UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File No. 0-5265
SCAN-OPTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0851857
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
169 Progress Drive, Manchester, CT 06040
(Address of principal executive offices) Zip Code
(860) 645-7878
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock,
$.02 par value
(Title of Class)
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. ( X ) YES ( ) NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock (common) held by non-affiliates
of the registrant: $40,950,031 as of March 26, 1997.
The number of shares of common stock, $.02 par value, outstanding as of March
26, 1997 was 6,970,218.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement, relating to the 1997 Annual Meeting
of Stockholders, which will be filed pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year, are incorporated by reference and included in the following:
Part III-Item 10 - Directors and Executive Officers of the Registrant
Part III-Item 11 - Executive Compensation
Part III-Item 12 - Security Ownership of Certain Beneficial
Owners and Management
Part III-Item 13 - Certain Relationships and Related Transactions
<PAGE>
PART I
ITEM 1 - BUSINESS
Scan-Optics, Inc. (the Company) was incorporated in Delaware in 1968 and has
its principal office at 169 Progress Drive, Manchester, Connecticut 06040.
The Company designs, manufactures, markets and services information processing
systems that are used for business solutions, imaging, data capture, document
processing and the management of information to meet business requirements. The
Company's Series 7000 Network Image Scanners and Series 9000 optical character
recognition (OCR) and intelligent character recognition (ICR) scanners deliver
cost-effective, high volume imaging solutions. Its UNIX and PC-based post-
scanning systems offer verification, image storage and retrieval, and document
management in an open-systems environment. The Company's professional services
integrates applications, scanning platforms and networked tools to deliver a
total turn-key system solution and maintains these systems to deliver
continuous results throughout the installation life.
TARGET SOLUTIONS
Health Care and Insurance Processing Solutions
The Company has been providing health care related information systems since
1985. These applications include processing customer satisfaction forms,
patient encounter forms, and Health Care Financing Administration (HCFA) forms.
To ease the implementation for customers, the systems are designed to utilize
industry standard components wherever feasible, including processing on
industry standard client/server, open LAN-based systems designed specifically
to improve the efficiency of health claim form reporting and processing. The
Company's goal in providing this solution is to minimize the customer
investment involved with processing paper health claim forms.
Order Processing Solutions
The Company has been providing applications for order entry for over 16 years.
At one customer site, order entry software processes over 800,000 orders daily.
Order entry is a key operational requirement for any successful company. The
Company's systems fulfill this requirement in an efficient, timely, and cost-
effective manner. The Company enjoys the reputation as a leading supplier of
high speed order entry software.
Tax and Financial Services Processing Solutions
The Company has had significant experience in processing taxes at various state
governments as well as at the Internal Revenue Service. Since the IRS SCRIPS
implementation over two hundred fifty million (250,000,000) tax documents have
been processed by the Company's Series 9000 systems. These Series 9000
systems use application programs developed and supported by the Company. The
Company has 26 years of experience in tax processing.
PRODUCTS
The Company designs, manufactures, markets and services information processing
systems which use "state of art" technology for imaging, automated data
capture, document processing and the management of information. These systems
employ high speed paper movement, OCR/ICR, high speed image capture, image
storage and retrieval systems, image information processing, key-entry,
microfilming, ink jet printing, high-speed paper handling with multi-pocket
page and/or document sorting, local area networking, client/server PC
processing, communications software and software/hardware integration
technologies to assure a complete approach to engineering solutions for data
processing.
These key product disciplines translate integration skills that leverage the
core competencies of the Company to provide broader solution alternatives.
These core competencies include:
Document Scanning
Character Recognition (OCR, ICR, Barcode, Marksense, etc.)
High Speed Paper Handling
Image Enhancement Algorithms and Image Quality
Key-From-Image and Data Entry
Customer Relations with Post Installation Support
Value Added Engineering Services and Solutions
CORE COMPETENCIES
Document Scanning
The Company has been addressing the high-speed, high-volume, page/document
processing market place since its inception in 1968. During 1992, the Company
introduced the generation of scanners called the Series 9000 system. This
system launched the Company into the full page image and recognition (ICR)
market. Full page document processing includes front and back imaging, OCR
reading, serialization and microfilming of a document in a single pass. During
1994, the Company introduced the Model 7800 scanner which is an image product
that can be utilized to improve Customer Service, Order Processing, and
Microfilm Replacement.
Character Recognition
As with the scanners, the Company has been providing its own developed
character recognition since 1968. This recognition has always included the
basic in-line recognition of machine printed, handprinted, and mark sense
forms. With the introduction of the Series 9000 system, the Company has
expanded this recognition to include barcode, patch code, special educational
score testing analysis, and special stamp recognition. In addition to these
recognition processes, the Company has integrated and developed neural
recognition technologies that support both in-line and post capture
recognition.
High Speed Paper Handling
The Company is a leader in patented high speed paper handling systems. The
Series 9000 scanner has over 150 systems installed worldwide. The Company has
over 350 scanning systems installed worldwide processing 17.5 million pieces of
paper on a daily basis.
Image Enhancement Algorithms and Image Quality
Image enhancement algorithms and image quality are priority development
activities for the Company. Image enhancement starts at the scanner capture
system. The Company provides the fastest page capture and image system on the
market today. This processing is carried forward into the Company's Key-From-
Image and Image Storage and Retrieval Systems. Management believes that the
Company's image quality is among the best in the industry. Electronic image
processing and storage are rapidly overtaking the use of microfilm and the
Company is on the leading edge of this technology with its hardware and
application software solutions.
Key-From-Image and Data Entry
The Company has been providing complete hardware and software solutions using
Key-From-Image (KFI) and Data Entry since 1976. This KFI and Data Entry
solution remains important today, using the latest open network and platform
designs with Windows, UNIX, Novell, TCP/IP, NT, and other industry standard
components. By combining the high-speed scanning systems with the flexibility
of KFI and Data Entry, customers are able to lower their overall data capture
and document processing costs while improving the level of data accuracy.
Customer Relations with Post Installation Support
29 Years of Customized Software Solutions
Customized software support has provided service to the Company's customers
since 1968. The Company's scanners and assorted network system products
provide the hardware platforms for delivering advanced high-volume forms
processing, imaging, and document management system solutions, especially in
Health Care, Order Entry, and Tax Processing. This customized software support
enables the Company to provide full production-ready application systems
tailored to the customer's specific needs.
This support is provided through professional services offered by the Company.
These services offer a total package of Application Services including:
specifications, design, development, installation, training, support and
project management. The Company also provides individual, custom software
services as requested by the customer. In this way, the Company can either
provide the entire package of software support or simply provide those services
that the customer desires.
29 Years of Hardware Support
The Company has been offering service and maintenance support to its broad
customer base since 1968. This support is available with either leased or
purchased systems in both domestic and international markets. Service is
provided through a network of over 100 service centers in North America, the
United Kingdom and Germany. The Company provides on-site and on-call service
with response times of two hours or less. The Company focuses on comprehensive
diagnostic routines, modular design and preventative maintenance procedures to
assure its users of high system availability to perform mission critical
applications.
Service revenue accounted for 34%, 34% and 38% of the Company's total revenue
for 1996, 1995 and 1994, respectively.
Value Engineering Services and Solutions
The Company has been supplying engineering services and solutions to meet
customer needs since introducing its first fully integrated solution in 1976.
The solutions include scanning, recognition, Key-From-Image, data entry, and
communications. During 1993, the Company was selected to develop a prototype
system to process medical claims for a health care agency in Japan. This
system was designed with 36 stacker pockets for sorting forms; expanded paper
handling capabilities for light-weight, flimsy forms; high resolution image
cameras to permit recognition of complex Japanese kanji characters; and
software forms recognition for up to 20,000 different form formats.
The Company has been involved in special recognition techniques to process
order forms that contain stamps. These stamps are used as an entry into a
sweepstake contest or to select ordered items for a record or book club. The
stamps are of a multitude of colors and are successfully processed through the
Company's special recognition features. In addition to stamp processing, the
Company has been engaged in recognition analysis for educational test scoring.
