SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
|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, 1996
Commission File No. 0-20097
ARC Capital
(Exact name of registrant as specified in its charter)
California 33-0256103
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2067 Commerce Drive
Medford, Oregon 97504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 776-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Class A Warrants
Class B Warrants
Units, each Unit consisting of two shares of
Class A Common Stock, two Class A Warrants,
and one Class B Warrant.
--------------------------------------
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 |_|
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. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 10, 1997, was approximately $17,261,000. (All
officers and directors of the registrant are considered affiliates; Class B
Common Stock is assumed to be equal in value to Class A Common Stock.)
On March 10, 1997, the registrant had 13,289,857 shares of Class A Common
Stock and 101,835 shares of Class B Common Stock, all no par value, issued and
outstanding.
See Page 39 for Exhibit Index
<PAGE>
PART I
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ITEM 1. BUSINESS
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HISTORY
=======
From inception in 1987 until early 1990, ARC Capital's ("ARC" or the
"Company") predecessor company, Applied Laser Systems ("ALS") was principally
engaged in research and development and organizational activities and its
revenues were insignificant. Beginning in early 1990, ALS engaged in the
business of designing, developing, manufacturing and marketing laser diode
devices incorporating its Visible Laser Module ("VLM (TM)"), a device which
generates a directed bright red spot of light for pointing out details on
presentation boards, movie and television screens, slides or other surfaces from
up to 300 feet away, and laser aimers, devices which can be mounted on pistols,
rifles and other weapons to enhance shooting accuracy by directing a bright red
spot of light onto a target.
In March 1992, ALS completed its initial public offering, the proceeds of
which were used to repay bridge financing and other loans, and for working
capital.
In the latter part of 1993, ALS conceived of a new business strategy
whereby ALS would restructure its organizational and capital structure to become
the parent company of various operating subsidiaries (i.e., the platform company
concept). ALS began implementing this platform company concept by transferring
its operating assets (except cash), consisting of its laser business, and all of
its liabilities to Applied Laser Systems, Inc., its newly-formed Oregon
subsidiary (ALSO), effective as of December 31, 1993. In February 1994, ALS
acquired all of the issued and outstanding capital stock of Simco/Ramic
Corporation, now SRC Vision, Inc. ("SRC") for $8.1 million in cash. During late
1993 and 1994, ALS entered a number of other proposed acquisition transactions.
By September 1994, ALS terminated these acquisition transactions resulting in
significant losses in 1994 (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). Following these terminations,
the Company restructured to concentrate on its SRC-based vision systems
business. In October 1995, ALS sold the ALSO operation for cash and changed its
name to ARC Capital. In March 1996, the Company acquired Netherlands-based
Pulsarr Holding b.v. ("Pulsarr"), and, in July 1996, the Company acquired the
assets and operations of Ventek, Inc. ("Ventek"), both of which are also engaged
in designing and marketing automated vision systems. Following its acquisition,
Ventek, Inc. was subsequently renamed Veneer Technology, Inc. ("Veneer"). The
current operating subsidiaries of ARC are SRC, Pulsarr and Ventek. ARC continues
to operate as the parent company, coordinating public relations, managerial,
financial and accounting functions, as well as developing and implementing its
growth strategy.
BUSINESS
========
The Company
===========
The Company designs, develops, manufactures and markets machine vision
systems that process images not discernible to the human eye. These systems
combine technologies in four key areas (lighting, cameras, processors and
software) to improve quality, enhance yield, reduce production costs and
increase throughput in a variety of markets and applications where human vision
is inadequate due to fatigue, visual acuity or speed. Where needed, ARC employs
highly specialized mechanical technologies to help customers integrate machine
vision systems into their production processes. The Company's products currently
serve two principal markets, the processing industry and the wood panel
production industry. Applications include quality control in the processing of
food, pulp wood, tobacco, and plastics for recycling, and quality control and
automated process control in wood panel production.
Since its founding in 1964, SRC has evolved from a single-product company
(an optical device to measure length and diameter of freshly cut logs) serving
the timber industry, into a provider of machine vision systems for a number of
processing industries. In 1984, SRC released its first machine vision product, a
fully automated defect removal system for the french fry processing industry,
designed to improve productivity and quality. The system utilized proprietary
material conveying systems, light sources, linear array CCD cameras, image
processing software, and standard bus based electronics to detect defective
french fries and efficiently remove them from a rapidly moving product stream.
SRC built upon its experience in potato processing to develop machine vision
systems for other food processing customers. These new systems increasingly
possessed more sophisticated capabilities, such as fully automated sorting and
continuous high volume product analysis.
From 1984 through the present, SRC, Pulsarr and Ventek have continued to
advance and refine their core technologies to increase the speed and improve the
accuracy of its machine vision products. Over 22 patents have resulted from
these ongoing efforts. Early SRC systems for the food processing industry
benefited from state-of-the-art microprocessors which have been replaced with
more powerful microprocessors as they became available over time. When full
color recognition systems were first introduced in 1987, SRC responded to the
need for color signal processing by developing a three-color image processing
system. SRC then invented a high resolution "RGB" (red green blue) or "true
color" camera because commercially available cameras lacked the ability to
detect the precise color of objects being viewed. The true color camera
significantly increased the accuracy of SRC's color processing machine vision
systems. SRC used the experience it gained developing the true color camera to
develop a high resolution panchromatic camera, so that customers who require
only black and white image processing can achieve the same level of precision
made possible by SRC's true color camera.
SRC has further increased the visual discrimination capabilities of its
machine vision systems with lighting, spectral analysis and mechanical
technologies. Since 1989, SRC has developed specialty lamps that take advantage
of the different reflective properties of items being processed on a single
conveyer. SRC began adding to its spectral characterization capability in 1992.
During this period, SRC developed several mechanical technologies, including
high-speed ejection modules, high-speed material handling, air-assist
stabilization and high-speed video motion analysis to facilitate processing on a
high speed conveyer. SRC continued to make significant technological advances
until 1993 when previous management reduced expenditure on research and
development resulting in a technology gap.
Following the acquisition of SRC in 1994, the Company embarked upon a plan
to revitalize its growth potential through significantly increased research and
development efforts and a reassessment of marketing goals. At the same time, the
Company established a new management team dedicated to identifying untapped
markets for machine vision systems. New management targeted marketing efforts at
niche markets in non-food processing industries such as plastics for recycling,
pulp wood and tobacco, which have resulted in higher average per unit sales
prices.
The addition of Pulsarr in March 1996 greatly expanded the Company's market
presence outside North America, especially in the food processing industry.
The addition of Ventek in July 1996 gave the Company its first machine
vision system application in the wood panel production industry. Ventek was
founded in 1991 by three engineers who were an integral part of the design and
development of the "Infrascan" scanner. In the early 1970's, the Infrascan
became the industry standard for detecting defects in wood veneer and it
remained the standard until 1994, when Ventek introduced its "New Vision"
system. Ventek's experience in wood panel production complements the Company's
lighting, camera, processing and software capabilities. The Company believes
that an enhanced level of precision will be achieved by incorporating SRC's high
speed line-scan camera into Ventek's veneer scanning systems, thereby increasing
their ability to separate the product into various grades, as well as to detect
and remove defects. This improved grading capability is expected to increase the
yield of high margin grades by correctly identifying them and minimizing waste,
enabling customers to increase margins on the product produced from any given
amount of raw inputs.
Industry Background
===================
Machine Vision:
---------------
Like human vision, machine vision requires sensing elements and image
processors. The camera and lighting components of machine vision systems are
capable of sensing images beyond the region of the electromagnetic energy
spectrum called "visible light." Machine vision systems working outside the
visible light range can often provide significantly enhanced discrimination
capabilities beyond that detectable to the human eye. For example, in plastics
recycling, this capability allows machine vision systems to discriminate between
two different types of plastics, PVC and PET, both of which are the same color.
Under the right kind of non-visible light, the different reflective properties
of these two plastics make them easily distinguishable to a high speed camera.
In addition, machine vision systems are capable of clearly viewing and reacting
to objects moving at speeds of up to 1,200 feet per minute. The processor and
software components of machine vision systems are capable of rapidly processing
and analyzing signals with a high level of uniformity. Because machine vision
systems do not fatigue, they are often preferable for high speed, repetitive
scanning or viewing of objects over indefinite periods of time, as required in
many production processes.
Quality Control:
----------------
Processing applications typically combine a computer-based conveyor system
with a machine vision system. The conveyor presents a moving stream of raw
product to a high-speed inspection camera. Data gathered by the camera is
processed by the computer using specially developed software with the purpose of
identifying the location on the conveyor of defective items for the express
purpose of rejecting such defective material. Processors of food, pulp wood,
tobacco and recycled plastic products must process large quantities of raw
product through different stages, including defect detection and sorting to
remove defective pieces and inspect for quality. In the agricultural area, the
frequency and severity of defects in the raw product is highly variable,
depending upon a variety of factors affecting crops.
Historically, defect detection, removal and quality control in the
industries addressed the Company have been labor intensive and dependent upon
and limited by the variability of the work force. These functions are performed
by a work force that is frequently unskilled and subject to a high turnover
rate. Large numbers of individual workers stand along a conveyor and visually
identify and manually remove defective pieces from the stream of moving product.
These manual methods cause inconsistent defect removal, as well as limited
throughput that varies based upon the number and abilities of the workers.
Manual methods also usually cause excessive amounts of good product to be
discarded along with defective product. The industry has sought to replace these
manual methods with automated systems that achieve higher yield and better
quality at reduced costs.
Automated Process Control:
--------------------------
Many types of manufacturing and processing require machine vision systems
because of the increasing demands for speed and accuracy. In high-volume
manufacturing processes, the demand for production of quality products has
driven the need for 100% inspection. The identification of defects in a
continuous stream of plywood veneer for wood panel production is the Company's
first such application. However, while machine vision systems have been
successfully used to identify and remove defects in panel production and other
industries, human eyes and hands are typically still used to repair defects,
grade and sort various types of products. Other companies, such as Cognex
Corporation, have and are addressing this need, but must combine their pattern
recognition software and computer hardware with lighting and cameras provided by
other entities. The Company believes that its ability to adapt its proprietary
lighting and cameras gives it an advantage over companies that must rely on
outside suppliers for these key components.
ARC Solutions
=============
The Company seeks to provide its customers with a competitive advantage by
reducing high labor costs, increasing yields and throughput and improving
quality control. The Company's machine vision systems are capable of automated
defect detection and removal and real-time quality analysis. These machine
vision systems use advanced optical inspection technology to help customers
recover more of the good product (higher yield) and remove a higher percentage
of defective product (quality control) than the manual sorting and defect
removal methods historically used by food processors. In the wood panel
production industry, increasing the number of decisions made by machine vision
systems can also result in increased throughput and higher yield with fewer line
workers. Machine vision systems of the type produced by ARC can add significant
value in environments where raw product is highly variable by improving the
uniformity of finished product.
Machine vision technology used for inspection and control of processes
(beyond defect removal) throughout manufacturing can eliminate adding value to
defective products, thereby reducing the finished product scrap rate. Machine
vision systems can be used for automated process control to add value and
improve efficiency in highly repetitive processes, such as grading and
statistical collection, that require speed, accuracy and rapid throughput. In
addition, machine vision systems are capable of providing real-time feedback
that could enable manufacturers to rapidly alter or modify production
specifications to achieve a high level of consistent quality not previously
achievable. Thus, automated process control applications present an opportunity
for ARC to achieve higher margins, while achieving substantial cost savings for
customers through the reduction of direct labor and improved product quality.
Strategy
========
The Company seeks to establish itself as the technological leader and
premier provider of machine vision systems in the markets it serves by adapting
its core competencies in camera, lighting, processing and software to meet
customer needs. The Company believes that the 1996 acquisitions of Ventek and
Pulsarr, and continuous development of vision systems apart from mechanical
product handling equipment can increase gross margins and enable the Company to
enter new higher margin markets. Important elements of the Company's growth
strategy include:
* Leverage Expertise in Lighting, Camera, Processing and Software
Technologies: The Company believes its core competitive strength is its
breadth and depth of expertise in optical, lighting, processing and
software technologies. The Company and its predecessors have developed this
expertise over a period of thirteen years and continue to expand its
capabilities through research and development. The Company seeks to expand
the applications for its technology and to capitalize on its ability to
apply its technology to develop new products and product enhancements.
* Identify and Target Key Niche Markets: The Company will seek to identify
well-defined, niche markets with the potential of higher per unit profit
margins. The Company believes that it will achieve higher margins where
customers require the full range of its machine vision systems'
capabilities in automated process control as well as in quality control. In
order to gain increased acceptance and market penetration for its machine
vision systems, ARC will continue to focus on forming strategic
relationships with leading companies in its target markets. The Company
believes this method of strategic market penetration to be very effective.
The Company believes that its previous relationship with Union Carbide, and
current relationships with VTT and CAE Machinery, Ltd. and others
demonstrate recognition of the technical advantages of its systems.
* Customize Technology to Meet Customer Needs: ARC designs its products to be
adaptable to individual customer requirements. ARC believes that this
flexibility, particularly in lighting and camera capabilities, gives it a
competitive advantage in being able to respond rapidly to changing needs in
existing and new markets. ARC adapts, customizes and integrates its machine
vision systems to solve customers' particular problems and therefore
satisfy customers' needs.
* Expand Sales and Distribution: The Company intends to expand sales and
distribution by implementing a regional sales and service office concept.
The Company is currently building upon its Pulsarr-based European sales and
service center. An additional office in another geographic location is
planned within 18 months. These regional sales and services offices would
oversee and direct the efforts of representatives for ARC. The Company
plans to strategically locate these regional sales and service offices and
to equip them, financing permitting, with demonstration systems to
facilitate customers' testing their products on systems similar to the
equipment that they would order from ARC.
* Aggressively Pursue Use of Trial Units at Customer Sites: The Company will
seek to place increased numbers of trial units at potential customers'
sites. ARC's experience with trial units has been successful because a
company which has a trial unit machine vision system installed in its
facility will frequently decide to retain and purchase the unit. Trial
units provide potential customers with the opportunity to experience a
reduction in their production cost prior to making the capital commitment
involved in purchasing one or more of the Company's machine vision systems.
* Evaluate and Pursue New Vision Related Products: The Company will seek to
identify technologies and capabilities that enhance its product offerings
and market applications through joint ventures, acquisitions, partnerships
or other business relationships.
Products
========
ARC currently offers the following products:
Product Industry Applications
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VHS OPTISORT(TM)(1) Food processing, Potato Chips, French
RX Series Plastic recycling Fries, Whole Potatoes,
RU Series Vegetables, Polyethyl
POM Series Teraphthalate Green/Clear
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KROMA-SORT(r) Food processing, Vegetables, Plastic Flake
Plastic
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SPECTRA-SORT(TM) Food processing, Potato Products, Cereals,
Plastic's recycling Vegetables
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Length & Defect Food processing French Fry Sorter
Analyzer(TM)
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Pulpwood Sorter Forest industry Wood Chip Sorter
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Tobacco Sorter II Tobacco Tobacco, Dry Food Products
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"New Vision" Veneer Plywood Veneer Screen defects, instruct
Scanning System other machines in Defect
Removal
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ARC's machine vision systems utilize lighting, camera and software
components, and housing and structural components made principally of stainless
steel. They are modular in design, which provides flexibility in configuration
to allow adaptability to products of many types of industries. The mechanical
design of these systems is extremely sturdy and conforms to various industry
regulations and standards.
Defect Detection and Removal:
-----------------------------
The technology used in ARC's machine vision systems is capable of viewing,
discriminating between usable versus defective pieces in periods ranging from 20
to 60 milliseconds (thousandths of a second), and removing the defect while the
product is traveling at speeds of 500 to 1,200 feet per minute. Initially, the
product stream is mono-layered (arranged into a single layer) by a vibrating
infeed conveyor belt, and fed onto the main conveyor by a steep infeed chute.
The chute accelerates the product to separate product units in the flow
direction. Mono-layering and creating a sufficient space between each piece of
product inspected, such as individual raisins, facilitates rapid, accurate
analysis by ARC's image processing hardware and software.
Once separated, product is moved through the system by the high speed main
belt conveyor. Customers select the belt color to provide a sharp contrast with
the product being sorted. Lighting is selected to maximize the difference in the
images reflected by acceptable and defective pieces of product. Intense,
specially conditioned fluorescent, or exotic gas discharge-produced light
illuminates the product beneath ARC's high speed line-scan camera. High speed
imaging in the camera module stores and compares light levels reflected by each
piece of product. Levels that fall within discrimination windows selected by the
operator are considered defects.
During the scanning and analysis, the system processor monitors the
conveyor belt position of each defective piece and tracks it through the short
distance to the downstream end of the main conveyor. The distance between the
point at which the camera detects the moving product and the point at which the
jet of air expels the defective piece ranges from two to 25 inches. Just as each
defective piece is leaving the main conveyor, a short jet of air is released
from one or more of the finely tuned ejectors. This jet of air rapidly changes
the paths of the defective pieces downward so that they miss the main outfeed
chute. Accepts are unaffected, pass across the gap to be gently decelerated on
the outfeed chute, and then travel on to downstream processing equipment.
ARC's machine vision systems allow the customer to establish basic sorting
criteria prior to running the system and are easily fine-tuned for day-to-day
changes in product characteristics and light levels.
Markets, Customers and Applications
===================================
To further its growth strategy, the Company is actively pursuing expansion
in both its current markets and by identifying and entering into new niche
markets (i.e., markets that are well defined have the potential for higher
profit margins and in which there is little competition). At the same time, ARC
engages in continuous modifications of its lighting, camera, processing and
software technologies to adapt them for new applications. Until recently, the
Company marketed its machine vision systems primarily for quality control in
sorting applications. However, the Company believes that many additional
applications for its machine vision systems exist in both food and non-food
markets, particularly in the area of automated process control. The Company
believes its ability to respond to customers' needs in niche markets by
customizing, developing and integrating its core technology will allow it to
penetrate these markets.
Food:
-----
The Company's largest market is the food processing industry. Within food
processing, the largest market segments for the Company's products have been
potatoes (principally french fries), vegetables and snack foods. The Company has
also penetrated fruits, cereals and confections, as well as a variety of other
market segments. Customers in the food industry include J.R. Simplot, Del Monte
Foods, PepsiCo, Inc. (Frito-Lay, Inc.), and Hershey Chocolate USA.
ARC's systems are used by fruit and vegetable processors where
field-harvested products are cleaned, graded, automatically sorted, blanched and
processed prior to freezing, canning or packaging for sale to institutional and
retail markets. Principal fruit and vegetable market segments for the Company
are green beans, peas, corn, carrots, onions, raisins, and peaches. The
Company's prospects for sales in the vegetable and fruit industry benefit from
its proprietary color automated defect removal systems, since defect detection
in most fruit and vegetable segments requires color analysis. In contrast, the
potato industry has been able to achieve effective detection of good and bad
product using black and white optical scanning technology.
Snack food processors use ARC's machine vision systems in a variety of
applications. Candy manufacturers scan product to remove partially wrapped
pieces. Potato chip manufacturers use ARC's vision capabilities to ensure
consistent color and quality.
Tobacco:
--------
ARC's machine vision systems provide tobacco companies sorting capability
to remove impurities and foreign matter from a stream of raw tobacco. ARC has
sold systems to leading U.S. and international tobacco companies, particularly
in Japan and Indonesia. ARC believes market growth for tobacco systems shows
great promise based upon the high degree of acceptance demonstrated by its
customers and the significant size of the worldwide tobacco processing market.
The Company has entered into an agreement with COMAS S.p.A., a manufacturer and
seller of tobacco processing machinery systems worldwide, whereby COMAS will
represent ARC in all areas of the world outside of North America and Japan.
Plywood Veneer:
---------------
The Company has targeted the need for detecting and eliminating defects
(edge cuts, knots and dark color) from the peeled ribbon of veneer used in wood
panel production for the plywood market. Since its introduction in 1994, the
Company's New Vision veneer scanning system has gained wide acceptance in the
North American plywood industry. The Company believes that it has placed systems
in approximately 70% of U.S. softwood veneer production lines, but has not yet
penetrated foreign markets to any significant extent, with only four systems
sold outside the U.S.
The New Vision veneer scanning machine vision system allows identification
of open voids, wane and closed defects in a fast-moving stream of wood veneer
used in plywood production just after a log is peeled. After defect
identification, the New Vision instructs a clipper (manufactured by another
company) to cut the veneer immediately before and after the defect. The New
Vision reduces the amount of good wood attached to the defect and ensures
complete defect identification at the beginning of the plywood production
process, which decreases the number of downgraded panels, increases dryer
efficiency by eliminating material that ultimately becomes dry waste and reduces
re-clipping of previously undetected defects. The savings provided by the New
Vision system in the form of higher portions of good wood recovered create
significant added value for customers. Major customers include Georgia-Pacific,
International Paper and Columbia Forest Products.
The Company believes that its market share in green veneer scanning
reflects the level of confidence that customers have for the reliability and
performance of its products. However, green veneer scanning, or initial
inspection of the veneer represents only one point in the vertical wood panel
production market. There are approximately eight other potential defect
detection applications in both the green and dry (i.e., after the veneer has
been dried before lay-up and lamination) veneer processing. In addition, the
Company believes that further market potential exists in grading and matching of
hardwood and furniture-grade veneers. Thus, existing and potential new customers
who process wood at other steps in the multi-step panel production process are
an untapped market for the Company's machine vision systems. The Company will
seek to leverage Ventek's brand name recognition in green veneer scanning to
reach customers at multiple points in the vertical market for wood panel
production so that existing and new customers can benefit from the full range of
the Company's technological capabilities.
Forest Products:
----------------
The pulpwood industry is beginning to recognize the benefits of using
machine vision to separate contaminants in pulpwood. Heavy duty ARC machine
vision systems, such as the Pulpwood Sorter, have been developed to sort bark,
rot and other undesirable wood parts from high quality wood chips used in making
paper. The sorter is able to identify bark, rot and trash and automatically
remove unwanted material from a fast-moving, continuous stream of wood chips. As
a result, high value chips can be economically recovered from lower quality and
formerly unusable limbs and small trees. After sorting for bark and darker
content, the wood chips command a higher market price because they require less
chemical processing in the manufacture of paper products. Customers in the
forest products industry include VTT and CAE Machinery, Ltd., the Company's
exclusive distributor of the Pulpwood Sorter in North America.
Based upon interest from major pulp producers, ARC believes that a large
potential market for this process exists worldwide. Other potential applications
for ARC machine vision systems for the forest products industry include
inspection and grading for finished lumber and reclamation of wood yard wastes.
Plastics Recycling:
-------------------
World-wide demand for plastics drives the need for ARC's machine vision
systems in the plastics recycling business. Two key factors may cause demand for
recycled plastics to increase: increasing raw input costs for new plastics and
more stringent recycling regulations. These developments will increase potential
customers' interest in using ARC's machine vision systems to perform automated
sorting of a variety of post-consumer materials. In the future, prices for new
plastic material are expected to rise, which may result in increased demand for
products made from recycled post-consumer material. At the same time that inputs
for new plastics have become more expensive, government regulations in the U.S.
and abroad have begun to require consumers and producers to recycle. As of
December 31, 1995, ten states had enacted legislation requiring recycling of
plastics and many others have legislation pending. ARC believes that most of the
states will eventually enact some type of recycling regulations. Many European
and other countries have also enacted recycling laws which require up to 40%
post-consumer material in plastic bottles.
Because different types of plastics used in consumer products have
different characteristics, they must be separated prior to use in recycled
products. ARC's proprietary lighting and camera technologies take advantage of
different reflective properties of these plastics to enable producers of
recycled plastics to accurately separate valuable materials that could otherwise
be wasted. Plastics used in recycled plastic products, include PET (polyethyl
teraphthalate) used for transparent soda bottles, NHDPE (natural high density
polyethylene) used for translucent milk and other fluid bottles, and colored
HDPE used for a variety of opaque, colored bottles, such as those used for motor
oil and dishwashing detergent. Another type of plastic, PVC (polyvinyl
chloride), has melting characteristics different from PET or HDPE. ARC has
developed technologies that (i) separate plastics by melting point, which is
necessary to ensure purity of the recycled material and to prevent costly
shutdowns of equipment used by recyclers in the processes, and (ii) separate
plastics by color, which is vital to the remarketing of the recycled material.
Customers in the plastics recycling market include Union Carbide, Inc., and
Wellman Industries.
Technology, Engineering, Research and Development
=================================================
Technology
==========
Lighting:
---------
ARC has developed a number of proprietary technologies that form the
foundation of its vision systems, particularly in the areas of lighting and
cameras. The performance of machine vision systems is analogous to human vision
insofar as the ability to see is only as good as the lighting and optics permit.
However, machine vision performance can be optimized through the use of
specialized lighting to improve the contrast between one part of an object and
another part of the same object, with the two parts having differing reflection
properties. ARC has developed proprietary lighting technology to enhance the
contrast discrimination for objects that have nearly identical visual properties
in the visible light range. ARC's proprietary lighting systems are manufactured
in-house.
Optimizing the performance of a machine vision system requires an
understanding of the spectral characteristics of the object being analyzed. This
means that the reflective properties of the object must be characterized as a
function of the varying color of light (i.e. wavelength of light) by which it is
illuminated. This process of characterizing the reflection of the object as a
function of the wavelength of light is called spectral analysis or spectroscopy.
ARC's spectroscopy laboratory is fully equipped to measure the reflective
properties of customer products with lighting that ranges from ultraviolet (UV)
to infrared (IR). This ability to determine the spectral characteristics of an
object allows ARC to eliminate trial and error approaches to lighting and camera
configurations and, therefore, ensures optimal visual discrimination capability
of ARC vision systems. To better serve its customers, ARC has developed a
portable spectrometer that can be taken into the field for applications where
measurements must be made on location due to the mutability or perishability of
the customer's product.
Cameras:
--------
Machine vision systems that have full color perception capability are
limited by the camera's ability to represent true color. True color means that
the color seen by both the human observer and the machine vision system's camera
must result in the same interpretation. The Company's full color cameras use
three fundamental colors: red, green and blue (RGB). The best color
representation can be achieved when each of the R, G, and B sensor elements
(i.e. pixels) are optically coincident. This means that when the RGB camera is
looking at a specific point on an object, all three (RGB) sensor arrays (charged
couple devices, or "CCD's") have corresponding R, G & B pixels looking at the
same spot. Color accuracy and, therefore, performance depends on the ability of
its camera to accurately align the RGB CCD's. SRC has a patented alignment
process for building its commercial full color line-scan cameras.
Processing:
-----------
An accurate interpretation of images created using lighting and cameras
depends on the image processing capabilities of the rest of the machine vision
system. Real-time image processing is accomplished by high speed electronic
signal processors (hardware) and detection algorithms (software). Successive
generations of ARC vision systems have grown from pan-chromatic/gray-scale
systems to full color vision. The current generation product under development
makes extensive use of DSP (digital signal processor) chips that allow
commonality within the machine with very high throughput performance and highly
flexible functional expansion capability.
Software:
---------
High speed vision requires efficient software algorithms. ARC maintains a
software group that develops specialized proprietary detection algorithms to
achieve real-time signal processing. Multiple generations of detection
algorithms have resulted in continual refinement of image processing capability.
This in-house software resource is also responsible for the creation of
user-friendly Graphics User Interfaces (GUI) that make ARC products easy to
learn, use and maintain. This enables workers in a customer's production process
to achieve the benefits of ARC's systems without extensive and time consuming
training.
Research and Development
========================
The Company anticipates research and development expenditures will continue
to increase in the future. Some of the more significant research and development
projects undertaken in recent years were the development of an
application-specific tobacco machine vision system for sorting, and processing
enhancements for existing and new systems. Further research and development
efforts are expected to flow from these activities.
ARC's research and development group conducts new product research and
development, provides support engineering for released products and project
engineering for custom systems. The R&D group includes electronic, mechanical
and software engineers, mathematicians and technical support personnel. Ongoing
development activities include improvements to current products and development
of new products. The Company provides engineering support for products in all of
its locations.
ARC's research and development expenses have been as follows:
Fiscal year ended December 31, 1994............................ 1,476,000
Fiscal year ended December 31, 1995............................ 1,987,000
Fiscal year ended December 31, 1996............................ 4,038,000
Marketing and Sales
===================
A principal ARC marketing strategy is to determine which new niche market
or application to pursue, and to form a strategic relationship with a leading
company in that market. ARC's objective in such an alliance is (i) to interest
the leader in purchasing ARC's machine vision systems, which may lead to further
sales to other companies in the field that follow industry trends, and (ii) to
obtain the benefit of direct customer input and participation during the product
design phase of adapting the ARC system to the new market or application. ARC
has identified new niche market opportunities for application of its machine
vision technology initially in pulp wood, tobacco and plastics for recycling.
Focused Customer Strategy:
--------------------------
In recent years, the Company has established certain contractual and
non-contractual relationships with existing customers, potential customers,
distributors and others. The purpose of this focused customer strategy is to
access such customers' knowledge and contacts within the applicable industries
to identify customer needs and expand sales. Relationships entered into since
1994 include the following:
<TABLE>
<CAPTION>
Name and/or Potential
Type of Company Industry Application Description of Relationship
- --------------- -------- ----------- ---------------------------
<S> <C> <C> <C>
1. Union Carbide Plastics Recycling whole Processing of post-consumer colored
recycling bottles and HDPE (high density polyethylene, used
plastic flakes for translucent milk and other
fluid bottles) to create PRISMA(TM)standard
plastics (PRISMA(TM) is a set of color
standards that allows for manufacture of
consistently colored HDPE containers which
require certain portions of post-consumer
material).
2. Excel Food Meat sorter Non-exclusive relationship with a large
(meat processor) U. S. meat processor resulting in a
USDA-approved meat sorting system.
3. COMAS, S.p.A. Tobacco Tobacco sorting COMAS contributes market access as well
(manufacturer as extensive product handling experience
of tobacco for improving ARC sorter designs to
processing accelerate market penetration with better
equipment) performing machines.
4. VTT (agency of Pulp wood Wood chip sorting Exclusive arrangement with VTT on the Massahake
the government wood chip upgrading process. The Massahake
of Finland) process allows for efficient utilization of
trees that are taken from the forest.
5. CAE Machinery, Pulp wood Wood chip sorting ARC seeks to capitalize on the reputation
Ltd. (major CAE in the technologically conservative
supplier to the forest products industry in North America
North American to speed the adoption of machine vision
wood products sorting technology in that industry.
industry)
6. Columbia Forest Wood veneer Further automation Agreement to mutually expore further
Products of veneer automation of hardwood plywood manufacturing
processing processes.
</TABLE>
The Company believes that adapting current ARC machine vision systems for
new applications through strategic relationships such as these will contribute
to base business growth and accelerate entry into new niche markets.
Sales and Distribution:
-----------------------
ARC has a direct sales force of 12 employees. It also markets its products
through representatives pursuant to various agreements covering different
geographical areas. Prior to September 30, 1996, ARC offered its products for
sale outside the United States and Canada through Ham & Hak Engineering b.v. and
its Foodectronics subsidiary. Sales to Foodectronics amounted to approximately
2.9%, 6.4% and 20.1% of ARC total sales in the twelve months ended December 31,
1996, 1995 and 1994, respectively. On September 30, 1996, SRC and Ham & Hak
terminated their ten-year exclusive distribution contract. The Company will now
sell and service its machine vision systems through its Pulsarr-based European
office and contract sales and service engineers.
Marketing Through Trial Units:
------------------------------
ARC occasionally enters into Site Lease Agreements with potential customers
which provide for a trial period (generally from two to four months) for the
customer to test a system. The potential customer pays a monthly rental fee for
the trial units, which is then credited against the purchase price when the
customer purchases the system. Due to the success rate in customer sales
resulting from the use of these trial units as a marketing tool, the Company
intends to seek to increase the placement of trial units in new potential
customer sites.
International Sales:
--------------------
International sales (i.e. sales outside the United States) for the years
ended December 31, 1996, 1995 and 1994 accounted for 53%, 26% and 22% of net
sales, respectively. International sales increased as a percentage of net sales
in 1996 because of the acquisition of Pulsarr in 1996. Foreign sales are
denominated in U. S. dollars, or, in the case of Pulsarr, primarily Dutch
guilders.
Backlog
=======
ARC's backlog for its products was approximately $7,578,000 at December 31,
1996, as compared to $2,307,000 at December 31, 1995. Shipment of all the
backlog orders is scheduled to take place within nine months. Backlog includes
only those orders for which a purchase order has been received and for which a
delivery schedule has been established by ARC. However, such orders can be
subject to cancellation by the customer. Because of the timing of orders,
customer changes in delivery schedule, cancellation of orders and trial period
programs which are not included in backlog, backlog as of any particular date
may not be representative of ARC's actual sales for any succeeding fiscal
period.
