for out-of-production products. (4) RELATED PARTY TRANSACTIONS (a) LOAN PAYABLE TO PRINCIPAL STOCKHOLDER The Company has a Convertible Revolving Credit Promissory Note ("the Convertible Note") and Revolving Loan and Security Agreement (the "Loan Agreement") with Mr. Robert Howard, Chairman of the Company, under which Mr. Howard has agreed to advance funds, or to provide guarantees of advances made by third parties in an amount up to $8,000,000. Such outstanding advances are collateralized by substantially all of the assets of the Company and bear interest at prime interest rate plus 2%. The Convertible Note entitles Mr. Howard to convert outstanding advances into shares of the Company's common stock at any time based on the outstanding closing market price of the Company's common stock at the time each advance is made. As of December 31, 1995 and 1994, the Company owed Mr. Howard $3,578,604 and $1,000,000, respectively, pursuant to the Loan Agreement, which is due for repayment on January 4, 1997. The Company has $4,421,396 available for future borrowings under the Loan Agreement. (b) PREMISES LEASE AND OTHER EXPENSES The Company conducts its operations in premises owned by Mr. Howard, covered by a lease which commenced October 1, 1984. The term of the lease is 1 year and expires September 30, 1996. As of December 31, 1995, future minimum lease payments under this lease are $78,500 for 1996. 30 31 HOWTEK, INC. Notes to Financial Statements (continued) (c) RELATED PARTY SALES During the year ended December 31, 1994 the Company sold equipment and services totalling $51,752, to Presstek, Inc., which Mr. Howard is the Chairman of the Board and a principal stockholder. There were no sales to Presstek in 1995 or 1993. (d) OTHER ASSETS - LOANS TO OFFICERS As of December 31, 1995 and 1994, the Company had outstanding loans to its officers in the aggregate amount of $48,760 and $52,833, respectively. These amounts are included in Prepaid and other. (5) CONVERTIBLE SUBORDINATED DEBENTURES As of December 31, 1995 and 1994, the Company's outstanding balance on its $8,000,000, 9% Convertible Subordinated Debentures (the "Debentures"), which come due 2001, was $2,181,000. Interest on the Debentures is payable semi-annually on June 1 and December 1. The Debentures are convertible into common stock of the Company at the conversion price of $19.00 per share, subject to adjustment in certain events. No Debentures were converted during 1995 or 1994. (6) STOCKHOLDERS' EQUITY (a) STOCK OPTIONS 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 31 32 HOWTEK, INC. Notes to Financial Statements (continued) 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 one 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. During 1993 options to purchase a total of 80,000 shares were granted to the Company's directors at the market price on the date of grant. No options were granted under the plan during 1994 and 1995. A summary of stock option (incentive and non-qualifying) activity is as follows: 32 33 HOWTEK, INC. Notes to Financial Statements (continued) 1984 STOCK OPTION PLAN AS AMENDED - ---------------------------------
Shares Subject to Options ------------------------- 1995 1994 1993 ---- ---- ---- Outstanding, beginning of year 408,985 445,685 459,759 Granted 0 87,000 187,000 Exercised (29,350) (45,200) (97,574) Cancelled (101,500) (78,500) (103,500) -------- ------- -------- Outstanding, end of year 278,135 408,985 445,685 -------- ------- -------- Exercisable at December 31, 188,885 155,233 102,349 -------- ------- --------
Price range of Options:
1995 1994 1993 ---- ---- ---- Outstanding $2.75-$14.00 $2.75-$14.00 $2.75-$14.00 Exercised $3.25-$ 8.75 $3.25-$ 6.13 $2.75-$ 9.50 Exercisable $2.75-$14.00 $2.75-$14.00 $4.50-$10.25
1993 STOCK OPTION PLAN - ----------------------
Shares Subject to Options ------------------------- 1995 1994 1993* ---- ---- ---- Outstanding, beginning of year 180,700 0 N/A Granted 233,500 180,700 N/A Exercised (7,450) 0 N/A Cancelled (81,100) (0) N/A ------- ------- --- Outstanding, end of year 325,650 180,700 N/A ------- ------- --- Exercisable at December 31, 35,150 0 N/A ------- ------- ---
Price range of Options:
1995 1994 1993 ---- ---- ---- Outstanding $6.63-$8.25 $6.50-$8.25 N/A Exercised $6.63-$8.25 $0.00-$0.00 N/A Exercisable $6.63-$8.25 $0.00-$0.00 N/A *1993 Stock Option Plan not in effect until 5/25/94.
33 34 HOWTEK, INC. Notes to Financial Statements (continued)
DIRECTOR INCENTIVE PLAN Shares Subject - ----------------------- to Options ---------- Outstanding, January 1, 1993 0 Granted 80,000 Exercised 0 Cancelled (0) ------ Outstanding, December 31,1993, 1994 & 1995 80,000 ------ Exercisable at December 31, 1995 80,000 ------
Price range of Options: 1993, 1994 & 1995 ----------------- Outstanding $6.50-$6.75 Exercisable $6.75 *Director Incentive Plan not in effect until 9/22/93.