This process is accomplished in full duplex mode at a transport speed of 50
inches per second.
SIGNIFICANT CUSTOMERS
In 1996, one customer accounted for approximately 38% of consolidated revenues.
In 1995, this same customer accounted for 31% of consolidated revenues. Two
customers accounted for approximately 22% of consolidated revenues in 1994,
each at 11%.
CHANNELS OF DISTRIBUTION
The Company is augmenting its practice of selling directly to end-users and
distributors to respond to new opportunities in the marketplace. The focus on
providing more complete solutions to customers has stimulated the pooling of
resources with selected system integration firms and specialized niche
suppliers. The cooperative effort with system integrators and other vendors
has introduced the Scan-Optics logo to new markets both domestically and
internationally.
BACKLOG
The backlog for the Company's products and services as of December 31, 1996 and
1995 was approximately $31,058,000 and $12,483,000 respectively. The backlog
consists of equipment, software and services to be sold and noncancelable
rentals and maintenance due on existing rental and maintenance contracts. The
Company normally delivers a system within 30 to 180 days after receiving an
order, depending upon the degree of software customization required.
MANUFACTURING
Manufacture of the Company's products requires the fabrication of sheet metal
and mechanical parts, the subassembly of electronic and mechanical parts and
components, and operational and quality control testing of components,
assemblies and completed systems. The Company's products consist of both
standard and Company-specified mechanical and electronic parts, sub-assemblies
and major components, including microcomputers. Most parts are purchased,
including many complex electronic and mechanical sub-assemblies. The Company
also purchases major standard components, including magnetic tape and disk
storage drives, display terminals, and microcomputers. An important aspect of
the Company's manufacturing activities is its quality control program which
uses computer-controlled testing equipment.
The Company has not experienced significant shortages of any components or
subassemblies; however, alternate sources for such components and subassemblies
have been developed.
COMPETITION
The Company competes with service providers utilizing multiple vendor
architectures. The Company differentiates its solutions by offering a total
system, including post installation of hardware and software services. The
Company focuses on industry specific "application" areas with solutions
utilizing image and data entry/data capture systems provided by the Company.
PATENTS
The Company currently has five United States patents in force which expire
between 2003 and 2013. The patents are on mechanical systems, electronic
circuits, electronic systems and software algorithms which are used throughout
the product lines. In May 1996, the Company submitted a patent application on
a software algorithm to improve recognition results through the use of
contextual editing. The Company expects to continue to apply for patents on
its new technological developments when it believes they are significant.
EMPLOYEES
As of December 31, 1996 the Company employed 298 persons, including 22 with
administrative and support responsibilities, 136 in marketing, sales, software
and service activities and 140 in engineering and production capacities. The
Company considers its employee relations to be good. The Company has not
experienced any work stoppages.
PRODUCT DEVELOPMENT
In June 1992, the Company introduced the Series 9000 Scanner. The Series 9000
integrates the latest in character recognition, image capture, and paper
handling technology into a high speed scanner. During 1993, the Company
introduced several options for this scanner. These options permit character
recognition and image processing on the "reverse side" of documents; a special
small document stacker module; and the ability to recognize several industry
standard bar-codes.
The Series 9000 interfaces with other company products to provide multi-media
data entry and image storage retrieval. During 1994, the Company developed and
delivered a network-based scanning, recognition and data entry product - the
Series 7000 - which addresses requirements for a distributed solution.
In April 1995, the Company introduced the Model 7800 Scanner. The Model 7800
is the world's fastest full-page image scanner, capable of capturing up to 200
full size pages per minute. It is based on Scan-Optics' high-end, industry
proven Series 9000. In April 1996, the model 7800 was recognized at an
industry trade show with the "Showstopper Award" for outstanding product.
In August 1995, the Company signed a license agreement to sell and support the
ImageEMC product. As part of the agreement, the Company took over support
requirements of the currently installed customer base and hired development and
support personnel from TCSI Corporation. The product was enhanced to accept
images and data from Scan-Optics scanners. Any enhancements made to the
product are owned by the Company. This product provides a total solution for
processing health care claim forms (HCFA 1500's). The product is a
client/server architecture and operates on industry standard hardware and
software platforms.
In July 1996, the Company introduced a high-speed neural networked based
handprint recognition system for use in the Series 9000 scanner. The In-Line
Neural Classifier operates at speeds of up to 7500 characters per second while
achieving a 50% reject rate reduction and 10% substitution rate reduction over
the current handprint recognition engine. The classifier is based on a special
neural network algorithm which is resistant to overtraining making it an ideal
candidate for character recognition systems.
The Company considers product development to be a significant element in
maintaining market share. During the years ended December 31, 1996, 1995 and
1994, the Company's research and development expenses were $4,142,000,
$4,574,000, and $5,690,000, respectively. Some portion of these amounts were
funded under the development agreements described below.
The Company intends to continue its program of development of additional
options and capabilities for its existing products as well as the development
of new products which exploit the Company's core competencies: document
scanning, character recognition, high speed paper handling, image enhancement,
key-from-image and data entry, customer relations and value engineering
services and solutions.
FUNDED DEVELOPMENT AGREEMENTS
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products. The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights. Royalties and other
considerations, up to a maximum of 130% of the amount advanced to the Company,
were required to be paid based on sales of the new product technology through
the termination dates of the agreements, June 30, 1995 and December 31, 1996.
As of December 31, 1996, the Company had repaid or accrued $4,738,500, 100% of
the maximum potential royalty.
During 1993, the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $370,000 in 1994 and $790,000
in 1993 . These revenues offset related costs incurred to develop the
modifications and enhancements. Two prototype systems were delivered in the
first quarter of 1994 and successfully passed customer acceptance testing. An
initial production contract was awarded for delivery in the fourth quarter of
1994. The ownership of the technologies created as a result of this
development agreement remains with the Company. No royalties or other
considerations are required as a part of this agreement.
During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to these development agreements of $336,000 in 1995, and
$364,000 in 1996. These revenues offset related costs incurred to develop the
modifications and enhancements. The ownership of the technologies created as a
result of this development agreement remains with the Company. No royalties or
other considerations are required as a part of this agreement.
EFFECTS OF ENVIRONMENTAL LAWS
The effect of federal and state environmental regulations on the Company's
operations is insignificant.
GEOGRAPHICAL SEGMENTS
Sales of equipment to customers in the international market represent an
important source of the Company's revenues. The Company has international
distributors located in 46 countries and covering six continents. The Company
does not believe that there are any special additional risks attendant to sales
in its present international markets.
The following table sets forth certain information relating to export sales for
the three most recent fiscal years ended December 31:
Export sales
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(thousands) 1996 1995 1994
Latin America and
South America $ 113 1% $ 375 2% $ 1,577 15%
Europe 433 2% 1,468 9% 2,187 21%
Pacific Rim 18,281 97% 14,143 89% 6,745 64%
$ 18,827 $ 15,986 $ 10,509
</TABLE>
Export sales represented 62%, 58% and 39% of net sales for the three years
ended December 31, 1996, 1995 and 1994, respectively.
ITEM 2 - PROPERTIES
The Company's world headquarters and manufacturing facility is located in a
newly renovated eighty-four thousand square foot, one-story building in
Manchester, Connecticut, leased for a term expiring in December 2006. The
Company also leases two sales, support, and research and development
facilities: one in Irvine, California of four thousand square feet expiring in
December 1998 and one in Berkeley, California of two thousand square feet
expiring in December 1997.
The Company leases office space throughout the United States for sales, service
and administrative functions. Office space for administration and equipment
demonstration is also leased by Scan-Optics, Ltd., in the United Kingdom and
Scan-Optics (Canada), Ltd., both wholly-owned subsidiaries.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
There are certain claims pending against the Company which arose in the normal
course of business. In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter during the fourth quarter of 1996 to a
vote of the stockholders.
EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
Officers of the Company are set forth in the schedule below.