Manufacturing and Supplies
==========================
The Company manufactures, assembles, and ships its products from its
facilities in Medford and Eugene, Oregon and Eindhoven, Holland. The Company's
Medford facility has a vertically integrated manufacturing process, beginning
with sheets and bars of stainless steel which are cut and configured, then
welded, to the Company's specifications for its components and machines. The
Medford operation also manufactures or assembles many of the components and
subassemblies used in its machines, such as the processing unit, air jet
expulsion component, frames and related systems. Additionally, all proprietary
components are manufactured by ARC in Medford, such as its RGB Cyclops(TM) color
cameras used for optical scanning in the KROMA-SORT(R) systems, and various
lights and lamps developed by the Company for certain of the systems. The
Company's Ventek (Eugene) and Pulsarr (Eindhoven) operations integrate hardware
components manufactured by outside suppliers. The Company's machine vision
systems incorporate its proprietary software and algorithms. Basic system
assembly is relatively consistent among product models using similarly
fabricated parts for the machine structure. Most systems are customized as to
number of cameras, lighting configurations and certain other features.
The Company has a computerized manufacturing inventory control system which
integrates and monitors purchasing, inventory control and production. Each
vision system is tested prior to delivery to a customer. The Company's quality
control process tests for reliability and conformance with product
specifications.
The Company is dependent on outside unaffiliated suppliers for some of the
components and parts used in its vision automation systems. Most major parts and
components are available from multiple sources; however, the prisms required in
RGB Cyclops color cameras are obtained from a single source supplier. Although
such supplier has not indicated any intention to limit or reduce sales of parts
to the Company, if it were to do so, the Company's business, results of
operations and financial condition could be adversely affected. The Company has
a supply contract with Pulsarr's product handling machinery supplier.
Historically, ARC has generally been able to obtain parts and components for its
systems, as needed, either from its then-current suppliers or replacement
vendors. ARC believes that it will continue to be able to obtain required
components and parts from various suppliers, although there can be no assurance
that it will be able to do so.
Warranty and Customer Service
=============================
ARC generally provides a one-year limited warranty on its products. Since
1993, there have not been any claims under ARC's warranty program that
materially affected ARC's operations. ARC also provides telephone customer
support services and offers annual service agreements.
In addition, for certain custom-designed systems, the Company contracts to
meet certain performance specifications for specific applications. The Company
has incurred higher warranty expenses related to new products, especially on
products that have not yet been proven to be commercially viable (such as
Pulsarr's water-jet cutting developmental products), than it typically incurs
with established products. There can be no assurance that the Company will not
incur substantial warranty expenses in the future related to new products as
well as established products, which may have an adverse effect on its results of
operations and customer relationships.
Competition
===========
The vision automation system industry is subject to intense competition.
Some of ARC's major competitors are substantially larger in size and have
greater financial resources than ARC. Some of its competitors sell machines
which are less expensive than ARC's. In some instances, a potential customer may
select the less expensive alternative even though the ARC system provides
greater sorting capability. Currently, Key Technology, Elbicon, Sortex, Allen
International, Morvue Electronics and Coe International are believed to be ARC's
direct competitors. There may be other competitors of ARC in addition to the
ones listed above. ARC competes with its competitors on the basis of quality,
technology, systems solutions and price. There can be no assurance that ARC will
continue to successfully differentiate its products from those of its
competitors.
Patents and Trademarks
======================
ARC has been issued or assigned approximately 22 United States patents, and
has applied for two other United States patents relating to its products,
including various inspection and detection systems and a cutter knife system. In
addition, ARC has obtained or has applied for patent protection for certain of
these systems in selected foreign countries. ARC believes that two of these
patents, a system for stabilizing articles on a conveyor and an RGB camera, are
important to its business. These two patents expire in March 2011 and September
2008, respectively. Other than the two patents described in the previous
sentence, ARC does not consider any of the present patents significant to its
current operations. These patents expire at various times over a six year period
commencing in April 2005. Additionally, SRC has seven registered trademarks: VHS
OPTISORT(TM), KROMA-SORT(R), SPECTRA-SORT(TM), Length and Defect Analyzer(TM),
Pulpwood Sorter, Quadra-View(R) and ODSS II(TM).
The Company also attempts to protect its trade secrets and other
proprietary information through proprietary information agreements with
employees and consultants and other security measures. There can be no assurance
that these measures will be successful in protecting the Company's proprietary
rights. The laws of certain countries in which the Company's products are or may
be manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
There can be no assurance that third parties will not assert infringement
of other claims against the Company with respect to existing or future products
or that licenses will be available on reasonable terms, or at all, with respect
to Company patents or any third-party technology. Litigation to prevent
infringement of Company patents or to determine the validity of any third-party
claims could result in significant expense to the Company and divert the efforts
of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company. The Company is not aware of
any threatened or pending patent actions.
As a result of the 1992 settlement of a lawsuit alleging certain patent
infringements, SRC entered into a royalty agreement pursuant to which SRC agreed
to pay royalties of 7% of certain vision system sales through the earlier of
June 30, 2003, and the date at which aggregate royalty payments equal
$1,600,000. The final royalty payment was made in July 1996.
Employees
=========
At December 31, 1996, the Company had 184 full-time employees, including 52
in manufacturing, 47 in engineering, research and development, 38 in marketing,
sales and service, and 26 in general administration and finance. None of the
Company's employees is represented by a labor union. The Company considers its
employee relations to be excellent.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The principal executive office of ARC and the principal executive office
and manufacturing facilities of SRC (a total of approximately 82,000 square
feet) are located on an approximately 6.4 acre parcel of land in Medford,
Oregon. SRC owns the land and building, subject to a deed of trust securing an
approximately $2.7 million loan made by Western Bank (the Western Bank Loan).
The Western Bank Loan bears interest at Western Bank's prime rate plus 3.5%
(9.5% as of December 31, 1996). The loan is due February 15, 2003.
The Company's Pulsarr manufacturing and research and development facility
is in a 45,000 square foot building located on a three-acre site in Eindhoven,
Holland. This facility, built to Pulsarr's specifications, was completed and
occupied in July 1996. Pulsarr owns the land and improvements subject to a deed
of trust securing two loans of approximately $2.0 million made by V.S.B. Bank.
The loans bear interest at 4.25%-7.85% and are due in equal installments over
the next 13-26 years.
Ventek occupies 12,000 square feet of a building which also houses a
principal supplier of mechanical components for its vision systems. The space is
leased through May 1997. The Company presently intends to extend the current
lease past its expiration date.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Liviakis Financial Communications, Inc.
=======================================
Effective December 31, 1993, the Company retained Liviakis Financial
Communications, Inc. ("Liviakis Financial"), a California corporation
wholly-owned by John Liviakis and his spouse, to provide financial
communications and other consulting services to the Company for a three-year
period. As consideration for these services, Liviakis Financial received 790,000
shares of Class A Common Stock as a commencement bonus as of December 31, 1993,
and was to receive an additional 2,400 shares of Class A Common Stock each month
for the term of the agreement. The value of the shares issued as a commencement
bonus aggregated $964,000 and was recorded as an expense prior to fiscal 1994.
On May 9, 1994, ARC's Board of Directors authorized management of the
Company to terminate the consulting agreement between the Company and Liviakis
Financial because of what the Company believed to have been material breaches of
the agreement by Liviakis Financial. On May 20, 1994, the Company filed a claim
with the American Arbitration Association seeking a determination that the
contract had been breached by Liviakis Financial, the return of the 790,000
shares of Class A Common Stock delivered to date to Liviakis Financial pursuant
to the contract, a determination that the Company had no obligation to issue
additional shares to Liviakis Financial under the contract, plus attorney's
fees.
Arbitration on the Company's claims against Liviakis Financial and Liviakis
Financial's counter-claims occurred in December 1994 and January 1995. On
February 15, 1995, the arbitrator issued an Interim Award requiring Liviakis
Financial to return 668,278 shares of Class A Common Stock to ARC, which shares
were returned in March 1995. Additionally, the Interim Award provided that ARC
was entitled to recover all of its reasonable expenses including, but not
limited to, attorney's fees and costs. The arbitrator also concluded that all
cross complaints by Liviakis Financial were without merit.
A gain of $732,000 was recorded in February 1995 related to the shares
recovered. In July 1995, ARC received $100,000 in full settlement of all fees
and expenses.
Ford & Cohn
===========
In March 1993, Wilson Ford, Robert Paul and Maxwell Cohn (together
"Claimants") brought various claims against ARC and William Patridge, Asif Ahmad
and Nagaraj Murthy, past or current directors or employees of ARC, in lawsuits
in the Superior Courts for Los Angeles County and Orange County, California. The
lawsuits were consolidated in February, 1994, and were litigated in Superior
Court for Los Angeles County in September and October, 1995.
Ford, a consultant to ARC, claims that ARC breached an agreement dated
September 17, 1987, and subsequently amended on August 16, 1988, by which he was
to receive 25,000 shares of stock of CNVS, Inc., predecessor to ARC, at no cost
and an option to purchase 25,000 additional shares in the future upon the
occurrence of specified events. Ford claims he was promised that this total of
50,000 shares in the Company would amount to 5% of the outstanding shares. Ford
also claims ARC owes him royalties under a royalty agreement for certain low
light video camera technology. ARC contends that Ford was never promised that
his interest would amount to 5% of the outstanding shares, that Ford failed to
fulfill his obligations under the royalty agreement, and that Ford's claims are
barred under various legal theories. Based on these allegations, Ford made
claims for breach of contract and breach of the covenant of good faith and fair
dealing.
The Claimants contend that statements allegedly made by William Patridge to
United States Alcohol Testing of America, Inc. ("USAT") caused USAT to rescind
an Asset Purchase Agreement with the Claimants. The Claimants allege that the
statements concerning outstanding lawsuits and disputes between ARC and the
Claimants were false and meant to disrupt the business relationship between
Prime Lasertech and USAT. The Claimants allegedly would have benefited from the
Asset Purchase Agreement as shareholders and/or licensees. Based on these
allegations, the Claimants made claims for intentional and negligent
interference with prospective advantage, intentional and negligent infliction of
emotional distress, and civil conspiracy.
On October 2, 1995, a jury awarded $375,000 to the Claimants, which
included $281,000 of punitive damages for the breach of contract claim. The
Company has filed motions with the court to eliminate the punitive portion of
the award. ARC believes such damages are improper because (i) the claimants did
not ask for punitive damages in the contract claim, and (ii) such damages cannot
be awarded for breach of contract under applicable state laws. ARC is also
attempting to overturn the balance of the breach of contract award based on the
fact that the claim was made after the statute of limitations had expired. ARC
has made an appeal to overturn the verdict based on these factors and certain
other irregularities that occurred during the trial, which ARC believes unfairly
affected the jury's decision. Due to the fact that a verdict was rendered, a
$93,000 loss on the breach of contract claim was recorded as a liability in the
fourth quarter of 1995.
Credit Suisse, Max Khan and Konrad Meyer
========================================
On January 9, 1997, the Company sued Credit Suisse in Jackson County,
Oregon, seeking $1,600,000 in fulfillment of Credit Suisse's contractual
obligation to fund a Private Placement Subscription Agreement dated May 14,
1996. The Company claims that Credit Suisse's failure to fund has limited ARC's
ability to finance its business plan for Pulsarr and other operations and, as a
result, will adversely impact ARC's credibility with investors and financial
analysts. Any erosion of credibility or, alternatively, the dilution of
shareholder value caused by alternate financing may, in turn, adversely impact
the Company's ability to raise debt and equity financing.
The suit also claims that Messrs. Khan and Meyer, who had previously
provided investment banking services to ARC, persuaded Credit Suisse to breach
the Subscription Agreement.
Other
=====
ARC is a party to several other suits in the ordinary course of its
business. Several of these actions have been brought in Europe against the
Company's Pulsarr subsidiary. ARC believes that the outcome of all such
proceedings, even if determined adversely to Pulsarr, will not have a material
adverse effect upon its financial statements since the Company is indemnified
for any losses arising from such suits by Pulsarr's former owner.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
None.
<PAGE>
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The Company's Class A Common Stock, Class A Warrants, and Class B Warrants
are quoted on the NASDAQ system under the symbols ARCCA, ARCCW and ARCCZ,
respectively. The high and low closing prices for the Class A Common Stock,
Class A Warrants and Class B Warrants as reported by NASDAQ for the last two
fiscal years are indicated below. Such prices are inter-dealer prices without
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions. There is no established public trading market for the
Company's Class B Common Stock.
<TABLE>
<CAPTION>
Class A
Common Stock Class A Warrants Class B Warrants
------------ ---------------- ----------------
Low High Low High Low High
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
- ----------------------------
First Quarter (January-March) 0.69 1.25 0.25 0.44 0.09 0.19
Second Quarter (April-June) 0.88 1.56 0.31 0.59 0.13 0.38
Third Quarter (July-September) 1.19 3.69 0.25 1.94 0.19 0.72
Fourth Quarter (October-December) 1.88 3.38 0.94 1.81 0.31 0.63
Year Ended December 31, 1996
- ----------------------------
First Quarter (January-March) 1.50 2.50 0.69 1.09 0.31 0.41
Second Quarter (April-June) 1.56 2.50 0.72 1.19 0.25 0.47
Third Quarter (July-September) 1.50 2.19 0.59 0.88 0.28 0.44
Fourth Quarter (October-December) 1.56 2.38 0.63 0.80 0.22 0.38
Closing price on March 10, 1997 1.56 0.41 0.13
</TABLE>
On December 31, 1996, there were 110 and 25 record owners of the Company's
Class A and Class B Common Stock, respectively. The majority of outstanding
shares of Class A Common Stock are held of record by a nominee holder on behalf
of an unknown number of ultimate beneficial owners. The Company believes that
the total number of beneficial owners of its common shares was approximately
2,300.
ARC has not declared or paid any cash dividends upon its Common Stock since
its inception. ARC does not anticipate paying any cash dividends in the
foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations will be used to finance the operations of ARC.
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The selected financial data for the Company presented below is derived from
and is qualified by the Company's financial statements included elsewhere in
this report, which have been audited, and should be read in conjunction with
such financial statements and the related notes thereto. Until early 1990, the
Company was principally engaged in research and development and organizational
activities relating to its laser operations. In October 1995, the Company sold
its laser operations, which accounted for all sales and related expenses in
fiscal years 1992, 1993, all sales and a portion of expenses for the three
months ended December 31, 1993, and a portion of 1994 sales and related
expenses. The laser operations have been treated as a discontinued business in
the selected financial data and in the financial statements included elsewhere
in this Form 10-K. All costs incurred by the Company prior to October 1, 1993
related to its laser operations and are netted against sales and included in the
loss from discontinued operations line. Around October 1, 1993, ARC conceived of
a new business strategy whereby ARC would restructure its organizational and
capital structure to become a parent company of various operating subsidiaries
(i.e., the platform company concept). Expenses incurred after October 1, 1993
relating to the platform Company activities are included in their applicable
line items in the Selected Financial Data below as they relate to continuing
operations.
In February 1994, the Company acquired SRC. In March and July of 1996, the
Company acquired Pulsarr and Ventek, respectively; their operations account for
a large portion of the fluctuation in amounts between fiscal years 1996 and
1995. In May 1994, the Company changed its fiscal year end from September 30 to
December 31. The quarter ended December 31, 1993, is excluded from any full
fiscal year and is shown separately below. Selected financial data should be
read in light of these facts and in conjunction with the Financial Statements,
notes to financial statements and other financial information included herein.
<TABLE>
<CAPTION>
Three
Year Ended December 31, Months Year Ended September 30,
------------------------------------------- Ended ----------------------------
1996 1995 1994 12/31/93 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 29,938,000 $ 19,394,000 $ 11,922,000 $ -- $ -- $ --
Cost of sales 15,794,000 11,194,000 8,537,000 -- -- --
Gross profit 14,144,000 8,200,000 3,385,000 -- -- --
Operating expenses 12,882,000 7,546,000 8,897,000 241,000 -- --
Charge for acquired in-process
technology 4,915,000 -- -- -- -- --
Charge for royalty expense 647,000 -- -- -- -- --
Interest and other (expense)
- net (960,000) 461,000 (37,000) (964,000) -- --
Income (loss) from continuing
operations (5,260,000) 1,115,000 (5,549,000) (1,205,000) -- --
(Loss) from discontinued
operations -- (173,000) (2,248,000) (326,000) (3,461,000) (2,446,000)
Net income (loss) (5,260,000) 942,000 (7,797,000) (1,531,000) (3,461,000) (2,446,000)
Earnings (loss) per share:
Continuing operations (0.46) 0.12 (0.57) (0.20) -- --
Discontinued operations -- (0.02) (0.23) (0.05) (0.91) (0.99)
Total (0.46) 0.10 (0.80) (0.25) (0.91) (0.99)
Weighted average number of
common stock outstanding 11,486,000 9,451,000 9,703,000 6,114,000 3,793,000 2,459,000
Balance Sheet Data:
Current assets 15,411,000 10,391,000 7,766,000 6,787,000 -- --
Current liabilities 9,498,000 3,501,000 3,181,000 810,000 -- --
Working capital surplus 5,913,000 6,890,000 4,585,000 5,977,000 -- --
Net assets relating to
discontinued operations -- -- 393,000 1,036,000 3,445,000 2,911,000
Total assets 30,938,000 17,628,000 14,876,000 6,815,000 3,445,000 2,911,000
Long term debt 14,940,000 4,875,000 2,737,000 -- -- --
Total shareholders' equity
(deficit) 6,500,000 9,252,000 8,958,000 5,996,000 3,445,000 2,911,000
</TABLE>
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Introduction
============
Before the February 1994 acquisition of SRC, ARC's sole operation was
Applied Laser Systems, Inc. of Oregon ("ALSO"), a manufacturer of laser diode
devices. The laser operation was sold in October 1995. Consequently, the results
of operations of ALSO have been reported as a discontinued business in the
accompanying financial statements and in the discussion below.
The Company acquired SRC, Pulsarr and Ventek in February 1994, March 1996
and July 1996, respectively. The operations of the acquired entities are
included in the financial statements from their respective acquisition dates.
The following table sets forth the results of operations for the last three
years (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- --------------------
Amounts % Amounts % Amounts %
--------- ------ --------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 29,938 100.0% $ 19,394 100.0% $ 11,922 100.0%
Cost of sales 15,794 52.8% 11,194 57.7% 8,537 71.6%
--------- -------- -------- ------- --------- -------
Gross profit 14,144 47.2% 8,200 42.3% 3,385 28.4%
--------- -------- -------- ------- --------- -------
Operating expenses:
Selling & marketing 4,662 15.6% 3,255 16.8% 2,636 22.1%
Research & development 4,038 13.5% 1,987 10.2% 1,476 12.4%
General & administrative 3,549 11.8% 1,933 10.0% 4,438 37.2%
Goodwill expense 633 2.1% 371 1.9% 347 2.9%
Charge for acquired in-process
technology 4,915 16.4% -- -- -- --
Charge for royalty expense 647 2.2% -- -- -- --
--------- -------- -------- -------- -------- -------
18,444 61.6% 7,546 38.9% 8,897 74.6%
--------- -------- -------- -------- -------- -------
Income (loss) from continuing
operations before other income
and expense (4,300) (14.4)% 654 3.4% (5,512) (46.2)%
Gain on rescission of stock
compensation - net -- -- 732 3.8% -- --
Other income (expense) - net 190 .6% 212 1.1% 211 1.8%
Interest expense (1,150) (3.8)% (483) (2.5)% (248) (2.1)%
---------- --------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes (5,260) (17.6)% 1,115 5.8% (5,549) (46.5)%
Provision for income taxes -- -- -- -- -- --
Income (loss) from continuing
operations (5,260) (17.6)% 1,115 5.8% (5,549) (46.5)%
Loss from discontinued
operations -- -- (173) (0.9)% (2,248) (18.9)%
--------- --------- -------- -------- --------- --------
Net income (loss) $ (5,260) (17.6)% $ 942 4.9% $ (7,797) (65.4)%
========= ========= ======== ======= ========= ========
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
===================================
Sales for 1996 were $29,938,000, up 54% when compared to sales for 1995 of
$19,394,000. The increase is due to the inclusion of $11,234,000 of Pulsarr's
and Ventek's sales. Sales of non-food machine vision systems increased 36% or
$4,118,000 to $15,524,000. Sales of food machine vision systems increased 80% or
$6,426,000 to $14,414,000. Total machine vision systems sold in 1996 were 127 as
compared to 67 in 1995.
Cost of sales was 52.8% of sales in 1996 and 57.7% in 1995.
Gross profit increased by 72.5% to $14,144,000 in 1996 when compared to
$8,200,000 of gross profit in 1995. In 1996, gross profit was 47.2%, as compared
to 42.3% in 1995. The increase in gross profit as a percentage of sales is
primarily related to the higher margin Ventek products included in 1996, as well
as a change in product mix at SRC to higher margin non-food industry systems.
Selling and marketing expense increased 43.2% in 1996 to $4,662,000 when
compared to 1995 due principally to the addition of Pulsarr and Ventek. Selling
and marketing expenses amounted to 13.5% of sales in 1996. Similar expenses in
1995 were $3,255,000 or 16.8% of sales.
Research and development expenses were $4,038,000 and $1,987,000 in 1996
and 1995, or 13.5% and 10.2% of sales, respectively. The larger research and
development level in 1996 was due principally to the continuing development of
SRC's Advanced Vision Processor and projects in non-food industry sorting
applications and $885,000 for Pulsarr and Ventek.
General and administrative expenses increased $1,616,000 to $3,549,000 in
1996 from $1,933,000 in 1995. The increase in general and administrative
expenses is due to the addition of Pulsarr and Ventek as well as an increase in
personnel costs and legal fees at SRC and ARC.
The increase in Goodwill amortization is due to the acquisitions of Pulsarr
and Ventek.
As discussed in the Notes to the Financial Statements, on March 1, 1996,
the Company acquired Pulsarr for approximately $7.8 million. Approximately $4.9
million of the purchase price was allocated to in-process technology, which was
charged to expense during the quarter ended March 31, 1996. This charge is not
deductible for tax purposes. The Company will need to invest in additional
development related to the in-process technology in order to make these
technologies commercially viable. These expenditures are expected to be paid out
over the next few years and will be funded primarily from cash generated from
operations.
In the first quarter of 1996, the Company wrote off $647,000 of deferred
royalty expenses relating to certain technologies, as all royalties have been
earned and the Company believes that no significant future economic life exists
relating to the royalty agreement, as the result of changing technologies. See
Liquidity and Capital Resources below.
In February 1995, Liviakis Financial Communications, Inc. returned
approximately 668,000 previously issued and outstanding shares of ARC Class A
Common Stock pursuant to an award in arbitration in favor of the Company. A gain
of $732,000 was recorded in February 1995 relating to the shares recovered.
The increase in interest expense is due to the increase in debt outstanding
relating to the acquisitions of Pulsarr and Ventek.
The net loss for 1996 was $5,260,000 as compared to net income of $942,000
in 1995. The variation is due primarily to the non-recurring charges for
in-process technology and royalty expense, the increased level of research and
development expenses, and the non-recurring gain in 1995 relating to the shares
of ARC Common Stock returned pursuant to an arbitration award.
Fiscal 1995 Compared to Fiscal 1994
===================================
The 1995 statement of operations includes 12 months of SRC's operations as
compared to 11 months in 1994 (i.e., since the date of the Company's acquisition
of SRC). Sales for 1995 increased 63% or $7,472,000 to $19,394,000 as compared
to 1994. Sales of non-food machine vision systems increased 550% or $9,653,000
to $7,988,000. Total machine vision systems sold in 1995 were 67 as compared to
54 systems in 1994.
Cost of sales was 57.7% of sales in 1995 and 71.6% in 1994. The decrease is
primarily due to a spreading of fixed manufacturing costs over a larger sales
base and better margins on sales of non-food industry systems. Cost of sales in
1994 also included restructuring charges of $138,000.
Gross profit increased by $4,815,000 to 42.3% of sales in 1995 as compared
to 28.4% of sales in 1994 as a result of the factors discussed above.
Selling and marketing expenses increased $619,000 or 23% from 1994 to 1995.
As a percentage of sales, such expenses were 16.8% in 1995 and 22.1% in 1994.
The decrease is due to the spreading of fixed costs over a larger sales base and
a relatively larger trade show expense in 1994 when compared to sales.
Management accelerated marketing activities in 1994 as compared to prior years.
Selling and marketing expenses also included restructuring charges of $227,000
in 1994.
Research and development ("R&D") expense increased $511,000 in 1995 to
$1,987,000. R&D expenditures were $1,476,000 in 1994. In 1994, such expenses
were increased from the previous year to develop SRC's next generation of
digital signal processor, which development continued in 1995. In 1994 SRC also
incurred the cost of developing the SPECTRA-SORT(TM) system and restructuring
charges of $132,000.
General and administrative expenses decreased by $2,505,000 to $1,933,000
for 1995 from $4,438,000 for 1994. The decrease is the result of the curtailment
of acquisition activities and cost reductions implemented in the September 1994
restructuring. During 1994, acquisition related and restructuring costs amounted
to $1,419,000. General and administrative expenses were 10% in 1995 as compared
to 37.2% in 1994. In 1995, general and administrative expenses were spread over
a larger sales base.
Goodwill expense increased $24,000 in 1995 because of one extra month of
amortization in that period. Goodwill amortization began in February 1994.
Income from continuing operations before other income and expense in 1995
was $654,000 compared to a loss of $5,512,000 in 1994 due to the above reasons.
In February 1995, Liviakis Financial Communications, Inc. returned
approximately 668,000 previously issued and outstanding shares of ARC Class A
Common Stock pursuant to an award in arbitration in favor of the Company. A net
gain of $732,000 was recorded in February 1995 relating to the shares recovered.
Interest expense increased to $483,000 in 1995 from $248,000 in 1994 as a
result of the additional debt outstanding.
Income from continuing operations before income taxes for 1995 was
$1,115,000 compared to a loss of $5,549,000 for 1994 due to the above reasons.
The loss from discontinued operations declined to $173,000 in 1995 from
$2,248,000 in 1994. The 1994 loss included restructuring charges of $1,250,000.
The remaining decrease in the loss from discontinued operations was primarily a
result of cost reductions implemented in the September 1994 restructuring.
Net income for 1995 was $942,000 as compared to a loss of $7,797,000 for
1994, a positive change of $8,739,000.
Liquidity and Capital Resources
===============================
In March 1996, in conjunction with the acquisition of Pulsarr, the Company
received $2,000,000 from the sale of 1,400,000 shares of Class A Common Stock
pursuant to a private placement. In April 1996, the Company received $3,000,000
representing the net proceeds of a private placement of a convertible debt. In
October 1995, the Company received approximately $1,052,000 from the sale of its
laser diode operations. In April 1995, the Company received $2,000,000
representing the net proceeds from a private placement of convertible debt. The
cash generated from these transactions was used to finance the acquisition of
Pulsarr and to provide funds for working capital purposes.
The Company's principal sources of operating capital have been funds from
the above transactions, its overseas Regulation S offerings in September and
October 1993 and in 1994 and its initial public offering in March 1992.
As of December 31, 1996, the Company had $5,913,000 in working capital.
As a result of the settlement in July 1992 of a lawsuit alleging certain
patent infringements, SRC entered into a royalty agreement, pursuant to which
SRC agreed to pay royalties of 7% of certain vision system sales through the
earlier of June 30, 2003, and the date at which aggregate royalty payments equal
$1,600,000. Until aggregate royalty payments equal $1,600,000, maximum annual
royalty payments were $400,000 through 1996. The final $400,000 installment was
paid on June 30, 1996. During the quarter ended March 31, 1996, the Company
wrote off against income $647,000 of deferred royalty expense related to the
settlement as all royalties had been earned and no significant future economic
life is estimated to exist.
The Company intends to continue to market its vision systems technology and
products, and will evaluate selected acquisition opportunities. Additional
investments will be required for capital equipment, marketing and research and
development for the Company to remain competitive. For example, funds must be
expended to complete development of the Company's next generation of processor
to enhance the Company's ability to effectively compete in certain markets with
Key Technology Inc.'s (the Company's principal competitor) 1995 product
introduction. Furthermore, if the Company consummates additional technology
intensive acquisitions, additional equipment and R & D investments may be
necessary, perhaps to a greater extent than for the Company's existing
operations.
The Company's ALSO operation, ARC's only business prior to the February
1994 acquisition of SRC, had suffered losses since inception. ALSO was sold in
October 1995. In 1995, SRC generated operating profits (before allocation of
corporate overhead expenses). Even though SRC reached operating profitability in
four of the last six quarters and had a history of profitable operations prior
to its acquisition by ARC, there can be no assurance that long term
profitability will be realized. Pulsarr operated profitably from 1990 through
1995, but at a small loss in 1996 due to the push-down of acquisition related
costs, including interest on acquisition debt. Ventek has operated profitably
since 1992. The Company operates in a highly competitive environment, and delays
and difficulties relating to technological changes and turnaround situations
often occur, any of which would materially and adversely affect the Company's
cash flow. Furthermore, operational and marketing difficulties may occur
relating to the integration of the recently completed acquisitions of Pulsarr
and Ventek.
The acquisition of Pulsarr occurred on March 1, 1996. In connection
therewith, the Company has paid approximately $6.3 million to the sellers. Cash
received from the March and April 1996 placements of stock and notes detailed
above generated approximately $5,000,000. The balance of the cash payments of
approximately $1,300,000, was paid from the Company's current cash balances.
The acquisition of Ventek occurred in July 1996. Consideration for the
transaction was approximately $5.1 million in notes and other securities as
described in Note 5 of Notes to Consolidated Financial Statements included
elsewhere in this Form 10-K.
Prior to 1995, the Company had a history of negative operating cash flow.
The Company believes it will operate at a negative cash flow during certain
periods in the future due to payment of notes issued in connection with prior
financings, working capital requirements, the need to fund certain development
projects, cash required to enter new market areas, and possible cash needed to
fully integrate Pulsarr's and Ventek's operations. To fulfill its operational
goals and to repay approximately $1.3 million in debt due in April 1997, the
Company will require approximately $1.3 million of additional financing. Other
than this financing need, management believes that the Company has sufficient
cash to enable the Company to sustain its operations and to adequately fund the
cash flow expected to be used in operating activities for the next twelve
months. Until the Company is able to consistently generate sustained positive
cash flow from operations, the Company must rely on debt or equity financing.
In January 1997, the Company sued Credit Suisse to fulfill its obligation
to fund $1.6 million pursuant to a Subscription Agreement dated May 14, 1996.
There can be no assurance that the Company will prevail in this suit although
the Company believes it has a contractual right to the funding.
In connection with the acquisition of Pulsarr, the Company wrote off
approximately $4.9 million of acquired in-process technology in the first
quarter of 1996. This non-recurring charge contributed to a substantial reported
loss in 1996, even though sales for 1996, including Pulsarr and Ventek from
their respective acquisition dates, increased from 1995 levels.
The Company is seeking additional financing; however, there can be no
assurance the Company will be able to obtain any additional financing on terms
satisfactory to the Company, if at all. The recent increases in (i) outstanding
shares of the Company's Class A Common Stock due to private placements and the
1997 Restricted Stock Plan, (ii) the April 1995 and April 1996 private
placements of convertible debt, (iii) notes issued in connection with the
acquisition of Ventek, (iv) a substantial loss in 1996, and (v) the number of
securities issuable upon exercise of warrants and convertible debt may limit the
Company's ability to negotiate additional debt or equity financing.
Other Information
=================
ARC did not have any material commitments for capital expenditures at
December 31, 1996.
<TABLE>
<CAPTION>
Cash Flow Summary*
==================
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities $ (950,000) $ 586,000 $ (6,190,000)
Net cash provided by (used in)
investing activities (7,511,000) 734,000 (8,938,000)
Net cash provided by financing activities 6,199,000 2,061,000 10,477,000
------------- ------------- --------------
Net increase (decrease) in cash $ (2,262,000) $ 3,381,000 $ (4,651,000)
============= ============= ==============
* This information was derived from the Consolidated Statements of Cash
Flows which are part of the Company's financial statements.
</TABLE>
Other than for fiscal 1995, in each of the fiscal periods set forth in the
Cash Flow Summary above, net losses driven by special charges in 1996 and
minimal revenues in 1994 were responsible for the significant cash flow deficits
from operating activities. Furthermore, in 1994 significant amounts were
expended in pursuit of the Company's acquisition strategy, including the
acquisition of SRC. There can be no assurance that the Company will ever sustain
long-term profitability, which could result in cash flow deficits.
Historically, the Company has financed its cash flow deficits by borrowings
and sales of securities, principally with the net proceeds of its Regulation S
offerings.
Inflation
=========
The Company has not been materially affected by general inflation.
Cautionary Statements and Risk Factors
======================================
The Company may, from time to time, make forward looking statements that
involve risks and uncertainties. Factors associated with the forward looking
statements which could cause actual results to differ materially from those
stated appear below. Readers should carefully consider the following cautionary
statements and risk factors.