(B) COMMON STOCK ISSUED IN PAYMENT OF LITIGATION SETTLEMENT During 1993 the Company agreed to pay $125,000 to Bidco Manufacturing Corp. in settlement of litigation. See Note 11 to Notes to Financial Statements. By agreement between the parties, the Company issued 25,000 shares of its Common Stock, $.01 par value, to Bidco, then filed a registration statement on Form S-3 which permitted Bidco to resell a sufficient amount of stock to realize net proceeds of $125,000. Bidco returned the balance, 4,865 shares, to the Company. (7) INCOME TAXES The provision for income taxes charged was as follows:
1994 1993 ---- ---- Current Tax Expense U.S. federal $325,000 $(11,017) State and local 82,000 15,920 -------- -------- Total Current $407,000 $ 4,903 ======== ======== Deferred Tax Expense U.S. federal $ 0 $ 0 State and local 0 0 -------- -------- Total Deferred $ 0 $ 0 ======== ======== Benefit of NOL's U.S. federal $310,000 $ 0 State and local 20,000 0 -------- -------- Total Benefit of NOL's $330,000 $ 0 ======== ======== Total provision $ 77,000 $ 4,903 ======== ========
34 35 HOWTEK, INC. Notes to Financial Statements (continued) (7) INCOME TAXES (continued) As a result of the 1995 loss, no income tax expense was incurred for that year. 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. These "temporary differences" are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax liabilities (assets) are comprised of the following at December 31:
1995 1994 ---- ---- Inventory (Section 263A) $ (195,000) $ (118,000) Inventory reserves (167,000) (98,600) Receivable reserves (99,000) (44,200) Other accruals (68,000) (78,200) Tax credits (1,815,000) (1,285,461) NOL carryforward (10,829,000) (9,490,000) Tax overpayment (22,500) (27,017) ------------ ------------ Gross deferred tax assets $(13,195,500) $(11,141,478) ------------ ------------ Accumulated depreciation 270,000 125,100 Gross deferred tax liabilities 270,000 125,100 ------------ ------------ Total tax(assets)liabilities $ 12,925,500) $(11,016,378) Deferred tax assets valuation allowance $(12,925,500) $(11,016,378) ============ ============ Net deferred tax assets $ 0 $ 0
As of December 31, 1995 the Company has net operating loss carryforwards totalling approximately $31,800,000. 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: 35 36 HOWTEK, INC. Notes to Financial Statements (continued) (7) INCOME TAXES (continued)
Expiration date Amount of remaining NOL 2000 1,200,000 2001 5,000,000 2002 8,900,000 2003 3,300,000 2004 4,200,000 2005 2,200,000 2006 2,200,000 2007 200,000 2008 600,000 2010 4,000,000
In addition the Company has available tax credit carryforwards (adjusted to reflect provisions of the Tax Reform Act of 1986) of approximately $1,815,000, which are available to offset future taxable income and income tax liabilities, when earned or incurred. These amounts expire in various years through 2010. (8) SALES INFORMATION (a) GEOGRAPHIC INFORMATION The Company's sales are made to U.S. and foreign distributors of computer and related products. Total export sales, which includes sales made to a U.S. based international distributor of computer and related products, were $14,090,095 or 69% of total sales in 1995, $11,656,000 or 48% of total sales in 1994 and $8,123,000 or 40% of total sales in 1993. The Company's principal concentration of export sales has been in Europe which accounted for 67% of 1995 exports sales, 69% in 1994 and 53% in 1993. The balance of the export sales were into the Far East, Mexico, Central America, and Canada. As of December 31, 1995 and 1994 the Company had outstanding receivables of $4,191,000 and $4,136,000, respectively, from distributors of its products outside of the United States. 36 37 HOWTEK, INC. Notes to Financial Statements (continued) (b) MAJOR CUSTOMERS During the years ended December 31, 1995, 1994 and 1993 the Company had two major customers, one of which operates as a U.S. based international distributor of computer and related products and the other as an OEM. The following represents the comparative sales and accounts receivable:
1995 1994 1993 Sales Amount % Amount % Amount % ----- --------------- -------------- -------------- Customer 1 $7,340,000 36 $5,260,000 22 $3,136,000 15 Customer 2 $4,179,000 20 $2,759,000 11 $2,267,000 11 Accounts Receivable ------------------- Customer 1 $1,946,000 $1,522,000 $ 634,000 Customer 2 $ 826,000 $ 783,000 $ 158,000
(9) COMMITMENTS AND CONTINGENCIES As of December 31, 1995 the Company had two lease obligations for facilities. The lease obligations for 1996 will be approximately $233,000. One lease expires on September 30, 1996 and the other is a monthly lease. (10) LEASE RECEIVABLES During 1991, the Company provided financing through one and three year sales-type leases for three Colorscan customers totalling $495,871. During 1992, the Company allowed a one year extension of terms on two of the leases and the third lease was sent to collection. The Company provided a reserve in 1992 for the estimated uncollectible amount. During 1993, it was determined that all outstanding lease receivables were uncollectible and were written off. (11) LEGAL PROCEEDINGS Howtek, Inc. v. Tektronix, Inc. - ------------------------------- On March 24, 1993 the Company filed suit against Tektronix, Inc. ("Tektronix") in United States District Court for the District of New Hampshire claiming infringement of certain of the Company's patents related to ink jet printing. Tektronix denied the claims and counterclaimed for unspecified damages. 37 38 HOWTEK, INC. Notes to Financial Statements (continued) (11) LEGAL PROCEEDINGS (continued) Howtek, Inc. v. Tektronix, Inc. (continued) ------------------------------------------- On December 31, 1993 the Company entered into a Settlement and License Agreement with Tektronix whereby the parties agreed to dismiss the lawsuit and Howtek granted Tektronix a paid-up license to its ink jet technology in exchange for a license fee of $3,000,000 which Tektronix has paid. Howtek, Inc. v. Brother International Corporation ------------------------------------------------- On April 26, 1993 Howtek filed suit against Brother International Corporation ("Brother") in the United States District Court for the District of New Hampshire claiming infringement of certain of the Company's patents related to ink jet printing. On September 27, 1993 the parties entered into a Settlement Agreement and Covenant Not To Sue, whereby the Company agreed not to sue Brother and its affiliates and suppliers for infringement of the Company's phase change ink jet technology in exchange for the payment by Brother to the Company of $1,000,000. Payment has been made and the lawsuit has been dismissed. Bidco Manufacturing Corp. v. Howtek, Inc. ----------------------------------------- This matter, which was disclosed in the Company's 1992 Annual Report on Form 10-K, was concluded by a Stipulation Of Compromise And Settlement And Order between the parties, dated August 30, 1993, whereby the Company agreed to pay Bidco $125,000 in final settlement. Payment has been made and the lawsuit has been dismissed. 