<TABLE>
<CAPTION>
Officer
Name Age Principal Occupation: Since:
<S> <C> <C> <C>
Richard I. Tanaka 68 Chairman of the Board of
Directors
1989
James C. Mavel 51 President, Chief Executive Officer,
and Director
1996
Robert L. Bell 45 Vice President -
Product Engineering
1993
William H. Cuddy 61 Corporate Secretary
1984
Richard C. Goyette 45 Vice President -
Sales and Marketing
1996
Clarence W. Rife 57 Vice President -
Customer Relations
1975
John B. Sayre 61 Vice President -
Manufacturing
1988
Michael J. Villano 37 Chief Financial Officer
and Vice President
1992
</TABLE>
<PAGE>
Dr. Tanaka joined the Company in September 1989 as Chairman of the Board, Chief
Executive Officer and President. Throughout 1996, Dr. Tanaka held the title of
Chairman of the Board of Directors and Chief Executive Officer. Dr. Tanaka
currently holds the title of Chairman of the Board. Prior to joining the
Company, Dr. Tanaka was President of Lundy Electronics and Systems, Inc., a
division of TransTechnology Corp. from 1987 to 1989 and from 1980 to 1986 he
was President and CEO of Systonetics, Inc.
Mr. Mavel joined the Company in January 1996 as President and Chief Operating
Officer. In June, 1996, Mr. Mavel became a director of the Company. On
December 31, 1996, Mr. Mavel was promoted to President and Chief Executive
Officer. Prior to joining the Company, from 1992 through 1995, Mr. Mavel
was Vice President and General Manager of the Imaging Systems Division of
Unisys. From 1991 to 1992, he was Group Vice President of the Financial
Information Systems Division of National Data Corporation.
Mr. Bell joined the Company in August 1993 as Vice President - Product
Engineering. Prior to this date, he was a consultant for the design and
development of information networks from 1991 to 1992 and from 1989 to 1991 he
was President of Bluebonnet, a research organization for advanced
telecommunications systems. From 1979 to 1989 he held various positions with
Recognition International, Inc.
Mr. Cuddy has been a partner in the law firm of Day, Berry and Howard since
1968. He was elected to the position of Corporate Secretary in September 1984.
Mr. Goyette joined the Company in March 1996 as Vice President - Sales and
Marketing. Prior to joining the Company, from 1993 through 1995, Mr. Goyette
was Vice President of the Imaging Systems Group of Unisys. From 1992 to 1993,
he was Vice President of the Software Products Group of Unisys. From 1990 to
1992 he was Vice President of Corporate Information Productivity Systems of
Unisys.
Mr. Rife has been employed by the Company since 1969 and was elected to the
position of Vice President in 1975. He is currently Vice President - Customer
Relations.
Mr. Sayre joined the Company in December 1988 as Vice President -
Manufacturing. Prior to this date he held various management positions with
Pratt and Whitney, Division of United Technologies Corporation, from 1985 to
1988 and previously with LTV/Republic Steel from 1980 to 1985.
Mr. Villano joined the Company in 1986 and in 1988 was named Assistant
Controller. In 1989 he was promoted to the position of Controller, in February
1992 was named Vice President and Controller and in March 1994 was named Chief
Financial Officer and Vice President.
The executive officers are elected for a one year term at the Directors'
meeting following the Annual Meeting of Stockholders each year. There are no
family relationships between any of the listed officers and directors.
<PAGE>
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The following is a two year history of Common Stock prices for each quarter.
The table sets forth the high and low closing quotations per share for the
periods indicated of the Common Stock in the over-the-counter market based upon
information provided by the National Association of Securities Dealers, Inc.
The closing quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not represent actual
transactions. There were 1,341 Common stockholders of record at December 31,
1996.
The Company has not paid dividends on its Common Stock and the Board of
Directors of the Company has no intention of declaring dividends in the
foreseeable future. The declaration and payment of dividends in the future
will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings, financial condition, capital
requirements and other factors.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 4 5/8 3 5 1/4 3 3/8 4 3/8 3 1/4 4 1/4 3
1995 6 1/4 4 3/4 5 3/4 4 1/8 5 1/8 3 5/8 3 5/8 2 1/8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
SCAN-OPTICS, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF OPERATIONS
SELECTED FINANCIAL DATA
(thousands, except share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 46,034 $ 42,084 $ 43,889 $ 36,381 $ 37,893
========= ========= ========= ======== ========
Income (loss) before
income taxes $ 3,265 $ (1,327) $ 1,244 $ (932) $ (1,493)
Income taxes (benefit) (9) (72) (40) 49 118
--------- --------- --------- -------- --------
Net Income (Loss) $ 3,274 $ (1,255) $ 1,284 $ (981) $ (1,611)
========= ========= ========= ======== ========
Earnings (loss) per share $ 0.49 $ (0.19) $ 0.19 $ (0.15) $ (0.25)
========= ========= ========= ======== ========
Average common and common
equivalent shares outstanding 6,715,462 6,620,270 6,859,544 6,345,137 6,321,922
SELECTED BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Total assets $ 31,121 $ 29,514 $ 29,619 $ 27,878 $ 26,995
Working capital $ 17,318 $ 14,239 $ 14,015 $ 13,135 $ 13,042
Total stockholders' equity $ 21,207 $ 17,751 $ 18,731 $ 17,097 $ 18,012
The Company has not paid any dividends for the five year period ended December 31, 1996.
The above financial data should be read in conjunction with the related consolidated financial
statements and notes thereto.
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- 1996 VS. 1995
OUTLOOK
The forward-looking statements contained in this Outlook and elsewhere in this
document are based on current expectations. As such, actual results may
differ materially.
In 1996, Scan-Optics derived 38% of its total revenue from one customer. The
Company expects this customer to continue to represent over 30% of its total
revenue in each of the next two fiscal years. It is expected that by 1999, the
majority of the program will be complete. Additional orders with this customer
are anticipated, but at a greatly reduced sales level.
Four major initiatives currently underway are expected to compensate for this
anticipated decline in revenues. The first initiative is in the health care
industry, combining our ImageEMC system with our high performance image capture
transports, to process HCFA Medicare claim forms as well as other types of
medical claim forms. The Company has focused on and has experienced success
with this vertical line of business and believes it provides an opportunity for
growth.
The second initiative consists of the Company's development of target market
data capture applications that, combined with its other high speed transports
and archival systems, will provide cost effective solutions. The current focus
is on the transportation, order entry, tax, health care and exam scoring
markets. The Company expects to continue to emphasize its "Solutions that
Work" focus on these targeted markets for the foreseeable future. As other
market opportunities emerge, the Company will evaluate the potential of using
its products and services to provide "Solutions that Work" in these new
markets.
The third initiative is further expansion into the international marketplace.
The Company has successfully penetrated the Japanese market and has experienced
strong sales activity through relationships with highly qualified and
productive distributors. Over the next two years, the Company will focus on
developing comparably strong relationships in Europe, South America and other
Pacific Rim countries.
The fourth initiative relates to the expansion of some of the Company's core
competencies in an effort to add revenues and profits. The Company believes
that the hardware service, manufacturing and custom engineering organizations
have potential to leverage their individual expertise, experience and cost
effectiveness to other entities.
The Company believes that success in achieving these initiatives will help
offset the foreseen reduction in sales for the customer described above. The
ability for the Company to achieve the above expectations could be impacted by
increased competition or a slowdown in the growth within the scanning and
imaging market, alternate forms of processing and changes in the economic
climates of foreign markets as well as that of the United States.
Total revenues increased $4.0 million from 1995.
Net sales increased $2.6 million or 9.5% from the prior year. North American
sales were relatively flat and international sales increased $2.8 million or
17.8% from 1995. International sales in the Pacific Rim showed another year
of growth from 1995 to 1996. Sales to Japanese distributors increased sales
volume in this marketplace by 27% or $4.1 million mainly due to the increase in
orders from 1995 levels with the Japanese government. Sales to Latin and South
America decreased $.3 million and sales to Europe decreased $1.0 million from
1995 to 1996, due to the absence of a focused sales program.