History of Losses; Negative Cash Flow:
--------------------------------------
Other than in 1995, the Company has had a history of losses and negative
operating cash flow. The Company believes it may operate at a negative cash flow
in the future due to (i) the need to fund certain development projects, (ii)
cash required to enter new market areas, (iii) interest costs associated with
recent financings, (iv) cash required for the repayment of debt, especially $1.5
million due in April 1997, and (v) possible cash needed to fully integrate
Pulsarr's and Ventek's operations. Until the Company is able to consistently
generate sustained positive cash flow from operations, the Company must rely on
debt or equity financing.
Although the Company achieved profitability in 1995, there can be no
assurance as to the Company's profitability on a quarterly or annual basis in
the future. Furthermore, the non-recurring expenses in early 1996 resulted in a
significant loss for the 1996 year.
Need for Additional Financing:
------------------------------
The Company is seeking additional financing; however, there can be no
assurance the Company will be able to obtain any additional financing on terms
satisfactory to the Company, if at all. The recent increases in (i) outstanding
shares of the Company's Class A Common Stock due to private placements and
implementation of the 1997 Restricted Stock Plan, (ii) the April 1995 and April
1996 private placements of convertible debt, (iii) a substantial loss in 1996,
(iv) debt incurred for the acquisition of Ventek, and (v) the number of
securities issuable upon exercise of warrants and convertible debt may limit the
Company's ability to negotiate additional debt or equity financing.
Uncertain Ability to Manage Growth and Integrate Acquired Businesses:
---------------------------------------------------------------------
As part of its business strategy, the Company intends to pursue rapid
growth. In March and July 1996, the Company acquired Pulsarr and Ventek,
respectively, which had sales in 1995 of approximately $11.4 million and $4.4
million, respectively, and would have added approximately 80% to the Company's
1995 sales on a proforma basis. This growth strategy will require the
integration of new entities, such as Pulsarr and Ventek, the establishment of
distribution relationships in foreign countries, expanded customer service and
support, increased personnel throughout the Company and the continued
implementation and improvement of the Company's operational, financial and
management information systems. There is no assurance that the Company will be
able to attract qualified personnel or to accomplish other measures necessary
for its successful integration of Pulsarr, Ventek or other acquired entities or
for internal growth, or that the Company can successfully manage expanded
operations. As the Company expands, it may from time to time experience
constraints that will adversely affect its ability to satisfy customer demand in
a timely fashion. Failure to manage growth effectively could adversely affect
the Company's financial condition and results of operations.
Rapid Technological Change; Product Development:
------------------------------------------------
The markets for the Company's machine vision products are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions and enhancements. For example, the Company believes that
the 1995 introduction by Key Technology, Inc. of its new line of vision sorting
equipment adversely affected bookings in late 1995 and 1996. Sales of products
such as those offered by the Company depend in part on the continuing
development and deployment of emerging technology and new services and
applications based on such technology. The Company's success will depend to a
significant extent upon its ability to enhance its existing products and develop
new products that gain market acceptance. There can be no assurance that the
Company will be successful in selecting, developing and manufacturing new
products or enhancing its existing products on a timely or cost-effective basis
or that products or technologies developed by others will not render the
Company's products noncompetitive or obsolete. Moreover, the Company may
encounter technical problems in connection with its product development that
could result in the delayed introduction of new products or product
enhancements. Failure to develop or introduce on a timely basis new products or
product enhancements that achieve market acceptance would materially and
adversely affect the Company's business, operating results and financial
condition.
Market Acceptance of New Products:
----------------------------------
The Company's future operating results will depend upon its ability to
successfully introduce and market, on a timely and cost-effective basis, new
products and enhancements to existing products. There can be no assurance that
new products or enhancements, if developed and manufactured, will achieve market
acceptance. The Company is currently in the initial prototype stage of
development on a new high speed software and digital signal processing
technology designed to significantly improve system performance. There can be no
assurance that a market for this system will develop (i.e., that a need for the
system will exist, that the system will be favored over other products on the
market, etc.) or, if a market does develop, that the Company will be able,
financially or operationally, to market and support the system successfully.
Dependence on Certain Markets and Expansion Into New Markets:
-------------------------------------------------------------
The future success and growth of the Company is dependent upon continuing
sales in domestic and international food processing market as well as successful
penetration of other existing and potential markets. A substantial portion of
the Company's historical sales has been in the potato and vegetable processing
markets. Reductions in capital equipment expenditures by such processors due to
commodity surpluses, product price fluctuations, changing consumer preferences
or other factors could have an adverse effect on the Company's results of
operations. The Company also intends to expand the marketing of its processing
systems in additional food markets such as meat and granular food products, as
well as nonfood markets such as plastics, wood products and tobacco, and to
expand its sales activities in foreign markets. In the case of Ventek, the wood
products market served is narrow, and saturation of that market and the
potential inability to identify and develop new markets could adversely affect
Ventek's growth rate. There can be no assurance that the Company can
successfully penetrate additional food and non-food markets or expand further in
foreign markets.
Lengthy Sales Cycle:
--------------------
The sales cycle in the marketing and sale of the Company's machine vision
systems, especially in new markets or in a new application, is lengthy and can
be as long as three years. Even in existing markets, due to the $100,000 to
$450,000 price range for each system, the purchase of a machine vision system
can constitute a substantial capital investment for a customer (which may need
more than one machine for its particular proposed application) requiring lengthy
consideration and evaluation. In particular, a potential customer must develop a
high degree of assurance that the product will meet its needs, successfully
interface with the customer's own manufacturing, production or processing
system, and have minimal warranty, safety and service problems. Accordingly, the
time lag from initiation of marketing efforts to final sales can be lengthy.
Competition:
------------
The markets for the Company's products are highly competitive. A major
competitor of the Company has recently made a new product introduction which has
increased the competition that the Company faces. Some of the Company's
competitors may have substantially greater financial, technical, marketing and
other resources than the Company. Important competitive factors in the Company's
markets include price, performance, reliability, customer support and service.
Although the Company believes that it currently competes effectively with
respect to these factors, there can be no assurance that the Company will be
able to continue to compete effectively in the future.
Dependence Upon Certain Suppliers:
----------------------------------
Certain key components and subassemblies used in the Company's products are
currently obtained from sole sources or a limited group of suppliers, and the
Company does not have any long-term supply agreements to ensure an uninterrupted
supply of these components. Although the Company seeks to reduce dependence on
sole or limited source suppliers, the inability to obtain sufficient sole or
limited source components as required, or to develop alternative sources if and
as required, could result in delays or reductions in product shipments which
could materially and adversely affect the Company's results of operations and
damage customer relationships. The purchase of certain of the components used in
the Company's products require an 8 to 12 week lead time for delivery. An
unanticipated shortage of such components could delay the Company's ability to
timely manufacture units, damage customer relations, and have a material adverse
effect on the Company. In addition, a significant increase in the price of one
or more of these components or subassemblies could adversely affect the
Company's results of operations.
Dependence Upon Significant Customers and Distribution Channel:
---------------------------------------------------------------
The Company sold equipment to two unaffiliated customers totaling 13% and
12% of sales in 1996 and to two customers totaling 19% and 16% of sales in 1995.
Sales to another unaffiliated customer totaled 15% of sales in 1994. Ventek's
sales have been to a relatively small number of multi-location plywood
manufacturers. The Company usually receives orders of from one to several
machine vision systems, but occasionally receives larger orders. While the
Company strives to create long-term relationships with its customers and
distributors, there can be no assurance that they will continue ordering
additional systems from the Company. The Company may continue to be dependent on
a small number of customers and distributors, the loss of which would adversely
affect the Company's business.
Risk of International Sales:
----------------------------
Due to its export sales (from the U.S. in the case of SRC and Ventek, or
from the Netherlands in the case of Pulsarr), the Company is subject to the
risks of conducting business internationally, including unexpected changes in
regulatory requirements; fluctuations in the value of the U.S. dollar or Dutch
guilder, which could increase the sales prices in local currencies of the
Company's products in international markets; delays in obtaining export
licenses, tariffs and other barriers and restrictions; and the burdens of
complying with a variety of international laws. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property rights to
the same extent as do the laws of the United States or the Netherlands.
Fluctuations in Quarterly Operating Results; Seasonality:
---------------------------------------------------------
The Company has experienced and may in the future experience significant
fluctuations in revenues and operating results from quarter to quarter as a
result of a number of factors, many of which are outside the control of the
Company. These factors include the timing of significant orders and shipments,
product mix, delays in shipment, capital spending patterns of customers,
competition and pricing, new product introductions by the Company or its
competitors, the timing of research and development expenditures, expansion of
marketing and support operations, changes in material costs, production or
quality problems, currency fluctuations, disruptions in sources of supply,
regulatory changes and general economic conditions. These factors are difficult
to forecast, and these or other factors could have a material adverse effect on
the Company's business and operating results. Moreover, due to the relatively
fixed nature of many of the Company's costs, including personnel and facilities
costs, the Company would not be able to reduce costs in any quarter to
compensate for any unexpected shortfall in net sales, and such a shortfall would
have a proportionately greater impact on the Company's results of operations for
that quarter. For example, a significant portion of the Company's quarterly net
sales depends upon sales of a relatively small number of high-priced systems.
Thus, changes in the number of such high-priced systems shipped in any given
quarter can produce substantial fluctuations in net sales, gross profits, and
net income from quarter to quarter. In addition, in the event the Company's
machine vision systems' average selling price increases, of which there can be
no assurance, the addition or cancellation of sales may exacerbate quarterly
fluctuations in revenues and operating results.
The Company's operating results may also be affected by certain seasonal
trends. The Company typically experiences lower sales and order levels in the
first quarter when compared with the preceding fourth quarter due primarily to
the seasonality of certain harvested food items. The Company expects these
seasonal patterns to continue, though their impact on revenues will decline as
the Company continues to expand its presence in nonagricultural and other
markets which are less seasonal.
Risks Associated With Possible Acquisitions:
--------------------------------------------
The Company may pursue strategic acquisitions or joint ventures in addition
to the acquisitions of Pulsarr and Ventek as part of its growth strategy. While
the Company has no understandings, commitments or agreements with respect to any
further acquisition, the Company anticipates that one or more potential
opportunities may become available in the future. Acquisitions and joint
ventures would require investment of operational and financial resources and
could require integration of dissimilar operations, assimilation of new
employees, diversion of management resources, increases in administrative costs
and additional costs associated with debt or equity financing. There can be no
assurance that any acquisition or joint venture by the Company will not have an
adverse effect on the Company's results of operations or will not result in
dilution to existing shareholders. If additional attractive opportunities become
available, the Company may decide to pursue them actively. There can be no
assurance that the Company will complete any future acquisitions or joint
ventures or that such a future transaction will not materially and adversely
affect the Company.
Dependence Upon Key Personnel:
------------------------------
The Company's success depends to a significant extent upon the continuing
contributions of its key management, technical, sales and marketing and other
key personnel. Except for William J. Young, the Company's President and Chief
Executive Officer, Alan R. Steel, the Company's Chief Financial Officer, Dr.
James Ewan, SRC's President and Chief Executive Officer, Jan C. Scholt,
Pulsarr's Managing Director, and the four former stockholders of Ventek, the
Company does not have long-term employment agreements or other arrangements with
such individuals which would encourage them to remain with the Company. The
Company's future success also depends upon its ability to attract and retain
additional skilled personnel. Competition for such employees is intense. The
loss of any current key employees or the inability to attract and retain
additional key personnel could have a material adverse effect on the Company's
business and operating results. There can be no assurance that the Company will
be able to retain its existing personnel or attract such additional skilled
employees in the future.
Intellectual Property:
----------------------
The Company's competitive position may be affected by its ability to
protect its proprietary technology. Although the Company has a number of United
States and foreign patents, there can be no assurance that any such patents will
provide meaningful protection for its product innovations. The Company may
experience additional intellectual property risks in international markets where
it may lack patent protection.
Product Liability and Other Legal Claims:
-----------------------------------------
From time to time, the Company may be involved in litigation arising out of
the normal course of its business, including product liability and other legal
claims. While the Company has a general liability insurance policy which
includes product liability coverage up to an aggregate amount of $10 million,
there can be no assurance that the Company will be able to maintain product
liability insurance on acceptable terms or that its insurance will provide
adequate coverage against potential claims in the future. There can be no
assurance that third parties will not assert infringement claims against the
Company, that any such assertion of infringement will not result in litigation
or that the Company would prevail in such litigation. Furthermore, litigation,
regardless of its outcome, could result in substantial cost to and diversion of
effort by the Company. Any infringement claims or litigation against the Company
could materially and adversely affect the Company's business, operating results
and financial condition. If a substantial product liability or other legal claim
against the Company were sustained that was not covered by insurance, there
could be an adverse effect on the Company's financial condition and
marketability of the affected products.
Warranty Exposure and Performance Specifications:
-------------------------------------------------
The Company generally provides a one-year limited warranty on its products.
In addition, for certain custom-designed systems, the Company contracts to meet
certain performance specifications for a specific application. In the past, the
Company has incurred higher warranty expenses related to new products than it
typically incurs with established products. For example, Pulsarr has sold
several water-jet cutting machines, a technology that has yet to be proven
commercially viable, which have required redesign and warranty-type expenditures
over the past several years. There can be no assurance that the Company will not
incur substantial warranty expenses in the future with respect to new products,
as well as established products, or with respect to its obligations to meet
performance specifications, which may have an adverse effect on its results of
operations and customer relationships.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The financial statements and related financial information required to be
filed hereunder are indexed on page F-1 of this report and incorporated herein
by reference.
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
<PAGE>
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
Management
Executive Officers and Directors
--------------------------------
The directors and executive officers of ARC are as follows:
Name Age Position
- ------------------------ ----- ------------------------------------------
William J. Young 54 President and Chief Executive Officer, and
Chairman of the Board of Directors
James Ewan, Ph.D. 48 President and Chief Executive Officer of
SRC Vision, Inc. and Director
Alan R. Steel 52 Vice President of Finance and Chief
Financial Officer and Secretary
Rodger A. Van Voorhis 39 President, Ventek, Inc. and Director
Asif S. Ahmad 53 Director
Haig S. Bagerdjian 39 Director
Vikram Dutt 55 Director
Robert M. Loeffler 74 Director
Nagaraj P. Murthy 42 Director
Jack Nelson 46 Director
William J. Young became President and Chief Executive Officer of the
Company effective February 1, 1994, and Chairman of the Board in September 1994.
Mr. Young was the President and Chief Executive Officer of Volkswagen of America
from 1991 through March 1993, where he was responsible for all the company's
operations in the United States, which exceeded $2.2 billion in revenue
annually. As CEO of Volkswagon of America, Mr. Young also served as President of
V-Crest Systems, Inc., a computer services company serving 1,200 automobile
agencies, and as a Director of VCI, Inc. a $2 billion financial services
company. From January 1989 through December 1991, Mr. Young served as Vice
President of Sales and Marketing of Volkswagen United States and its 700 dealers
operating in the North American market. From 1982 through 1988, Mr. Young headed
W.J. Young and Associates, an automotive marketing consulting company. From 1979
through May 1983, Mr. Young was the General Manager of the Volkswagen Division
of Volkswagen of America, where he was responsible for implementing the sale and
marketing strategies of the Volkswagen Division and the maintenance and
financial health of the Volkswagen dealer organization of 950 dealers. Prior to
1979, Mr. Young served in the capacity of National Sales Manager, and held other
management positions in the Volkswagen organization and other companies. Mr.
Young is a director of Lithia Motors, Inc.
Dr. James Ewan became President and Chief Executive Officer of the
Company's SRC Vision, Inc. ("SRC") subsidiary in May 1994 and a Director of the
Company in 1996. Before joining SRC, Dr. Ewan was with Teledyne Corporation from
1985 to 1994 where he was President of Teledyne Microwave and General Manager of
Teledyne Monolithic Microwave. At Teledyne Microwave, Dr. Ewan was responsible
for restructuring the company from primarily a military electronics company to
one that derived half of revenues from commercial applications. Dr. Ewan led
Teledyne Monolithic Microwave from its start-up phase until it was eventually
merged into Teledyne Microwave as an operating division. Prior to Teledyne, Dr.
Ewan was Section Manager of the Gallium-Arsenide Microelectronics Center of The
Aerospace Corporation from 1980 to 1985. While at Aerospace, Dr. Ewan was
responsible for the development of a range of state-of-the-art compound
semiconductor technology, device and circuit processing and digital and analog
circuit design.
Alan R. Steel became Vice President of Finance and Chief Financial Officer
on March 14, 1994. Mr. Steel was the Vice President and Chief Financial Officer
of DDL Electronics, Inc. ("DDL"), a New York Stock Exchange listed company,
since 1983. From 1980 to 1983, he served as Controller for DDL. While at DDL,
Mr. Steel was responsible for handling New York Stock Exchange compliance,
financial and SEC reporting, public and private equity offerings and shareholder
relations. From 1975 to 1980, he served as financial manager for ARCO
Transportation Company, a subsidiary of Atlantic Richfield Company. From 1974 to
1975 he was the Director of Internal Control at Atlantic Richfield Company. From
1967 to 1994, Mr. Steel was a certified public accountant with Arthur Andersen &
Company.
Rodger Van Voorhis joined Ventek in 1992 as Vice President of Operations
and became President in 1996, and a director of the Company in 1996. Mr. Van
Voorhis was previously an Assistant Vice President of Marketing for United
Financial Systems, and held various management positions at Morvue Electronics,
Inc., a designer and manufacturer of wood veneer defect scanning systems. On
July 24, 1996, Mr. Van Voorhis entered into a five-year employment agreement
with Ventek which provides for an annual base salary of $150,000 and a $375
monthly automobile allowance. The contract provides that if Mr. Van Voorhis is
terminated other than for cause before July 24, 1999, he shall be paid his base
salary until that date.
Asif S. Ahmad is one of the two founders of ARC. He was the Chairman of the
Board and Chief Executive Officer of ARC since it was incorporated in September
1987 until December 1993, and he remains a director of ARC. From July 1984 until
the present, Mr. Ahmad has been practicing as a certified public accountant at
his firm, Ahmad and Company, Certified Public Accountants. Mr. Ahmad is a member
of Chartered Accountants Institute, Quebec and Ontario, Canada, and a member of
the California State Board of Accountancy.
Haig S. Bagerdjian is currently Senior Vice President, Business Development
and General Counsel for Syncor International Corporation, a Chatsworth,
California-based operator of domestic and international nuclear pharmacy service
centers, at which he has been employed since 1991. From 1987 to 1991, he served
in several executive level positions at Calmark Holding Corporation. He also was
General Counsel for American Adventure, Inc., which was a subsidiary of Calmark
Holding. Mr. Bagerdjian received a J.D. from Harvard Law School and is admitted
to the State Bar of California.
Since 1983, Vikram Dutt has been the President of Aaron, Dutt and Edwards,
Inc. a Chicago, Illinois consulting firm specializing in consulting and
administration of pension and profit sharing plans. Mr. Dutt received a B.S.in
Chemical Engineering and an M.B.A. from the University of Illinois.
Since 1978, Robert Loeffler has been a Director, Chairman of the Audit
Committee and member of the Executive Committee and Compensation Committee at
PaineWebber Group, Inc. From 1987 to 1991, Mr. Loeffler was attorney of counsel
to Wyman, Bautzer, Kuchel & Silbert in Los Angeles, California. Prior to that,
he spent ten years as Partner and Managing Partner at Jones, Day, Reavis & Pogue
in Los Angeles prior to his retirement from the firm. From 1965 to 1973, Mr.
Loeffler served in a variety of positions at the asset management company,
Investors Diversified Services, Inc. (IDS), including Chief Legal Officer. Mr.
Loeffler received an LL.B., magna cum laude from Harvard Law School. He is
admitted to the state bars of New York, California, Minnesota and Oklahoma.
Dr. Nagaraj P. Murthy is one of the two founders of ARC. He was Secretary
and Treasurer since it was incorporated in 1987 until December 1993, and he
remained the Secretary of ARC until April 1994. Dr. Murthy has been practicing
as a dentist at his firm, Nagaraj P. Murthy, DDS, Inc. since 1979, and is a
member of the American Dental Association and the California Dental Association.
Jack Nelson, Esq. has served as the Chairman of the Board, Chief Executive
Officer and Treasurer of Advanced NMR Systems, Inc., a public company, since
June 1991, and was Vice Chairman from 1990 until June 1991. Mr. Nelson is also
Chairman of the Board and Treasurer of Advanced Mammography Systems, a public
company. From January 1986 to December 1993, Mr. Nelson was an attorney at the
firm of Zaslowsky, Marx & Nelson.
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The Company currently compensates directors who are not also officers or
employees of the Company ("outside" directors) for attending Board meetings and
committee meetings in the form of stock options. Generally, outside directors
will be granted options to purchase 100,000 shares of Class A Common Stock at
the closing price determined on the date such person becomes a director of ARC.
The options vest 25% upon becoming a director, with the remaining 75% vesting
25% per year over the next three years, subject to service as a director.
Members of the Stock Option, Audit, and Compensation Committees receive $400 per
meeting not held in conjunction with a regularly scheduled board meeting.
William J. Young, James Ewan and Rodger Van Voorhis receive no compensation as
directors. All directors are reimbursed for expenses incurred in attending board
and committee meetings.
Executive Compensation
======================
The following table sets forth the compensation for the Chief Executive
Officer ("CEO") and each executive officer who received over $100,000 in cash
compensation for the fiscal year ended December 31, 1996
<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------------------- Compensation
Name and Principal Positions Year(3) Salary Bonus (4) Other(1) Options - #
- ---------------------------- ---- ------ ----- ------- -----------
<S> <C> <C> <C> <C> <C>
William J. Young 1996 $ 235,000 $40,000 $ 30,000 --
President & Chief Executive 1995 150,000 -- -- 500,000 (2)
Officer 1994 137,500 -- -- 250,000
James Ewan 1996 200,000 40,000 30,000 --
President of SRC Vision 1995 160,000 -- -- 300,000 (2)
1994 100,000 -- -- 150,000
Alan R. Steel 1996 135,000 20,000 15,000 --
Vice President, Finance and 1995 120,000 -- -- 250,000 (2)
Chief Financial Officer 1994 95,000 -- -- 100,000
<FN>
(1) Amounts represent sign-on bonuses. No individual listed in the table
received aggregate other compensation exceeding $50,000 or 10% of the
compensation reported in the table for such individual or group.
(2) Includes 250,000, 150,000 and 100,000 options for Messrs. Young, Ewan and
Steel, respectively, which were granted in replacement of those
originally granted in 1994 after such 1994 options were canceled.
(3) Messrs. Young, Ewan and Steel jointed the Company in February, March and
May 1994, respectively.
(4) Amounts represent 80% of 1996 bonuses which are payable in cash. The
remaining 20% ($10,000 for Messrs. Young and Ewan, and $5,000 for Mr.
Steel will be paid only if the Company achieves specified profit goals
for 1997.
</FN>
</TABLE>
Employment Agreements
=====================
Effective February 1, 1994, William J. Young became President and Chief
Executive Officer of the Company at a starting salary of $150,000. Mr. Young
became Chairman of the Board on September 9, 1994. Mr. Young also received,
during the first year of employment, a one-time payment of $25,000 to offset his
relocation expenses and costs associated with the purchase of a new home. Mr.
Young was also granted (i) options to purchase 150,000 shares of Class A Common
Stock not under the Company's 1991 or 1994 Stock Option Plans exercisable at
$4.62 per share, and (ii) 100,000 shares of Class A Common Stock under the 1994
Stock Option Plan exercisable at $4.875 per share, which vested at a rate of 33%
per year. In 1995, these options were canceled and replaced with new options.
Effective January 1, 1996, Mr. Young entered a new employment contract with the
Company which provided for a sign-on bonus of $30,000 and an annual salary of
$235,000. Effective January 1, 1997, Mr. Young entered a new employment contract
which provided for an annual salary of $250,000. The new employment agreement
replaced the previous agreement. The agreement provides that if Mr. Young is
terminated by the Company at any time other than for cause, he is entitled to
two years' salary as severance. Additionally, the Company provides Mr. Young
with the use of a car.
Effective May 1, 1994, Dr. James Ewan became President and Chief Executive
Officer of SRC at a starting salary of $160,000. Dr. Ewan was also granted
options to purchase 150,000 shares of Class A Common Stock under the 1994 Stock
Option Plan exercisable at $3.50 per share. In 1995, these options were canceled
and replaced by new options. Effective January 1, 1996, Dr. Ewan entered a new
employment agreement with SRC which provided for a sign-on bonus of $30,000 and
an annual salary of $200,000. Effective January 1, 1997, Dr. Ewan entered a new
employment contract which provided for an annual salary of $225,000. The new
employment agreement replaced the previous agreement. The agreement provides
that if Dr. Ewan is terminated by SRC at any time other than for cause, he is
entitled to two years' salary as severance. Furthermore, if William J. Young
leaves the employ of the Company, Dr. Ewan may invoke the severance provision at
his option. Dr. Ewan is also provided with the use of a car.
Effective March 14, 1994, the Company entered into an employment agreement
with Alan R. Steel, Vice President of Finance and Chief Financial Officer, for
an annual salary of $120,000 per year. Mr. Steel was also granted options to
purchase 100,000 shares of Class A Common Stock under the 1994 Stock Option Plan
exercisable at $4.875 per share. In 1995, these options were canceled and
replaced with new options. Additionally, the Company paid certain relocation
expenses for Mr. Steel. Effective January 1, 1996, Mr. Steel entered a new
employment contract with the Company which provided for a sign-on bonus of
$15,000 and an annual salary of $135,000. Effective January 1, 1997, Mr. Steel
entered a new employment contract which provided for an annual salary of
$143,000. The new employment agreement replaced the previous agreement. The
agreement provides that if Mr. Steel is terminated by the Company at any time,
other than for cause, he is entitled to two years' salary as severance.
Additionally, the Company provides Mr. Steel with the use of a car.
Limitation of Liability and Indemnification Matters
===================================================
The Company's Restated Articles of Incorporation limit the liability of its
directors. As permitted by amendments to the California General Corporation Law
enacted in 1987, directors will not be liable to ARC for monetary damages
arising from a breach of their fiduciary duty as directors in certain
circumstances. Such limitation does not affect liability for any breach of a
director's duty to ARC or its stockholders (i) with respect to approval by the
director of any transaction from which he derives an improper personal benefit,
(ii) with respect to acts or omissions involving an absence of good faith, that
he believes to be contrary to the best interest of ARC or its stockholders, that
involve intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern or inattention that amounts to an abdication of
his duty to ARC or its stockholders, or that show a reckless disregard for his
duty to ARC or its stockholders in circumstances in which he was, or should have
been aware, in the ordinary course of performing his duties, of a risk of
serious injury to ARC or its stockholders, or (iii) based on transactions
between ARC and its directors or another corporation with inter-related
directors or on improper distributions, loans or guarantees under applicable
sections of the California General Corporation Law. Such limitation of liability
also does not affect the availability of equitable remedies such as injunctive
relief or rescission. ARC has been informed that in the opinion of the
Securities and Exchange Commission indemnification provisions, such as those
contained in ARC's Restated Articles of Incorporation, are unenforceable with
respect to claims arising under federal securities laws.
ARC's Amended and Restated Bylaws provide that ARC shall indemnify its
directors and officers to the full extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law, and ARC has entered into indemnity agreements with its directors
and officers providing such indemnity.
Stock Options
=============
There were no stock options granted to the named executive officers in
1996.
The following table sets forth information concerning options exercised and
held by each of the named executive officers, and the value of options held at
December 31, 1996:
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options at
Number of December 31, 1996 December 31, 1996(1)
Shares ----------------- --------------------
Acquired Dollar
Name On Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
William J. Young 0 0 333,333/166,667 $300,000/$115,000
James Ewan 0 0 200,000/100,000 $138,000/$69,000
Alan R. Steel 0 0 166,667/83,000 $115,000/$57,000
<FN>
(1) Amounts are shown as the difference between exercise price and fair market
value (based on the closing price of $1.69 per share at fiscal year end).
</FN>
</TABLE>
No options were exercised by any of the Company's executive officers during
the year ended December 31, 1996.
1991 and 1994 Stock Option Plans
================================
The Company has adopted two stock option plans, the 1991 Stock Option Plan
(the "1991 Plan") and the 1994 Stock Option Plan (the "1994 Plan") (collectively
the "Plans"), covering 1,000,000 and 2,000,000 shares, respectively, of Class A
Common Stock, pursuant to which officers, non-employee directors and employees
of the Company, as well as other persons who render services to or are otherwise
associated with the Company, are eligible to receive incentive and/or
non-qualified stock options.
The terms of the Plans are substantially the same. The 1991 Plan, which
expires in December 2001, and the 1994 Plan, which expires in November 2004, are
administered by the Stock Option Committee of the Board of Directors, currently
consisting of Jack Nelson and Robert M. Loeffler. The selection of participants,
allotments of shares, determination of price and other conditions of purchase of
options will be determined by the Board or the Stock Option Committee at its
sole discretion in order to attract and retain persons instrumental to the
success of the Company. Incentive stock options granted under the Plans are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the fair market value of the Class A
Common Stock on the date of the grant, except that the term of an incentive
stock option granted under the Plans to a shareholder owning more than 10% of
the voting power of the Company on the date of grant may not exceed five years
and its exercise price may not be less than 110% of the fair market value of the
Class A Common Stock on the date of the grant. Non-qualified options granted
under the Plans may be granted at less than the fair market value of the Class A
Common Stock on the date of grant.
As of December 31, 1996, options to purchase 67,000 shares of Class A
Common Stock were available for future grant under the Plans.
During the year ended December 31, 1996, an option covering 100,000 shares
was granted to James K. Rifenbergh upon his appointment to the Company's Board
of Directors. The options were not part of the 1991 or 1994 Stock Option Plans
and were granted by approval of other members of the Company's Board of
Directors. The options had an exercise price of $2.38 per share, vested 25% on
the June 1, 1996 grant date and an additional 25% on each of the next three
anniversary dates of the grant, and expired May 31, 2001. In January 1997, Mr.
Rifenbergh resigned as a director.
Subsequent to December 31, 1996, the Board of Directors granted the
following options to the named, newly appointed directors:
<TABLE>
<CAPTION>
Exercise or
Name and Options Base Price
Relationship to Company Granted (1) ($/Share) Expiration Vesting
- ----------------------------- ----------- --------- ---------- -------
<S> <C> <C> <C> <C>
Haig S. Bagerdjian, Director 100,000 $1.69 01/10/02 25% per year
beginning 01/10/97
Vikram Dutt, Director 100,000 $1.69 01/10/02 25% per year
beginning 01/10/97
Robert M. Loeffler, Director 100,000 $1.69 01/10/02 25% per year
beginning 01/10/97
<FN>
(1) Options granted to Messrs. Bagerdjian, Dutt and Loeffler were not part of
the 1991 or 1994 Stock Option Plans and were granted by approval of other
members of the Company's Board of Directors.
</FN>
</TABLE>
SRC Stock Option Plan
=====================
Subsequent to December 31, 1996, the Board of Directors approved the
adoption of the SRC Vision, Inc. 1997 Stock Option Plan (the "SRC Plan")
covering 396,000 shares of SRC's common stock, pursuant to which officers,
directors, employees and other persons providing significant services to SRC are
eligible to receive incentive and/or non-qualified stock options. The SRC Plan,
which expires in August 2007, is administered by the Stock Option Committee of
SRC's Board of Directors. The selection of participants, allotments of shares,
determination of price and other conditions of purchase of options will be
determined by SRC's Board or the Stock Option Committee at its sole discretion
in order to attract and retain persons instrumental to the success of SRC.
Incentive stock options granted under the SRC Plan are exercisable for a period
of up to ten years from the date of grant at an exercise price which is not less
than the fair market value of SRC's common stock on the date of the grant,
except that the term of an incentive stock option granted under the SRC Plan to
a shareholder owning more than 10% of the voting power of SRC on the date of
grant may not exceed five years and its exercise price may not be less than 100%
of the fair market value of the SRC common stock on the date of the grant.
Non-qualified options granted under the SRC Plan may be granted at less than the
fair market value of the SRC common Stock on the date of grant.
The SRC Plan was established in contemplation of a possible future initial
public offering ("IPO") of SRC common stock to raise long-term growth capital
for SRC. While the Company has no current specific plans to effect such an
offering, the Company's Board of Directors determined that it would be in the
best interest of ARC, as the only stockholder of SRC, to "incentivize" key
directors and employees of SRC prior to an IPO in order to retain the services
of such individuals. The following table sets forth information with respect to
SRC options granted to the named ARC executive officers subsequent to December
31, 1996:
<TABLE>
<CAPTION>
Exercise
Name and Number of Price
Relationship to SRC Options Granted ($/Share)(1) Expiration Vesting
------------------- --------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
William J. Young, 42,660 $1.86 01/09/07 100% on 01/10/06 (2)
Chairman of the Board
James Ewan, President 152,300 $1.86 01/09/07 100% on 01/10/06 (2)
and Chief Executive Officer
and Director
Alan R. Steel, Chief Financial 25,005 $1.86 01/09/07 100% on 01/10/06 (2)
Officer and Director
<FN>
(1) The exercise price represents fair market value on the grant date as
determined by independent valuation.