38 39 HOWTEK, INC. Notes to Financial Statements (continued) (11) LEGAL PROCEEDINGS (continued) Howtek, Inc. v. TECO et al -------------------------- On June 7, 1994 the company filed a complaint in the United States District Court, District of New Hampshire against TECO Electric & Machinery Co. Ltd. ("TECO"), several TECO subsidiaries, a TECO employee, and a number of distributors of TECO products. The Company claims, inter alia, that TECO breached an exclusive manufacturing contract it entered into with the Company to manufacture digital color scanners exclusively for the Company by selling scanners under its own labels and those of other companies. The Company's claim is based upon misappropriation of trade secrets, civil conspiracy, unfair competition, and breach of contract. The Company initially sought damages in its complaint in the amount of $17 million, however, an expert retained by the Company to testify at the trial has subsequently concluded that the Company's damages, as a result of TECO's actions and omissions, are substantially in excess of the amount alleged in the complaint. TECO has answered the complaint and asserted various counterclaims, including misrepresentation and breach of contract, and is claiming approximately $3,000,000 in payment for past due services and breach of obligations by the Company to allow TECO to manufacture other scanner products for the Company. The court has instructed the parties to engage in alternative dispute resolution to attempt to resolve the dispute A date for trial has not been set. There can be no assurance that the Company will be successful in the action, or if it is, as to the amount of damages it may be awarded. (12) FINANCIAL INSTRUMENTS The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, loan payable to principle stockholder and convertible debentures approximated fair value as of December 31, 1995 and 1994. 39 40 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 COSTS AND DEDUCTIONS- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE OF PERIOD Year End December 31, 1995: Allowance for Doubtful Accounts................ $130,000 $ 200,820 $ 40,110(1) $290,710 Inventory Reserve......... $289,463 $3,012,632 $2,811,639(3) $490,456 Year End December 31, 1994: Allowance for Doubtful Accounts ................ $116,563 $ 72,595 $ 59,158(1) $130,000 Warranty Reserve ......... $ 96,287 $ 0 $ 96,287(2) $ 0 Inventory Reserve ........ $562,465 $ 0 $ 273,002(3) $289,463 Year End December 31, 1993: Allowance for Lease Receivables.............. $200,000 $ 141,113 $ 341,113 $ 0 Allowance for Doubtful Accounts ................ $ 73,601 $ 647,625 $ 604,663(1) $116,563 Warranty Reserve ......... $ 49,885 $ 46,402 $ 0 $ 96,287 Inventory Reserve ........ $209,845 $2,569,861 $2,217,241(3) $562,465 Advance to Suppliers Reserve.................. $175,000 $ 0 $ 175,000 $ 0 (1) Represents the net of accounts charged off and provisioned for future potential writeoff. (2) Represents provision and cost of warranty expense. (3) Represents inventory written off and disposed of.
40 EX-10.B 2 LEASE RENEWAL 1 EXHIBIT 10(b) LEASE RENEWAL Effective October 1, 1995, the Indenture of Lease (the "Lease") dated October 1, 1984 between Robert Howard and Howtek, Inc., for the premises located at 21 Park Avenue, Hudson New Hampshire is renewed for a term of one (1) year, expiring September 30, 1996, at the base rent of $78,499.92 payable in twelve monthly installments of $6,541.66. All other terms and conditions of the Lease remain in effect. Dated: October 1, 1995 HOWTEK, INC. By: ------------------------ Title: --------------------------- Robert Howard 41 EX-10.D 3 ADDENDUM TO REVOLVING LOAN & SECURITY AGMNT 1 EXHIBIT 10(d) ADDENDUM NO.12 REVOLVING LOAN AND SECURITY AGREEMENT CONVERTIBLE REVOLVING CREDIT PROMISSORY NOTE DATED OCTOBER 26, 1987 For consideration given and received, Robert Howard and Howtek, Inc., hereby agree to extend the repayment date in Paragraph D of the above referenced Convertible Revolving Credit Promissory Note, as amended,(the "Note") from January 4, 1997 to January 4, 1998 and further the parties agree that Howtek, Inc. may only repay the Note with the approval of Robert Howard, provided that if Robert Howard does not give such approval, Howtek, Inc.may repay the Note on the expiration of five (5) years from the date Howtek, Inc. first gave Robert Howard written notice of its intent to repay the Note. Effective the 19th day of March 1996. HOWTEK, INC. By: ------------------------ --------------------------- Title: Robert Howard EX-10.E 4 STANDARD CONFIGURATION OEM AGREEMENT 1 EXHIBIT 10(e) 12/13/94 STANDARD CONFIGURATION OEM AGREEMENT THIS AGREEMENT is made and entered into on this day of December 19 , ("Effective Date") by and between Howtek, Inc., (hereinafter "Howtek"), a Delaware corporation with a principal place of business at 21 Park Avenue, Hudson, New Hampshire, 03051, and, Crosfield Electronics Limited, a United Kingdom corporation, ("OEM") with a principal place of business at Three Cherry Trees Lane, Hemel Hempstead, Herts, HP2 7RH, England. WHEREAS Howtek engages in the development, manufacture and sale of a drum scanner for both reflective and transmissive material which offers interfaces to a number of computer platforms including, but not limited to, Macintosh and IBM compatible computers (the "Product" more particularly described in the "Specifications" set forth in Exhibit "A", attached hereto), which are marketed to end users through a network of Original Equipment Manufacturers (OEM), dealers and directly by Howtek; and WHEREAS OEM engages in the development and marketing of Color Electronic Pre-Press Systems; and WHEREAS, OEM is ultimately owned by E.I. DuPont de Nemours and Company and Fuji Photo Film Ltd., of the U.S.A. and Japan respectively, in equal shares; and WHEREAS OEM intends to both sell the Product supplied by Howtek as a stand alone item to third parties as well as to integrate the Product under this OEM Agreement into it's own products and systems and offer in both cases warranty, maintenance and services for the Products purchased hereunder and such sales to be both direct from OEM and by way of intermediaries between OEM and end-users of the Products; ACCORDINGLY IT IS AGREED BETWEEN THE PARTIES AS FOLLOWS: 1. TERM Subject to the termination provisions of Article 15, the initial term of this agreement is 12 months, beginning on the effective date, and shall be renewed automatically at the end of the term for successive twelve month terms. The expiration or termination of this Agreement shall not relieve the OEM from making any payments then and thereafter due under the terms of this Agreement nor from the obligation not to disclose or use trade secrets and any proprietary or confidential information of Howtek. 2. ORDERS AND FORECASTS OEM shall order Howtek product, as described in Exhibit "B" ("Product"), by issuing a written purchase order to Howtek at least 90 days prior to requested delivery date (or such shorter period as is acceptable to Howtek) which authorizes shipment of product under this Agreement and which specifies the quantity, model, description, price, requested shipment date, destination, and shipping instructions. OEM shall be entitled to reschedule delivery 2 of ordered Product, on a one time basis per purchase order, for Product which is scheduled to be delivered more than 30 days from date of giving notice of rescheduling, provided that such delivery may only be rescheduled for a date not to exceed 120 days from the date of the original purchase order. To enable Howtek to assess future requirements, OEM shall provide to Howtek a twelve month rolling forecast of Product OEM expects to purchase from Howtek on the signing of this Agreement (see Exhibit "C") and OEM shall update this forecast quarterly throughout the term of this Agreement and any renewals thereof. Such forecast shall not require OEM to purchase nor Howtek to deliver the amount of Product listed in the forecast. Provided OEM is in compliance with the terms of this Agreement, Howtek will accept all OEM purchase orders which are consistent with the volumes set forth in the forecasts it provides to Howtek. It is understood, however, that the first three months of such forecast shall be based upon firm purchase orders. 