Service revenues increased $1.4 million from 1995 to 1996. Customer hardware
service revenue decreased $.2 million due to the replacement of older product
lines with current product which requires less maintenance than earlier product
lines. Software service revenue increased $.9 million due to software becoming
a larger component of the customer solution. Engineering revenue increased $.7
million from 1995 to 1996 due to a new product development agreement completed
in the third quarter of 1996. (See Note G of the Consolidated Financial
Statements.)
Cost of sales were approximately the same as the 1995 level. However, the
gross margin percentage increased 5.7% from 29.5% in 1995 to 35.2% in 1996.
The increase in gross margin is mainly due to a $1.9 million decrease in
manufacturing costs, reflecting the manufacturing efficiencies achieved from
increased production and purchasing volumes. Additionally, the Company's
required sales discounts decreased due to the completion of two major research
and development agreements. (See Note G of the Consolidated Financial
Statements.)
Marketing and service expenses decreased by $.7 million in 1996 principally due
to a decrease in salaries and fringe benefits resulting from a reduction in the
work force in late 1995.
Research and development expenses decreased $.4 million from 1995 mainly due to
the decrease in engineering staff resulting from a reduction in the work force
in late 1995.
General and administrative expenses increased $.8 million compared to the prior
year mainly due to a $.3 million expense related to the incentive compensation
plan, which was based upon the achievement of predetermined net income targets.
Legal fees increased $.2 million from 1995. Also, salaries and related
benefits increased $.3 million due to the addition of James Mavel, the
Company's new President in January 1996.
Interest expense decreased $.4 million due to the significant decrease in the
average outstanding loan balance for 1996, which was $1.1 million compared to
$5.3 million in 1995.
<PAGE>
RESULTS OF OPERATIONS -- 1995 VS. 1994
Total revenues decreased $1.8 million from 1994.
Net sales increased $.7 million from the prior year. North American sales
decreased $4.6 million and international sales increased $5.3 million from
1994. The North American sales decreased due to the completion of the primary
implementation of the IRS SCRIPS award in 1994. International sales in the
Pacific Rim showed significant growth from 1994 to 1995. Sales to a Japanese
health agency increased sales volume in this marketplace by 123% or $8.3
million. Sales to Latin America and South America decreased 76% or $1.2
million. Sales to Europe decreased 80% or $1.8 million over the prior year.
These decreases are reflective of large non-recurring sales which occurred in
the prior year.
Service revenues decreased $2.3 million from 1994 to 1995. Customer service
revenue decreased $1.5 million due to the replacement of older product lines
with current product which requires less maintenance than earlier product
lines. Software service revenue decreased $.3 million due to the decrease in
North American sales during the year. Engineering revenue decreased $.5
million from 1994 to 1995 due to the completion of a significant product
development agreement.
Cost of sales increased $1.9 million from 1994 to 1995. The gross margin
percentage decreased 5.3% from 34.8% in 1994 to 29.5% in 1995. The decrease in
gross margin is due to the shift in revenue mix from domestic sales to
international sales, particularly to the Pacific Rim. Sales to a Japanese
health agency, due to the volume of orders, carried a lower margin percentage.
Additionally, unabsorbed manufacturing expenses increased in 1995 due to the
fluctuations in production volume throughout the year.
Marketing and service expenses decreased by $.7 million in 1995 principally due
to staffing reductions related to changes in the installed base of serviced
equipment.
Research and development expenses decreased $1.1 million from 1994 mainly due
to the decrease in engineering staff resulting from the corporate
reorganization as well as a decrease in the utilization of outside consultants.
General and administrative expenses increased $.5 million compared to the prior
year mainly due to a $.2 million increase in legal expenses, and a $.1 million
increase in the Company's contribution to the 401(k) plan. Additionally,
outside recruiting firms were utilized in 1995 to fill open positions in upper
management.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1.0 million from 1995 to 1996 for the
reasons discussed below.
Total Company borrowings decreased $.2 million to $.1 million at December 31,
1996. The average borrowing level for 1996 was $1.1 million compared to $5.3
million for 1995. The change in borrowing level is due in part to the increase
in sales realized in 1996 as well as the benefit of a reduction in operating
expenses that occurred in late 1995. On March 12, 1997, the Company received a
commitment letter from the bank extending the maturity date of the outstanding
line of credit to May 28, 1998. The line of credit was reduced from $6 million
to $4 million ($2 million each for the international and domestic lines) which
is reflective of the Company's current cash availability and projected cash
flow requirements for the next twelve months. Management believes that the
line of credit provides the Company with sufficient financial resources to meet
its working capital requirements. (See Note C of the Consolidated Financial
Statements.)
Operating activities provided $3.1 million of cash in 1996 compared to $2.4
million in 1995. The increase of $.7 million is mainly attributable to the
$3.3 million of net income realized in 1996 compared to the net loss of $1.3
million in 1995. The effect of the net income increase was offset by
fluctuations in other balance sheet items as discussed below.
Non-cash expenses recorded in 1996 were $3.5 million vs. $2.5 million in 1995.
These expenses relate to depreciation of fixed assets which is discussed in net
plant and equipment below, amortization of customer service spare parts
inventory, provisions for losses on accounts receivable and provisions for
inventory obsolescence.
Accounts receivable decreased $1.0 million from 1995 mainly due to a $.9
million decrease in systems currently undergoing acceptance testing. The
Company's revenue recognition policy relating to sales of certain equipment
records revenue upon acceptance of the related application software.
Total inventories increased $1.2 million from 1995 levels. Manufacturing
inventories increased $2.0 million during the year mainly due to increases in
work-in-process of $3.3 million reflecting increased production volumes.
Finished goods inventory decreased $1.3 million due to the Company's focused
effort to reduce inventory levels. Customer service inventory decreased $.8
million from 1995, mainly due to increased amortization of parts inventory
compared to the prior year, as well as a transfer to the Manufacturing
department for use in the Manufacturing process.
Net plant and equipment increased $.4 million in 1996. The major components of
this increase include $1.2 million of capitalized leasehold improvements
related to the consolidation of facilities in Manchester, Connecticut. Other
additions of $1.4 million include the capitalization of customer support
equipment and engineering test equipment. Offsetting the plant and equipment
increases were $.7 million of asset disposals in 1996 and depreciation recorded
of $1.5 million which was $.3 million higher than 1995 expense levels.
Other assets increased $.1 million due to an increase in the cash surrender
value of the Company's officers' life insurance policies.
Accounts payable and accrued expenses increased $1.8 million from 1995 levels.
Although accounts payable decreased $.4 million due to improvements in the
just-in-time inventory procurement process and improvements in cash flow,
accrued expenses increased $2.2 million mainly due to increases in accrued
wages of $1.0 million, reflecting a $.8 million incentive compensation accrual
and a $.2 million increase in accrued commissions. Other increases included
additional sales and use tax accruals, royalties payable and other
miscellaneous reserves.
Customer deposits decreased $3.6 million reflective of a change in the
negotiated payment terms with the customer which decreased the deposit
percentage and shortened the payment terms.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Scan-Optics, Inc.