(2) Upon completion of an IPO, vesting will accelerate to 100% on the third
anniversary date of the IPO.
</FN>
</TABLE>
In January 1997, a total of 342,445 options were granted to selected
optionees under the SRC Plan on the same terms as indicated above for the named
executives. Options to purchase 53,555 shares of SRC common stock are available
for future grant under the SRC Plan.
1997 Restricted Stock Plan
==========================
In January 1997, the Board of Directors adopted the 1997 Restricted Stock
Plan (the "1997 Plan") to compensate for past performance, and to retain the
services of, selected officers and directors of the Company and its
subsidiaries. A maximum of 2,000,000 shares of Class A Common Stock may be
issued under the 1997 Plan, which is administered by the Board of Directors.
Subject to the provisions of the 1997 Plan, the Board may interpret the
provisions of, and adopt amendments to, the plan. Stock awards under the 1997
Plan are subject to terms and conditions as determined by the Board.
On January 10, 1997, the Board awarded restricted shares of Class A Common
Stock to the following named executives of the Company:
William J. Young 952,000 Shares
James Ewan 572,000 Shares
Alan R. Steel 476,000 Shares
As to 10% of the shares, such shares cannot be traded or transferred unless
(i) the employee remains in the employ of the Company until January 10, 2000 and
(ii) a payment of $1.80 per share is made by the employee to ARC. As to 90% of
the shares, such shares cannot be traded or transferred unless, in addition to
the conditions in the prior sentence, the market price of the stock as quoted by
Nasdaq or other applicable stock exchange for any 30 consecutive days prior to
the third anniversary date of the award is at least $20 per share. If any of
these conditions are not met, the shares of stock will be forfeited and returned
to the Company.
Report of the Compensation Committee on Executive Compensation
==============================================================
During the fiscal year ended December 31, 1996, the Company had a
Compensation Committee of the Board of Directors (the "Committee") consisting of
directors Jack Nelson and Joseph A. DeRose or James Rifenbergh. Messrs. DeRose
and Rifenbergh resigned as directors in June 1996 and January 1997,
respectively, replaced in January 1997 by Robert M. Loeffler. The compensation
of the executive officers of the Company, including those of the executive
officers named in the Executive Compensation table above, is determined by the
Committee.
The Company's executive compensation programs are designed to:
* provide competitive levels of base compensation in order to attract,
retain, and motivate high quality employees;
* tie individual total compensation to individual performance and the
success of the Company; and
* align the interests of the Company's executive officers with those of its
stockholders.
In the last several years, the Company has been transformed from a single
business entity founded in 1987 to a holding company with three operating
subsidiaries. Past and current compensation programs reflect the change in
business organization. In view of the relatively brief evolution of the
executive management team, the Company's executive compensation program has a
limited history, with focus being upon base salary and stock-based compensation,
such as grants of stock options and restricted stock.
Base Compensation
=================
In determining base compensation for the Company's executive officers, the
Committee assesses the relative contribution of each executive officer to the
Company, the background and skills of each individual, and the particular
opportunities and problems which the individual confronts in his position with
the Company. These factors are then assessed in the context of competitive
market factors, including competitive opportunities with other companies. The
Committee may also supplement base compensation through discretionary bonuses
and/or grants of stock-based compensation in the course of its ongoing
assessments of the performance of the Company's executive officers. In making
its assessments of the Company's executive officers, other than Mr. Young, the
Committee gives significant consideration to the views of Mr. Young including
with respect to awards of stock options.
Stock Options
=============
The Committee believes that the Company, its shareholders, and its
executive officers and other employees are well served by stock-based
compensation. Accordingly, the Committee views options granted under the 1991
and the 1994 Plans, and the restricted stock grants under the 1997 Plan, as
important to an effective executive compensation policy. The same rationale is
also applicable to the Company's outside directors, pursuant to which awards are
granted to new directors meeting specified criteria.
Chairman of the Board, President and Chief Executive Officer
============================================================
In determining the compensation of the Chairman of the Board, President and
Chief Executive Officer, the Committee focused upon the programs described
above.
Mr. Young, the Company's Chairman, President and Chief Executive Officer,
was hired in February 1994. Mr. Young receives a base salary and has been
granted stock options and restricted stock. The Committee believes that
stock-based compensation granted to Mr. Young closely align his interests with
those of the Company's stockholders.
The Committee believes that the factors described in this report are
significant for determining the Company's performance, and consequently,
compensation of officers; but stockholders should be aware that these are not
the only factors which influence Company stock value or overall performance, and
that the same factor may not be the most significant in any succeeding period.
Also, the achievement of targeted objectives by the Company in any period may
not be solely indicative of the Company's future performance.
Compensation Committee
Robert M. Loeffler
Jack Nelson
<PAGE>
Compensation Committee Interlocks and Insider Participation
===========================================================
During the fiscal year ended December 31, 1996, ARC's Board of Directors
had a Compensation Committee consisting of two directors--Jack Nelson (for all
of 1996) and Joseph DeRose (from January to June of 1996) or James K. Rifenbergh
(from July to December 1996). Robert M. Loeffler was appointed to the
Compensation Committee in January 1997 upon Mr. Rifenbergh's resignation from
the Board. There are no interlocks between the Company and other entities
involving the Company's executive officers and board members who serve as
executive officers or board members of other entities.
Comparative Stock Performance
=============================
The chart below sets forth a line graph comparing the performance of the
Company's Class A Common Stock against the Nasdaq Stock Market - US Index and a
peer group index (Nasdaq Non-Financial Stock Index) for the period commencing
March 10, 1992 (the date of the Company's initial public offering), and ending
December 31, 1996. During the period from March 10, 1992, through December 31,
1993, the Company was primarily engaged in the design, manufacture, and
marketing of laser diode devices. The Company purchased SRC, Pulsarr Holding
b.v. and Ventek, Inc., manufacturers of vision systems used in defect
identification and machine sorting and defect removal equipment, in 1994 and
1996. As most of the Company's competitors in these business segments are
privately held, a directly comparable peer group index is not available.
Therefore, the Nasdaq Non-Financial Stock Index was selected as the peer group
index.
The indices assume that the value of the investment in ARC Capital Class A
Common Stock and each index was $100 on March 10, 1992, and that dividends were
reinvested. The performance graph is provided as required under federal proxy
rules.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
03/10/92 09/30/92 09/30/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ARC Capital $ 100.00 $ 122.66 $191.46 $ 29.70 $ 71.45 $ 60.29
Nasdaq Stock Market-
US Index 100.00 93.88 122.96 122.55 173.31 213.18
Nasdaq Non-Financial
Stocks 100.00 88.79 115.60 114.55 159.63 193.95
</TABLE>
Resignation of Directors
========================
In June 1996, the Company's Board of Directors accepted the resignation of
Joseph A. DeRose. In January 1997, the Company's Board of Directors accepted the
resignation of James K. Rifenbergh.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of Class A Common Stock as of March 10, 1997, by (i) each person who
is known by ARC to own beneficially more than 5% of outstanding Class A Common
Stock; (ii) each of ARC's directors and named executive officers; and (iii) all
executive officers and directors of ARC as a group:
Approximate
Amount and Nature of Percent of
Name and Address Beneficial Ownership Ownership(1)
---------------- -------------------- ------------
William J. Young 1,566,300 (2) (4) (5) 10.5%
2067 Commerce Drive
Medford, OR 97504
Allen & Company Incorporated 731,587 (3) 6.4%
and Allen Holding, Inc.
711 Fifth Avenue
New York, NY 10022
Dr. James Ewan 872,000 (2) (5) 6.1%
2067 Commerce Drive
Medford, OR 97504
Alan R. Steel 726,000 (2) (5) 5.1%
2067 Commerce Drive
Medford, OR 97504
Rodger A. Van Voorhis 608,333 (6) 4.4%
4217 West Fifth Avenue
Eugene, OR 97402
Nagaraj P. Murthy, DDS 400,727 (5) 2.9%
1601 North Long Beach Boulevard
Compton, CA 90221
Asif S. Ahmad 367,394 (5) 2.7%
249 East Ocean Boulevard
Long Beach, CA 90802
Jack Nelson, Esq. 75,000 (5) *
c/o 2067 Commerce Drive
Medford, OR 97504
Vikram Dutt 25,000 (5) *
150 North Wacker Drive
Chicago, IL 60606
Robert M. Loeffler 25,000 (5) *
10701 Wilshire Boulevard #1401
Los Angeles, CA 90024
Haig S. Bagerdjian 25,000 (5) *
20001 Prairie Street
Chatsworth, CA 91311
All executive officers and 2,541,121 18.9%
directors as a group (10 persons)
* Less than 1%
(1) Does not include any shares of Class A Common Stock issuable upon
exercise of any options other than certain options held by such shareholder.
(2) Includes 952,000, 572,000 and 476,000 shares of restricted stock owned
by Messrs. Young, Ewan and Steel, respectively.
(3) Pursuant to Schedule 13G, filed with the Securities and Exchange
Commission on February 14, 1997, this amount includes 126,904 shares of Class A
Common Stock issuable upon exercise of Class A Warrants and 604,683 shares of
Class A Common Stock issuable upon exercise of Class B Warrants.
(4) Consists of (i) 500,000 shares of Class A Common Stock issuable upon
exercise of vested options; (ii) an aggregate of 14,000 shares of Class A Common
Stock issuable upon exercise of 5,000 Class A Warrants and the exercise of the
Class B Warrants underlying the Class A Warrants; (iii) 72,800 shares of Class A
Common Stock issuable upon exercise of 52,000 Class B Warrants (of which 14,000
Class B Warrants are held by Mr. Young jointly with his spouse and 16,000 Class
B Warrants are held by Mr. Young as trustee for his minor child), and (iv)
27,500 outstanding shares of Class A Common Stock.
(5) Includes the currently vested portion of options held by Messrs. Ahmad
(75,000 shares), Murthy (75,000 shares), Nelson (75,000 shares), Ewan (300,000
shares), Steel (250,000 shares), Dutt (25,000 shares), Loeffler (25,000 shares)
and Bagerdjian (25,000 shares).
(6) Consists of (i) 25,000 shares of Class A Common Stock owned by Whamdyne
LLC; (ii) 333,333 shares of Class A Common Stock issuable pursuant to the terms
of a $2,250,000 convertible note to Veneer Technology, Inc.; and (iii) 250,000
shares of Class A Common Stock issuable upon exercise of warrants owned by
Veneer Technology, Inc. Mr. Van Voorhis is a 25% owner of Whamdyne, LLC and
Veneer Technology, Inc. and is, therefore, deemed to be a beneficial owner of
such shares. See also "Certain Transactions."
The Class A Common Stock and Class B Common Stock are substantially
identical on a share-for-share basis. The holders of Common Stock vote as a
single class on all matters to come before stockholders for a vote and may
cumulate their votes in the election of directors upon giving notice as required
by law. Each share of Class B Common Stock is automatically converted into one
share of Class A Common Stock upon its sale or transfer, or the death of the
holder.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
====================================================================
Under the federal securities laws, the Company's directors, executive
officers, and any person holding more than 10% of the Company's Class A Common
Stock, Redeemable Class A Warrants, Redeemable Class B Warrants or Units
(consisting of shares of Class A Common Stock, Redeemable Class A Warrants and
Redeemable Class B Warrants) are required to report their ownership of the
Company's securities and any changes in that ownership to the Securities and
Exchange Commission. Specific due dates for these reports have been established,
and the Company is required to report in this Proxy Statement any failures to
file by these dates since the Company became public in March 1992. The Company
knows of no instances of persons who have failed to file or have delinquently
filed Section 16(a) reports within the most recently completed fiscal year
except that one report covering beneficial ownership by Mr. Van Voorhis of Class
A Common Stock was filed late.
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Concurrent with the Company's July 1996 acquisition of the assets,
operations and name of Ventek, Inc. (the remaining business being renamed Veneer
Technology, Inc. ("Veneer")), Rodger A. Van Voorhis was appointed a director of
the Company. Mr. Van Voorhis remains a stockholder of Veneer, a private company
engaged in real estate and other business.
In connection with the acquisition, ARC issued the following notes to
Veneer: (i) a 6.75% $1,000,000 note due in three years; (ii) a 6.75% $2,250,000
note due in three years convertible into the Company's Class A Common Stock at
$2.25 per share; and (iii) a note and stock appreciation rights payable (a) by
issuance of up to 1,800,000 shares of Class A Common Stock or at the Company's
option, in cash in three years, or (b) solely in cash in the event ARC Common
Stock is delisted from the Nasdaq Stock Market. The $2,250,000 note also
contains a provision giving Veneer the right to sell back to ARC up to 1,000,000
shares of ARC Class A Common Stock received upon conversion for consideration
consisting of SRC common stock owned by ARC, but only if an IPO of SRC common
stock is completed before the maturity date of the note.. The number of shares
of SRC common stock to be paid shall be determined by dividing the total market
value (as defined) of the shares of ARC Class A Common Stock to be sold by 70%
of the IPO price of SRC's common stock.
The Company also issued a warrant to purchase 1,000,000 shares of Class A
Common Stock at $2.25 per share which vests over a four-year period subject to
Ventek's meeting specified sales and earnings goals.
In 1996, the Company authorized a 7.5%, $100,000 loan to Dr. Ewan, which
loan was funded in 1997. The loan is secured by real property. The loan,
including interest thereon, is to be forgiven at the rate of 25% per year over
four years beginnining on the first anniversary of the loan date, provided Dr.
Ewan remains an employee of the Company.
<PAGE>
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.
DATED: March 11, 1997 ARC CAPITAL
By: /s/ William J. Young
----------------------
William J. Young
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William J. Young Chairman of the Board of Directors,
- ------------------------------ Chief Executive Officer and President
William J. Young March 11, 1997
/s/ Alan R. Steel Chief Financial Officer, Principal
- ------------------------------ Financial and Accounting Officer
Alan R. Steel March 11, 1997
Director March __, 1997
- ------------------------------
Asif S. Ahmad
/s/ Haig S. Bagerdjian Director March 11, 1997
- ------------------------------
Haig S. Bagerdjian
/s/ Vikram Dutt Director March 14, 1997
- ------------------------------
Vikram Dutt
/s/ James Ewan Director March 11, 1997
- ------------------------------
James Ewan
/s/ Robert M. Loeffler Director March 10, 1997
- ------------------------------
Robert M. Loeffler
/s/ Nagaraj P. Murthy Director March 28, 1997
- ------------------------------
Nagaraj P. Murthy
Director March __, 1997
- ------------------------------
Jack Nelson
Director March __, 1997
- ------------------------------
Rodger A. Van Voorhis
</TABLE>
<PAGE>
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1,2. Financial Statements and Schedules.
The financial statements and schedules of the Company are set forth
in the "Index to Financial Statements and Financial Statement
Schedules" on page F-1.
3. Exhibits. The following exhibits are filed as a part of this report:
Exhibit
Number Description
- ------ -----------
3.1 Restated Articles of Incorporation of the Company as amended to
date.(7)
3.2 Restated and Amended By-Laws of the Company. (7)
4.1 Form of Warrant Agreement (including forms of Class A and Class B
Warrant Certificates). (1)
4.2 Form of Underwriter's Unit Purchase Option. (1)
4.3 Form of Class C Warrant Agreement (including form of Class C Warrant
Certificate). (1)
4.4 Form of Class D Warrant Agreement. (1)
4.5 Form of Class F Warrant Agreement. (7)
4.6 Form of Class G Warrant Agreement. (8)
4.7 Form of Class H Warrant Agreement. (9)
4.8 Form of Class I Warrant Agreement. (11)
4.9 Form of Laidlaw Warrant Agreement. (7)
4.10 Form of stock option agreement. (10)
4.11 Form of 1997 Restricted Stock Plan and restricted stock agreement.
(12)
10.1 Stock Option Plan and form of option agreements. (1)
10.2 Form of Indemnity Agreement between the Company and each of its
officers and directors. (1)
10.3 Settlement Agreement and License Agreement dated July 27, 1992,
between Key Technology, Inc. and SRC Vision. (2)
10.4 Employment Agreement between Alan R. Steel and the Company dated
January 1, 1997.
10.5 Employment Agreement between William J. Young and the Company dated
January 1, 1997.
10.6 Employment Agreement between William J. Young and SRC Vision, Inc.
dated January 1, 1997.
10.7 Employment Agreement between James Ewan and the Company dated January
1, 1997.
10.8 Confidential Separation Agreement dated September 9, 1994, between
the Company and William C. Patridge. (3)
10.9 Convertible Subordinated Secured Note dated April 13, 1995, between
ARC and Ilverton International, Ltd. (4)
10.10 Form of Pledge and Security Agreement dated April 13, 1995, among
ARC, Ilverton International, Ltd. and pledge holder. (4)
10.11 Plan of Merger between ALS and ARC to effect an amendment to the
Company's Articles of Incorporation to change the Company's name
from Applied Laser Systems to ARC Capital. (5)
10.12 Asset Purchase Agreement between Applied Laser Systems, Inc. and
Coherent, Inc. dated September 22, 1995. (5)
10.13 Stock Purchase Agreement dated March 1, 1996, (without exhibits)
between Meijn Beheer b.v. and ARC Netherlands b.v., a wholly-owned
subsidiary of the Company. (6)
10.14 Stock Purchase Agreement dated March 1, 1996, between J. C. Scholt
and ARC Netherlands b.v., a wholly-owned subsidiary of the Company.
(6)
10.15 Convertible Note dated March 1, 1996, issued in connection with that
certain Stock Purchase Agreement dated March 1, 1996, between
J. C. Scholt and ARC Netherlands b.v. (6)
10.16 Subscription Agreement dated January 18, 1996, between the Company
and Swiss American Securities, Inc. as agent for Credit Suisse
related to the private placement of 1,400,000 shares of the Company's
Class A Common Stock. (6)
10.17 Subscription Agreement dated April 9, 1996, between the Company and
Swiss American Securities, Inc., as agent for Credit Suisse, related
to the private placement of $3,000,000 of convertible secured notes.
(8)
10.18 Convertible Secured Note dated April 17, 1996, between the Company
and Ilverton International, Inc. (13)
10.19 Asset Purchase Agreement dated July 24, 1996, by and among ARC,
Ventek and the shareholders of Ventek. (11)
10.20 $1,000,000 Note dated July 24, 1996, between ARC and Ventek. (11)
10.21 $2,250,000 Convertible Note dated July 24, 1996, between ARC and
Ventek. (11)
10.22 $1,125,000 Note dated July 24, 1996, between ARC and Ventek. (11)
10.23 Stock Appreciation Rights Agreement dated July 24, 1996 between ARC
and Ventek. (11)
10.24 Form of Employment Agreement dated July 24, 1996 between each of the
four stockholders of Ventek and ARC. (11)
10.25 Pledge and Security Agreement dated July 24, 1996, by and among ARC,
ARC Subsidiary, Inc., Ventek and Solin and Associates, P.C. (11)
10.26 Subscription Agreement dated May 14, 1996, between the Company and
Swiss American Securities, Inc., as agent for Credit Suisse, related
to the private placement of $1,600,000 of convertible secured notes.
10.27 1997 SRC Vision, Inc. Stock Option Plan and forms of stock option
agreements.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- ----------------------------------
(1) Previously filed as an exhibit to Form S-1 (File No. 33-45126).
(2) Filed with the SEC on May 18, 1994, as an exhibit to the Company's
Post Effective Amendment No. 5 to Form S-1 (File No. 33-45126).
(3) Previously filed with the SEC on September 15, 1994, as an exhibit to
ARC's current report on Form 8-K dated September 9, 1994.
(4) Filed with the SEC on April 13, 1995, as an exhibit to the Company's
Form 10-K.
(5) Filed with the SEC on October 5, 1995, as an exhibit to the Company's
Form 8-K dated October 2, 1995.
(6) Filed with the SEC on March 6, 1996, as an Exhibit to the Company's
Form 8-K dated March 1, 1996.
(7) Previously filed as an exhibit to Form S-3 (File No. 333-10847).
(8) Filed with the SEC on April 14, 1996, as an exhibit to the Company's
Form 10-K for the year ended December 31, 1995.
(9) Filed with the SEC on May 14, 1996, as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1996.
(10) Filed with the SEC as an exhibit to form S-1 (File No. 33-45126).
(11) Filed with the SEC on July 30, 1996, as an exhibit to the Company's
Form 8-K dated July 24, 1996.
(12) Filed with the SEC on January 22, 1997, as an exhibit to the
Company's Form 8-K dated January 9, 1997.
(13) Filed with the SEC on May 14, 1996, as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1996.
(b) Reports on Form 8-K:
On October 7, 1996, a Form 8-K was filed regarding the acquisition of
Ventek to include audited financial statements of the business
acquired and related proforma financial information.
On January 22, 1997, a Form 8-K was filed regarding the resignation
of a director, the appointment of four new directors, and adoption of
the 1997 Restricted Stock Plan.
<PAGE>
ARC Capital
Index to Financial Statements and Financial Statement Schedules
Page
----
Financial Statements
- --------------------
Report of Independent Accountants F-2
Consolidated Balance Sheets -
December 31, 1996 and 1995 F-3
Consolidated Statements of Operations -
Fiscal Years Ended December 31, 1996, 1995 and 1994 F-4
Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules
- -----------------------------
Schedule VIII - Valuation and Qualifying Accounts F-25
F-1
<PAGE>
Price Waterhouse Opinion
Report of Independent Accountants
To the Board of Directors and Shareholders of ARC Capital:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of ARC
Capital and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
March 18, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ARC Capital
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
1996 1995
------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 1,909,000 $ 4,171,000
Accounts receivable, net of allowance for doubtful
accounts of $280,000 and $165,000 at
December 31, 1996 and 1995, respectively (Note 1) 4,979,000 1,904,000
Inventories (Notes 1 and 3) 8,132,000 3,810,000
Prepaid expenses 391,000 506,000
------------- -------------
Total current assets 15,411,000 10,391,000
Property, plant and equipment, net (Notes 1, 4 and 7) 6,488,000 4,693,000
Intangible assets, net (Note 5) 7,876,000 1,885,000
Other assets 1,163,000 659,000
------------- -------------
$ 30,938,000 $ 17,628,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,897,000 $ 769,000
Short-term borrowings (Note 7) 947,000 --
Accrued liabilities (Notes 6 and 10) 1,299,000 845,000
Customer deposits (Note 1) 2,463,000 1,083,000
Accrued payroll 707,000 374,000
Warranty reserve 479,000 408,000
Current portion of notes payable (Note 7) 1,706,000 22,000
------------- -------------
Total current liabilities 9,498,000 3,501,000
------------- -------------
Notes payable, less current portion (Note 7) 14,940,000 4,875,000
------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 9, 10 and 11): Common stock:
Class A - no par value, one vote per share: 60,000,000
shares authorized, 11,140,000 and 8,718,000 shares
issued and outstanding at December 31, 1996 and
1995, respectively 25,648,000 22,966,000
Class B - no par value, one vote per share: 3,000,000 shares
authorized, 110,000 and 705,000 shares issued and
outstanding at December 31, 1996 and 1995, respectively 72,000 458,000
Class E - no par value, one vote per share: 3,000,000 shares
authorized, 0 and 497,000 shares issued and outstanding
at December 31, 1996 and 1995 (subject to forfeiture) -- 326,000
Common stock warrants 2,403,000 3,112,000
Additional paid in capital 2,797,000 1,500,000
Accumulated deficit (24,370,000) (19,110,000)
Cumulative translation adjustment (Note 1) (50,000) --
------------- -------------
Total shareholders' equity 6,500,000 9,252,000
------------- -------------
$ 30,938,000 $ 17,628,000
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 1) $ 29,938,000 $ 19,394,000 $ 11,922,000
Cost of sales 15,794,000 11,194,000 8,537,000
------------ ------------ ------------
Gross profit 14,144,000 8,200,000 3,385,000
------------ ------------ ------------
Operating expenses:
Selling and marketing 4,662,000 3,255,000 2,636,000
Research and development (Note 1) 4,038,000 1,987,000 1,476,000
General and administrative 3,549,000 1,933,000 4,438,000
Goodwill amortization 633,000 371,000 347,000
Charge for acquired in-process technology 4,915,000 -- --
Charge for royalty expense 647,000 -- --
------------ ------------ ------------
18,444,000 7,546,000 8,897,000
------------ ------------ ------------
Income (loss) from continuing operations
before other income and expense (4,300,000) 654,000 (5,512,000)
Other income and expense:
Gain on rescission of stock
compensation - net (Note 10) -- 732,000 --
Investment and other income 190,000 212,000 211,000
Interest expense (1,150,000) (483,000) (248,000)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes (5,260,000) 1,115,000 (5,549,000)
Provision for income taxes (Note 8) -- -- --
------------ ------------ ------------
Income (loss) from continuing operations (5,260,000) 1,115,000 (5,549,000)
Loss from discontinued operations (Notes 1 and 12) -- (173,000) (2,248,000)
------------ ------------ ------------
Net income (loss) $ (5,260,000) $ 942,000 $ (7,797,000)
============= ============ ============
Earnings (loss) per share (Notes 1 and 11):
Continuing operations $ (0.46) $ 0.12 $ (0.57)
Discontinued operations 0.00 (0.02) (0.23)
------------- ------------ ------------
Total $ (0.46) $ 0.10 $ (0.80)
============= ============ ============
Weighted average shares outstanding (Notes 1 and 11) 11,486,000 9,451,000 9,703,000
============= ============= ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Shareholders' Equity (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class E
Common Stock Common Stock Common Stock Common Additional Cumulative
------------ ------------ ------------ Stock Paid in Accumulated Translation
Shares Amount Shares Amount Shares Amount Warrants Capital Deficit Adjustments
------ ------ ------ ------ ------ ------ -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993 6,000,000 $12,719,000 971,000 $ 630,000 497,000 $ 326,000 $3,076,000 $1,500,000 $(12,255,000) $ --
Stock compensation 12,000 15,000 -- -- -- -- -- -- -- --
Common stock issued
through Regulation
S offering 3,000,000 10,793,000 -- -- -- -- -- -- -- --
Repurchase of Class
A Common Stock (40,000) (104,000) -- -- -- -- -- -- -- --
Conversion of Class
B to Class A
Common Stock 253,000 164,000 (253,000) (164,000) -- -- -- -- -- --
Exercise of warrants 8,000 34,000 -- -- -- -- (5,000) -- -- --
Issuance of warrants -- -- -- -- -- -- 26,000 -- -- --
Net loss -- -- -- -- -- -- -- -- (7,797,000) --
--------- ----------- -------- --------- ------- --------- ---------- ---------- ------------ --------
Balance,
December 31, 1994 9,233,000 23,621,000 718,000 466,000 497,000 326,000 3,097,000 1,500,000 (20,052,000) --
Rescission of stock
compensation, net (612,000) (747,000) -- -- -- -- -- -- -- --
Issuance of Class
F Warrants in
connection with
debt issuance -- -- -- -- -- -- 15,000 -- -- --
Conversion of Class
B to Class A
Common Stock 13,000 8,000 (13,000) (8,000) -- -- -- -- -- --
Exercise of options 84,000 84,000 -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- -- 942,000 --
--------- ----------- -------- --------- ------- --------- ---------- ---------- ------------ --------
Balance,
December 31, 1995 8,718,000 22,966,000 705,000 458,000 497,000 326,000 3,112,000 1,500,000 (19,110,000) --
Redemption of Class
E Common Stock -- -- -- -- (497,000) (326,000) -- 326,000 -- --
Expiration of Class
E Warrants -- -- -- -- -- -- (971,000) 971,000 -- --
Issuance of Class G,
H, I and J Warrants -- -- -- -- -- -- 262,000 -- -- --
Conversion of Class
B to Class A
Common Stock 595,000 386,000 (595,000) (386,000) -- -- -- -- -- --
Common Stock issued
through Regulation
S Offering 1,400,000 1,571,000 -- -- -- -- -- -- -- --
Exercise of options 83,000 80,000 -- -- -- -- -- -- -- --
Partial conversion
of Note Payable 344,000 645,000 -- -- -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- -- -- -- (50,000)
Net loss -- -- -- -- -- -- -- -- (5,260,000) --
--------- ----------- -------- --------- ------- --------- ---------- ---------- ------------ --------
Balance,
December 31, 1996 11,140,000 $25,648,000 110,000 $ 72,000 -- $ -- $2,403,000 $2,797,000 $(24,370,000) $(50,000)
========= =========== ======== ========= ======= ========= ========== =========== ============ ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ARC Capital
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,260,000) $ 942,000 $ (7,797,000)
Loss from discontinued operations -- 173,000 2,248,000
------------ ------------ ------------
(Loss) income from continuing operations (5,260,000) 1,115,000 (5,549,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Charge for acquired in-process technology 4,915,000 -- --
Charge for royalty expense 247,000 -- --
Cash outflows related to discontinued operations -- (728,000) (1,606,000)
Provision for restructuring adjustments -- -- 930,000
Depreciation and amortization 1,263,000 831,000 744,000
Stock compensation -- (732,000) --
Changes in assets and liabilities
(net of amounts purchased in acquisition):
Accounts receivable (1,741,000) (122,000) (776,000)
Inventories (581,000) 402,000 (175,000)
Prepaid expenses and other assets 156,000 (399,000) (189,000)
Accounts payable, short-term borrowings,
accrued liabilities, customer deposits,
accrued payroll, and warranty reserve 51,000 219,000 431,000
------------ ------------ ------------
Net cash (used in) provided by operating activities (950,000) 586,000 (6,190,000)
------------ ------------ ------------
Cash (used in) provided by investing activities:
Proceeds from sale of ALSO -- 1,052,000 --
Acquisition of SRC Vision -- -- (8,100,000)
Acquisition of Pulsarr/Ventek - net (5,984,000) -- --
Purchases of property and equipment (1,527,000) (598,000) (468,000)
Collection (issuance) of notes receivable - net -- 280,000 (370,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (7,511,000) 734,000 (8,938,000)
------------ ------------ ------------
Cash (used in) provided by financing activities:
Notes payable to related parties, net -- -- (202,000)
Notes payable to bank and others, net 4,621,000 2,137,000 (39,000)
Proceeds from common stock issuances 1,896,000 -- 10,793,000
Proceeds from exercise of stock options 82,000 84,000 --
Proceeds from exercise of warrants -- -- 29,000
Repurchase of Class A Common Stock -- -- (104,000)
Debt issuance costs (400,000) (160,000) --
------------ ------------ ------------
Net cash provided by financing activities 6,199,000 2,061,000 10,477,000
------------ ------------ ------------
Net (decrease) increase in cash (2,262,000) 3,381,000 (4,651,000)
Cash and cash equivalents, beginning of the period 4,171,000 790,000 5,441,000
------------ ------------ ------------
Cash and cash equivalents, end of the period $ 1,909,000 $ 4,171,000 $ 790,000
============ ============ ============
Supplemental cash flow information:
Cash paid for:
Interest $ 809,000 $ 372,000 $ 251,000
============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ARC CAPITAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Basis of Presentation:
----------------------
The consolidated financial statements include the accounts of ARC Capital
("ARC" or the "Company") and its four wholly-owned subsidiaries, SRC Vision,
Inc. ("SRC"); Ventek, Inc. ("Ventek"); ARC Netherlands B.V. and its respective
wholly-owned subsidiary, Pulsarr Holding B.V. ("Pulsarr"); and Applied Laser
Systems, Inc. of Oregon ("ALSO").
ALSO designed, developed, manufactured and marketed laser diode devices,
incorporating its visible laser module, and "no-light" products based on
technology for illumination with infrared laser systems. In October 1995, the
Company sold the operations of ALSO to Coherent, Inc. for cash (see Note 12).
In February 1994, the Company acquired all of the issued and outstanding
capital stock of SRC for $8,100,000 in cash. In March 1996, the Company acquired
all of the issued and outstanding stock of Pulsarr for $7.8 million in cash and
a note. In July 1996, the Company acquired the business and certain assets of
Ventek, subject to certain liabilities, for $5.1 million in notes. The
operations of each of the three acquired entities are included in the
consolidated financial results since their respective acquisition dates. Through
these subsidiaries, the Company designs, manufactures and markets computer-aided
vision defect detection and sorting and defect removal equipment for use in a
variety of industries, including food processing, wood products and recycling.
The Company's systems combine optical and mechanical systems technologies to
perform diverse scanning, analytical sensing, measuring and sorting applications
on a variety of products such as food, wood and plastic. The Company sells its
products throughout the world (see Note 13).
Use of Estimates:
-----------------
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.
Accounting Period:
------------------
The Company utilizes a 52-53 week fiscal year ending on the Sunday closest
to the end of the fiscal period. Fiscal periods shown ended December 29, 1996,
December 31, 1995 and January 1, 1995. In these financial statements, the fiscal
periods are shown as December 31, 1996, December 31, 1995 and December 31, 1994,
for clarity of presentation.