3. PRICE The OEM Purchase Prices and Discounts are set forth in Exhibit B. The initial OEM Purchase Price to be paid by OEM after the signing of this Agreement shall be based upon the Product purchase volumes forecast by the OEM pursuant to Section 2 above. At the end of each three month period following the commencement of this Agreement, if OEM's purchasing history and open orders of Product are not at the forecasted rate, then the OEM Discount and OEM Purchase Price shall be adjusted, up or down, to reflect the actual sales rate achieved during said preceding three month period, on all open and succeeding purchase orders until revised again in accordance with this provision. In order to accomodate OEM's market development efforts during the initial term of this Agreement OEM's Product purchases shall be aggregated over an eighteen month period for purposes of calculating the appropriate purchase price discount in Exhibit "B" and thereafter shall be aggregated over a twelve month period. Quarterly price reviews will continue during the initial term, but the quantities will be measured against an eighteen month term. The OEM Purchase Price does not include sales, use or other applicable taxes. OEM agrees either to furnish an appropriate exemption and/or resale certificate, or to pay Howtek, upon presentation of invoices therefor, the amounts of any such taxes which Howtek may be required to collect. Howtek shall endeavor throughout the term of this Agreement to make, and OEM shall endeavor to suggest, improvements to the Product and manufacturing processes to enable cost reductions to the Product to take place to the benefit of both parties. The pricing set forth for the Product in Exhibit "B", as may be amended from time to time, during each term, shall be the maximum price for the duration of that period. The price may be reviewed at twelve (12) monthly periods thereafter to assess whether it should be adjusted from that agreed. Any change to the purchase price which is in excess of the average United States of America inflation figure at the time of the annual review will be justified in detail by Howtek and approved by the OEM before coming into effect, such approval shall not be unreasonably withheld. Howtek will endeavor to maintain prices at competitive levels against similar classes of product produced by other manufacturers. If OEM considers that this is not being maintained for any reason then this will be subject to discussion between the Parties to resolve the matter. In the event that the U.S. list price of the Product is reduced by Howtek at any time, Howtek shall notify OEM forthwith and Exhibit B shall be amended accordingly. The prices as so altered shall apply to all Products delivered on and after the applicable date of the price reduction, including outstanding orders. Howtek shall credit OEM againstthe purchases of future Products with amounts paid by OEM over and above the applicable reduced price for all Products (excluding Product demonstration units) held in stock by OEM for a period of not more than 60 days at the time of introduction of the 2 3 said reduction". 4. PAYMENT Payment to Howtek by OEM for the purchase of Product shall be due 50 days from date of invoice which date shall correspond to the date of shipment of Product to OEM from Howtek's facility. Howtek shall send a copy of the invoice by facsimile transmission to OEM on the date of shipment. 5. DELIVERY, TITLE, RISK OF LOSS Howtek shall endeavor to ship Products as close to the requested order date as possible. However, Howtek shall not be liable for delays in delivery or failure to manufacture due to causes beyond its reasonable control, including, without limitation, acts of God, an inability to obtain necessary labor, materials or manufacturing facilities. In the event of any such delay, the date of delivery shall be extended for a period equal to the time lost by reason of the delay. All Howtek Products purchased hereunder shall be sold F.C.A. (Incoterms), common carrier, Howtek's facility, Hudson, New Hampshire or other designated Howtek distribution facility, freight collect, and title and risk of loss shall pass to OEM upon tender of delivery to a carrier. Howtek shall retain a purchase money security interest in all Products until paid for in full by OEM and OEM hereby authorizes Howtek to file and sign on behalf of OEM any documents necessary to perfect or secure Howtek's security interest in the Product. Products will be packaged at Howtek's expense in accordance with standard commercial packaging for air freight. The fastest and most economical means of shipment will be negotiated between Howtek and OEM. OEM shall, at its own expense, obtain import licenses necessary for importing the Products from the U.S.A. and Howtek will make its best efforts to assist OEM in obtaining any necessary licenses for export of the Product and spare parts. Howtek agrees to manufacture the Product to the applicable FCC standards and obtain all related FCC certifications. OEM acknowledges that such certifications are in Howtek's name, and agrees to take such action, if any, necessary to maintain FCC compliance in OEM's name. On request, Howtek will provide OEM with a copy of Howtek's certification of FCC compliance. 6. SPARE PARTS Howtek agrees to make available for purchase by OEM spare parts for Products purchased hereunder during the term of this Agreement and for a period of seven years from the date of termination of this Agreement (excluding commercially available components conforming to industry standards), on the terms and conditions of this Agreement and at Howtek's then standard prices provided to comparable customers at comparable quantities and on comparable terms and conditions. If, however, Product spare parts shall be discontinued during the term of this Agreement, or thereafter, Howtek shall provide OEM 120 days notice thereof and the opportunity to submit firm purchase orders and take delivery of such spare parts up to 12 months from the date of such notice. These spare parts may contain renovated components, however, they will function and be warranted as new spare parts. Attached to the Agreement as Schedule "F" is a Spare Parts Price List. OEM shall be entitled to a discount off this Spare Parts Price List at the same level OEM is entitled to under Schedule "B" for the purchase of Product. 7. DISCONTINUED PRODUCTS If, during the Term, Howtek discontinues the Product, Howtek agrees to provide OEM with one hundred twenty (120) days notice of Product discontinuance. OEM may place orders for discontinued Products during the notification period, for 3 4 delivery up to 12 months from the date of notice of Product discontinuance. 