We have audited the accompanying consolidated balance sheets of Scan-Optics,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Scan-
Optics, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated 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. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Hartford, Connecticut
January 31, 1997, except for the second paragraph of
Note C, as to which the date is March 12, 1997
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
(thousands, except share data) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,279 $ 281
Accounts receivable, less allowance of $673
in 1996 and $413 in 1995 9,262 10,297
Inventories 14,920 13,746
Prepaid expenses and other 1,274 1,261
------- --------
Total current assets 26,735 25,585
Plant and equipment:
Equipment 14,094 14,097
Leasehold improvements 3,980 2,837
Office furniture and fixtures 1,248 1,215
------- --------
19,322 18,149
Less allowances for depreciation and
amortization 15,147 14,340
------- --------
4,175 3,809
Other assets 211 120
------- --------
Total Assets $ 31,121 $ 29,514
======= ========
<PAGE>
December 31
(thousands, except share data) 1996 1995
- ---------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 98 $ 305
Accounts payable 2,470 2,862
Salaries and wages 1,940 909
Taxes other than income taxes 682 338
Income taxes 207 185
Customer deposits 2,323 5,900
Other 1,697 847
------------------------
Total current liabilities 9,417 11,346
Other liabilities 497 417
Stockholders' Equity
Preferred stock, par value $.02 per share,
authorized 5,000,000 shares; none
issued or outstanding
Common stock, par value $.02 per share,
authorized 15,000,000 shares;
issued, 6,945,701 shares in 1996 and
6,935,184 shares in 1995 139 139
Common stock Class A Convertible, par
value $.02 per share, authorized 3,000,000
shares; available for issuance 2,145,536
shares; none issued or outstanding
Capital in excess of par value 34,297 34,271
Retained-earnings deficit (10,159) (13,433)
Foreign currency translation adjustments (292) (315)
Unearned ESOP compensation (132) (265)
-------- -------
23,853 20,397
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
-------- -------
Total stockholders' equity 21,207 17,751
-------- -------
Total Liabilities and Stockholders' Equity $ 31,121 $ 29,514
======== =======
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
(thousands, except share data) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $ 30,275 $ 27,642 $ 26,988
Service revenues 15,671 14,309 16,616
Other operating revenues 88 133 285
-------- -------- ---------
Total revenues 46,034 42,084 43,889
Costs and Expenses
Cost of sales 19,622 19,487 17,584
Marketing and service expenses 15,046 15,769 16,437
Research and development expenses 4,142 4,574 5,690
General and administrative expenses 3,939 3,142 2,637
Interest expense 102 488 376
-------- -------- ---------
Total costs and expenses 42,851 43,460 42,724
-------- -------- ---------
Operating income (loss) 3,183 (1,376) 1,165
Other income, net 82 49 79
-------- -------- ---------
Income (loss) before income taxes 3,265 (1,327) 1,244
======== ======== =========
Income tax benefit (9) (72) (40)
------------------ ---------
Net Income (Loss) $ 3,274 $ (1,255) $ 1,284
================== =========
Earnings (loss) per share $ 0.49 $ (0.19) $ 0.19
================== =========
Average common and common equivalent shares 6,715,462 6,620,270 6,859,544
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Foreign
Capital in Retained- Currency Unearned
Common Stock Excess of Earnings Translation ESOP Treasury
(thousands, except share data) Shares Amount Par Value Deficit Adjustments Comp. Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994 6,779,568 $ 135 $ 33,931 $(13,462) $ (331) $ (530) $ (2,646) $17,097
Issuance of common stock upon
exercise of stock options 126,512 3 271 274
Unearned ESOP compensation
amortization 133 133
Net income 1,284 1,284
Foreign currency translation
adjustments (57) (57)
- ------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 6,906,080 138 34,202 (12,178) (388) (397) (2,646) 18,731
Issuance of common stock upon
exercise of stock options 29,104 1 69 70
Unearned ESOP compensation
amortization 132 132
Net loss (1,255) (1,255)
Foreign currency translation
adjustments 73 73
- ------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 6,935,184 139 34,271 (13,433) (315) (265) (2,646) 17,751
Issuance of common stock upon
exercise of stock options 10,517 26 26
Unearned ESOP compensation
amortization 133 133
Net income 3,274 3,274
Foreign currency translation
adjustments 23 23
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 6,945,701 $ 139 $ 34,297 $(10,159) $ (292) $ (132) $(2,646) $21,207
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 3,274 $ (1,255) $ 1,284
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 1,524 1,214 1,198
Amortization 1,123 1,034 923
Provision for losses on accounts receivable 711 236
Provision for inventory obsolescence 127 477
Changes in operating assets and liabilities:
Accounts receivable 324 (1,409) (115)
Inventories, prepaid expenses and other (2,437) (735) (2,392)
Accounts payable and accrued expenses 1,833 (206) (534)
Income taxes 22 10 (26)
Customer deposits (3,577) 3,735 542
Other 145 (230) (115)
--------- ------- --------
Net cash provided by operating activities 3,069 2,394 1,242
Investing Activities
Purchases of plant and equipment (1,890) (401) (1,870)
--------- ------- --------
Net cash used by investing activities (1,890) (401) (1,870)
Financing Activities
Proceeds from issuance of common stock 26 70 274
Proceeds from borrowings 22,631 31,777 25,219
Principal payments on borrowings (22,838) (33,737) (24,970)
--------- -------- -------
Net cash provided (used) by financing activities (181) (1,890) 523
Increase (decrease) in cash and cash equivalents 998 103 (105)
Cash and Cash Equivalents at Beginning Of Year 281 178 283
---------- -------- --------
Cash and Cash Equivalents at End of Year $ 1,279 $ 281 $ 178
========== ======== ========
Supplemental Cash Flow Information
Interest paid $ 129 $ 502 $ 342
========== ======== ========
Income taxes paid $ 26 $ 59 $ 79
========== ======== ========
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Accounting Policies
Organization: The Company designs and manufactures information processing
systems used for imaging, data capture, document processing and information
management. The Company's systems, software and services are marketed world-
wide to commercial and government organizations either directly by the Company
sales organization or through distributors. The Company's business is
vulnerable to a number of factors beyond its control. These include (1) the
effect of a weakening in the domestic and international economies which
potentially impacts capital investments by customers, (2) the cyclical nature
of funding within federal and state government agencies, (3) competition from
similar products, (4) the implementation of other technologies which may
provide alternative solutions, and (5) the stability of sole source suppliers.
Basis of Presentation: The consolidated financial statements include the
accounts of Scan-Optics, Inc. and its subsidiaries, all wholly-owned. All
intercompany accounts and transactions are eliminated in the consolidated
financial statements. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. While management believes that the
estimates and related assumptions used in the preparation of these financial
statements are appropriate, actual results could differ from those estimates.
Cash Equivalents: Highly liquid investments purchased with maturities of three
months or less are considered cash equivalents.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Plant and Equipment: Plant and equipment is stated on the basis of cost.
Depreciation is computed principally using the straight-line method over
periods of 3 to 10 years. Leasehold improvements are amortized over the useful
life of the improvements or the life of the lease, whichever is shorter.
Revenue Recognition: Revenues from maintenance and application software
services are recognized as earned. Revenues relating to sales of certain
equipment (principally optical character recognition equipment) are recognized
upon acceptance of the related application software.
Income Taxes: Deferred income taxes are provided for differences between the
income tax and the financial reporting bases of assets and liabilities at the
statutory tax rates that will be in effect when the differences are expected to
reverse.
Stock Based Compensation: The Company generally grants stock options to key
employees and members of the board of directors with an exercise price equal to
the fair value of the shares on the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants. Therfore, the Company has elected the disclosure
provisions only of FASB Statement No. 123.
Earnings (Loss) Per Share: Earnings (loss) per share amounts are computed
using weighted average common and common equivalent shares outstanding during
the year assuming conversion of the common stock equivalents into common stock,
if dilutive, at the weighted average market price of the stock for the year.
All shares held by the Company's Employee Stock Ownership Plan (ESOP) are
considered outstanding.
Foreign Currency Translation: The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with FASB Statement No.
52, Foreign Currency Translation. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using the average exchange
rate for the year. The gains and losses resulting from the changes in exchange
rates from year to year have been reported separately as a component of
stockholders' equity.
Reclassifications: Certain 1995 and 1994 amounts have been reclassified to
conform to current year presentation.