Cash Equivalents:
-----------------
A For financial reporting purposes, cash equivalents consist primarily of
money market instruments and bank certificates of deposit that have original
maturities of three months or less.
F-7
<PAGE>
Concentrations of Credit Risk:
------------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of money market instruments
and trade receivables. The Company invests its excess cash in money market
instruments and certificates of deposit with high credit quality financial
institutions, and by policy, limits the amount of credit exposure to any one
issuer. Concentrations of credit risk with respect to trade receivables exist
because the Company's subsidiaries rely heavily on a relatively small number of
customers (see Note 13). The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses, to date, have been within
management's expectations.
Inventories:
------------
Manufacturing inventories are stated at the lower of cost or net realizable
value, with cost determined principally by use of the first-in, first-out
method.
Property, Plant, and Equipment:
-------------------------------
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed by either the straight-line or an accelerated method
over the estimated useful lives of the assets, which range from 3 to 30 years.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in operations for the period. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals and betterments
are capitalized.
Intangible Assets:
------------------
Intangible assets primarily represent the excess of the purchase price of
acquisitions over the fair value of net assets acquired ("goodwill"). Intangible
assets also represent costs allocated to existing technologies and other
specifically identifiable assets arising from business acquisitions. Intangible
assets are being amortized on the straight-line basis over seven to fifteen
years (see Note 5). The Company assesses the recoverability of its intangible
assets as described under Long-Lived Assets below.
Long-Lived Assets:
------------------
In March 1995, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standard No. 121 (FAS 121), "Accounting for
the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed
Of." FAS 121 requires that long-lived assets and certain identifiable intangible
assets to be held and used by a company be reviewed for impairment whenever
events or changes in circumstances indicate that expected future cash flows
(undiscounted and without interest charges) for individual subsidiaries may not
be sufficient to support the recorded assets. If undiscounted cash flows are not
sufficient to support the recorded assets, an impairment is recognized to reduce
the carrying value of the assets based on expected discounted cash flows of the
subsidiary. The Company adopted the statement in fiscal 1996; however, the
adoption did not have a material impact on the Company's financial statements.
Revenue Recognition:
--------------------
The Company recognizes revenue upon shipment of products or upon the
customer's acceptance of the product, as contractually agreed. Customer deposits
represent monies received in advance of shipment of products.
Research and Development Costs:
-------------------------------
Research and development costs are expensed as incurred. Research and
development expense is related to developing new products and to improving
existing products or processes.
Earnings (Loss) Per Share:
--------------------------
Earnings (loss) per share has been computed based on the weighted average
number of common shares and dilutive common equivalent shares outstanding during
the period. Class E shares have been excluded from the net earnings (loss) per
share calculation as they were considered to be "contingent shares" and
anti-dilutive for purposes of the calculation. Class B shares have been
considered outstanding on an "as if converted" basis from the date the
underlying stock was issued (see Note 11).
Changes in Classification:
--------------------------
Certain reclassifications have been made to the fiscal 1995 and 1994
financial statements to conform with the financial statement presentation for
fiscal 1996. Such reclassifications had no effect on the Company's net loss or
shareholders' equity.
Income Taxes:
-------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes."
FAS 109 requires the recognition of deferred tax assets and liabilities for the
expected tax effects from differences between the financial reporting and tax
bases of assets and liabilities. In estimating future tax effects, FAS 109
generally considers all expected future events other than enactments of changes
in tax law or statutorily imposed rates.
Stock-Based Compensation:
-------------------------
The Company uses the intrinsic value based method in accounting for its
stock option plans as prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" (see Note 9).
Fair Value of Financial Assets and Liabilities:
-----------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial assets and liabilities. The Company estimates the fair value
of its monetary assets and liabilities based upon the existing interest rates
related to such assets and liabilities compared to current market rates of
interest for similar nature and degree of risk. The Company estimates that the
carrying value of all of its monetary assets and liabilities approximates fair
value as of December 31, 1996.
Foreign Currency Translation:
-----------------------------
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of shareholders'
equity.
- --------------------------------------------------------------------------------
NOTE 2 - ACQUISITION STRATEGY AND RESTRUCTURING
- --------------------------------------------------------------------------------
In 1993, the Company established a long-term growth through acquisition
strategy. In connection with its strategy, the Company adjusted its organization
and capital structure at the end of 1993 and the beginning of 1994 which
transformed the Company into a "platform" company, with each of its business
units operating as a separate subsidiary. ARC intended to use, and has used, a
portion of the approximately $17,692,000 raised in 1993 and 1994 in Regulation S
offerings and/or its securities to acquire other companies with certain key or
proprietary technology, know-how, licenses or other assets which, in the opinion
of management, had potential to contribute to the long-term growth of ARC in
either its current or new businesses.
In February 1994, ARC acquired all of the issued and outstanding capital
stock of SRC for $8.1 million in cash (see Note 5). Between March and September
1994, new management of the Company terminated discussions with five other
acquisition candidates after performing due diligence procedures. The costs
associated with these terminated acquisitions aggregated $648,000 and are
included in general and administrative expenses.
Restructuring:
--------------
In September 1994, the Company adjusted its platform and ALSO operations
due to the winding down of the acquisition activities described above and a
change in product line direction, respectively. William C. Patridge resigned as
Chairman of the Board. Including Mr. Patridge's resignation, the platform was
reduced from eleven to five employees. At ALSO, the high-powered laser project
was canceled due to the perceived lack of market for the product and to redirect
available resources to remaining product lines. The employee count at ALSO was
reduced by approximately 29%. Restructuring adjustments recorded in 1994
included write-downs for idled assets and excess inventories, employee severance
costs, legal and settlement costs associated with due diligence and terminating
acquisitions, specifically identified warranty issues and related items. These
adjustments were reflected as increased cost of sales ($138,000) and operating
expenses ($1,130,000), or if related to ALSO, they are included in loss from
discontinued operations ($1,250,000).
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORIES
- --------------------------------------------------------------------------------
Inventories consist of the following:
December 31,
-------------------------------
1996 1995
------------- -------------
Raw materials $ 2,662,000 $ 1,242,000
Work-in-process 2,234,000 889,000
Finished goods 3,236,000 1,679,000
------------- -------------
$ 8,132,000 $ 3,810,000
============= =============
The increase is due principally to the acquisition of Pulsarr and Ventek in
the current year (see Note 5).
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant and equipment consists of the following:
December 31,
------------------------------
1996 1995
------------- -------------
Land $ 1,339,000 $ 879,000
Buildings 4,780,000 3,449,000
Machinery and equipment 799,000 342,000
Furniture, fixtures and office equipment 988,000 820,000
------------- -------------
7,906,000 5,490,000
Less: accumulated depreciation (1,418,000) (797,000)
------------- -------------
$ 6,488,000 $ 4,693,000
============= =============
Substantially all of the property, plant and equipment is secured by
various mortgage notes payable (see Note 7). Depreciation expense aggregated
$630,000, $460,000 and $397,000, respectively, for 1996, 1995 and 1994.
- --------------------------------------------------------------------------------
NOTE 5 - ACQUISITIONS
- --------------------------------------------------------------------------------
SRC:
----
On February 2, 1994, the Company purchased all of the outstanding shares of
stock of SRC for $8,100,000 in cash. The Company has accounted for this
acquisition using the purchase method. The cost of the acquisition was allocated
to the assets acquired and liabilities assumed on the basis of their fair values
at the date of acquisition. Goodwill of $2,632,000 was recorded as the
difference between the acquisition cost and the fair values of the assets
acquired and liabilities assumed. The Company is amortizing goodwill over seven
years using the straight-line method. Goodwill amortization for 1996, 1995 and
1994 was $371,000, $371,000 and $347,000, respectively.
Pulsarr:
--------
On March 1, 1996, the Company acquired all of the outstanding capital stock
of Pulsarr for cash of $6.5 million and notes payable aggregating $1.3 million
(see Note 7). The acquisition is accounted for under the purchase method of
accounting. The $7.8 million purchase price was allocated based on the fair
values of the identifiable assets of Pulsarr as follows: $1.1 million represents
the fair values of net tangible assets of Pulsarr, $4.9 million represents
acquired in-process technology which was charged to operations in the quarter
ended March 31, 1996, and the remainder of $1.8 million represents existing
technologies and goodwill to be amortized over 15 years. Existing technology and
goodwill amortization for the year ended December 31, 1996 was $100,000. The
fair values of the acquired in-process technologies and existing technologies
and goodwill were determined from independent appraisals received by the
Company.
Ventek:
-------
On July 24, 1996, the Company acquired certain assets and the business of
Ventek, subject to certain liabilities. The purchase price was approximately
$5.1 million in notes and other securities: (i) a 6.75% $1,000,000 note due in
three years; (ii) a 6.75% $2,250,000 note due in three years convertible into
the Company's Class A Common Stock at $2.25 per share; and (iii) a note and
stock appreciation rights payable (a) by issuance of up to 1,800,000 shares of
Class A Common Stock or at the Company's option, in cash in three years, or (b)
solely in cash in the event ARC Common Stock is delisted from the Nasdaq Stock
Market. The Company also issued a warrant to purchase 1,000,000 shares of Class
A Common Stock which vests over a four year period subject to Ventek meeting
specified sales and earnings goals. The acquisition is accounted for under the
purchase method of accounting. The $5.1 million purchase price was allocated
based on the fair values of the identifiable assets of Ventek as follows: $0.2
million represents the fair values of net tangible assets of Ventek, and the
remainder of $4.9 million represents goodwill to be amortized over 15 years.
Goodwill amortization for the year ended December 31, 1996 was $162,000.
The consolidated results of operations for the Company include SRC's,
Pulsarr's and Ventek's results of operations from their respective acquisition
dates.
Unaudited Proforma Statements of Operations:
--------------------------------------------
The unaudited proforma condensed combined statements of operations, shown
below as supplemental information, assumes the acquisitions of Pulsarr and
Ventek occurred as of the beginning of 1996 and 1995. However, the proforma
combined balances are not necessarily indicative of balances which would have
resulted had the acquisitions occurred as of the beginning of the years
presented. Unaudited proforma condensed combined statements of operations for
1996 and 1995 are as follows:
Proforma (unaudited)
------------------------------
1996 1995
------------- -------------
Sales $ 34,945,000 $ 35,422,000
============= =============
Gross profit $ 17,803,000 $ 19,729,000
============= =============
Net income $ 1,796,000 $ 2,823,000
============= =============
Earnings per share $ 0.15 $ 0.22
============= =============
The $4.9 million charge for in-process technologies is excluded from the
above proforma information.
Supplemental Cash Flow Disclosures Relating to Acquisitions:
------------------------------------------------------------
In 1996, the Company paid $5,984,000 in cash, net of cash acquired, as part
of the cost to acquire Pulsarr and Ventek as follows:
Fair value of tangible assets acquired $ 6,997,000
Acquired existing and in-process technologies 6,653,000
Goodwill and other intangible assets 4,987,000
Liabilities assumed (6,368,000)
Issuance of acquisition notes and warrants (6,285,000)
-------------
Cash paid $ 5,984,000
=============
- --------------------------------------------------------------------------------
NOTE 6 - ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
Accrued liabilities consist of the following:
December 31,
-------------------------------
1996 1995
------------- -------------
Commissions and royalties $ 192,000 $ 530,000
Legal claims and fees 431,000 185,000
Interest 220,000 48,000
Other 456,000 82,000
------------- -------------
$ 1,299,000 $ 845,000
============= =============
- --------------------------------------------------------------------------------
NOTE 7 - FINANCING ARRANGEMENTS
- --------------------------------------------------------------------------------
Short-term borrowings represent Pulsarr's outstanding borrowings pursuant
to its operational line of credit. As of December 31, 1996, Pulsarr had
borrowings under this line of credit totaling $947,000. The maximum borrowing
capacity under this line is approximately $1,145,000 (2,000,000 Dutch Guilders).
The line of credit is secured by receivables and inventories of Pulsarr. As of
December 31, 1996, the interest rate was 4.375%.
Long-term debt consists of the following:
December 31,
-------------------------------
1996 1995
------------- -------------
Mortgage note (SRC) $ 2,715,000 $ 2,737,000
Mortgage notes (Pulsarr) 1,962,000 --
10.25% convertible note 1,515,000 2,160,000
6.75% convertible note 3,400,000 --
Pulsarr acquisition note 316,000 --
6% convertible note 927,000 --
6.75% note (Ventek) 1,000,000 --
6.75% convertible note (Ventek) 2,250,000 --
Ventek note 1,529,000 --
Technical development grant 1,032,000 --
------------- -------------
16,646,000 4,897,000
Less: current maturities (1,706,000) (22,000)
------------- -------------
$ 14,940,000 $ 4,875,000
============= =============
The SRC mortgage note is payable to a bank in monthly installments of
$23,000 including interest at 9.5%, with the remaining unpaid balance due on
February 15, 2003. In February 1996, and every three years thereafter until
maturity, the note provides that the interest rate will be adjusted to 3.5%
above the prime rate. While a normal February 1996 adjustment would have
resulted in a rate of 12%, the holder of the note has agreed to fix the interest
rate at 9.5% until February 1999. The note is secured by all of SRC's property,
plant and equipment. The loan agreement contains certain covenants and
restrictions including limitations on incurrence of debt and payment of
dividends.
The Pulsarr mortgage notes are payable to a bank and consist of the
following: (i) a note for $552,000 payable in equal monthly installments over 13
years, bearing interest at 4.25% as of December 31, 1996 and (ii) a note for
$1,410,000 payable in equal monthly installments over 26 years, bearing interest
at 7.85% as of December 31, 1996. The interest rate for the 13-year note changes
monthly based on the Amsterdam Inter-Bank Offering Rate (AIBOR). The interest
rate on the 26-year note is based on the bank's long-term rates and is fixed at
7.85% through 2001. The notes are secured by Pulsarr's land and building, as
well as a restricted cash deposit of $285,000 as of December 31, 1996. The
deposit earns interest at a variable rate and will be reduced as Pulsarr makes
principal payments when due. The deposit is included in Other assets in the
accompanying Consolidated Balance Sheets.
On April 13, 1995, the Company borrowed $2,160,000 pursuant to a
convertible subordinated secured note. Interest on the note is 10.25% and is
payable twice yearly. The principal amount is due in April 1997. The note is
secured by the issued and outstanding capital stock of ARC's wholly-owned
subsidiary, SRC. The note is convertible into the Company's Class A Common Stock
at $1.875 per share. In connection with the borrowing, the Company paid a
finders fee of $160,000 and issued 300,000 warrants to purchase Class A Common
Stock at $1.875 per share. In October 1996 and March 1997, $645,000 and $250,000
of principal of the note were converted into 344,000 and 133,333 shares of Class
A Common Stock, respectively.
In April 1996, in connection with the acquisition of Pulsarr, the Company
raised a net of $3,000,000 in a private placement of $3,400,000 of convertible
secured notes. The notes bear interest at 6.75% payable quarterly. The interest
rate may be adjusted upward on each anniversary date of the notes if the market
price of the Company's Class A Common Stock fails to reach certain levels. The
maximum possible coupon interest rate is 11.25% if none of the market price
thresholds are met. The principal amount will be due in April 2001. The notes
are secured by 54% of the stock of ARC Netherlands B.V., a wholly-owned
subsidiary of the Company established to purchase Pulsarr. The notes are
convertible into the Company's Class A Common Stock at $2.125 per share. In
connection with the borrowing, the Company paid a finder's fee of $400,000 and
issued 340,000 warrants to purchase Class A Common Stock at $2.125 per share.
The Pulsarr acquisition note and 6% convertible note arose from the
Company's purchase of 20% of Pulsarr's stock from J. C. Scholt, Pulsarr's
managing director. The Pulsarr acquisition note is payable in five equal annual
installments beginning March 1, 1997. The 6% convertible note bears interest at
6% payable annually; is due in one installment on the earlier of (i) February
28, 2001, (ii) upon termination of Mr. Scholt's employment agreement other than
for cause, or (iii) upon Mr. Scholt's death to his heirs; is secured by 20% of
the stock of Pulsarr; and is convertible into ARC Class A Common Stock at $2.22
per share.
ARC issued the following notes in connection with the acquisition of
Ventek: (i) the 6.75% $1,000,000 note due July 23, 1999; (ii) a 6.75% $2,250,000
note due July 23, 1999 convertible into the Company's Class A Common Stock at
$2.25 per share; and (iii) a $1,125,000 note and stock appreciation rights
payable (a) by issuance of up to 1,800,000 shares of Class A Common Stock or at
the Company's option, in cash on July 23, 1999, or (b) solely in cash in the
event ARC Common Stock is delisted from the Nasdaq Stock Market. The $1,125,000
note and stock appreciation rights payable was valued at $1,529,000 on the
acquisition date based upon an independent appraisal received by the Company.
All three notes are secured by all of the issued and outstanding shares of
Ventek. The three notes are payable to Veneer Technology, Inc. a company owned
by the four former stockholders of Ventek, all of whom are current employees of
the Company. The 6.75% $2,250,000 note also contains a provision that, upon an
initial public offering ("IPO") of the common stock of one or more of, or any
combination of, SRC, Pulsarr and Ventek (together, "Subsidiary"), but only if
such IPO occurs during the term of the note, the noteholder shall have the right
to sell back to ARC up to 1,000,000 shares of ARC Class A Common Stock received
upon conversion for consideration consisting of Subsidiary common stock owned by
ARC. The number of shares of Subsidiary common stock to be paid shall be
determined by dividing the total market value (as defined) of the shares of ARC
Class A Common Stock to be sold by 70% of the IPO price of Subsidiary's common
stock.
Pulsarr has a conditional obligation to repay a technical development loan
received from the government of the Netherlands should the development of
certain technologies prove to be commercially successful. If the technologies
are commercially successful, the technical development loan must be repaid at a
rate of 11% of net sales of the products including such technologies, and bears
interest at a rate of 8% per annum from the date the technologies become
commercially successful. If the technologies are not commercially successful,
there is no obligation to repay the loan. The Company is currently developing
these technologies and expects that such technologies will be commercially
successful. If the Company should discontinue development of these technologies,
the Company will recognize a gain on the forgiveness of this liability.
As of December 31, 1996, the aggregate amount of minimum maturities of
long-term debt are as follows: 1997--$1,706,000; 1998--$193,000;
1999--$4,975,000; 2000--$198,000; 2001--$4,528,000; and thereafter $5,046,000.
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
- --------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes is composed of
the following:
1996 1995 1994
------------- ------------- -------------
Domestic $ 75,000 $ 1,115,000 $ (5,549,000)
Foreign (5,335,000) -- --
------------- ------------- -------------
$ (5,260,000) $ 1,115,000 $ (5,549,000)
============= ============= =============
The components of the provision for income taxes are as follows:
1996 1995 1994
------------- ------------- -------------
Federal:
Current $ -- $ -- $ --
Deferred (124,000) 386,000 (2,582,000)
------------ ------------ -------------
Total Federal (124,000) 386,000 (2,582,000)
------------ ------------ -------------
State:
Current -- -- --
Deferred (14,000) 45,000 (304,000)
------------ ------------ -------------
Total State (14,000) 45,000 (304,000)
------------ ------------ -------------
Increase (decrease) in
valuation allowance 138,000 (431,000) 2,886,000
------------ ------------ -------------
Total provision $ -- $ -- $ --
============ ============ =============
The tax effect of temporary differences between financial reporting and the
tax bases of assets and liabilities relate to the following:
December 31,
-------------------------------
1996 1995
------------- -------------
Deferred tax asset:
Loss carry-forwards $ 6,181,000 $ 6,403,000
Reserves and accruals 454,000 346,000
Research and development costs 167,000 226,000
Property basis differences 520,000 341,000
------------- -------------
7,322,000 7,316,000
Deferred tax liability:
Royalty -- (132,000)
------------- -------------
Net deferred tax asset before
valuation allowance 7,322,000 7,184,000
Deferred tax asset valuation allowance (7,322,000) (7,184,000)
------------- -------------
$ -- $ --
============= =============
The deferred tax asset has been fully reserved in accordance with FAS 109
because the Company cannot anticipate future taxable income to realize the
potential benefits of the gross deferred tax asset.
The provision for (benefit from) income taxes differs from an amount
computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Provision for (benefit from) income taxes
at federal statutory rate $ (1,788,000) $ 320,000 $ (2,651,000)
State taxes (benefit) (259,000) 38,000 (312,000)
Non-deductible in-process technology charge 1,671,000 -- --
Realized benefit from utilizing net operating
loss carry-forward 191,000 -- --
Deferred tax valuation allowance 138,000 (431,000) 2,886,000
Nondeductible expenses 47,000 73,000 77,000
------------ ------------ ------------
$ -- $ -- $ --
============= ============ ============
</TABLE>
The Company has net operating loss carry-forwards of approximately
$16,200,000. Such carry-forwards may be used to offset taxable income, if any,
in future years through their expiration in 2003-2010. Because of the
substantial change in the Company's ownership which occurred as a result of the
initial public offering in March 1992 and subsequent issuances of common stock,
the annual amount of tax loss carry-forward which can be utilized is limited.
Utilization of approximately $9,300,000 of the above carry-forwards is limited
to approximately $1,800,000 per year. Such limitation could result in the
expiration of a part of the carry-forwards before their utilization.
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT AND STOCK OPTION PLANS
- --------------------------------------------------------------------------------
The Company sponsors a defined contribution 401(k) plan covering
substantially all employees. Pursuant to the provisions of the plan, eligible
participants may elect to contribute up to 15% of their base compensation,
subject to certain limitations, and the Company may, at its option, match
employee contributions up to a certain percentage. No Company matching has
occurred under the plan.
The Company maintains several stock option plans under which non-qualified
and incentive stock options for the Company's Class A Common Stock have been
granted to directors, officers, and other employees. The plans are administered
by the Stock Option Committee of the Board of Directors (the "Committee").
Additionally, the Company has occasionally granted non-plan options to
directors, officers or consultants on terms similar to plan options. The stock
option price per share for options granted is determined by the Committee and is
based on market price of the Company's common stock on the date of grant and
each option is exercisable within the period and in the increments as determined
by the Committee, except that no option can be exercised later than 10 years
from the date it was granted. The stock options generally vest over one to four
years. The terms of non-plan options are determined by the full Board of
Directors or the Compensation Committee of the Board.
The following table sets forth the options granted, forfeited, and
exercised during the three years ended December 31, 1996, and their respective
weighted average exercise price per share:
Weighted
Shares Average
Under Option Price Per Share
------------ ---------------
Balance at December 31, 1993 1,102,000 $ 3.58
Granted 1,007,000 4.67
Exercised -- --
Canceled (370,000) 4.42
-------- ------
Balance at December 31, 1994 1,789,000 $ 4.02
Granted 1,957,000 1.00
Exercised (84,000) 1.00
Canceled (1,012,000) 3.89
---------- ------
Balance at December 31, 1995 2,650,000 $ 1.94
Granted 698,000 1.93
Exercised (83,000) 1.00
Canceled (138,000) 1.21
----------- ------
Balance at December 31, 1996 3,127,000 $ 2.00
=========== ======
The following table sets forth information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- -------------- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
1.00 1,674,000 8 years 1.00 1,094,000 1.00
1.63-2.38 653,000 9 years 1.95 81,000 1.63
3.00-4.94 800,000 7 years 4.01 800,000 4.01
----------- -----------
3,127,000 1,975,000
=========== ===========
</TABLE>
There are 67,000 shares available for future grants.
In January 1997, the Company established an SRC stock option plan (the "SRC
Plan") under which incentive and non-qualified stock options for SRC's common
stock may be granted to directors, officers and other employees. The plan is
administered by the Stock Option Committee of the Board of Directors of SRC (the
"SRC Committee"). The stock option price per share for options granted under the
SRC Plan is determined by the SRC Committee and is based on the fair market
value of the Company's common stock on the date of grant, and each option is
exercisable within the period and in the increments as determined by the SRC
Committee, except that no option may be exercised before the ninth anniversary
date of grant unless there shall have been an IPO of SRC's common stock, and
except that no option can be exercised later than ten years from the date it was
granted.
In January 1997, SRC granted a total of 342,445 options under the SRC Plan
to purchase SRC common stock at $1.86 per share. The options become exercisable
on January 10, 2006 and expire one year thereafter. Upon completion of an
initial public offering of SRC's common stock, the vesting of such options will
accelerate so that 100% will be exercisable on the third anniversary date of the
IPO.
Statement of Financial Accounting Standards No. 123 ("FAS 123"): During
1995, the Financial Accounting Standards Board issued FAS 123, "Accounting for
Stock Based Compensation," which defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
the Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Entities electing to remain with the accounting in APB 25
must make proforma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined in this Statement has been
applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for proforma disclosure purposes
the value of all options granted during 1996 and 1995 using the Black-Scholes
option pricing model as prescribed by FAS 123 and the following weighted average
assumptions used for grants: risk-free interest rate--6.77%; expected dividend
yield--0%; expected lives--5 Years; expected volatility--67%. Adjustments are
made for options forfeited prior to vesting. The total value of options granted
was computed to be the following approximate amounts, which would be amortized
over the vesting period of the options:
Year ended December 31, 1996 $ 789,000
Year ended December 31, 1995 $ 817,000
If the Company had accounted for these plans in accordance with FAS 123,
the Company's net income (loss) and proforma net income (loss) per share would
have been reported as follows:
December 31,
-------------------------------
1996 1995
------------- -------------
Net income (loss):
As reported $ (5,260,000) $ 942,000
Proforma $ (5,797,000) $ 397,000
Proforma earnings (loss) per share:
As reported $ (0.46) $ 0.10
Proforma $ (0.51) $ 0.04
The weighted average fair value of options granted during 1996 and 1995 was
$1.13 and $0.42, respectively.
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, CONTINGENCIES AND SPECIAL ITEMS
- --------------------------------------------------------------------------------
Royalty Commitments:
--------------------
In connection with the settlement of a patent infringement lawsuit in 1992,
SRC entered into a royalty agreement whereby SRC agreed to pay royalties of 7%
of certain vision system sales through June 30, 2003, up to a maximum of
$400,000 per year and $1,600,000 in the aggregate. Royalty expense aggregated
$214,000 and $199,000 in 1995 and 1994, respectively, and is included in costs
of sales. The final $400,000 payment under the settlement was made in July 1996.
In 1996, the Company wrote off $647,000 of remaining deferred royalty expense
because all royalties have been earned, and the Company believes that no
significant future economic life exists relating to the royalty agreement as a
result of changing technologies.
Liviakis Financial Communications, Inc.:
----------------------------------------
Effective December 31, 1993, the Company retained Liviakis Financial
Communications, Inc. ("Liviakis Financial"), a California corporation
wholly-owned by John Liviakis and his spouse, to provide financial
communications and other consulting services to the Company for a three-year
period. As consideration for these services, Liviakis Financial received 790,000
shares of Class A Common Stock as a commencement bonus as of December 31, 1993,
and was to receive an additional 2,400 shares of Class A Common Stock each month
for the term of the agreement. The value of the shares issued as a commencement
bonus aggregated $964,000 and was recorded as an expense prior to fiscal 1994.
On May 9, 1994, ARC's Board of Directors authorized management of the
Company to terminate the consulting agreement between the Company and Liviakis
Financial because of what the Company believed to have been material breaches of
the agreement by Liviakis Financial. On May 20, 1994, the Company filed a claim
with the American Arbitration Association seeking a determination that the
contract had been breached by Liviakis Financial, the return of the 790,000
shares of Class A Common Stock delivered to date to Liviakis Financial pursuant
to the contract, a determination that the Company had no obligation to issue
additional shares to Liviakis Financial under the contract, plus attorney's
fees.
Arbitration on the Company's claims against Liviakis Financial and Liviakis
Financial's counter-claims occurred in December 1994 and January 1995. On
February 15, 1995, the arbitrator issued an Interim Award requiring Liviakis
Financial to return 668,278 shares of Class A Common Stock to ARC, which shares
were returned in March 1995. Additionally, the Interim Award provided that ARC
was entitled to recover all of its reasonable expenses including, but not
limited to, attorney's fees and cost. The arbitrator also concluded that all
cross complaints by Liviakis Financial were without merit.
A gain of $732,000 was recorded in February 1995 related to the shares
recovered. In July 1995, ARC received $100,000 in full settlement of all fees
and expenses.
Ford & Cohn:
------------
In March 1993, Wilson Ford, Robert Paul and Maxwell Cohn (together
"Claimants") brought various claims against ARC and William Patridge, Asif Ahmad
and Nagaraj Murthy, past or current directors or employees of ARC, in lawsuits
in the Superior Courts for Los Angeles County and Orange County, California. The
lawsuits were consolidated in February 1994, and were litigated in Superior
Court for Los Angeles County in September and October, 1995.
Ford, a consultant to ARC, claims that ARC breached an agreement dated
September 17, 1987, and subsequently amended on August 16, 1988, by which he was
to receive 25,000 shares of stock of CNVS, Inc., predecessor to ARC, at no cost
and an option to purchase 25,000 additional shares in the future upon the
occurrence of specified events. Ford claims he was promised that this total of
50,000 shares in the Company would amount to 5% of the outstanding shares. Ford
also claims ARC owes him royalties under a royalty agreement for certain low
light video camera technology. Based on these allegations, Ford made claims for
breach of contract and breach of the covenant of good faith and fair dealing.
ARC contends that Ford was never promised that his interest would amount to 5%
of the outstanding shares, that Ford failed to fulfill his obligations under the
royalty agreement, and that Ford's claims are barred under various legal
theories.
The Claimants contend that statements allegedly made by William Patridge to
United States Alcohol Testing of America, Inc. ("USAT") caused USAT to rescind
an Asset Purchase Agreement with the Claimants. The Claimants allege that the
statements concerning outstanding lawsuits and disputes between ARC and the
Claimants were false and meant to disrupt the business relationship between
Prime Lasertech and USAT. The Claimants allegedly would have benefited from the
Asset Purchase Agreement as shareholders and/or licensees. Based on these
allegations, the Claimants have made claims for intentional and negligent
interference with prospective advantage, intentional and negligent infliction of
emotional distress, and civil conspiracy.
On October 2, 1995, a jury awarded $375,000 to the Claimants, which
included $281,000 of punitive damages for the breach of contract claim. The
Company has filed motions with the court to eliminate the punitive portion of
the award. ARC believes such damages are improper because (i) the claimants did
not ask for punitive damages in the contract claim, and (ii) such damages cannot
be awarded for breach of contract under applicable state laws. ARC is also
attempting to overturn the balance of the breach of contract award based on the
fact that the claim was made after the statute of limitations had expired. ARC
has made an appeal to overturn the verdict based on these factors and certain
other irregularities that occurred during the trial, which ARC believes unfairly
affected the jury's decision. Due to the fact that a verdict was rendered, a
$93,000 loss on the breach of contract claim was recorded as a liability in the
fourth quarter of 1995. As of December 31, 1996, the Company had posted a
$375,000 appeal bond secured by restricted cash in an equal amount. The bond and
restricted cash was increased by $206,000 in January 1997. The restricted cash
deposit is included in Other assets in the accompanying Consolidated Balance
Sheets.
Credit Suisse, Max Khan and Konrad Meyer:
-----------------------------------------
On January 9, 1997, the Company sued Credit Suisse in Jackson County,
Oregon, seeking $1,600,000 in fulfillment of Credit Suisse's contractual
obligation to fund a private placement Subscription Agreement dated May 14,
1996. The Company claims that Credit Suisse's failure to fund has limited ARC's
ability to finance its business plan for Pulsarr and, as a result, will
adversely impact ARC's credibility with investors and financial analysts. Any
erosion of credibility or, alternatively, the dilution of shareholder value
caused by alternate financing will, in turn, adversely impact the Company's
ability to raise debt and equity financing.
The suit also claims that Messrs. Khan and Meyer, who had previously
provided investment banking services to ARC, persuaded Credit Suisse to breach
the Subscription Agreement.
Other:
------
ARC is a party to several other suits in the ordinary course of its
business. Several of these actions have been brought in Europe against the
Company's Pulsarr subsidiary. ARC believes that the outcome of all such
proceedings, even if determined adversely to Pulsarr, will not have a material
effect upon its business since the Company is indemnified for any losses arising
from such suits by Pulsarr's former owner.
- --------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
- --------------------------------------------------------------------------------
Common Stock and Recapitalization:
----------------------------------
On February 25, 1992, the Company completed a six-for-one reverse stock
split, reconstituted all outstanding shares as Class A Common Stock and effected
a share exchange of one share of Class B Common Stock and two shares of Class E
Common Stock for each share of Class A Common Stock outstanding. The common
stock amounts and loss per share amounts for all periods presented have been
adjusted to reflect the effect of these actions (see Note 1 and below for a
description of shares utilized in the calculation of earnings (loss) per share).