8. NON-DISCLOSURE (a) Except as provided below, OEM agrees not to disclose to any third party, or to use or employ, except as may be expressly contemplated by this Agreement, either during the performance thereof or for three years thereafter, any information of whatever nature in any way pertaining or relating to Howtek's Product technology, manufacturing methods, processes, strategies, prices, customers or related affairs furnished by Howtek, or otherwise acquired by OEM in connection with this Agreement ("Confidential Information"). Upon termination or cancellation of this Agreement, OEM shall surrender to Howtek, all written and descriptive matter, including but not limited to drawings, blueprints, description, or other paper or documents which contain such information. OEM shall be authorized to disclose to sales intermediaries authorized by OEM any Confidential Information which is necessary for the support, maintenance, promotion, marketing and sale of the Product provided such intermediaries agree in writing to protect such Confidential Information under terms substantially similar to this clause 8. The purpose of the foregoing sentence is to provide OEM with flexibility in promoting, supporting, servicing and selling the Product without disclosing the more sensitive types of Confidential Information such as drawings, manufacturing data and software source code. (b) For the avoidance of doubt, OEM has substantial knowledge, experience and expertise in color scanning technology and this undertaking in Section 8 shall be both without prejudice to OEM's rights thereto and be restricted to information expressly connected with the Product Technology. (c) Nothing in this Section 8 shall apply to Confidential Information: (i) which is publicly available through no fault of OEM; (ii) which was in possession of the OEM prior to the date of disclosure, as shown by prior written records; (iii) which is subsequently learned by the OEM from any third party which was not restricted from disclosing it, as shown by its written records; (iv) which is subsequently developed by OEM independently of disclosure hereunder, as shown by prior written records; (v) which the OEM can show in writing has been released for publication; (vi) which is authorized for disclosure by subsequent written agreement between the parties; (vii) which Howtek designates in writing as non-confidential. 9. LIMITED WARRANTY AND REMEDY LIMITATIONS Howtek warrants to OEM that the Product (other than spare parts) supplied hereunder shall be free from defects in material and workmanship under normal use and maintenance in accordance with the directions and cautions 4 5 contained in the manuals accompanying the Product for a period of the lesser of 360 days from date of shipment by Howtek to OEM or 180 days from the date of receipt by the end-user. Howtek warrants that spare parts shall be free from defects in material and workmanship under normal use and maintenance for 180 days from date of shipment by Howtek. Howtek's obligation under this warranty is limited to replacing or repairing, free of charge, any defective part returned to Howtek, Hudson, New Hampshire, or its designated service depot. This warranty is void if Product is abused, misused, is not operated in accordance with the Specifications set forth in Exhibit "A", or is operated with parts that were not manufactured or approved by Howtek. Howtek shall only be required to respond to warranty claims submitted by the OEM. The OEM shall indemnify and hold Howtek harmless from any warranty claims made directly to Howtek by persons purchasing Howtek Products from the OEM.. During the warranty period OEM shall pay for the return to Howtek of any faulty product. If the Product is found to be faulty due to poor design, workmanship or materials then Howtek shall reimburse OEM for the transportation costs incurred. Howtek shall also be responsible for freight charges, taxes and insurance charges for the return of repaired Products to OEM. During the warranty period if the Products require replacing or repairing due to accident, misuse, neglect, wilful act, default, operator error or any cause other than normal use, then OEM or the end user shall pay for labor and parts and all other associated delivery costs. THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER WRITTEN, ORAL OR IMPLIED INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE. HOWTEK SHALL NOT BE RESPONSIBLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF PRODUCTS NOT BEING AS WARRANTED AND OEM'S REMEDIES SHALL BE LIMITED TO THOSE ABOVE SET FORTH. Neither OEM nor any other person, firm or corporation is authorized to make any other warranties on behalf of Howtek or to assume for Howtek any other liabilities in connection with Products purchased hereunder. 10. LIMITATION OF DAMAGES Howtek shall not be liable for any loss, damages, either direct or consequential, arising from any cause whatsoever beyond its reasonable control. IN NO EVENT WILL HOWTEK BE LIABLE FOR ANY COLLATERAL, CONSEQUENTIAL, OR INDIRECT DAMAGES ARISING OUT OF OR RELATED TO THE TRANSACTIONS WHICH ARE THE SUBJECT HEREOF, EVEN IF HOWTEK SHALL HAVE BEEN ADVISED OF SUCH POTENTIAL DAMAGES, PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT BE CONSTRUED TO LIMIT HOWTEK'S LIABILITY FOR PERSONAL INJURY OR DEATH BY IMPOSITION OF STRICT LIABILITY OR CAUSED BY HOWTEK'S SOLE NEGLIGENCE. Whilst the parties acknowledge that any safety issue is unlikely to arise in relation to the products, each of the parties hereto shall assume full responsibility for and hold the other harmless from and against third party actions, claims or expenses in respect of personal injury, death or damage to property caused by its negligent act, or omission in relation to the products. 5 6 11. INSTALLATION AND SERVICE OEM shall be responsible for the installation and service of Products. Howtek agrees to provide the contents of the Product manuals in electronic digital format which Howtek hereby licenses OEM to use and modify in connection with its own documentation. Howtek authorizes OEM to translate the manuals into any language. Howtek will provide, at no cost to OEM, user training for the Product at OEM's site. Installation instructions are set forth in the User Manual and the Product is designed for end-user installation. Service training and support will be provided for a fee, by Howtek. 12. PATENTS Howtek agrees to defend or to settle, at its own cost, any action, suit or proceeding against OEM based upon a claim alleging that Product infringes the U.S. or European patent, copyright or other intellectual property rights of the complaining party, provided that: Howtek is notified promptly in writing by OEM of the existence of the claim, OEM requests Howtek to undertake its defense and gives Howtek the right to maintain sole control of the defense and all negotiations for settlement or compromise of such claim, and OEM customer cooperates with Howtek in such defense. Howtek shall not be liable to OEM if the claim of infringement is based upon the use of Product supplied by Howtek where any alteration to the Product has been made by OEM. Howtek shall have the right to substitute for the infringing product another suitable product or, at Howtek's option, obtain for OEM the right to continue the use of such product or take back such product and refund any sums OEM has paid Howtek therefore less a reasonable amount for use, damage, obsolescence and depreciation based on five year straight line amortization. If infringement is alleged prior to completion of delivery of the product, Howtek may decline to make further shipments without being in breach of contract. THE FOREGOING STATES HOWTEK'S ENTIRE LIABILITY AND OEM'S SOLE REMEDY WITH RESPECT TO CLAIMS OF PATENT, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHT INFRINGEMENT AND HOWTEK SHALL NOT BE LIABLE FOR ANY COLLATERAL, CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES ARISING OUT OF ANY SUCH INFRINGEMENT. 