NOTE B -- INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
December 31
(thousands) 1996 1995
<S> <C> <C>
Finished goods $ 1,534 $ 2,823
Work-in-process 6,084 2,820
Service parts 4,276 5,043
Materials and component parts 3,026 3,060
$14,920 $13,746
</TABLE>
NOTE C -- CREDIT ARRANGEMENTS
The Company has a line of credit agreement (Agreement) with a bank which
expires on May 29, 1997. The Agreement has two components, a $3 million line
(international) guaranteed by a third party bank which is collateralized by
international accounts receivable and inventory, and which bears interest at
prime (8 1/4% at December 31, 1996); and a $3 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and which bears
interest at prime plus 1/2% (8 3/4% at December 31, 1996). The weighted average
interest rate on borrowings during 1996 and 1995 was 8.6% and 9.1%
respectively. The unused portion of the $3 million domestic line is subject to
a commitment fee of 3/4% per annum. Borrowings under the Agreement are subject
to various limitations based upon percentages of eligible receivables and
inventories of the Company. The available balance on the total line of credit
was $5,902,000 at December 31, 1996. In addition, the Agreement contains
covenants which, among other things, require the maintenance of specified
working capital, debt to equity ratios, net income levels and tangible net
worth levels.
On March 12, 1997, the Company received a commitment letter from the bank
extending the maturity date of the outstanding line of credit to May 28, 1998.
The line of credit was reduced from $6 million to $4 million ($2 million each
for the international and domestic lines) which is reflective of the Company's
current cash availability and projected cash flow requirements for the next
twelve months. The commitment letter is subject to the extension of the
guarantee by the third party bank on the international line. The Company
expects that the guarantee will be extended.
The carrying value of the notes payable to bank approximates its fair value.
NOTE D -- CAPITAL STOCK
The Board of Directors is authorized to issue shares of the Company's preferred
stock in series, to establish from time to time the number of shares to be
included in each series and to fix the designation, powers, preferences and
other terms and conditions with respect to such stock. No shares have been
issued to date.
Class A stock has the same rights as common stock, except that its holders may
not vote for the election of directors, and it is convertible into common stock
on a share for share basis. On September 2, 1994, all outstanding shares of
Class A stock were converted to common stock.
At December 31, 1996, the Company had reserved 1,333,907 shares of common stock
for the exercise of warrants (18,000) and the issuance or exercise of stock
options (1,315,907).
NOTE E -- COMMON STOCK WARRANTS
Warrants outstanding generally have anti-dilution provisions and expire in
1998.
Price Per Share Shares
Warrants outstanding January 1, 1993 $3.63 18,000
Granted in 1993 $5.38 25,000
Warrants outstanding December 31, 1994, 1995 $3.63 - $5.38 43,000
Expired in 1996 $5.38 25,000
Warrants outstanding December 31, 1996 $3.63 18,000
<PAGE>
NOTE F -- STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options. Under APB No. 25, because
the exercise price of the Company's stock options equals market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has five stock option plans for key employees and board members.
Options granted under the plans are for a period of ten years and at prices not
less than the fair market value of the shares at date of grant except that the
price for non-qualified options may not be less than the par value of the
stock. Options for employees are not exercisable for one year following the
date of grant and then are exercisable in such installments during the period
prior to expiration as the Stock Option Committee shall determine. Options for
Directors are not exercisable until six months after the grant thereof.
Options may be exercised from time to time, in part or as a whole, on a
cumulative basis as determined by the Stock Option Committee under all stock
option plans.
The following schedule summarizes the changes in stock options for each of the
three years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Option Price
Shares Per Share
Outstanding January 1, 1994
(559,388 exercisable) 784,111 $1.25 to $9.63
Granted 153,500 5.75 to 9.00
Exercised (126,512) 1.25 to 3.63
Cancelled (36,582) 3.13 to 6.00
Outstanding December 31, 1994
(531,273 exercisable) 774,517 1.50 to 9.63
Granted 91,000 2.13 to 6.00
Exercised (29,104) 2.00 to 3.25
Cancelled (49,698) 2.00 to 9.25
Outstanding December 31, 1995
(587,260 exercisable) 786,715 1.50 to 9.63
Granted 124,000 3.25 to 4.75
Exercised (10,517) 1.50 to 3.25
Cancelled (41,484) 2.13 to 9.63
Outstanding December 31, 1996
(567,991 exercisable) 858,714 $1.50 to $9.63
</TABLE>
At December 31, 1996 there were 457,193 options available for grant.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The assumptions used in the
valuation model were: risk free interest rate - 7%, expected life - 10 years
and expected volatility range of .449 to .592.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For the purpose of pro forma disclosures, the estimated fair value of the stock
options is expensed ratably over the vesting period which is 36 months. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
December 31
(thousands) 1996 1995
<S> <C> <C>
Net income (loss), as previously reported $ 3,274 $ (1,255)
Stock option expense 153 101
Pro forma net income (loss) $ 3,121 $ (1,356)
Earnings (loss) per share, as previously reported $ .49 $ (.19)
Stock option expense .02 .02
Pro forma earnings (loss) per share $ .47 $ (.21)
</TABLE>
<PAGE>
NOTE G -- RESEARCH AND DEVELOPMENT AGREEMENTS
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products. The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights. Royalties and sales
discounts, up to a maximum of 130% of the amount advanced to the Company, were
required based on sales of the new product technology through the termination
dates of the agreements, June 30, 1995 and December 31, 1996. As of December
31, 1996, the Company had repaid or accrued $4,738,000 or 100% of the maximum
potential obligation.
During 1993, the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $370,000 in 1994 and $790,000
in 1993. These revenues offset related costs incurred to develop the
modifications and enhancements. Two prototype systems were delivered in the
first quarter of 1994 and successfully passed customer acceptance testing. An
initial production contract was awarded for delivery in the fourth quarter of
1994. The ownership of the technologies created as a result of this
development agreement remains with the Company. No royalties or other
considerations are required as a part of this agreement.
During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $336,000 in 1995 and 364,000
in 1996. These revenues offset related costs incurred to develop the
modifications and enhancements. The ownership of the technologies created as a
result of this development agreement remains with the Company. No royalties or
other considerations are required as a part of this agreement.
NOTE H -- EMPLOYEE BENEFITS
The Company maintains a Retirement Savings Plan for United States employees.
Under this plan, all employees may contribute up to 15% of their salary to a
retirement account up to the maximum amount allowed by law. The Company
contributed an amount equal to 50% of the first 4% contributed by the
participant in 1996 and 1995, and 25% of the first 4% in 1994. The Company's
contributions to this plan were $189,000, $205,000 and $107,000 for 1996, 1995
and 1994, respectively.
The Company sponsors an Employee Stock Ownership Plan (the Plan) covering
substantially all full-time employees. The Plan, which is a tax qualified
employee benefit plan, was adopted by the Board of Directors of the Company on
January 29, 1988 to provide retirement benefits for employees. The Plan
borrowed $1,325,000 to purchase 260,000 shares of the Company's stock to be
allocated to participants ratably over a ten year period. The ESOP loan was
guaranteed by the Company and the outstanding balance of the loan was repaid in
1991. At December 31, 1996, there were 26,000 unallocated shares. In 1996,
1995 and 1994 the expenses related to the Plan were $132,481 in each year.
NOTE I -- INCOME TAXES
The Company has approximately $5,300,000, $4,300,000 and $2,900,000 of net
operating loss carryforwards for federal, state and foreign income tax
purposes, respectively, which are scheduled to expire periodically between
1997 and 2010. For financial reporting purposes a valuation allowance has been
recognized to offset the deferred tax assets related to those carryforwards and
other temporary differences.