Each share of Class B stock is automatically converted into one share of
Class A stock upon its sale or transfer or the death of the holder. The Class E
shares were automatically convertible into Class B shares if the Company
attained certain earnings levels or if the Class A shares traded at certain
dollar amounts. Since earnings and market value levels were not achieved, the
Class E shares were redeemed by the Company for nominal consideration on
February 15, 1996. All of the common shareholders are entitled to share equally
in the assets available for distribution.
Initial Public Offering:
------------------------
In March 1992, the Company completed an underwritten initial public
offering of 1,200,000 units. These units consist of 2,400,000 shares of Class A
Common Stock, 2,400,000 redeemable Class A Warrants (each exercisable for one
share of Class A Common Stock and one redeemable Class B Warrant) and 1,200,000
redeemable Class B Warrants (each exercisable for one share of Class A Common
Stock). In addition, the over-allotment option provided to the underwriter was
exercised in April 1992, resulting in the sale of an additional 180,000 units.
These units, which expired unexercised on March 9, 1997, consisted of 360,000
shares of Class A Common Stock, 360,000 redeemable Class A Warrants and 180,000
redeemable Class B Warrants. The offering resulted in proceeds of approximately
$6.7 million, net of issuance costs of approximately $1.6 million. (See further
discussion of the attributes of the warrants below.)
Regulation S Offerings - Sales of Common Stock:
-----------------------------------------------
In September and October 1993 and February 1994, the Company sold an
aggregate of 5,360,000 shares of its Class A Common Stock in private Regulation
S offerings to foreign investors at substantial discounts from the then trading
price of the Class A Common Stock in the over-the-counter market. Of these
shares, 2,360,000 were sold for $3.25 per share and 3,000,000 were sold for an
average price of $4.08 per share. In March 1996 in connection with the
acquisition of Pulsarr, the Company sold 1,400,000 shares of Class A Common
Stock in a private Regulation S offering at the then market price of the stock.
Preferred Stock, Exchange Agreement and Lock-Up and Contribution Agreement:
---------------------------------------------------------------------------
Effective September 30, 1991, the Company issued 1,500,000 shares of Series
A Preferred Stock in settlement of advances from shareholders. The shares were
issued in fiscal 1992. The Series A Preferred Stock was nonvoting, had no
dividend rights, and had a liquidation preference of $1.00 per share. The shares
also had certain redemption provisions.
In December 1993, the Company and three of its principal shareholders,
including its president at that time, entered into an exchange agreement and a
lock-up and contribution agreement effective December 31, 1993. The lock-up and
contribution agreement provided that the three principal shareholders agreed not
to sell their stock for two years, and further provided that the two principal
shareholders (excluding the Company's president) contribute all 1,500,000 shares
of their Series A Preferred Stock to the capital of the Company.
Pursuant to the exchange agreement, the same two principal shareholders
exchanged all of their 1,502,906 shares of Class E Common Stock for 3,002,906
Class E Warrants to purchase one share of Class A Common Stock each at $5.50 per
share. The Class E Warrants were held in escrow by the Company and were subject
to the same conditions as the Class E Common Stock. Since the financial
conditions set forth for Class E Common Stock were not met within the time frame
specified, the Class E Warrants ceased to exist on February 15, 1996.
Class E Common Stock and Class E Warrants:
------------------------------------------
On February 15, 1996, the Company redeemed all 497,094 shares of its Class
E Common Stock for nominal consideration. Also on that date, the 3,002,906 Class
E Warrants to purchase Class A Common Stock ceased to exist because escrow
conditions related to the warrants were not met.
Schedule of Outstanding Stock, Warrants, Units, Convertible Debt and
Potential Dilution:
---------------------------------------------------------------------------
The following table summarizes, as of December 31, 1996, outstanding common
stock, potential dilution to the outstanding common stock upon exercise of
warrants and UPO Units and conversion of convertible debt, and proforma proceeds
from the exercise of warrants and UPO Units. The table also sets forth the
exercise or conversion prices and warrant expiration and debt due dates.
<TABLE>
<CAPTION>
Exercise Proforma
Number or Principal Class A Common or Proceeds
Amount Outstanding Conversion Stock After Conversion or Debt
Security at December 31, 1996 Factor Conversion Price Reduction
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Class A (D) 11,139,857 11,139,857
Class B 110,168 110,168
-------------
Total currently outstanding 11,250,025
Warrants (expiration date):
A (3/9/98) 2,941,963 1.4 4,118,748 $ 2.84 $ 11,697,000
B (3/9/98) 4,354,863 (A) 1.4 6,096,808 4.17 25,424,000
C (3/9/98) 846,250 1.4 1,184,750 2.21 2,618,000
D (6/30/98-7/31/98) 275,000 1 275,000 2.75 756,000
F (4/12/98) 300,000 1 300,000 1.88 564,000
G (2/28/99) 240,000 1 240,000 2.00 480,000
H (4/16/01) 340,000 1 340,000 2.13 724,000
I (7/23/01) 1,000,000 (B) 1 1,000,000 2.25 2,250,000
J (9/30/99) 300,000 1 300,000 2.03 608,000
Gerinda (8/97) 300,000 1 300,000 5.00 1,500,000
Laidlaw (4/1/97) 135,000 1 135,000 2.25 304,000
------------- ---------------
14,290,306 46,925,000
------------- ---------------
Unit Purchase Options
(3/9/97): (C) 188,400 6.38 1,202,000
Class A Common 376,800 1 376,800
A Warrants 376,800 1.4 527,520 2.84 1,498,000
B Warrants 565,200 1.4 791,280 4.17 3,300,000
------------- ---------------
1,695,600 6,000,000
------------- ---------------
Convertible Debt (due date):
10.25% Notes (4/13/97) $ 1,515,000 (E) 808,000 1.88 1,515,000
6.75% Notes (4/16/01) 3,400,000 1,600,000 2.13 3,400,000
6.75% Ventek Note (7/23/99) 2,250,000 1,000,000 2.25 2,250,000
6% Note (2/28/01) 980,000 441,486 2.22 980,000
Ventek Note (7/23/99) 1,529,000 (B) 1,800,000 1,529,000
------------- ---------------
5,649,486 9,674,000
------------- ---------------
Potentially outstanding shares and proforma proceeds
and reduction of debt 32,885,417 $ 62,599,000
============= ===============
</TABLE>
(A) Includes 1,412,900 outstanding plus 2,941,963 assuming exercise of the
Class A Warrants.
(B) The Company issued the $1,529,000 note and Class I Warrant in
connection with the Ventek acquisition (see Note 5). The note is
payable, (a) at the Company's option, in cash or by delivery of up to
1,800,000 shares of Class A Common Stock on the third anniversary date
of the note; or (b) solely in cash in the event ARC Common Stock is
delisted from the Nasdaq Stock Market. The Warrant vests 25% in each of
the next four years if sales and earnings objectives are achieved.
(C) The Unit Purchase Options expired March 8, 1997 unexercised thereby
reducing the potentially outstanding shares and proforma proceeds by
1,695,000 and $6,000,000, respectively.
(D) Subsequent to December 31, 1996, the Company issued 2,000,000 shares
pursuant to the 1997 Restricted Stock Plan described below.
(E) Subsequent to December 31, 1996, $250,000 principal amount of the
10.25% Note was converted into 133,333 shares of Class A Common Stock.
The proforma amounts above are for illustrative purposes only. Unless the
market price of ARC's Class A Common Stock rises significantly above the
exercise or conversion prices, it is unlikely that any warrants will be
exercised or that the debt will be converted.
The Company has the right to redeem the Class A and Class B Warrants at a
price of $.05 per warrant, subject to certain conditions regarding the bid price
of the Class A Common Stock. All classes of warrants provide for adjustment of
the exercise price and for a change in the number of shares issuable upon
exercise to protect holders against dilution in the event of a stock dividend,
stock split, combination or reclassification of the Class A Common Stock. The
Class A, B, C and D Warrants also provide for such an adjustment upon issuance
of shares of Class A Common Stock at prices lower than the market price then in
effect other than issuances upon exercise of options granted to employees,
directors and consultants to ARC, or options to be granted under any ARC stock
option plan.
In addition, on December 31, 1996, ARC had outstanding options to purchase
3,127,000 shares of Class A Common Stock, 2,766,000 of which are under its stock
option plans (see Note 9).
The existence of these outstanding warrants, options, and convertible debt,
including those granted or to be granted under ARC's Stock Option Plans or
otherwise, and potentially issuable shares pursuant to antidilution provisions
of warrant agreements could adversely affect ARC's ability to obtain future
financing. The price which ARC may receive for the Class A Common Stock issued
upon exercise of options and warrants, or amount of debt forgiven in the case of
conversion of debt, may be less than the market price of Class A Common Stock at
the time such options and warrants are exercised or debt is converted. For the
life of the warrants, options and convertible debt, the holders are given, at
little or no cost, the opportunity to profit from a rise in the market price of
their Class A Common Stock without assuming the risk of ownership. Moreover, the
holders of the options and warrants might be expected to exercise them at a time
when ARC would, in all likelihood, be able to obtain needed capital by a new
offering of its securities on terms more favorable than those provided for by
the options and warrants.
1997 Restricted Stock Plan:
---------------------------
The 1997 Restricted Stock Plan ("1997 Plan") was established to retain the
services of selected employees, officers and directors of the Company and
provide them with strong incentives to enhance the Company's growth and stock
price. The total number of shares of Class A Common Stock issuable under the
1997 Plan shall not exceed 2,000,000.
In January 1997, the Company's Board of Directors awarded 2,000,000 shares
of restricted Class A Common Stock to three key employees of the Company. As to
10% of the stock, such shares cannot be traded or transferred unless (i) the
employee remains in the employ of the Company until January 10, 2000 and (ii) a
payment of $1.80 per share is made by the employee to ARC. As to 90% of the
stock, such stock cannot be traded or transferred unless, in addition to the
conditions in the prior sentence, the market price of the stock as quoted by
Nasdaq or other applicable stock exchange for any 30 consecutive days prior to
the third anniversary date of the award is at least $20 per share. If any of
these conditions are not met, the related shares of stock will be forfeited and
returned to the Company.
Earnings (Loss) Per Share:
--------------------------
Earnings (loss) per share is computed based on the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of the shares relating to a
note and stock appreciation right agreement, options and warrants.
As ARC has outstanding options and warrants which, in the aggregate, exceed
20% of the common stock currently outstanding, ARC is required to follow the
provisions of Accounting Principles Board (APB) Opinion No. 15, paragraph 38, in
calculating earnings (loss) per share, if dilutive. APB 15, paragraph 38,
assumes the exercise of all options and warrants and certain other computations.
If earnings (loss) per share so computed resulted in a lower earnings or greater
loss per share when compared to earnings (loss) per share excluding such items,
such amount would be reported in the financial statements. The APB 15, paragraph
38 calculation was not dilutive for the full years ending December 31, 1996 or
1995 even though dilution did occur during 1996 for the quarters ended September
30 and December 31, 1996 standing alone.
- --------------------------------------------------------------------------------
NOTE 12 - DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
In October 1995, the Company sold the ALSO laser operations to Coherent,
Inc. for approximately $1,052,000 in cash, which represented the net book value
of the operation. Operating results for the above discontinued business have
been excluded from the Consolidated Statements of Operations to present
separately the results of continuing operations. Net sales for ALSO for the
years ended 1995 and 1994 were $2,279,000 and $3,272,000, respectively.
- --------------------------------------------------------------------------------
NOTE 13 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
- --------------------------------------------------------------------------------
The Company is engaged in one principal activity--designing, manufacturing
and marketing of computer-aided vision defect detection and sorting and defect
removal equipment. The Company has subsidiaries located in the United States and
the Netherlands. Revenue transfers between geographic areas, and other
intergeographical eliminations are not material. Net sales, net income (loss)
and identifiable assets by geographic areas are as follows:
1996 1995 1994
-------------- -------------- --------------
Net sales:
United States $ 21,506,000 $ 19,394,000 $ 11,922,000
Europe 8,432,000 -- --
-------------- -------------- -------------
$ 29,938,000 $ 19,394,000 $ 11,922,000
============== ============== =============
Net income (loss):
United States $ 75,000 (A)$ 942,000 $ (7,797,000)
Europe (5,335,000)(B) -- --
-------------- -------------- -------------
$ (5,260,000) $ 942,000 $ (7,797,000)
============== ============== =============
Identifiable assets:
United States $ 20,784,000 $ 17,628,000 $ 14,876,000
Europe 10,154,000 -- --
-------------- -------------- -------------
$ 30,938,000 $ 17,628,000 $ 14,876,000
============== ============== =============
(A) Includes charges of $647,000 for the write-off of deferred royalty
expense.
(B) Includes a charge of $4,915,000 for the write-off of acquired
in-process technology.
Included in United States sales are export sales of $7,504,000 in 1996,
$5,117,000 in 1995 and $2,650,000 in 1994.
The Company sold equipment to two different unaffiliated customers totaling
13% and 12% of sales in 1996 and to two customers totaling 19% and 16% of sales
in 1995. Sales to a third unaffiliated customer totaled 15% of sales in 1994.
- --------------------------------------------------------------------------------
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters Ended March 31 June 30 September 30 December 31 Total
- -------------------------------------------------------------------------------------------------------------
Fiscal 1996
- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 3,613,000 $ 6,419,000 $ 10,097,000 $ 9,809,000 $ 29,938,000
Gross profit 1,479,000 2,598,000 5,094,000 4,973,000 14,144,000
Net income (loss) (6,797,000)(A) (900,000) 985,000 1,452,000 (5,260,000)
Earnings (loss) per share: (0.68) (0.08) 0.07 0.08 (0.46)
Fiscal 1995
- -----------
Sales 2,726,000 4,976,000 6,550,000 5,142,000 19,394,000
Gross profit 831,000 2,030,000 2,886,000 2,453,000 8,200,000
Income (loss):
Continuing operations 97,000 201,000 617,000 200,000 1,115,000
Discontinued operations (26,000) 57,000 (53,000) (151,000) (173,000)
-------------- ------------- -------------- ------------- -------------
Net income (loss) $ 71,000 $ 258,000 $ 564,000 $ 49,000 $ 942,000
============== ============= ============== ============= =============
Earnings (loss) per share:
Continuing operations $ 0.01 $ 0.01 $ 0.07 $ 0.03 $ 0.12
Discontinued operations -- 0.01 (0.01) (0.02) (0.02)
-------------- ------------- -------------- ------------ -------------
Total $ 0.01 $ 0.02 $ 0.06 $ 0.01 $ 0.10
============== ============= ============= ============= =============
</TABLE>
(A) Includes charges of $4,915,000 and $647,000 for the write-off of acquired
in-process technology and deferred royalty expense, respectively. The
Company previously reported a net loss of $7,970,000 on its Form 10-Q for
the quarter ended March 31, 1996. The $1,173,000 reduction of the loss as
previously reported was solely related to a reduction in the charge for
acquired in-process technologies. During the fourth quarter of 1996, an
independent valuation of Pulsarr's in-process technologies, existing
technologies and business and other intangible assets was completed
resulting in a reduction in the $6,088,000 charge previously taken for
acquired in-process technology to $4,915,000.
<PAGE>
- --------------------------------------------------------------------------------
ARC Capital
Schedule VIII - Valuation and Qualifying Accounts For the Years Ended December
31, 1994, 1995 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged Balance
beginning cost and to other at end
of period expenses accounts Deductions of period
--------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts $ -- $ 64,000 $ 101,000 $ -- $ 165,000
============== ============= ============ =========== ===========
Year ended December 31, 1995:
Allowance for excess and
obsolete inventory $ -- $ 305,000 $ -- $ -- $ 305,000
============== ============= ============ =========== ===========
Allowance for doubtful accounts $ 165,000 $ -- $ -- $ -- $ 165,000
============== ============= ============ =========== ===========
Year ended December 31, 1996:
Allowance for excess and
obsolete inventory $ 305,000 $ 131,000 $ -- $ -- $ 436,000
============== ============= ============ =========== ===========
Allowance for doubtful accounts $ 165,000 $ 21,000 $ 120,000 $ (26,000) $ 280,000
============== ============= ============ =========== ===========
</TABLE>
F-25
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
ARC Capital, a California corporation (the "Company"), and Alan Steel (the
"Executive"), as of January 1, 1997.
I. RECITAL.
WHEREAS, the Company desires to employ the Executive as Vice
President-Finance and Chief Financial Officer.
NOW, THEREFORE, the Company and the Executive desire to set forth in this
Agreement the terms and conditions of the Executive's employment with the
Company.
II. EMPLOYMENT.
The Company hereby employs the Executive and the Executive hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
January 1, 1997 to and including December 31, 1998. This Agreement shall be
automatically renewed for one additional year unless the Executive or the
Company gives notice to the other, in writing, at least 30 days prior to the
expiration of this Agreement, of its or his desire to terminate this Agreement
or modify its terms. The Company agrees that the Executive will be located, and
will render such services, in the Medford, Oregon area.
III. DUTIES.
A. The Executive shall serve during the course of his employment as Vice
President-Finance and Chief Financial Officer of the Company and shall have such
other similar duties and responsibilities as the Board of Directors of the
Company shall determine from time to time.
B. The Executive agrees to devote substantially all of his time, energy and
ability to the business of the Company and shall not be involved in the
operations or management of any other competitive business. Nothing herein shall
prevent the Executive, upon written approval of the Board of Directors of the
Company, from serving as a director or trustee of other corporations or
businesses which are not in competition with the business of the Company or in
competition with any present or future affiliate of the Company.
C. For the term of this Agreement, the Executive shall report to the Chief
Executive Officer of the Company.
IV. COMPENSATION.
A. Base Salary. The Company shall pay the Executive a base salary at the
rate of $143,000 per year. Such salary shall be earned monthly and shall be
payable in periodic installments no less frequently than monthly in accordance
with the Company's customary practices. Amounts payable shall be reduced by
standard withholding and other authorized deductions.
B. Annual Bonus, Incentive, Savings and Retirement Plans. The Executive
shall be entitled to participate in all annual bonus, incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
peer executives of the Company.
C. Welfare Benefit Plans. The Executive shall be eligible for participation
in and shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company to the extent applicable generally
to other peer executives of the Company.
D. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
E. Fringe Benefits. The Executive shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. Vacation. The Executive shall be entitled to paid vacation of four weeks
per year.
G. Automobile. At the Executive's option, the Company shall provide the
Executive with the use of a Company owned or leased automobile or the Executive
shall be entitled to a $600.00 per month automobile allowance.
V. TERMINATION.
A. Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that disability of the Executive has occurred (pursuant to the definition
of Disability set forth below), it may give to the Executive written notice of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the day of
receipt of such notice by the Executive. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from his duties with the
Company on the basis provided in this agreement for a period of 3 months as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or his legal representative. "Incapacity" as used
herein shall be limited only to such Disability which substantially prevents
Company from availing itself of the services of the Executive.
B. Cause. The Company may terminate the Executive's employment for Cause.
For purposes of this Agreement, "Cause" shall mean that the Company, acting in
good faith based upon the information then known to the Company, determines that
the Executive has: (1) committed an act of fraud upon, or an act evidencing
material dishonesty toward the Company; or (2) been convicted of a felony, which
conviction through lapse of time or otherwise is not subject to appeal; or (3)
willfully refused to perform material required duties and responsibilities or
performed them with gross negligence or willful misconduct.
C. Obligations of the Company upon Termination Based upon Death or
Disability or Cause.
1. Death or Disability. If the Executive's employment is terminated by
reason of the Executive's Death or Disability, this Agreement shall
terminate without further obligations to the Executive or his legal
representatives under this Agreement, other than for (a) payment of the sum
of (i) the Executive's annual base salary through the date of termination
to the extent not theretofore paid, (ii) reasonable employment expenses, as
provided herein, through the date of termination to the extent not
theretofore paid and (iii) any accrued vacation pay to the extent not
theretofore paid (the sum of the amounts described in clauses (i), (ii) and
(iii) shall be hereinafter referred to as the "Accrued Obligations"), which
shall be paid to the Executive or his estate or beneficiary, as applicable,
in a lump sum in cash within 30 days of the date of termination and (b)
payment to the Executive or his estate or beneficiary, as applicable, any
amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
2. Cause. If the Executive's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
the Executive other than for the timely payment of Accrued Obligations and
any amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
D. Obligations of the Company upon Termination without Cause. If the
Executive's employment is terminated by the Company other than for cause then
the Company shall pay Executive the Accrued Obligations and, in addition, shall
pay the Executive an amount equal to two years' base salary in equal monthly
installments unless such termination follows a "change of control," in which
case the Company will immediately pay the Executive such amount in cash. In
addition, the Company shall continue to pay the Executive's health and medical
benefits for a period of two years following the termination, at which time the
Executive will be entitled to pursue, at the Executive's cost, applicable COBRA
benefits. Moreover, all of the Executive's employee stock options shall become
fully vested.
For purposes of this Agreement, a change of control shall mean: (a) any
transfer or series of transfers of capital stock of the Company, other than as a
result of a sale of capital stock of the Company pursuant to a public offering
registered under the Securities Act of 1933, as amended, as a result of which
the holders of capital stock of the Company prior to such transfer or transfers
become, collectively, the legal or beneficial holders of less than fifty percent
(50%) of the capital stock of the Company; (b) the consummation of any merger or
consolidation of the Company with another corporation; provided, however, that
no Change in Control shall be deemed to have occurred if, immediately following
such merger or consolidation, legal or beneficial holders of capital stock of
the Company prior to such merger or consolidation shall own or control, directly
or indirectly, through one or more intermediaries, equity securities
representing the power to vote or direct the voting of more than fifty percent
(50%) of the voting power of all classes of equity securities entitled to vote
in the election of directors of the corporation resulting from such merger or
consolidation; or (c) any transfer of all or substantially all of the business
and assets of the Company to another corporation; provided, however, that no
Change in Control shall be deemed to have occurred if the legal or beneficial
holders of capital stock of the Company prior to such transfer of control,
retain directly or indirectly through one or more intermediaries, the power to
vote or direct the voting of more than fifty percent (50%) of the voting power
of all classes of equity securities entitled to vote in the election of
directors of such corporation to which all or substantially all of the business
and assets of the Company are transferred.
E. Special Severance. Following the expiration of this Agreement, if the
Executive's employment at any time is terminated without cause, then the Company
shall pay the Executive as special severance compensation an amount equal to two
years' base salary, payable in 24 equal monthly installments. This special
severance payment shall be reduced by standard withholding and other authorized
deductions.
VI. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Medford, Oregon in accordance with the rules and
procedures of the American Arbitration Association. In the event either party
institutes arbitration under this Agreement, the costs and expenses of such
arbitration (including counsel fees) shall be borne by each of the parties, or
as the arbitrator(s) may determine at the request of either party.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during his employment by the
Company or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the company, he shall not, without the prior written consent of the
Company, or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it.
VIII. SUCCESSORS.
A. This Agreement is personal to the Executive and shall not, without the
prior written consent of the Company, be assignable by the Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
IX. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
X. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Executive and the Board of Directors of the Company.
XI. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
XII. COMPLETE AGREEMENT.
This instrument constitutes and contains the entire agreement and
understanding concerning the Executive's employment and the other subject
matters addressed herein between the parties, and supersedes and replaces all
prior negotiations and all agreements proposed or otherwise, whether written or
oral, concerning the subject matters hereof. This is an integrated document.
XIII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XIV. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XV. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to the Executive at
_____________________________________________________________, or addressed to
the Company at 2067 Commerce Drive, Medford, OR, 97504. Any party may change the
address at which notice shall be given by written notice given in the above
manner.
XVI. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XVII. LEGAL COUNSEL.
The Executive and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have had the opportunity to consult
with legal counsel of their choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ARC CAPITAL ALAN STEEL
By_________________________ __________________________
Its________________________
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
ARC Capital, a California corporation (the "Company"), and William J. Young (the
"Executive"), as of January 1, 1997.
I. RECITAL.
WHEREAS, the Company desires to employ the Executive as Chairman, President
and Chief Executive Officer;
NOW, THEREFORE, the Company and the Executive desire to set forth in this
Agreement the terms and conditions of the Executive's employment with the
Company.
II. EMPLOYMENT.
The Company hereby employs the Executive and the Executive hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
January 1, 1997 to and including December 31, 1998. This Agreement shall be
automatically renewed for one additional year unless the Executive or the
Company gives notice to the other, in writing, at least 30 days prior to the
expiration of this Agreement, of its or his desire to terminate this Agreement
or modify its terms. The Company agrees that the Executive will be located, and
will render such services, in the Medford, Oregon area.
III. DUTIES.
A. The Executive shall serve during the course of his employment as
Chairman of the Board, President and Chief Executive Officer of the Company and
shall have such other similar duties and responsibilities as the Board of
Directors of the Company shall determine from time to time.
B. The Executive agrees to devote substantially all of his time, energy and
ability to the business of the Company and shall not be involved in the
operations or management of any other competitive business. Nothing herein shall
prevent the Executive, upon written approval of the Board of Directors of the
Company, from serving as a director or trustee of other corporations or
businesses which are not in competition with the business of the Company or in
competition with any present or future affiliate of the Company.
C. For the term of this Agreement, the Executive shall report to the Board
of Directors of the Company.
IV. COMPENSATION.
A. Base Salary. The Company shall pay the Executive a base salary at the
rate of $215,000 per year. Such salary shall be earned monthly and shall be
payable in periodic installments no less frequently than monthly in accordance
with the Company's customary practices. Amounts payable shall be reduced by
standard withholding and other authorized deductions.
B. Annual Bonus, Incentive, Savings and Retirement Plans. The Executive
shall be entitled to participate in all annual bonus, incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
peer executives of the Company.
C. Welfare Benefit Plans. The Executive shall be eligible for participation
in and shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company to the extent applicable generally
to other peer executives of the Company.
D. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
E. Fringe Benefits. The Executive shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. Vacation. The Executive shall be entitled to paid vacation of four weeks
per year.
G. Automobile. At the Executive's option, the Company shall provide the
Executive with the use of a Company owned or leased automobile or the Executive
shall be entitled to a $600.00 per month automobile allowance.
V. TERMINATION.
A. Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that disability of the Executive has occurred (pursuant to the definition
of Disability set forth below), it may give to the Executive written notice of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the day of
receipt of such notice by the Executive. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from his duties with the
Company on the basis provided in this agreement for a period of 3 months as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or his legal representative. "Incapacity" as used
herein shall be limited only to such Disability which substantially prevents
Company from availing itself of the services of the Executive.
B. Cause. The Company may terminate the Executive's employment for Cause.
For purposes of this Agreement, "Cause" shall mean that the Company, acting in
good faith based upon the information then known to the Company, determines that
the Executive has: (1) committed an act of fraud upon, or an act evidencing
material dishonesty toward the Company; or (2) been convicted of a felony, which
conviction through lapse of time or otherwise is not subject to appeal; or (3)
willfully refused to perform material required duties and responsibilities or
performed them with gross negligence or willful misconduct.
C. Obligations of the Company upon Termination Based upon Death or
Disability or Cause.
1. Death or Disability. If the Executive's employment is terminated by
reason of the Executive's Death or Disability, this Agreement shall
terminate without further obligations to the Executive or his legal
representatives under this Agreement, other than for (a) payment of the sum
of (i) the Executive's annual base salary through the date of termination
to the extent not theretofore paid, (ii) reasonable employment expenses, as
provided herein, through the date of termination to the extent not
theretofore paid and (iii) any accrued vacation pay to the extent not
theretofore paid (the sum of the amounts described in clauses (i), (ii) and
(iii) shall be hereinafter referred to as the "Accrued Obligations"), which
shall be paid to the Executive or his estate or beneficiary, as applicable,
in a lump sum in cash within 30 days of the date of termination and (b)
payment to the Executive or his estate or beneficiary, as applicable, any
amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
2. Cause. If the Executive's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
the Executive other than for the timely payment of Accrued Obligations and
any amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
D. Obligations of the Company upon Termination without Cause. If the
Executive's employment is terminated by the Company other than for cause then
the Company shall pay Executive the Accrued Obligations and, in addition, shall
pay the Executive an amount equal to two years' base salary in equal monthly
installments unless such termination follows a "change of control," in which
case the Company will immediately pay the Executive such amount in cash. In
addition, the Company shall continue to pay the Executive's health and medical
benefits for a period of two years following the termination, at which time the
Executive will be entitled to pursue, at the Executive's cost, applicable COBRA
benefits. Moreover, all of the Executive's employee stock options shall become
fully vested.
For purposes of this Agreement, a change of control shall mean: (a) any
transfer or series of transfers of capital stock of the Company, other than as a
result of a sale of capital stock of the Company pursuant to a public offering
registered under the Securities Act of 1933, as amended, as a result of which
the holders of capital stock of the Company prior to such transfer or transfers
become, collectively, the legal or beneficial holders of less than fifty percent
(50%) of the capital stock of the Company; (b) the consummation of any merger or
consolidation of the Company with another corporation; provided, however, that
no Change in Control shall be deemed to have occurred if, immediately following
such merger or consolidation, legal or beneficial holders of capital stock of
the Company prior to such merger or consolidation shall own or control, directly
or indirectly, through one or more intermediaries, equity securities
representing the power to vote or direct the voting of more than fifty percent
(50%) of the voting power of all classes of equity securities entitled to vote
in the election of directors of the corporation resulting from such merger or
consolidation; or (c) any transfer of all or substantially all of the business
and assets of the Company to another corporation; provided, however, that no
Change in Control shall be deemed to have occurred if the legal or beneficial
holders of capital stock of the Company prior to such transfer of control,
retain directly or indirectly through one or more intermediaries, the power to
vote or direct the voting of more than fifty percent (50%) of the voting power
of all classes of equity securities entitled to vote in the election of
directors of such corporation to which all or substantially all of the business
and assets of the Company are transferred.
E. Special Severance. Following the expiration of this Agreement, if the
Executive's employment at any time is terminated without cause, then the Company
shall pay the Executive as special severance compensation an amount equal to two
years base salary, payable in 24 equal monthly installments. This special
severance payment shall be reduced by standard withholding and other authorized
deductions.
VI. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Medford, Oregon in accordance with the rules and
procedures of the American Arbitration Association. In the event either party
institutes arbitration under this Agreement, the costs and expenses of such
arbitration (including counsel fees) shall be borne by each of the parties, or
as the arbitrator(s) may determine at the request of either party.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during his employment by the
Company or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the company, he shall not, without the prior written consent of the
Company, or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it.
VIII. SUCCESSORS.
A. This Agreement is personal to the Executive and shall not, without the
prior written consent of the Company, be assignable by the Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
IX. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
X. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Executive and the Board of Directors of the Company.
XI. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
XII. COMPLETE AGREEMENT.
This instrument constitutes and contains the entire agreement and
understanding concerning the Executive's employment and the other subject
matters addressed herein between the parties, and supersedes and replaces all
prior negotiations and all agreements proposed or otherwise, whether written or
oral, concerning the subject matters hereof. This is an integrated document.
XIII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XIV. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XV. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to the Executive at
___________________________________________________________, or addressed to the
Company at 2067 Commerce Road, Medford, OR, 97504. Any party may change the
address at which notice shall be given by written notice given in the above
manner.
XVI. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XVII. LEGAL COUNSEL.
The Executive and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have had the opportunity to consult
with legal counsel of their choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ARC CAPITAL WILLIAM J. YOUNG
By__________________________ ___________________________
Its_________________________
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
SRC Vision, Inc., a corporation (the "Company"), and William J. Young (the
"Executive"), as of January 1, 1997.
I. RECITAL.
WHEREAS, the Company desires to employ the Executive as Chairman of the
Board.
NOW, THEREFORE, the Company and the Executive desire to set forth in this
Agreement the terms and conditions of the Executive's employment with the
Company.
II. EMPLOYMENT.
The Company hereby employs the Executive and the Executive hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
January 1, 1997 to and including December 31, 1998. This Agreement shall be
automatically renewed for one additional year unless the Executive or the
Company gives notice to the other, in writing, at least 30 days prior to the
expiration of this Agreement, of its or his desire to terminate this Agreement
or modify its terms. The Company agrees that the Executive will be located, and
will render such services, in the Medford, Oregon area.
III. DUTIES.
A. The Executive shall serve during the course of his employment as
Chairman of the Board of the Company and shall have such other similar duties
and responsibilities as the Board of Directors of the Company shall determine
from time to time.
B. The Executive agrees to devote a portion of his time, energy and ability
to the business of the Company that he deems necessary.
C. For the term of this Agreement, the Executive shall report to the Board
of Directors of the Company.
IV. BASE SALARY.
The Company shall pay the Executive a base salary at the rate of $35,000
per year. Such salary shall be earned monthly and shall be payable in periodic
installments no less frequently than monthly in accordance with the Company's
customary practices. Amounts payable shall be reduced by standard withholding
and other authorized deductions.
V. TERMINATION.
A. Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that disability of the Executive has occurred (pursuant to the definition
of Disability set forth below), it may give to the Executive written notice of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the day of
receipt of such notice by the Executive. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from his duties with the
Company on the basis provided in this agreement for a period of 3 months as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or his legal representative. "Incapacity" as used
herein shall be limited only to such Disability which substantially prevents
Company from availing itself of the services of the Executive.