13. WORK ON OEM CUSTOMER'S PREMISES In the event of any work by Howtek, its employees or agents in the premises of OEM or its customers, OEM shall take (or cause its customers to take) all necessary precautions to prevent the occurrence of any injury to such persons or property, during the progress of such work. Except for injury due solely and directly to the negligence of a Howtek employee or agent while on the premises of OEM or its customers, OEM hereby indemnifies Howtek against all claims, demands, liabilities or loss by Howtek employees or agents which may result in any way from any act or omission of OEM, its customers or their agents, employees or subcontractors. 14. SOFTWARE Howtek hereby grants to OEM a non-exclusive, non-assignable license to the software supplied with the Product ("Software") pursuant to the provisions of the Software License in Exhibit"D" for the OEM's internal use and development in conjunction with the marketing, distribution and sale of the Product. Until the expiration or termination of the Agreement the OEM is hereby granted the right to sublicense the Softwareto persons in the chain of distribution and to end-user customers, by contractually binding such persons or end-users with terms substantially similar to the restrictions of Howtek's Standard Software License Agreement in Exhibit "D". In 6 7 addition, Howtek hereby agrees to make available to OEM all software development tools which Howtek makes available to third party software developers, including the SCSI Command Interface Specification HPF 082 (Rev.-1) dated July 14, 1994. scanning functions for the Product and the source code to what Howtek calls the "D4500 plug-in module" which is driver software that permits the Product to operate with scanning application programs. The source code to the the Plug in Module and any other development tools provided to OEM is licensed for OEM's internal use only, may not be copied (except for archival purposes), distributed, disclosed to third parties, or used for any purpose other than to support the sale of Products purchased hereunder. Upon the expiration or termination of this Agreement, OEM shall promptly return to Howtek all such source code, including copies, and any related documentation. Any software which OEM creates using this source code shall be the exclusive property of OEM, including all copyright, trademark and patent rights thereto. Howtek does not grant OEM a source code license to the operating software resident in firmware in the Product which controlls the opersting functions of the Product and such software remains the exclusive property of Howtek. Howtek's warranty for the Product shall not cover any software generated by OEM and any faults or defects occuring due to the modified software shall be corrected by OEM at OEM's expense. 15. TERMINATION OR MODIFICATION Either party shall have the right to terminate this Agreement immediately if the other ceases to function as a going concern, becomes insolvent, makes an assignment for the benefit of creditors, files a petition in bankruptcy or permits a petition to be filed against it. Either party shall have the further right to terminate this agreement, and/or suspend credit and delay delivery until payment is received, and/or otherwise alter terms of payment, and/or treat orders as having been cancelled if either party (i) fails to make payment when due or (ii) breaches any of its other obligations hereunder and such violation or breach remains uncured for thirty (30) days after notice by the non-breaching party to the other. Termination or expiration of this Agreement shall not relieve either party from the obligation to honor any commitments under this Agreement, including outstanding purchase orders, outstanding accounts due and the confidentiality requirements. 16. INDEPENDENT CONTRACTOR OEM's relationship with Howtek shall be that of an independent contractor and nothing contained herein shall be construed as creating the relationship of partner, principal and agent, joint venturers or legal representatives for any purpose. Neither party to this Agreement shall have the authority to act for or bind the other. 17. CHANGE CONTROL Howtek agrees that there will be no change to the Product which affects form, fit or function within the 90 day period between order and shipment. Howtek will advise OEM of any change in form, fit or function to the Product by means of a Howtek engineering change order ("ECO") at least 90 days prior to implementation. If any change in the form, fit or function of the Product is incompatible with OEM's products, then OEM may order versions of the Product without the changes pursuant to Section 7 of this Agreement. Howtek shall give at least 180 days advance notice of any scanner which replaces the 4500 to OEM (where Howtek's development cycles allow). Notice of Development shall never be less than 90 days before public announcement. Howtek will offer any scanner which replaces the 4500 to OEM for test and evaluation when available and prior to commercial shipment. 7 8 18. CANCELLATION If OEM cancels a purchase order, Howtek shall make its best efforts to minimize the costs of cancellation. OEM shall reimburse Howtek for all such reasonable costs incurred. 19. FACTORY ACCEPTANCE TEST The Product is designed to meet the Factory Acceptance Test Specification ("FAT Specification") provided in Exhibit "E". Prior to shipment, all Products will be subject to the Factory Acceptance Test by Howtek in accordance with Howtek's standard procedure for such Products. A Factory Acceptance Test Certificate will be provided with all Products purchased under this Agreement. Howtek shall, upon OEM request, permit technical representatives of OEM to be present at such test and inspection, provided OEM notifies Howtek in advance. Following receipt of the Product at the OEM designated destination, OEM shall at its discretion, subject the Product to the Factory Acceptance Test. If the Product does not meet this Factory Acceptance Test it may be rejected by OEM and any payments due with regard to such Product would be withheld by OEM until the Product meets the FAT Specification. 20. TRADEMARKS Howtek agrees to replace its trademarks and logos with OEM's trademarks and logos, as provided by OEM, to the Product and packaging, following approval by Howtek of such Trademarks and logos, which approval shall not be unreasonably withheld. Howtek agrees to allow OEM to affix its own labels and logos to the documentation OEM supplies with the Product and does not require Howtek labels and logos to be applied thereto. OEM agrees to defend and indemnify Howtek against any loss, expense or liability to third parties arising directly or indirectly out of Howtek's compliance with OEM supplied trademarks or logos attached to the Product or associated packaging. Howtek agrees to deliver the product painted in the color specified by OEM at the time of authorization of this Agreement and as modified from time to time by the OEM, except that any such subsequent color modifications shall be made as part of an engineering change order in accordance with this Agreement and any incremental costs above the then current painting costs resulting from this change shall be borne by OEM. In addition, any such changes shall not effect Product