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
<CAPTION>
December 31
(thousands) 1996 1995
<S> <S> <S>
Deferred tax assets:
Net operating losses $ 3,108 $ 3,422
Depreciation 106 99
Inventory valuation 101 831
Accounts receivable reserves 231 167
Revenue recognition 13 13
Vacation accrual 245 258
Other 258 279
Total deferred tax assets 4,062 5,069
Deferred tax liabilities:
Depreciation and other (390) (82)
Inventory (156)
Sales type lease (73)
Valuation allowance (3,443) (4,987)
Net deferred taxes $ 0 $ 0
</TABLE>
For financial reporting purposes, income (loss) before income taxes is set
forth in the following tabulation:
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
(thousands) 1996 1995 1994
Domestic $ 4,523 $ (407) $ 2,150
Foreign (1,258) (920) (906)
$ 3,265 $(1,327) $ 1,244
</TABLE>
<PAGE>
Income taxes (benefit) are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
<S> <C> <C> <C>
(thousands) 1996 1995 1994
Currently payable
(refundable):
Foreign $ (69) $ (132) $ (100)
State 60 60 60
$ (9) $ (72) $ (40)
</TABLE>
A reconciliation of the effective tax rate to the statutory rate is as follows:
Year Ended December 31
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Statutory federal income tax rate 34% (34%) 34%
State income taxes, net of federal benefit 2 5 5
Foreign income taxes (benefit) (2) (10) (8)
Net operating loss carryforward
(benefit) limitation (34) 34 (34)
0% (5%) (3%)
</TABLE>
NOTE J -- LEASE COMMITMENTS
The Company's principal lease commitments are for its corporate office and
manufacturing facility in Manchester, Connecticut and its research and
development facilities in Irvine and Berkeley, California. The Manchester
lease expires on December 31, 2006, the Irvine lease expires on December 31,
1998 and the Berkeley lease expires on December 14, 1997. Minimum rental
payments for all noncancelable leases which are operating leases with terms
equal to or in excess of one year as of December 31, 1996 are as follows:
Operating
(thousands) Leases
1997 $ 418
1998 415
1999 374
2000 338
2001 348
Thereafter 1,800
Total minimum lease payments $ 3,693
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$678,000, $887,000, and $808,000, respectively.
NOTE K -- CONTINGENCIES
There are certain claims pending against the Company which arose in the normal
course of business. In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.
NOTE L -- SEGMENT INFORMATION
Export sales by geographic area were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(thousands) 1996 1995 1994
<S> <S> <S> <S>
Latin America and South America $ 113 $ 375 $ 1,577
Europe 433 1,468 2,187
Pacific Rim 18,281 14,143 6,745
$ 18,827 $ 15,986 $ 10,509
</TABLE>
In 1996 and 1995, one customer accounted for approximately 38% and 31% of
consolidated revenues, respectively. Two customers accounted for approximately
22% of consolidated revenues in 1994, each at 11%.
NOTE M -- BILL AND HOLD TRANSACTIONS
Revenue relating to sales of certain equipment (principally optical character
recognition equipment) are recognized upon acceptance of the related
application software. When customers, under the terms of specific orders or
contracts, request that the Company manufacture and invoice the equipment on a
bill and hold basis, the Company recognizes revenue based upon an in-house
acceptance test that is certified by the customer. Revenues recorded during
1996 and 1995 included bill and hold transactions of $10.8 million and $5.7
million, respectively. Accounts receivable included bill and hold receivables
of $4.9 million and $1.6 million at December 31, 1996 and 1995, respectively.
NOTE N -- FOURTH QUARTER ADJUSTMENTS (unaudited)
Fourth quarter 1996 net income of $2.1 million includes charges to expense of
$1.5 million. The major components of these charges include incentive
compensation of $.8 million and the write off of older products used for
demonstration and customer support that are no longer used of $.3 million.
These adjustments reduced fourth quarter net income by $.22 per share.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to Directors and additional information pertaining to
Executive Officers is included, under the caption "Governance of the Company",
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 15, 1997 and is incorporated herein by reference and made a
part hereof.
ITEM 11 - EXECUTIVE COMPENSATION
This information is included, under the caption "Executive Compensation", in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 15, 1997 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included, under the caption "Share Ownership of
Management", in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 15, 1997 and is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included, under the caption "Certain Transactions", in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 15, 1997 and is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and report of independent
auditors of the Company and its subsidiaries are included in Item 8:
(1) Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31,
1996
(2) The following consolidated financial statement schedule is
included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(3) Listing of Exhibits
*3.1(a) Certificate of Incorporation, including amendments
thereto (filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1, File No. 2-70277).
*3.1(b) Amendments to Certificate of Incorporation adopted May
17, 1984, included in Exhibits A, B, C and D in the
Company's proxy statement dated April 17, 1984 for the
Annual Meeting of Stockholders held May 17, 1984.
*3.1(c) Amendment to Article Tenth of the Certificate of
Incorporation included as Exhibit A in the Company's
proxy statement dated April 16, 1987 for the Annual
Meeting of Stockholders held May 19, 1987.
*3.2(a) By-laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File
No. 2-70277).
*3.2(b) Amendments to By-laws of the Company adopted May 17,
1984, included in Exhibits A and B in the Company's
proxy statement dated April 17, 1984 for the Annual
Meeting of Stockholders held May 17, 1984.
*3.2(c) Amendment to By-laws of the Company adopted at the
meeting of the Board of Directors on January 28, 1991,
included as Exhibit 3.2(c) in the Company's Annual
Report on Form 10K filed for the year ended December 31,
1991.
*+10.1 The Scan-Optics, Inc. 1979 Incentive and Non-Qualified
Stock Option Plan included in Exhibit B in the Company's
Proxy statement dated June 8, 1979 for the Annual
Meeting of Stockholders held on June 27, 1979.
* +10.2 The Scan-Optics, Inc. 1984 Incentive and Non-Qualified
Stock Option Plan included in Exhibit E in the Company's
Proxy statement dated April 19, 1984 for the Annual
Meeting of Stockholders held on May 17, 1984.
* +10.3 The Scan-Optics, Inc. 1987 Incentive and Non-Qualified
Stock Option Plan included in Exhibit B in the
Company's Proxy statement dated April 16, 1987 for the
Annual Meeting of Stockholders held on May 19, 1987.
* +10.4 The Scan-Optics, Inc. 1990 Incentive and Non-Qualified
Stock Option Plan included in Exhibit A in the Company's
Proxy statement dated April 30, 1990 for the Annual
Meeting of Stockholders held on June 12, 1990.
* +10.5 The Scan-Optics, Inc. 1990 Stock Option Plan for Outside
Directors included in Exhibit B in the Company's Proxy
statement dated April 30, 1990 for the Annual Meeting of
Stockholders held on June 12, 1990.
* +10.6 Employment agreement between Richard I. Tanaka and Scan-
Optics, Inc. effective September 5, 1989, included as
Exhibit 10.7 in the Company's Annual Report on Form 10-K
filed for the year ended December 31, 1991.
* +10.7 Severance agreement between Clarence W. Rife and Scan-
Optics, Inc. dated December 17, 1986, included as
Exhibit 10.8 in the Company's Annual Report on Form 10-K
filed for the year ended December 31, 1991.
* +10.8 Executive severance agreement between certain officers
and Scan-Optics, Inc. dated July 28, 1992, included as
Exhibit 10.8 in the Company's Annual Report on Form 10-K
filed for the year ended December 31, 1992.
+10.9 Amendment No.1 to Employment Agreement, dated as of
December 31, 1996, between Scan-Optics, Inc. and
Richard I. Tanaka.
+10.10 Employment agreement, effective as of December 31, 1996,
between Scan-Optics, Inc, and James C. Mavel
11. Computation of earnings per share for the last three
fiscal years.
* 22. List of subsidiaries of the Company, included as Exhibit
10.8 in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 1993.
23. Consent of Independent Auditors.
27. Financial Data Schedule.
* Exhibits so marked have heretofore been filed by the Company
with the Securities and Exchange Commission and are incorporated herein by
reference.
+ Management contract for compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14(c) of this
report.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter ended
December 31, 1996.
(c) Exhibits
The exhibits required by this item are included herein.
(d) Financial Statement Schedule
The response to this portion of Item 14 is submitted as
a separate section of this report.
<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 annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCAN-OPTICS, INC.
Registrant
By: /ss/
James C. Mavel
President, Chief Executive Officer,
and Director
Date: March 24, 1997
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 in the capacities and on the dates indicated.