B. Cause. The Company may terminate the Executive's employment for Cause.
For purposes of this Agreement, "Cause" shall mean that the Company, acting in
good faith based upon the information then known to the Company, determines that
the Executive has: (1) committed an act of fraud upon, or an act evidencing
material dishonesty toward the Company; or (2) been convicted of a felony, which
conviction through lapse of time or otherwise is not subject to appeal; or (3)
willfully refused to perform material required duties and responsibilities or
performed them with gross negligence or willful misconduct.
C. Obligations of the Company upon Termination Based upon Death or
Disability or Cause.
1. Death or Disability. If the Executive's employment is terminated by
reason of the Executive's Death or Disability, this Agreement shall
terminate without further obligations to the Executive or his legal
representatives under this Agreement, other than for payment of the sum of
(i) the Executive's annual base salary through the date of termination to
the extent not theretofore paid, and (ii) reasonable employment expenses,
as provided herein, through the date of termination to the extent not
theretofore paid (the sum of the amounts described in clauses (i) and (ii)
shall be hereinafter referred to as the "Accrued Obligations"), which shall
be paid to the Executive or his estate or beneficiary, as applicable, in a
lump sum in cash within 30 days of the date of termination.
2. Cause. If the Executive's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
the Executive other than for the timely payment of Accrued Obligations.
D. Obligations of the Company upon Termination without Cause. If the
Executive's employment is terminated by the Company other than for cause then
the Company shall pay Executive the Accrued Obligations and, in addition, shall
pay the Executive an amount equal to two years' base salary in equal monthly
installments unless such termination follows a "change of control," in which
case the Company will immediately pay the Executive such amount in cash.
For purposes of this Agreement, a change of control shall mean: (a) any
transfer or series of transfers of capital stock of the Company, other than as a
result of a sale of capital stock of the Company pursuant to a public offering
registered under the Securities Act of 1933, as amended, as a result of which
the holders of capital stock of the Company prior to such transfer or transfers
become, collectively, the legal or beneficial holders of less than fifty percent
(50%) of the capital stock of the Company; (b) the consummation of any merger or
consolidation of the Company with another corporation; provided, however, that
no Change in Control shall be deemed to have occurred if, immediately following
such merger or consolidation, legal or beneficial holders of capital stock of
the Company prior to such merger or consolidation shall own or control, directly
or indirectly, through one or more intermediaries, equity securities
representing the power to vote or direct the voting of more than fifty percent
(50%) of the voting power of all classes of equity securities entitled to vote
in the election of directors of the corporation resulting from such merger or
consolidation; or (c) any transfer of all or substantially all of the business
and assets of the Company to another corporation; provided, however, that no
Change in Control shall be deemed to have occurred if the legal or beneficial
holders of capital stock of the Company prior to such transfer of control,
retain directly or indirectly through one or more intermediaries, the power to
vote or direct the voting of more than fifty percent (50%) of the voting power
of all classes of equity securities entitled to vote in the election of
directors of such corporation to which all or substantially all of the business
and assets of the Company are transferred.
VI. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Medford, Oregon in accordance with the rules and
procedures of the American Arbitration Association. In the event either party
institutes arbitration under this Agreement, the costs and expenses of such
arbitration (including counsel fees) shall be borne by each of the parties, or
as the arbitrator(s) may determine at the request of either party.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during his employment by the
Company or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the company, he shall not, without the prior written consent of the
Company, or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it.
VIII. SUCCESSORS.
A. This Agreement is personal to the Executive and shall not, without the
prior written consent of the Company, be assignable by the Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
IX. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
X. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Executive and the Board of Directors of the Company.
XI. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
XII. COMPLETE AGREEMENT.
This instrument constitutes and contains the entire agreement and
understanding concerning the Executive's employment and the other subject
matters addressed herein between the parties, and supersedes and replaces all
prior negotiations and all agreements proposed or otherwise, whether written or
oral, concerning the subject matters hereof. This is an integrated document.
XIII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XIV. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XV. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to the Executive at
____________________________________________________, or addressed to the
Company at 2067 Commerce Road, Medford, OR 97504. Any party may change the
address at which notice shall be given by written notice given in the above
manner.
XVI. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XVII. LEGAL COUNSEL.
The Executive and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have had the opportunity to consult
with legal counsel of their choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SRC VISION, INC. WILLIAM J. YOUNG
By__________________________ __________________________
Its_________________________
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
SRC Vision, Inc., a corporation (the "Company"), and James Ewan (the
"Executive"), as of January 1, 1997.
I. RECITAL.
WHEREAS, the Company desires to employ the Executive as President and Chief
Executive Officer.
NOW, THEREFORE, the Company and the Executive desire to set forth in this
Agreement the terms and conditions of the Executive's employment with the
Company.
II. EMPLOYMENT.
The Company hereby employs the Executive and the Executive hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
January 1, 1997 to and including December 31, 1998. This Agreement shall be
automatically renewed for one additional year unless the Executive or the
Company gives notice to the other, in writing, at least 30 days prior to the
expiration of this Agreement, of its or his desire to terminate this Agreement
or modify its terms. The Company agrees that the Executive will be located, and
will render such services, in the Medford, Oregon area.
III. DUTIES.
A. The Executive shall serve during the course of his employment as
President and Chief Operating Officer of the Company and shall have such other
similar duties and responsibilities as the Board of Directors of the Company
shall determine from time to time.
B. The Executive agrees to devote substantially all of his time, energy and
ability to the business of the Company and shall not be involved in the
operations or management of any other competitive business. Nothing herein shall
prevent the Executive, upon written approval of the Board of Directors of the
Company, from serving as a director or trustee of other corporations or
businesses which are not in competition with the business of the Company or in
competition with any present or future affiliate of the Company.
C. For the term of this Agreement, the Executive shall report to the Chief
Executive Officer of the Company.
IV. COMPENSATION.
A. Base Salary. The Company shall pay the Executive a base salary at the
rate of $225,000 per year. Such salary shall be earned monthly and shall be
payable in periodic installments no less frequently than monthly in accordance
with the Company's customary practices. Amounts payable shall be reduced by
standard withholding and other authorized deductions.
B. Annual Bonus, Incentive, Savings and Retirement Plans. The Executive
shall be entitled to participate in all annual bonus, incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
peer executives of the Company.
C. Welfare Benefit Plans. The Executive shall be eligible for participation
in and shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company to the extent applicable generally
to other peer executives of the Company.
D. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other peer executives of the Company.
E. Fringe Benefits. The Executive shall be entitled to fringe benefits in
accordance with the plans, practices, programs and policies as in effect
generally with respect to other peer executives of the Company.
F. Vacation. The Executive shall be entitled to paid vacation of four weeks
per year.
G. Automobile. At the Executive's option, the Company shall provide the
Executive with the use of a Company owned or leased automobile or the Executive
shall be entitled to a $600.00 per month automobile allowance.
V. TERMINATION.
A. Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that disability of the Executive has occurred (pursuant to the definition
of Disability set forth below), it may give to the Executive written notice of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the day of
receipt of such notice by the Executive. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from his duties with the
Company on the basis provided in this agreement for a period of 3 months as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or his legal representative. "Incapacity" as used
herein shall be limited only to such Disability which substantially prevents
Company from availing itself of the services of the Executive.
B. Cause. The Company may terminate the Executive's employment for Cause.
For purposes of this Agreement, "Cause" shall mean that the Company, acting in
good faith based upon the information then known to the Company, determines that
the Executive has: (1) committed an act of fraud upon, or an act evidencing
material dishonesty toward the Company; or (2) been convicted of a felony, which
conviction through lapse of time or otherwise is not subject to appeal; or (3)
willfully refused to perform material required duties and responsibilities or
performed them with gross negligence or willful misconduct.
C. Obligations of the Company upon Termination Based upon Death or
Disability or Cause.
1. Death or Disability. If the Executive's employment is terminated by
reason of the Executive's Death or Disability, this Agreement shall
terminate without further obligations to the Executive or his legal
representatives under this Agreement, other than for (a) payment of the sum
of (i) the Executive's annual base salary through the date of termination
to the extent not theretofore paid, (ii) reasonable employment expenses, as
provided herein, through the date of termination to the extent not
theretofore paid and (iii) any accrued vacation pay to the extent not
theretofore paid (the sum of the amounts described in clauses (i), (ii) and
(iii) shall be hereinafter referred to as the "Accrued Obligations"), which
shall be paid to the Executive or his estate or beneficiary, as applicable,
in a lump sum in cash within 30 days of the date of termination and (b)
payment to the Executive or his estate or beneficiary, as applicable, any
amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
2. Cause. If the Executive's employment is terminated by the Company
for Cause, this Agreement shall terminate without further obligations to
the Executive other than for the timely payment of Accrued Obligations and
any amounts due pursuant to the terms of any applicable welfare or pension
benefit plans.
D. Obligations of the Company upon Termination without Cause. If the
Executive's employment is terminated by the Company other than for cause then
the Company shall pay Executive the Accrued Obligations and, in addition, shall
pay the Executive an amount equal to two years' base salary in equal monthly
installments unless such termination follows a "change of control," in which
case the Company will immediately pay the Executive such amount in cash. In
addition, the Company shall continue to pay the Executive's health and medical
benefits for a period of two years following the termination, at which time the
Executive will be entitled to pursue, at the Executive's cost, applicable COBRA
benefits. Moreover, all of the Executive's employee stock options shall become
fully vested.
For purposes of this Agreement, a change of control shall mean: (a) any
transfer or series of transfers of capital stock of the Company, other than as a
result of a sale of capital stock of the Company pursuant to a public offering
registered under the Securities Act of 1933, as amended, as a result of which
the holders of capital stock of the Company prior to such transfer or transfers
become, collectively, the legal or beneficial holders of less than fifty percent
(50%) of the capital stock of the Company; (b) the consummation of any merger or
consolidation of the Company with another corporation; provided, however, that
no Change in Control shall be deemed to have occurred if, immediately following
such merger or consolidation, legal or beneficial holders of capital stock of
the Company prior to such merger or consolidation shall own or control, directly
or indirectly, through one or more intermediaries, equity securities
representing the power to vote or direct the voting of more than fifty percent
(50%) of the voting power of all classes of equity securities entitled to vote
in the election of directors of the corporation resulting from such merger or
consolidation; or (c) any transfer of all or substantially all of the business
and assets of the Company to another corporation; provided, however, that no
Change in Control shall be deemed to have occurred if the legal or beneficial
holders of capital stock of the Company prior to such transfer of control,
retain directly or indirectly through one or more intermediaries, the power to
vote or direct the voting of more than fifty percent (50%) of the voting power
of all classes of equity securities entitled to vote in the election of
directors of such corporation to which all or substantially all of the business
and assets of the Company are transferred.
In addition, in the event that William J. Young leaves the employment of
ARC Capital on or before December 31, 1997, other than being terminated for
cause, then the Executive shall have the option for a period of 30 days
following the termination of Mr. Young's employment to treat this Agreement as
being terminated without cause but not involving a change of control.
E. Special Severance. Following the expiration of this Agreement, if the
Executive's employment at any time is terminated without cause, then the Company
shall pay the Executive as special severance compensation an amount equal to two
years base salary, payable in 24 equal monthly installments. This special
severance payment shall be reduced by standard withholding and other authorized
deductions.
VI. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement, its
enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Medford, Oregon in accordance with the rules and
procedures of the American Arbitration Association. In the event either party
institutes arbitration under this Agreement, the costs and expenses of such
arbitration (including counsel fees) shall be borne by each of the parties, or
as the arbitrator(s) may determine at the request of either party.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during his employment by the
Company or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the company, he shall not, without the prior written consent of the
Company, or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it.
VIII. SUCCESSORS.
A. This Agreement is personal to the Executive and shall not, without the
prior written consent of the Company, be assignable by the Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise.
IX. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
X. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Executive and the Board of Directors of the Company.
XI. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
XII. COMPLETE AGREEMENT.
This instrument constitutes and contains the entire agreement and
understanding concerning the Executive's employment and the other subject
matters addressed herein between the parties, and supersedes and replaces all
prior negotiations and all agreements proposed or otherwise, whether written or
oral, concerning the subject matters hereof. This is an integrated document.
XIII. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California, and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with, and governed by, by the laws
of the State of California without regard to principles of conflict of laws.
XIV. CONSTRUCTION.
Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
XV. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or if mailed
by registered or certified mail, postage prepaid, addressed to the Executive at
_______________________________________________, or addressed to the Company at
2067 Commerce Road, Medford, OR, 97504. Any party may change the address at
which notice shall be given by written notice given in the above manner.
XVI. EXECUTION.
This Agreement is being executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Photographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XVII. LEGAL COUNSEL.
The Executive and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have had the opportunity to consult
with legal counsel of their choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SRC VISION, INC. JAMES EWAN
By__________________________ _____________________________
Its_________________________
EXHIBIT 10.26
THIS SUBSCRIPTION AGREEMENT AND THE CONVERTIBLE SUBORDINATED NOTES SOLD
HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 AS AMENDED
(THE SECURITIES ACT"), BUT IS SOLD PURSUANT TO AN EXEMPTION FROM THE
REQUIREMENTS OF SAID ACT. NEITHER SUCH NOTES NOR ANY INTEREST OF PARTICIPATION
HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED OR DISPOSED OF IN THE UNITED
STATES OR TO A "U.S. PERSON" AS DEFINED IN REGULATION S PROMULGATED UNDER SUCH
ACT ("REGULATION S") EXCEPT IN COMPLIANCE WITH REGULATION S.
SUBSCRIPTION AGREEMENT
Mr. Alan Steel, CFO
ARC Capital
2067 Commerce Drive
Medford, Oregon 97504
Gentlemen:
THIS OFFSHORE SECURITIES SUBSCRIPTION AGREEMENT (this "Agreement") is
executed in reliance upon the transactional exemption afforded by Regulation S
("Regulation S") as promulgated by the Securities and Exchange Commission
("SEC") under the Securities Act of 1933, as amended ("1933 Act").
THIS AGREEMENT has been executed by the undersigned in connection with the
placement of Subordinated Convertible Notes pursuant to section 903 (c) (2) of
Regulation S (hereinafter referred to as the "Notes") of ARC Capital, a
corporation under the laws of the State of California, U.S.A., NASDAQ symbol
"ARCCA" (hereinafter referred to as the "Seller" or the "Company"). The Notes
being sold pursuant to this Agreement have not been registered under the 1933
Act and may not be offered to sold in the United States or to U.S. Persons,
other than distributors (as such terms are defined in Regulation S), unless the
Notes are registered under the 1933 Act, or an exemption from the registration
requirement of the 1933 Act is available. The terms on which the Notes can be
converted into Common Stock (such common stock underlying the Notes being
referred to herein as "Shares") and the other terms of the Notes are set forth
therein. The offer and sale of Notes and the Shares (collectively the
"Securities"), are being made in reliance upon the provision of Regulation S
("Regulation S") under the United States Securities Act of 1933, as amended (the
"Act").
The undersigned, Swiss American Securities Inc. as agent for Credit
Suisse(herein referred to as Buyer or "Purchaser"), in order to induce the
Company to enter into the transaction contemplated hereby and acknowledging that
the Company will rely thereon, represents and warrants and agrees as follows:
1. Subject to the terms and conditions set forth in this Agreement, the
undersigned hereby subscribes for $1,600,000 in principal amount of 6.75%
Subordinated Convertible (Sales of Notes are made only in $100,000 increments).
Upon execution of this Subscription Agreement by the Company, Purchaser
will wire transfer available funds in U.S. dollars payable to the Company via
escrow account as follows:
The Notes shall be delivered to the Purchaser c/o Swiss American
Securities, as escrow agent, on a delivery versus payment basis and funds shall
be wired by Purchaser as follows:
Bank: United National Bank of Oregon
400 SW Sixth Avenue
ABA# 123 000 220
FBO: ARC Capital
Acct # 1260015896
2. Representation and Warranties: The Purchaser hereby acknowledges,
represents and warrants to and agrees with the Company as follows:
(a) The Purchaser has been furnished with the Company's press releases,
current Annual Report on Form 10-K for year ending December 31, 1994, and
Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and
September 30, 1995, and the Form 8K dated March 6, 1996, and the Form 8-K-A
dated May 13, 1996 (the "Disclosure Documents"). The Purchaser acknowledges that
the Company will, upon written request made by the Purchaser, provide without
charge, copies of all documents identified in the Disclosure Documents.
(b) The Purchaser represents and warrants that it is not a U.S. person (as
defined in Rule 902(0) of Regulation S.
(c) The Purchaser acknowledges that the offer and sale of the Notes are not
taking place within the United States, but rather in an offshore transaction.
"United States" means the United States, its territories and possessions, and
any state of the United States, and the District of Columbia. No "direct selling
efforts" (as defined in Regulation S) may be made in United States by the
Company, and distributor of the Notes, any of their affliates or any person
acting on behalf of any of the foregoing.
(d) The Purchaser acknowledges its understanding that the offer and sale of
the Notes is intended to be exempt from registration under the 1993 Act by
virtue of Regulation S.
(e) The Purchaser acknowledges that the Securities have not been registered
under the 1933 Act and, therefore, cannot be offered or sold in the United
States or to U.S. persons for a period of a minimum of 40 days from the sale of
Notes, unless the Notes are registered under the 1933 Act, or an exemption from
the registration requirements of the Act is available.
(f) The Purchaser acknowledges that this Agreement and any certificate
representing the Notes or Notes issued under this Agreement shall bear the
restrictive legend set forth on the Notes. The purchaser further acknowledges
that the Company will affect a conveyance only in accordance with Regulation S.
(g) All offers and sales of these Securities prior to the expiration of 40
days from the later of the date when these Notes were first offered to persons
other than distributors or the date of closing of this offering shall be made
only in accordance with Rule 903 or Rule 904 of Regulation S or pursuant to an
available exemption from the registration requirements of the 1933 Act.
(h) Purchaser is purchasing the Notes as an agent for Credit Suisse on
behalf of "non-U.S." investors and not on behalf of any U.S. person, and no sale
has been prearranged with a purchaser in the United States.
(i) The Purchaser acknowledges that Purchaser in making the decision to
purchase the Notes subscribed for, has relied upon independent investigations
made by it and its Purchaser representatives, if any, of material books and
records of the Company, all materials contracts and documents relating to this
offering and have had an opportunity to ask questions of, and to receive answers
from, Company or any person acting on its behalf concerning the terms and
conditions of this offering. Purchaser and its representatives, if any, have
been provided with access to all publicly available materials relating to the
offer and sale of the Notes which have been requested. Purchaser and its
representatives, if any, have received complete and satisfactory answers to any
such inquiries.
3. Representations and Warranties: The Company hereby acknowledges,
represents and warrants to and agrees with the Purchaser as follows:
(a) The Company is a "Reporting Issuer." The Company has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the proceeding 12 months and has been subject to such filing
requirements for the past 90 days.
(b) The Offering is being made pursuant to SEC Regulation 230.903 (c)(2).
(c) The Company will issue Notes in the form of Exhibit "A" attached
hereto.
(d) The Company has the requisite corporate power and authority to enter
into this Agreement and to sell and deliver the Securities. This Agreement and
the issuance of the Securities have been duly and validly authorized by all
necessary corporate action by the Company. This Agreement and the Notes have
been duly and validly executed and delivered by and on behalf of the Company,
and are valid and binding obligations of the Company, enforceable in accordance
with their respective terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting creditors rights generally.
(e) The Shares issued upon conversion of the Notes (after the 40-day
holding period) will contain no restrictive legend and will not be the subject
of any stop transfer direction or order.
5. Miscellaneous:
(a) All notices or other communications given or made hereunder shall be in
writing and shall be delivered or mailed by registered or certified mail, return
receipt requested, postage prepaid, to the undersigned at the Purchaser's
address set forth on the signature page below.
(b) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and may be amended only by a
writing executed by all parties.
(c) All pronouns contained herein and any variations thereof shall be
deemed to refer to the masculine, feminine, or neuter, singular or plural, as
the identify of the parties hereto require.
(d) This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
(e) Upon execution of this Agreement by the Company, Purchaser shall wire
funds to the Escrow Agent to be distributed in accordance with the Private
Placement and Distribution Agreement.
IN WITNESS WHEREOF, the Purchaser has executed this Subscription Agreement
on this 14th day of May, 1996.
PURCHASER
Name: Swiss American Securities Inc.
As Agent for Credit Suisse
Address: 100 Wall Street, N.Y., N.Y. 10005
Signature: /s/ S. R. DiDonna
-------------------------------
ACCEPTED BY: S. R. DiDonna
Executive Vice President
ARC CAPITAL
/s/ Alan Steel /s/ Edward F. Anselmin
- ---------------------------------- -------------------------------
Edward F. Anselmin, V.P.
EXHIBIT 10.27
Date Adopted:
January 10, 1997
SRC VISION, INC.
1997 STOCK OPTION PLAN
1. PURPOSE OF PLAN
1.1 Purpose. The purpose of the Plan is to enable the Company to grant to
selected Eligible Persons a favorable opportunity to acquire Common Stock and,
thereby, to create an incentive for them to remain in the employ of or provide
services to the Company or any Affiliate and to contribute to its success.
1.2 Nature of Options. Options granted under the Plan may be Incentive
Options or Nonqualified Options, as determined by the Administrator at the time
of grant.
1.3 Rule 701. At the time the Plan is being adopted, the Company is not
subject to the reporting requirements of section 13 or 15(d) of the Exchange Act
and is not an investment company registered or required to be registered under
the Investment Company Act of 1940. As such, the Company's offers and sales of
Common Stock under the Plan are, to the extent determined by the Administrator
in accordance with Applicable Laws, intended to be exempt from the registration
requirements of the Securities Act under Rule 701 under the Securities Act.
2. CERTAIN DEFINITIONS; CONSTRUCTION
2.1 Definitions. When used herein, the following terms shall have the
meaning indicated:
(a) "Administrator" means the Board or any Committee as shall be
administering the Plan.
(b) "Affiliate" means, with respect to any entity, any "parent" or
"subsidiary" of the entity as those terms are defined in sections 424(e) and
424(f), respectively, of the Code.
(c) "Applicable Laws" means the laws, rules and regulations relating to the
adoption, implementation and administration of stock option plans under
applicable state corporate laws, federal and state securities laws and the Code.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended, and
applicable Treasury Regulations promulgated thereunder.
(f) "Committee" means a committee appointed by the Board in accordance with
section 4.1 hereof.
(g) "Common Stock" means the common stock, $.0001 par value, of the
Company.
(h) "Company" means SRC Vision, Inc., an Oregon corporation.
(i) "Disability" means total and permanent disability as defined in section
22(e)(3) of the Code.
(j) "Eligible Persons" means directors, officers and other employees of the
Company or of any Affiliate of the Company, as well as non-employee consultants
and advisors who may perform significant services for or on behalf of the
Company or any Affiliate.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(1) if the Common Stock is listed on established stock exchange or a
national market system, including without limitation the Nasdaq National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of Common
Stock shall be the closing sales price for such stock (or the closing bid,
if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in Common Stock) on the last
market trading day prior to the day of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems
reliable;
(2) if the Common Stock is quoted on the Nasdaq System (but not on the
Nasdaq National Market thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a share of Common Stock shall be the mean between the high bid and
low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable; and
(3) in the absence of an established trading market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Option" means an Option intended to qualify as an incentive
stock option within the meaning of section 422 of the Code.
(n) "Nonqualified Option" means any Option other than an Incentive Option.
(o) "Notice of Grant" means a written notice specifying certain terms and
conditions of an Option grant.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an Option, together with any
Notice of Grant relating to the Option.
(r) "Optionee" means an Eligible Person or permitted transferee who holds
an outstanding Option.
(s) "Plan" means this 1997 Stock Option Plan, as originally adopted and as
amended from time to time as herein provided.
(t) "Plan of Exchange" means any agreement, plan or arrangement under which
an outstanding Option may be surrendered in exchange for a newly granted Option
with a lower exercise price or other terms which differ from the terms of the
Option surrendered.
(u) "Section 16" means section 16 of the Securities Exchange Act.
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Subsidiary" shall have the meaning set forth in Section 424(f) of the
Code.
(x) "Termination of Employment" shall mean the date when any employee-
employer relationship between an Optionee and the Company is terminated for any
reason, including, but not limited to, a termination by resignation, discharge,
death, disability or retirement, but excluding (1) terminations where there is a
simultaneous reemployment or continuing employment of an Optionee by the
Company, (2) at the discretion of the Administrator, terminations which result
in a temporary severance of the employee-employer relationship, and (3) at the
discretion of the Administrator, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company with the
former employee. The Administrator, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Employment.
2.2 Construction. The Plan shall be construed in accordance with the
following provisions:
(a) the adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company. Nothing in the Plan shall be
construed to limit the right of the Company (1) to establish any other forms of
incentives or compensation for employees of the Company, or (2) to grant or
assume options or other rights otherwise than under the Plan in connection with
any proper corporate purpose, including, but not by way of limitation, the grant
or assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, firm or association;
(b) the existence of outstanding Options under the Plan shall not affect
the Company's right to effect adjustments, recapitalizations, reorganizations or
other changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the dissolution or
liquidation of the Company's or any other corporation's assets or business, or
any other corporate act, whether similar to the events described above or
otherwise; and
(c) nothing in the Plan or in any Option Agreement shall confer upon any
Optionee any right to continue in the employ of the Company or shall interfere
with or restrict in any way the rights of the Company, which are hereby
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without cause.
3. STOCK SUBJECT TO THE PLAN
3.1 Common Stock. Subject to adjustment as provided in section 9 hereof,
the stock to be offered and issued under the Plan shall be shares of Common
Stock, which may be either authorized and unissued shares or treasury shares.
The cumulative aggregate number of shares of Common Stock to be offered and
issued under the Plan shall not exceed 396,000, subject to adjustment as
provided in section 9 hereof.
3.2 Calculation of Shares. If an Option shall expire or terminate for any
reason without having been fully exercised, or is surrendered pursuant to a Plan
of Exchange or otherwise, the unpurchased shares subject thereto shall again be
available for the purposes of the Plan. Where the exercise price of an Option is
paid by means of the Optionee's surrender of previously owned shares of Common
Stock or the Company's withholding of shares otherwise issuable upon exercise of
the Option as permitted herein, only the net number of shares issued and which
remain outstanding in connection with such exercise shall be deemed "issued" and
no longer available for issuance under the Plan.
3.3 Reservation of Shares. The Company will at all times during the term of
the Plan reserve and keep available such number of shares of Common Stock as
shall be sufficient to satisfy the requirements of the Plan.
4. ADMINISTRATION
4.1 Administrator. The Plan shall be administered by the Board or, either
in its entirety or only insofar as it relates to Eligible Persons subject to
section 16 (if any), by a committee of the Board established for this purpose in
accordance with Applicable Laws. If necessary in order to comply with Rule 16b-3
under the Exchange Act as contemplated below, the Committee shall, in the
Board's discretion, be comprised solely of "non-employee directors" within the
meaning of said Rule 16b-3. The foregoing notwithstanding, the Administrator may
delegate nondiscretionary administrative duties to such employees of the Company
as it deems proper and the Board, in its absolute discretion, may at any time
and from time to time exercise any and all rights and duties of the
Administrator under the Plan.
4.2 Expenses; Exculpation. All expenses and liabilities which members of
the Administrator incur in connection with the administration of this Plan shall
be borne by the Company. The Administrator may employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Administrator, the
Company and the Company's directors, officers and other employees shall be
entitled to rely upon the advice, opinions or valuations of any such persons. No
member of the Administrator shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan.
4.3 Powers of Administrator. Subject to the provisions of the Plan, and in
the case of a Committee, subject to the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(a) to determine whether and to what extent Options are granted hereunder;
(b) to select from among Eligible Persons those individuals to whom Options
shall be granted hereunder;
(c) to determine the number of shares of Common Stock to be covered by each
Option granted hereunder;
(d) to approve forms of Option Agreements and other instruments for use
under the Plan;
(e) to determine the terms and conditions, not inconsistent with the terms
of the Plan, of any Option granted hereunder, the exercise price, the time or
times when the Option may be exercised (which may be based on performance or
other criteria), any vesting, acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding the Option or the shares of Common
Stock relating thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
(f) to determine the Fair Market Value of Common Stock;
(g) to reduce the exercise price of any Option to the then current Fair
Market Value if the Fair Market Value of Common Stock covered by such Option
shall have declined since the date the Option was granted;
(h) to construe and interpret the terms and provisions of the Plan and of
any Option Agreement and all Options granted under the Plan;
(i) to prescribe, amend and rescind rules and regulations relating to the
Plan, including rules and regulations relating to sub-plans established for the
purpose of qualifying for preferred tax treatment under foreign tax laws;
(j) to modify or amend each Option (subject to section 12.2 hereof),
including the discretionary authority to extend the post-termination
exercisability period of any Option longer than is otherwise provided for in the
Plan;
(k) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant or exercise of an Option authorized
by the Administrator;
(l) to institute from time to time a Plan of Exchange; and
(m) to make all other determinations it deems necessary or advisable for
administering the Plan or any Option Agreement or Option.
The Administrator's decisions, determinations and interpretations shall be
final and binding on all Optionees and other persons.
5. PARTICIPATION
Eligible Persons shall be eligible for selection to participate in the Plan
upon approval by the Administrator; provided, however, that only "employees"
(within the meaning of section 3401(c) of the Code) of the Company shall be
eligible for the grant of Incentive Options. An individual who has been granted
an Option may, if otherwise eligible, be granted additional Options if the
Administrator shall so determine. No Eligible person is entitled to participate
in the Plan by matter of right; only those Eligible Persons who are selected by
the Administrator in its discretion shall participate in the Plan.
6. OPTION AGREEMENT; TERMS OF OPTIONS
6.1 Option Agreement. Each Option shall be evidenced by an Option
Agreement, which shall be subject to the terms and conditions of the Plan and
shall contain such other terms and conditions that are not inconsistent with the
Plan as the Administrator may deem appropriate in each case. In the event of a
conflict between the terms or conditions of an Option Agreement and the terms
and conditions of the Plan, the terms and conditions of the Plan shall govern.
Failure of an Optionee to execute an Option Agreement shall not invalidate or
render void the grant of an Option hereunder.
6.2 Exercise Price. The exercise price of each Incentive Option shall be
determined by the Administrator, but shall not be less than 100% of the Fair
Market Value of Common Stock on the date of grant. If an Incentive Option is
granted to an employee who at the time of grant owns (within the meaning of
section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of capital stock of the Company, the Option exercise price shall be
at least 110% of the Fair Market Value of Common Stock on the date of grant. The
exercise price of each Nonqualified Option also shall be determined by the
Administrator, but shall not be less than 85% of the Fair Market Value of Common
Stock on the date of grant. The status of each Option granted under the Plan as
either an Incentive Option or a Nonstatutory Stock Option shall be determined by
the Administrator at the time the Administrator acts to grant the option, and
shall be designated as such in the related Option Agreement.
6.3 "Reload" Options. At the time of grant or at any time thereafter, the
Administrator may determine that an Optionee who has paid the exercise price of
an Option by surrendering previously owned shares of Common Stock or by the
Company's withholding of shares otherwise issuable upon exercise of the Option
shall automatically receive a new Option hereunder to purchase additional shares
of Common Stock equal to the number of shares so surrendered or withheld and may
specify the terms and conditions of such "reload" options.
6.4 Payment of Exercise Price. Except as provided below, payment in full
shall be made for all shares of Common Stock purchased at the time written
notice of exercise of an Option is given to the Company, either in cash or by
delivery by the Optionee of Common Stock already owned by the Optionee, for all
or part of the aggregate exercise price of the shares as to which the Option is
being exercised, provided that the Fair Market Value of such Common Stock is
equal on the date of exercise to the aggregate exercise price of the shares as
to which the Option is being exercised. In this regard, consecutive book-entry
exercises, or so-called pyramiding, shall be permitted in the discretion of the
Administrator. At the time an Option is granted or exercised, the Administrator,
in its discretion, may authorize one or more of the following additional methods
of payment:
(a) acceptance of the Optionee's full recourse promissory note for a
portion of the aggregate exercise price of the shares as to which the Option is
being exercised, payable on such terms and bearing such interest as determined
by the Administrator, which promissory note may be either secured or unsecured
in such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of Common Stock so acquired);
provided, however, that not less than the aggregate par value of the shares of
Common Stock to be issued shall be paid in cash;
(b) any other property, so long as such property constitutes valid
consideration under Applicable Laws for the shares as to which the Option is
being exercised and is surrendered in good form for transfer; and
(c) by means of so-called cashless exercises as permitted under applicable
rules and regulations of the Securities and Exchange Commission and the Federal
Reserve Board.