already placed on order by OEM. 21. MANUFACTURING LICENSE (a) Howtek agrees that it will negotiate a manufacturing license for the Product with OEM on terms and conditions to be mutually agreeable to the Parties. The Manufacturing License shall be an exclusive, non-assignable license to OEM for the manufacture of the Product in Europe and will include the license to all related software necessary for the successful manufacture and sale of the Product. The detailed operating conditions of the Manufacturing License are to be determined under a separate agreement between the Parties. Pursuant to such a Manufacturing License, Howtek would endeavor to transfer all manufacturing knowledge and know-how to OEM, and if OEM requires and at OEM's expense, provide trained support and technical assistance during the set up phase for the manufacture of the Product at OEM's production facility. The intellectual property rights in the manufacturing data developed by Howtek shall remain Howtek's exclusive property. Nothing in this clause shall be construed as transferring any intellectual property rights in the Product or manufacturing data to OEM. (b) In the event Howtek voluntarily or involuntarily is placed in liquidation under the U.S. 8 9 Bankruptcy laws, Howtek agrees to (i) allow OEM to purchase the Product directly from Juno Enterprises, Inc. ("Juno"), the third party manufacturer of the Product, and in the event the Product is unavailable from Juno in the quantities previously forecasted by OEM then (ii) Howtek agrees to provide licensing rights to OEM to manufacture the Product on payment of a royalty (to be negotiated among the parties at such time) to Howtek in such amount such that OEM shall be no worse off than if it was continuing to buy the Product from Howtek. (c) Howtek agrees to enter into an Escrow Agreement with OEM the purpose of which is to enable OEM to obtain possession of the Product drawings and Software source code in the event Howtek is voluntarily or involuntarily placed in liquidation under the U.S. Bankruptcy laws pursuant to Subsection (b) above. 22. GENERAL PROVISIONS ------------------ A. GOVERNING LAW; JURISDICTION: COSTS OF LITIGATION This Agreement and any transactions by and between Howtek and OEM hereunder shall be governed by, construed and interpreted in accordance with the laws of the state of New Hampshire. OEM expressly consents to the jurisdiction of any court of competent jurisdiction located in New Hampshire for the disposition of any dispute hereunder. Should legal action become necessary to enforce any of the terms and conditions set forth herein, the losing party shall pay to the prevailing party all out of pocket expenses incurred in connection with such action, including reasonable attorney's fees. B. ENTIRE AGREEMENT: AMENDMENT Howtek and OEM agree that the terms and conditions set forth in this Agreement shall govern all purchases of product during the initial and any renewal term of this Agreement. This Agreement supersedes all proposals, oral or written, and all negotiations, conversations or discussions between OEM and Howtek relating to the subject matter of this Agreement. This Agreement shall not be amended or superseded except by an agreement in writing signed by Howtek and OEM which specifically states that such modification or amendment is made pursuant to this article. C. NON-WAIVER OF DEFAULT Howtek's failure to insist upon strict performance of any of the provisions contained herein shall in no way constitute a waiver of its rights as set forth herein, at law or in equity, or a waiver by Howtek of any other provisions of prior, concurrent or subsequent default by Howtek in the performance of or compliance with any of the terms and conditions set forth herein. Neither the acceptance of payments after the due date, nor acceptance of adjustments, nor the acceptance of interest charges specified hereunder, nor the failure of Howtek to enforce any other of its rights under this Agreement shall be deemed a waiver of any of Howtek's rights or remedies. D. SEVERABILITY If any provision herein shall be held to be invalid or unenforceable for any reason such provision shall, to the extent of such invalidity or unenforceability, be severed, but 9 10 without in any way affecting the remainder of such provision or any other provision contained herein, all of which shall continue in full force and effect. E. EXPORT OBLIGATION The equipment sold under this Agreement may be subject to U.S. Government export regulations. To the extent required by law any equipment delivered within the United States, that is subsequently exported by the OEM must be licensed in accordance with the regulation of the U.S. Department of Commerce or any other appropriate U.S. Government agency and it is the responsibility of the OEM to obtain such license and approval. F. ASSIGNMENT Neither party may assign or otherwise transfer its rights or obligations under this agreement without first receiving the written consent of the other, which consent shall not unreasonably withheld, except that either party may assign its rights and obligations under this Agreement to any party which acquires all or substantially all of the assets of such party related to the Product without having to obtain the consent of the other party. G. NOTICES All notices in connection with this Agreement shall be in writing and sent registered mail, return receipt requested at the following address: If to LICENSOR: General Counsel Howtek, Inc. 21 Park Avenue Hudson, NH 03031 If to LICENSEE: Anthony Halker Marketing Director Crosfield Electronics Ltd. Three Cherry Trees Lane Hemel Hempstead Herts HP2 7RH England H. HEADINGS The headings herein are for convenience only and shall not affect the construction of any provision hereof. 10 11 IN WITNESS WHEREOF, The parties have caused this Agreement to be executed and do hereby warrant and represent their respective signatures that they are duly authorized to enter into this Agreement. HOWTEK, INC. CROSFIELD ELECTRONICS LIMITED By: By: ------------------------------ --------------------------- Title: Title: ------------------------------ --------------------------- Date: Date: ------------------------------ --------------------------- SUMMARY OF EXHIBITS - ------------------- Exhibit A Product Specification Exhibit B List of Products and Prices Exhibit C Forecast and Purchasing Commitment Exhibit D Software Licensing Agreement Exhibit E Factory Acceptance Test Exhibit F Spare Parts Price List 11 12 EXHIBIT "A" PRODUCT SPECIFICATIONS 12 13 EXHIBIT "B" LIST OF PRODUCTS AND PRICES 13 14 EXHIBIT "C" FORECAST (to be provided by Crosfield) 14 15 EXHIBIT "D" SOFTWARE LICENSE AGREEMENT This Software License Agreement is entered into between Howtek, Inc., 21 Park Avenue, Hudson New Hampshire ("LICENSOR"), and ____________________________ ______________________, ("LICENSEE") on the following terms and conditions. 1. SOFTWARE REMAINS LICENSOR'S PROPERTY. Title to the software licensed hereunder, which shall include all software listed or accompanying Products listed in Exhibit A or included as firmware in products listed in Exhibit A, related documentation, and all changes, modifications and/or enhancements thereto ("Software") and all rights therein, including all rights in patents, copyrights, and trade secrets applicable thereto, shall remain vested in LICENSOR. Any copies of the Software made by LICENSEE, in whole or in part, shall remain LICENSOR's property. 