6.5 Withholding. Irrespective of the form of payment of the exercise price
of an Option, the delivery of shares pursuant to the exercise of an Option shall
be conditioned upon payment by the Optionee to the Company of amounts sufficient
to enable the Company to pay all federal, state, and local withholding taxes
applicable, in the Company's judgment, to the exercise. In the sole discretion
of the Administrator, such payment to the Company may be effected through (a)
the Company's withholding from the number of shares of Common Stock that would
otherwise be delivered to the Optionee by the Company on exercise of the Option
a number of shares of Common Stock equal in value (as determined by the Fair
Market Value of Common Stock on the date of exercise) to the aggregate
withholding taxes, (b) payment by the Optionee to the Company of the aggregate
withholding taxes in cash, (c) withholding by the Company from other amounts
contemporaneously owed by the Company to the Optionee, or (iv) any combination
of these three methods.
6.6 Vesting and Exercise.
(a) Each Option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Administrator shall
determine; provided, however, that each Option shall become exercisable in full
no later than 10 years after such option is granted; and provided, further, that
if an Optionee shall not in any given installment period purchase all of the
shares which such Optionee is entitled to purchase in such installment period,
such Optionee's right to purchase any shares not purchased in such installment
period shall continue until the expiration or sooner termination of the
Optionee's Option. The Administrator may, at any time after grant of an Option
and from time to time, increase the number of shares purchasable in any
installment, subject to the total number of shares subject to the Option and the
limitations set forth in paragraph (f) of this section 6.6. At any time and from
time to time prior to the time when any exercisable Option or exercisable
portion thereof becomes unexercisable under the Plan or the applicable Option
Agreement, such Option or portion thereof may be exercised in whole or in part;
provided, however, that the Administrator may, by the terms of the Option
Agreement, require any partial exercise to be with respect to a specified
minimum number of shares. No Option or installment thereof shall be exercisable
except with respect to whole shares. Fractional share interests shall be
disregarded, except that they may be accumulated as provided above and except
that if such a fractional share interest constitutes the total shares of Common
Stock remaining available for purchase under an Option at the time of exercise,
the Optionee shall be entitled to receive on exercise a certified or bank
cashier's check in an amount equal to the Fair Market Value of such fractional
share of stock.
(b) To the extent that the aggregate Fair Market Value (determined on the
date of grant) of Common Stock with respect to which an Incentive Option granted
hereunder (together with any Incentive Options granted to the Optionee under all
other plans of the Company) are exercisable for the first time by an Optionee in
any calendar year under the Plan exceeds $100,000, such Option shall be treated
as a Nonqualified Option to the extent required by section 422 of the Code. The
rule set forth in the preceding sentence shall be applied by taking Options into
account in the order in which they were granted.
(c) Exercising an Option in any manner shall decrease the number of shares
thereafter available for purposes of the Plan, and for sale under the Option, by
the number of shares as to which the Option is exercised.
(d) The Administrator may, at any time, extend the exercise period of an
Option as stated in the relevant Option Agreement for any period not exceeding
the original expiration date of the Option on such terms and conditions as it
may determine.
(e) Notwithstanding any provision of this section 6.6, in no event shall
any Option be exercised after the expiration date of the Option set forth in the
applicable Option Agreement.
(f) If Common Stock acquired upon exercise of any Incentive Option is
disposed of in a disposition that, under section 422 of the Code, disqualifies
the Optionee from the application of section 421(a) of the Code, the holder of
the Common Stock immediately before the disposition shall comply with any
requirements imposed by the Company in order to enable the Company to secure the
related income tax deduction to which it is entitled in such event.
7. TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY
7.1 Termination of Employment.
(a) Upon Termination of Employment of an Optionee, other than upon the
Optionee's death or Disability, the Optionee may exercise his or her Option, but
only within such period of time as is specified in the Notice of Grant, and only
to the extent that the Optionee was entitled to exercise it at the date of
termination (but in no event later than the expiration date of the Option set
forth in the applicable Option Agreement). In the case of an Incentive Option,
such period of time for exercise shall not exceed three months from the date of
termination. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for three months following Termination of
Employment of the Optionee. If, on the date of termination, the Optionee is not
entitled to exercise the Optionee's entire Option, the shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by the Option shall revert to the Plan. Notwithstanding the above, in
the event of an Optionee's change in status from employee to nonemployee
consultant or advisor, any Incentive Option held by the Optionee shall cease to
be treated as an Incentive Option and shall be treated for tax purposes as a
Nonqualified Option three months and one day following such change of status.
(b) The Administrator may in its sole discretion accelerate the
exercisability of all or part of an Option upon termination or employment or
cessation of services.
7.2 Disability. In the event of a Termination of Employment of an Optionee
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option at any time within twelve months from the date of such termination, but
only to the extent that the Optionee was entitled to exercise it at the date of
such termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option also shall revert to the Plan.
7.3 Death. In the event of the Termination of Employment of an Optionee by
reason of his or her death, the Option may be exercised at any time within
twelve months following the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance. If, after an Optionee's death, the Optionee's
estate or a person who acquired the right to exercise the Option by bequest or
inheritance is not entitled to exercise the entire Option, the shares covered by
the unexercisable portion of the Option shall revert to the Plan. If, after
death, the Optionee's estate or a person who acquired the right to exercise the
Option by bequest or inheritance does not exercise the Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
7.4 Leave of Absence. Unless otherwise provided in the applicable Option
Agreement, and to the extent permitted by section 422 of the Code, an Optionee's
employment shall not be deemed to terminate by reason of sick leave, military
leave or other leave of absence approved by the Company if the period of any
such leave does not exceed a period approved by the Company, or such longer
period, if any, for which the Optionee's right to reemployment by the Company is
guaranteed either contractually or by statute; provided, however, that, with
respect to Incentive Options, a leave of absence or other change in the
employee-employer relationship shall constitute a Termination of Employment if,
and to the extent that, such leave of absence or other change interrupts
employment for the purposes of section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said section. For purposes of
Incentive Options, no such leave may exceed 90 days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If reemployment
upon expiration of a leave of absence approved by the Company is not so
guaranteed, on the 91st day of such leave any Incentive Option held by the
Optionee shall cease to be treated as an Incentive Option and shall be treated
for tax purposes as a Nonqualified Option. Unless otherwise determined by the
Administrator in its discretion, vesting of options shall be suspended during a
leave of absence.
7.5 Transfer to Related Corporation. In the event an employee leaves the
employ of the Company to become an employee of a Subsidiary or any employee
leaves the employ of a Subsidiary to become an employee of the Company or
another Subsidiary, such employee shall be deemed to continue as an employee for
purposes of this Plan.
8. TRANSFERABILITY OF OPTIONS
8.1 Options Generally Nontransferable. Except as provided in section 8.2
hereof, each Option shall, by its terms, be nontransferable by the Optionee
other than by will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the Optionee or by his or her
guardian or legal representative. More particularly, but without limiting the
generality of the immediately preceding sentence, an Option may not be sold,
assigned, transferred, pledged or hypothecated (whether by operation of law or
otherwise), and shall not be subject to execution, attachment or similar
process. Any attempted sale, assignment, transfer, pledge, hypothecation or
other disposition of any Option contrary to the provisions of the Plan and the
applicable Option Agreement, and any levy of any attachment or similar process
upon an Option, shall be null and void, and otherwise without effect, and the
Administrator may, in its sole discretion, upon the happening of any such event,
terminate such Option forthwith.
8.2 Permitted Transfers. In the discretion of the Administrator and subject
to Applicable Laws, a Nonqualified Option may be transferred by the Optionee
pursuant to a qualified domestic relations order (as defined by the Code).
However, any Nonqualified Option so transferred shall continue to be subject to
all the terms and conditions contained in the Option Agreement evidencing such
Option.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE
9.1 Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon surrender or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in this respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
9.2 Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, to the extent that an Option has not been previously
exercised, it will terminate immediately prior to the consummation of such
proposed action. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Common Stock covered thereby, including shares as
to which the Option would not otherwise be exercisable.
9.3 Merger or Sale of Assets. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option shall be assumed or an equivalent option
substituted by the successor corporation or any Affiliate of the successor
corporation. In the event that the successor corporation refuses to assume or
substitute for the Option, the Optionee shall have the right to exercise the
Option as to all of the shares covered thereby, including shares as to which it
would not otherwise be exercisable. If an Option is exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be fully
exercisable for a period of less than 15 days from the date of such notice, and
the Option shall terminate upon the expiration of the period specified in such
notice.
9.4 Fractional Shares. No fractional share of Common Stock shall be issued
under the Plan on account of any adjustment under any provision of this section
9.
10. DATE OF GRANT AND EXERCISE
10.1 Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination to grant
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
10.2 Date of Exercise. An Option shall be deemed to be exercised when the
Secretary of the Company receives written notice from the Optionee of such
exercise, payment of the exercise price determined pursuant to section 6.4
hereof and set forth in the Option Agreement, and all representations,
indemnifications and documents reasonably requested by the Administrator.
10.3 Issuance of Share Certificates. The Company shall not be required to
issue or deliver any certificate or certificates for shares of Common Stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) the admission of such shares to listing on all stock exchanges on which
such class of stock is then listed;
(b) the completion of any registration or other qualification of such
shares under any state or federal law, or under the rule or regulations of the
Securities and Exchange Commission or any other governmental regulatory body
which the Administrator shall, in its absolute discretion, deem necessary or
advisable;
(c) the obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) the lapse of such reasonable period of time following the exercise of
the option as the Administrator may establish from time to time solely for
reasons of administrative convenience; and
(e) the receipt by the Company of full payment for such shares, including
payment of any applicable withholding tax.
10.4 Rights of Optionees and Beneficiaries. The Company shall pay all
amounts payable hereunder only to the Optionee or beneficiaries entitled thereto
pursuant to the Plan. The Company shall not be liable for the debts, contracts
or engagements of any optionee or his or her beneficiaries, and rights to cash
payments under the Plan may not be taken in execution by attachment or
garnishment, or by any other legal or equitable proceeding while in the hands of
the Company.
10.5 Government Regulations. The Plan, and the grant hereunder and exercise
of Options and the issuance and delivery of shares of Common Stock subject to
Options, shall be subject to compliance with all applicable federal and state
laws, rules and regulations (including but not limited to state and federal
securities laws) and federal margin requirements and to such approvals by any
listing, regulatory or governmental authority as may, in the opinion of counsel
for the Company, be necessary or advisable in connection therewith. Any
securities delivered under the Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Company, provide
such assurances and representations to the Company as the Company may deem
necessary or desirable to assure compliance with all applicable legal
requirements.
11. LIABILITY OF COMPANY
11.1 Absence of Authority. The inability of the Company to obtain authority
from any regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
of Common Stock hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such shares as to which such requisite authority
shall not have been obtained.
11.2 Grants in Excess of Available Shares. If shares of Common Stock
covered by an Option exceeds, as of the date of grant, the number of shares
which may be issued under the Plan without additional stockholder approval, such
Option shall be void with respect to such excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares subject to
the Plan is timely obtained in accordance with section 12.2(c) hereof.
12. EFFECTIVE DATE; AMENDMENT AND TERMINATION
12.1 Effective Date. The Plan shall be effective as of the date of the
Board's adoption of the Plan; provided that the Plan shall have been approved by
the stockholders of the Company within twelve months before or after the date of
adoption by the Board. Options may be granted but not exercised prior to
stockholder approval of the Plan. If any Options are so granted and stockholder
approval shall not have been obtained within twelve months of the date of
adoption of the Plan by the Board, such Options shall terminate retroactively as
of the date they were granted.
12.2 Amendment.
(a) The Plan shall terminate automatically as of the earlier of (1) the
sale of all shares available for issuance under the Plan, (2) the close of
business on the day preceding the tenth anniversary date of its adoption by the
Board, or (3) earlier as provided below.
(b) The Administrator may at any time suspend, amend or terminate the Plan
and may, with the consent of an Optionee, make such modifications of the terms
and conditions of such Optionee's Option as it shall deem advisable. No Option
may be granted during any suspension of the Plan or after such termination. The
amendment, suspension or termination of the Plan shall not, without the consent
of the Optionee affected thereby, alter or impair any rights or obligations
under any Option theretofore granted under the Plan. No Option may be granted
during any period of suspension nor after termination of the Plan.
(c) The Company shall obtain stockholder approval of any Plan amendment to
the extent necessary or desirable to comply with Rule 16b-3 under the Exchange
Act or section 422 of the Code (or any successor rule or statute or other
Applicable Law, including the requirements of any exchange or quotation system
on which the Common Stock is listed or quoted). Such stockholder approval, if
required, shall be obtained in such a manner and to such a degree as the
Administrator determines is required by Applicable Laws.
13. MISCELLANEOUS
13.1 Privileges of Stock Ownership; Investment Intent. An Optionee shall
not be entitled to the privilege of stock ownership as to any shares of Common
Stock not actually issued to the Optionee. Upon exercise of an Option at a time
when there is not in effect under the Securities Act a Registration Statement
relating to the Common Stock issuable upon exercise or payment therefor and
available for delivery a Prospectus meeting the requirements of section 10(a)(3)
of the Securities Act, the Optionee shall represent and warrant in writing to
the Company that the shares purchased are being acquired for investment and not
with a view to the distribution thereof.
13.2 Reports to Optionees. The Company shall furnish to each Optionee under
the Plan the Company's annual report and such other periodic reports, if any, as
are disseminated by the Company in the ordinary course to its stockholders.
13.3 Legend Conditions.
(a) In order to enforce any restrictions imposed upon Common Stock issued
upon exercise of an Option or to which such Common Stock may be subject, the
Administrator may cause a legend or legends to be placed on any share
certificates representing such Common Stock, which legend or legends shall make
appropriate reference to such restrictions, including, but not limited to, a
restriction against sale of such Common Stock for any period of time as may be
required by Applicable Laws. If any restriction with respect to which a legend
was placed on any certificate ceases to apply to Common Stock represented by
such certificate, the owner of the Common Stock represented by such certificate
may require the Company to cause the issuance of a new certificate not bearing
the legend.
(b) Additionally, and not by way of limitation, the Administrator may
impose such restrictions on any Common Stock issued pursuant to the Plan as it
may deem advisable, including, without limitation, restrictions under the
requirements of any stock exchange upon which Common Stock is then traded.
13.4 Use of Proceeds. Proceeds realized pursuant to the exercise of Options
shall constitute general funds of the Company.
13.5 Governing Law. The Plan shall be governed by, and construed in accor-
dance with the laws of the State of Oregon (without giving effect to conflicts
of law principles). * * *
SRC VISION, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the ___ day of __________ 19__, by and between
SRC VISION, INC. (the "Company"), and ______________________________
("Optionee").
R E C I T A L
Pursuant to the SRC VISION, INC. 1997 Stock Option Plan (the "Plan"), the
Administrator (the "Administrator") has authorized the granting to Optionee of a
nonqualified stock option to purchase the number of shares of Common Stock of
the Company specified in Paragraph 1 hereof, at the price specified therein,
such option to be for the term and upon the terms and conditions hereinafter
stated.
A G R E E M E N T
NOW, THEREFORE, in consideration of the promises and of the undertakings of
the parties hereto contained herein, it is hereby agreed:
1. Number of Shares; Option Price. Pursuant to said action of the
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase, upon and subject to the terms and conditions of the Plan,
________________ shares of Common Stock of the Company ("Shares") at the price
of $______________ per share.
2. Term. This Option shall expire on the day before the tenth (10th)
anniversary of the date hereof unless such Option shall have been terminated
prior to that date in accordance with the provisions of the Plan or this
Agreement. The term "Subsidiary" herein means a subsidiary corporation, as such
term is defined in the Plan.
3. Shares Subject to Exercise. Shares subject to exercise shall be 100% on
or after the ninth anniversary of the date hereof. Notwithstanding the vesting
schedule in the preceding sentence, (A) upon completion of an initial public
offering (the "IPO") of the Company's Common Stock or securities convertible
into Common Stock, vesting shall be accelerated so that 100% shall become vested
on the third (3rd) anniversary of the IPO; and (B) if the Company, or its parent
company (currently ARC Capital) consummates an agreement to sell a majority of
the Company's business or assets, or merge (the "Sale") with another entity that
is not at least 50% owned by its parent company (currently ARC Capital) or
another affiliated entity owned by its parent company, 100% of the Shares shall
immediately become vested; provided, however, that Optionee remains an employee
of the Company at the time of vesting. All Shares shall thereafter remain
subject to exercise for the term specified in Paragraph 2 hereof, provided that
Optionee is then and has continuously been in the employ of the Company, a
Parent or a Subsidiary, subject, however, to the provisions of Paragraph 5
hereof.
4. Method and Time of Exercise. The Option may be exercised by written
notice delivered to the Company stating the number of shares with respect to
which the Option is being exercised, together with cash or by delivery by the
Optionee of Common Stock already owned by the Optionee, for all or part of the
aggregate exercise price of the shares as to which the Option is being
exercised, provided that the Fair Market Value of such Common Stock is equal on
the date of exercise to the aggregate exercise price of the shares as to which
the Option is being exercised. In this regard, consecutive book-entry exercises,
or so-called pyramiding, shall be permitted in the discretion of the
Administrator. At the time an Option is granted or exercised, the Administrator,
in its discretion, may authorize one or more of the following additional methods
of payment:
(a) acceptance of the Optionee's full recourse promissory note for a
portion of the aggregate exercise price of the shares as to which the
Option is being exercised, payable on such terms and bearing such interest
as determined by the Administrator, which promissory note may be either
secured or unsecured in such manner as the Administrator shall approve
(including, without limitation, by a security interest in the shares of
Common Stock so acquired); provided, however, that not less than the
aggregate par value of the shares issued shall be paid in cash;
(b) any other property, so long as such property constitutes valid
consideration under Applicable Laws for the shares as to which the Option
is being exercised and is surrendered in good form for transfer; and
(c) by means of so-called cashless exercises as permitted under
applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board.
Any shares of Common Stock used to exercise an option must have been held
by the Optionee for at least six months prior to exercise unless the
Administrator in its sole and absolute discretion permits shares of Common Stock
with a shorter holding period to be used. Not less than 100 shares may be
purchased at any one time unless the number purchased is the total number
purchasable under such Option at the time. Only whole shares may be purchased.
5. Withholding. Irrespective of the form of payment of the exercise price
of an Option, the delivery of shares pursuant to the exercise of an Option shall
be conditioned upon payment by the Optionee to the Company of amounts sufficient
to enable the Company to pay all federal, state, and local withholding taxes
applicable, in the Company's judgment, to the exercise. In the sole discretion
of the Administrator, such payment to the Company may be effected through (a)
the Company's withholding from the number of shares of Common Stock that would
otherwise be delivered to the Optionee by the Company on exercise of the Option
a number of shares of Common Stock equal in value (as determined by the Fair
Market Value of Common Stock on the date of exercise) to the aggregate
withholding taxes, (b) payment by the Optionee to the Company of the aggregate
withholding taxes in cash, (c) withholding by the Company from other amounts
contemporaneously owed by the Company to the Optionee, or (iv) any combination
of these three methods.
6. Exercise on Termination of Employment. If Optionee shall cease to be
employed by the Company or a Subsidiary (or, in the case of a nonemployee, shall
cease performing services for the Company or a Subsidiary), Optionee's right, if
any, to exercise his options will be limited to installments accrued under
Paragraph 3 hereof on the date of termination (unless the Administrator
accelerates the exercisability of the Option pursuant to Section 7.1(b) of the
Plan), and will be governed by Section 7 of the Plan. The maximum period
permissible under Section 7 in the absence of Administrator action for each type
of termination of employment or cessation of services described therein shall
apply unless the Administrator has made other provision herein.
7. Nontransferability. This Option may not be assigned or transferred
except by will or by the laws of descent and distribution, and may be exercised
only by Optionee during his lifetime and after his death, by his personal
representative or by the person entitled thereto under his will or the laws of
intestate succession.
8. Optionee Not a Shareholder. Optionee shall have no rights as a
shareholder with respect to the Common Stock of the Company covered by such
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of the Option. No adjustment will be made for dividends or
other rights for which the record date is prior to the date such stock
certificate or certificates are issued, except as provided in Section 9 of the
Plan.
9. No Right to Employment. Nothing in this Option shall confer upon the
Optionee any right to continue in the employ of the Company or to continue to
perform services for the Company or any Subsidiary, or shall interfere with or
restrict in any way the rights of the Company to discharge or terminate any
officer, director, employee, independent contractor or consultant at any time
for any reason whatsoever, with or without good cause.
10. Modification and Termination. The rights of Optionee are subject to
modification and termination in certain events as provided in Sections 7 and 9
of the Plan.
11. Restrictions on Sale of Shares. Optionee represents and agrees that
upon his exercise of the Option, in whole or in part, unless there is in effect
at that time under the Securities Act of 1933 a registration statement relating
to the shares issued to him, he will acquire the shares issuable upon exercise
of this option for the purpose of investment and not with a view to their resale
or further distribution, and that upon such exercise thereof he will furnish to
the Company a written statement to such effect, satisfactory to the Company in
form and substance. Optionee agrees that any certificate issued upon exercise of
this Option may bear a legend indicating that their transferability is
restricted in accordance with applicable state and federal securities law. Any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 5 and 6 hereof shall, upon each exercise of the option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.
12. Plan Governs. This Agreement and the Option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of that Plan, as it may be construed by the
Administrator. Optionee hereby acknowledges receipt of a copy of the Plan.
13. Notices. All notices to the Company shall be addressed to the
Administrator at the principal office of the Company at 2067 Commerce Drive,
Medford, Oregon 97504 and all notices to Optionee shall be addressed to Optionee
at the address of Optionee on file with the Company or its Subsidiaries, or to
such other address as either may designate to the other in writing. A notice
shall be deemed to be duly given if and when enclosed in a properly addressed
sealed envelope deposited, postage prepaid, with the United States Postal
Service. In lieu of giving notice by mail as aforesaid, written notice under
this Agreement may be given by personal delivery to Optionee or to the
Administrator (as the case may be).
14. Sale or Other Disposition. If Optionee at any time contemplates the
disposition (whether by sale, gift, exchange, or other form or transfer) of any
Shares acquired by exercise of this option, he or she will first notify the
Company in writing of such proposed disposition and cooperate with the Company
in complying with all applicable requirements of law, which, in the judgment of
the Company, must be satisfied prior to such disposition.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
SRC VISION, INC.
By__________________________
OPTIONEE
----------------------------
(Signature)
----------------------------
(Typed or Printed Name)
Address:
----------------------------
----------------------------
----------------------------
SRC VISION, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the ____ day of _______________ 19__ by and
between SRC VISION, INC. (the "Company"), and ___________________________
("Optionee").
R E C I T A L
Pursuant to the SRC VISION, INC. 1997 Stock Option Plan (the "Plan"), the
Administrator (the "Administrator") has authorized the granting to Optionee of
an incentive stock option to purchase the number of shares of Common Stock of
the Company specified in Paragraph 1 hereof, at the price specified therein,
such option to be for the term and upon the terms and conditions hereinafter
stated.
A G R E E M E N T
NOW, THEREFORE, in consideration of the promises and of the undertakings of
the parties hereto contained herein, it is hereby agreed:
1. Number of Shares; Option Price. Pursuant to said action of the
Administrator, the Company hereby grants to Optionee the option ("Option") to
purchase subject to the terms and conditions of the Plan, ______________ shares
of Common Stock of the Company ("Shares") at the price of $______ per share.
2. Terms. This Option shall expire on the day before the tenth (10th)
anniversary (fifth anniversary if Optionee owns more than 10% of the voting
stock of the Company, a Parent or a Subsidiary on the date of this Agreement) of
the date hereof unless such Option shall have been terminated prior to that date
in accordance with the provisions of the Plan or this Agreement. The term
"Subsidiary" herein means a subsidiary corporation, as such term is defined in
the Plan.
3. Shares Subject to Exercise. Shares subject to exercise shall be 100% on
or after the ninth anniversary of the date hereof. Notwithstanding the vesting
schedule in the preceding sentence, (A) upon completion of an initial public
offering of the Company's Common Stock or securities convertible into Common
Stock (the "IPO"), vesting shall be accelerated so that 100% shall become vested
on the third (3rd) anniversary of the IPO; and (B) if the Company, or its parent
company (currently ARC Capital) consummates an agreement to sell a majority of
the Company's business or assets, or merge ("Sale") with another entity that is
not at least 50% owned by its parent company or other affiliated entity owned by
its parent company, 100% of the Shares shall immediately become vested;
provided, however, that Optionee remains an employee of the Company at the time
of vesting. All Shares shall thereafter remain subject to exercise for the term
specified in Paragraph 2 hereof, provided that Optionee is then and has
continuously been in the employ of the Company, a Parent or a Subsidiary,
subject, however, to the provisions of Paragraph 5 hereof.
4. Method and Time of Exercise. The Option may be exercised by written
notice delivered to the Company stating the number of shares with respect to
which the Option is being exercised, together with cash or by delivery by the
Optionee of Common Stock already owned by the Optionee, for all or part of the
aggregate exercise price of the shares as to which the Option is being
exercised, provided that the Fair Market Value of such Common Stock is equal on
the date of exercise to the aggregate exercise price of the shares as to which
the Option is being exercised. In this regard, consecutive book-entry exercises,
or so-called pyramiding, shall be permitted in the discretion of the
Administrator. At the time an Option is granted or exercised, the Administrator,
in its discretion, may authorize one or more of the following additional methods
of payment:
(a) acceptance of the Optionee's full recourse promissory note for a
portion of the aggregate exercise price of the shares as to which the
Option is being exercised, payable on such terms and bearing such interest
as determined by the Administrator, which promissory note may be either
secured or unsecured in such manner as the Administrator shall approve
(including, without limitation, by a security interest in the shares of
Common Stock so acquired); provided, however, that not less than the
aggregate par value of the shares of Common Stock to be issued shall be
paid in cash;
(b) any other property, so long as such property constitutes valid
consideration under Applicable Laws for the shares as to which the Option
is being exercised and is surrendered in good form for transfer; and
(c) by means of so-called cashless exercises as permitted under
applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board.
Any shares of Common Stock used to exercise an option must have been held
by the Optionee for at least six months prior to exercise unless the
Administrator in its sole and absolute discretion permits shares of Common Stock
with a shorter holding period to be used. Not less than 100 shares may be
purchased at any one time unless the number purchased is the total number
purchasable under such Option at the time. Only whole shares may be purchased.
5. Withholding. In the event that this Option shall lose its qualification
as an incentive stock option, irrespective of the form of payment of the
exercise price of this Option, the delivery of shares pursuant to the exercise
of this Option shall be conditioned upon payment by the Optionee to the Company
of amounts sufficient to enable the Company to pay all federal, state, and local
withholding taxes applicable, in the Company's judgment, to the exercise. In the
sole discretion of the Administrator, such payment to the Company may be
effected through (a) the Company's withholding from the number of shares of
Common Stock that would otherwise be delivered to the Optionee by the Company on
exercise of this Option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of exercise) to
the aggregate withholding taxes, (b) payment by the Optionee to the Company of
the aggregate withholding taxes in cash, (c) withholding by the Company from
other amounts contemporaneously owed by the Company to the Optionee, or (iv) any
combination of these three methods.
6. Exercise on Termination of Employment. If Optionee shall cease to be
employed by the Company or a Subsidiary, Optionee's right, if any, to exercise
his options will be limited to installments accrued under Paragraph 3 hereof on
the date of termination (unless the Administrator accelerates the exercisability
of the Option pursuant to Section 7.1(b) of the Plan) and will be governed by
Section 7 of the Plan. The maximum period permissible for an incentive stock
option under Section 7 in the absence of Administrator action shall apply for
each type of termination of employment described therein unless the
Administrator has made other provision herein.
7. Nontransferability. This Option may not be assigned or transferred
except by will or by the laws of descent and distribution, and may be exercised
only by Optionee during his lifetime and after his death, by his representative
or by the person entitled thereto under his will or the laws of intestate
succession.
8. Optionee Not a Shareholder. Optionee shall have no rights as a
shareholder with respect to the Common Stock of the Company covered by the
Option until the date of issuance of a stock certificate or stock certificates
to him upon exercise of the Option. No adjustment will be made for dividends or
other rights for which the record date is prior to the date such stock
certificate or certificates are issued, except as provided in Section 9 of the
Plan.
9. No Right to Employment. Nothing in this Option shall confer upon the
Optionee any right to continue in the employ of the Company or to continue to
perform services for the Company or any Subsidiary, or shall interfere with or
restrict in any way the rights of the Company to discharge or terminate any
officer, director, employee, independent contractor or consultant at any time
for any reason whatsoever, with or without good cause.
10. Modification and Termination. The rights of Optionee are subject to
modification and termination in certain events as provided in Sections 7 and 9
of the Plan.
11. Restrictions on Sale of Shares. Optionee represents and agrees that,
upon his exercise of the Option in whole or in part, unless there is in effect
at that time under the Securities Act of 1933 a registration statement relating
to the shares issued to him, he will acquire the shares issuable upon exercise
of this Option for the purpose of investment and not with a view to their resale
or further distribution, and that upon each exercise thereof he will furnish to
the Company a written statement to such effect, satisfactory to the Company in
form and substance. Optionee agrees that any certificates issued upon exercise
of this Option may bear a legend indicating that their transferability is
restricted in accordance with applicable state or federal securities law. Any
person or persons entitled to exercise this option under the provisions of
Paragraphs 5 and 6 hereof shall, upon each exercise of the option under
circumstances in which Optionee would be required to furnish such a written
statement, also furnish to the Company a written statement to the same effect,
satisfactory to the Company in form and substance.
12. Plan Governs. This Agreement and the Option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan, as it may be construed by the
Administrator. It is intended that this option shall qualify as an incentive
stock option as defined by Section 422 of the Code, and this Agreement shall be
construed in a manner which will enable this Option to be so qualified. Optionee
hereby acknowledges receipt of a copy of the Plan.
13. Notices. All notices to the Company shall be addressed to the
Administrator at the principal office of the Company at 2067 Commerce Drive,
Medford, Oregon 97504, and all notices to Optionee shall be addressed to
Optionee at the address of Optionee on file with the Company or its
Subsidiaries, or to such other address as either may designate to the other in
writing. A notice shall be deemed to be duly given if and when enclosed in a
properly addressed sealed envelope deposited, postage prepaid, with the United
States Postal Service. In lieu of giving notice by mail as aforesaid, written
notices under this Agreement may be given by personal delivery to Optionee or to
the Administrator (as the case may be).
14. Sale or Other Disposition. Optionee understands that, under current
law, beneficial tax treatment resulting from the exercise of this Option will be
available only if certain requirements of the Code are satisfied, including
without limitation, the requirement that no disposition of Shares acquired
pursuant to exercise of this Option be made within two years from the grant date
or within one year after the transfer of Shares to him or her. If Optionee at
any time contemplates the disposition (whether by sale, gift, exchange, or other
form of transfer) of any such Shares, he or she will first notify the Company in
writing of such proposed disposition and cooperate with the Company in complying
with all applicable requirements of law, which, in the judgment of the Company,
must be satisfied prior to such disposition. In addition to the foregoing,
Optionee hereby agrees that if Optionee disposes (whether by sale, exchange,
gift, or otherwise) of any Shares acquired by exercise of this Option within two
years of the grant date or within one year after the transfer of such Shares to
Optionee upon exercise of this Option, then Optionee shall notify the Company of
such disposition in writing within 30 days from the date of such disposition.
Said written notice shall state the date of such disposition, and the type and
amount of the consideration received for such Share or Shares by Optionee in
connection therewith. In the event of any such disposition, the Company shall
have the right to require Optionee to immediately pay the Company the amount of
taxes (if any) which the Company is required to withhold under federal and/or
state law as a result of the granting or exercise of the Option and the
disposition of the Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
SRC VISION, INC.
By__________________________
OPTIONEE
----------------------------
(Signature)
----------------------------
(Typed or Printed Name)
Address:
----------------------------
----------------------------
----------------------------
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-10847),
Registration Statement on Form S-8 (No. 33-87064) and Registration Statement on
Form S-3 (No. 33-76864) of ARC Capital (formerly Applied Laser Systems, Inc.) of
our report dated March 18, 1997 appearing on page F-2 of this Annual Report on
Form 10-K.
PRICE WATERHOUSE LLP
Portland, Oregon
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
December 31, 1996 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1909
<SECURITIES> 0
<RECEIVABLES> 5259
<ALLOWANCES> 280
<INVENTORY> 8132
<CURRENT-ASSETS> 15411
<PP&E> 7906
<DEPRECIATION> 1418
<TOTAL-ASSETS> 30938
<CURRENT-LIABILITIES> 9498
<BONDS> 14940
0
0
<COMMON> 25720
<OTHER-SE> (19220)
<TOTAL-LIABILITY-AND-EQUITY> 30938
<SALES> 29938
<TOTAL-REVENUES> 29938
<CGS> 15794
<TOTAL-COSTS> 28486
<OTHER-EXPENSES> 5562 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1150
<INCOME-PRETAX> (5260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5260)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5260)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
<FN>
<F1>
Other expenses include a charge for acquired in-process technology of $4915
and a charge for royalty expense of $647.
</FN>
</TABLE>