2. LICENSE. LICENSOR grants to LICENSEE a nonexclusive, worldwide license to use, the object code version of the Software. No right to copy the Software, in whole or in part, is granted except as hereinafter expressly provided. This license may not be assigned, sublicensed, other than to a resellerauthorized by Licensee or otherwise transferred by LICENSEE without prior written consent of LICENSOR. LICENSEE is only authorized to use the Software and related documentation in conjunction with the use by LICENSEE of the LICENSOR products with which they were furnished. 3. RIGHT TO COPY; PROTECTION AND SECURITY a. LICENSEE agrees to reproduce any LICENSOR copyright notice, and other proprietary legend in the Software and to include the same on all copies of the Software it makes in whole or in part. The LICENSOR copyright notice may appear in any of several forms, including machine readable form within the Software, and LICENSEE agrees to reproduce such notice in each form in which it appears. b. LICENSEE shall be responsible for marking all Software with the appropriate proprietary legends and copyright notices of the LICENSOR and any other person with proprietary rights in the Software. c. LICENSEE's obligations to protect LICENSOR's proprietary rights in the Software shall survive the termination of this Agreement until such proprietary Software enters the public domain through no fault of, or breach by LICENSEE, of this License Agreement. 4. TERM a. This Agreement will take effect as of the effective date of the accompanying Agreement and shall run coterminously therewith. b. This Agreement may be terminated by LICENSEE upon one month's prior written notice. 15 16 LICENSOR may terminate this Agreement if LICENSEE is in default of any of the terms and conditions of this Agreement, and termination is effective if LICENSEE fails to correct such default within thirty (30) days after written notice thereof by LICENSOR. c. Within one month after termination or expiration of the Agreement, LICENSEE will furnish to LICENSOR a certificate certifying that through its best effort, and to the best of its knowledge, the original and all copies, in whole or in part, in any form of the connection with this Agreement (except copies for which LICENSEE has paid a licensee fee for LICENSEE's own use), have been destroyed, except that LICENSEE may retain one copy for archival or support purposes. 5. USE OF LICENSOR'S NAME. The right granted by LICENSOR hereunder shall not be construed, directly or indirectly, by implication, estoppel or otherwise, as granting to LICENSEE the right to advertise the Software as a LICENSOR product. 6. DOCUMENTATION. LICENSEE may without charge make copies of the Software documentation (user manuals, product data sheets, etc.) as are necessary for its internal archival use only provided all of LICENSOR's and others' copyright and proprietary legends are reproduced. 7. SOFTWARE LICENSED HEREUNDER IS WARRANTED TO CONFORM TO PUBLISHED SPECIFICATIONS WITH NO ADDITIONAL WARRANTY WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING FITNESS FOR PARTICULAR OR INTENDED PURPOSE AND MERCHANTABILITY. IN NO EVENT SHALL LICENSOR BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) ARISING FROM USE OF THE SOFTWARE. LICENSOR will endeavor to correct problems and/or bugs relevant to the software as brought to the attention of LICENSOR by LICENSEE. 8. NONDISCLOSURE AND CONFIDENTIALITY. The Software licensed hereunder is proprietary to and a trade secret of Howtek, and shall not be disclosed to any person or entity not a party to this Agreement. Software which has been independently developed by LICENSEE or is in the public domain without being disclosed by LICENSEE in breach of this Agreement is not subject to the above restriction. LICENSEE recognizes the valuable proprietary, trade secret nature of the Software and agrees to indemnify Howtek for Howtek's damages in the event of the unauthorized disclosure by LICENSEE, its affiliates, employees or representatives of information related thereto. In addition, LICENSEE hereby agrees not to disclose to any party other than Howtek, (to which it hereby agrees to disclose) information regarding the performance or reliability of the Software. 9. EXPORT LICENSES. LICENSEE shall not transmit, directly or indirectly, the Software to any country in contravention of the U.S. Export Control Regulations. To the extent LICENSOR has information regarding such countries it will make such information available to LICENSEE. 10. NOTICES. All notices in connection with this Agreement shall be in writing and sent registered mail, return receipt requested at the following address: 16 17 If to LICENSOR: General Counsel Howtek, Inc. 21 Park Avenue Hudson, NH 03031 If to LICENSEE: Anthony Halker Marketing Director Crosfield Electronics Ltd. Three Cherry Trees Lane Hemel Hempstead Herts HP2 7RH England 11. LITIGATION. This Agreement and any transactions by and between Howtek and OEM hereunder shall be governed by, construed and interpreted in accordance with the laws of the state of New Hampshire. OEM expressly consents to the jurisdiction of any court of competent jurisdiction located in New Hampshire for the disposition of any dispute hereunder. Should legal action become necessary to enforce any of the terms and conditions set forth herein, the losing party shall pay to the prevailing party all out of pocket expenses incurred in connection with such action, including reasonable attorney's fees. No legal proceeding arising from any transaction hereunder may be instituted more than two years after the cause of action arose. 12. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between the parties with respect to the subject matter herein, and merges and supersedes all prior written agreements, discussions and understandings, express or implied, concerning such matters and shall take precedence over any conflicting terms which may be contained in LICENSEE's purchase order to LICENSOR's order acknowledgement form. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first written above. LICENSOR: LICENSEE: By: By: ----------------------- ------------------------------ Title: Title: -------------------- --------------------------- Date: Date: --------------------- --------------------------- 17 18 EXHIBIT "E" FACTORY ACCEPTANCE TEST 18 19 EXHIBIT "F" SPARE PARTS PRICE LIST 19 EX-23.A 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 (A) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Howtek, Inc. Hudson, New Hampshire We hereby consent to the incorporation by reference in the respective Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-14634 and 33-72534) of our report dated February 16, 1996, relating to the consolidated financial statements and schedule of Howtek, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. We also consent to the references to us under the caption "Experts" in the Prospectuses. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP New York, New York February 22, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 574,647 0 6,764,854 290,710 6,840,823 14,137,204 10,844,445 7,815,236 18,495,240 4,203,168 2,181,000 0 0 80,225 8,452,243 18,495,240 20,603,654 20,603,654 13,983,819 13,983,819 11,441,837 0 433,045 (5,255,047) 0 (5,255,047) 0 0 0 (5,255,047) (0.66) 0 ADDITIONAL CURRENT ASSET PREPAID AND OTHER $247,590 OTHER ASSETS OF $1,328,827 LOAN PAYABLE TO PRINCIPAL STOCKHOLDER $3,578,604
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