/ss/
James C. Mavel President, Chief Executive Officer,
and Director
(Principal Executive Officer)
Date: March 24, 1997
/ss/
Michael J. Villano Chief Financial Officer and Vice
President
(Principal Financial and
Accounting Officer)
Date: March 24, 1997
/ss/
Richard I. Tanaka Chairman of the Board of Directors
Date: March 24, 1997
/ss/
Logan Clarke, Jr. Director March 24, 1997
/ss/
Richard J. Coburn Director March 24, 1997
/ss/
E. Bulkeley Griswold Director March 24, 1997
/ss/
Lyman C. Hamilton, Jr. Director March 24, 1997
/ss/
Robert H. Steele Director March 24, 1997
A majority of the Directors
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
SCAN-OPTICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions(1) Period
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Reserve for doubtful accounts $ 413 $ 711 $ 451 $ 673
Year ended December 31, 1995:
Reserve for doubtful accounts $ 279 $ 236 $ 102 $ 413
Year ended December 31, 1994:
Reserve for doubtful accounts $ 313 $ 34 $ 279
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
<PAGE>
Exhibit 10.9
Amendment No. 1 to Employment Agreement
This Amendment No. 1, dated as of December 9, 1996, amends the
Employment Agreement ("the Employment Agreement") made and entered into as of
the 5th day of September, 1989, by and between Scan-Optics, Inc., a Delaware
corporation with its principal office in East Hartford, Connecticut (the
"Corporation"), and Richard I. Tanaka (the "Executive").
WHEREAS, the Corporation and the Executive desire to effect a
management transition whereby the Executive will phase out of his executive
positions with the Corporation;
WHEREAS, the intent of the Corporation and the Executive in entering
into this Amendment No. 1 is to help assure that the objectives of that
management transition are met by removing uncertainties on timing, by providing
a climate where the focus of both parties is on mutually held objectives, and
by minimizing conflicts in objectives between the parties;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. The Executive will cease to be the Chief Executive Officer of
the Corporation no later than December 31, 1996.
2. The Executive will continue as Chairman of the Board of
Directors until the 1997 Annual Meeting of the stockholders of
the Corporation. His focus until that date will be on (1) the
long range strategic plan of the Corporation, (2) providing
assistance to the Chief Executive Officer in developing the
theme, words and visuals related to the 1996 Annual Report, and
(3) developing the best strategy and tactics possible, so as to
sign or have a letter of intent signed, on future VSOP orders
and the further national health contract related to additional
Japanese healthcare Scan-Optics systems.
3. For 12 months after the 1997 Annual Meeting of Stockholders, the
Executive will continue as an executive employee of the
Corporation. He will not have specific assigned duties but will
be available to assist and consult with the Corporation on
specific issues related to customers and products. These issues
may include, but are not limited to, product direction, the
international market, and relationships with distributors and
customers as related to the Japanese market.
4. The Executive will remain an executive employee and retain all
of the benefits of full-time employment during that 12-month
period. The Executive's salary and benefits will remain in
effect during that period and will not be less than at the
levels existing on the date of this Amendment No. 1 (except that
the Corporation may make changes in benefit plans applying to
the Executive and other employees as long as the Executive
continues to be treated fairly in relation to the other
participating employees), and the Executive's stock options will
remain in place during that period and thereafter in accordance
with their terms.
5. The Corporation and the Executive agree that (a) the Executive
will not be entitled to any severance pay or continued
participation in the Corporation's health and disability
insurance plans or the continuation of any other benefits,
compensation or remuneration following or as the result of the
termination of his employment with the Corporation at the end of
that 12-month period; that (b) the payments and other benefits
provided for him in this Amendment No. 1 are in lieu of the
severance pay and the continuation of participation in health
and disability insurance plans provided for in Section 11(g) of
the Employment Agreement; and (c) that the provisions of Section
11(d) of this Agreement will not apply to or be activated by the
changes in the Executive's job responsibilities contemplated by
or resulting from this Amendment No. 1.
6. Except as specifically amended by this Amendment No. 1, the
provisions of the Employment Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No.
1 as of the date first above written.
SCAN-OPTICS, INC.
By /s/ E. Bulkeley Griswold
Name: E. Bulkeley Griswold
Title: Chairman of the Stock Options
and Executive Compensation
Committee
/s/ Richard I. Tanaka
Richard I. Tanaka
<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into effective as of the 31st day of
December, 1996, by and between SCAN-OPTICS, INC., a Delaware corporation with
its principal office in East Hartford, Connecticut (the "Corporation"), and
James C. Mavel, (the "Executive").
W I T N E S S E T H:
WHEREAS, The Corporation desires to employ the Executive and to be
assured of its rights to his services in an executive capacity on the terms and
conditions hereinafter set forth, and the Executive is willing to accept such
employment;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. Employment.
The Corporation hereby employs the Executive as its President
and Chief Executive Officer and in such other executive capacities as the Board
of Directors of the Corporation may from time to time designate, and the
Executive accepts such employment and agrees to serve in such capacities upon
the terms and conditions hereinafter set forth.
2. Term.
The term of the Executive's employment under this Agreement (the
"Term") shall commence on December 31, 1996 and shall continue until the
Executive's employment is terminated by either party in accordance with the
terms of this Agreement.
3. Duties of Employment.
During the Term, the Executive shall perform all duties assigned
or delegated to him from time to time by the Board of Directors of the
Corporation, and shall perform all acts and services customarily associated
with his position as President and Chief Executive Officer of the Corporation,
devoting his full time, best efforts and attention to the advancement of the
interests and business of the Corporation hereunder, and shall not be engaged
in or concerned with any other duties or pursuits which are competitive or
inconsistent with the business of the Corporation.
4. Compensation and Benefits.
As compensation for the services to be rendered by the Executive
hereunder:
(a) The Corporation shall pay to the Executive a base salary
of TWO HUNDRED THOUSAND DOLLARS ($200,000) per year of the Term or such greater
amount as the Board of Directors of the Corporation may from time to time
determine, payable in equal monthly installments.
(b) The Corporation shall pay the Executive annual incentive
compensation as a participant in the Corporation's annual management bonus
program, involving both potential cash and option benefits, in amounts to be
determined by the Stock Options and Executive Compensation Committee of the
Board of Directors following the availability of annual financial results and
taking into consideration the Executive's attainment of the management
objectives determined annually by agreement between said Committee and the
Executive. Such incentive compensation will be paid within sixty (60) days
after the end of each year of the Term.
(c) During the Term, the Corporation shall purchase and
maintain for the Executive and his designated beneficiaries term life insurance
on the life of the Executive in the face amount of $550,000.
(d) During the Term, the Corporation shall provide the
Executive with a late model automobile of a model chosen by the Executive,
equipped with a telephone, shall replace such automobile every three years, and
shall pay all maintenance, insurance, tax and licensing expenses associated
with such automobile. The automobile shall be leased at a lease rate not to
exceed $800 per month or owned by the Corporation.
(e) The Executive shall be entitled to participate in the
Corporation's health and disability insurance plans in effect from time to
time. The Executive may participate in other Employee Benefits of the
Corporation available generally to its executive employees to the extent and on
such terms as the Board of Directors of the Corporation shall in its sole
discretion determine.
5. Expense Reimbursement.
(a) The Corporation shall reimburse the Executive for
reasonable expenses not exceeding $2,000 per year incurred by the Executive for
accounting and income tax return preparation services and tax advice. Such
amount shall be deemed income to the Executive for purposes of income taxation.
(b) The Corporation shall reimburse the Executive for ordinary
and necessary business expenses incurred by the Executive in the course of
performing his duties hereunder in accordance with the expense reimbursement
policies or practices of the Corporation in effect from time to time.
6. Vacation.
The Executive shall be entitled each year of the Term to a
vacation of four (4) weeks or of a length determined by the Corporation's
vacation policy in effect from time to time, whichever is greater, during which
time his compensation shall continue to be paid as provided in Section 4.
7. Confidential Information.
The Executive understands that in the course of his employment
by the Corporation, the Executive will receive certain trade secrets, lists of
customers and other confidential information concerning the business of the
Corporation, which the Corporation desires to protect. The Executive agrees
that he will not, at any time during or after his employment by the
Corporation, divulge to anyone outside the Corporation or use for his own
benefit any confidential information or trade secrets of the Corporation,
including but not limited to the management methods, operating techniques,
customer lists, costs, technology, know-how, prospective acquisitions,
employee lists, training manuals and procedures, personnel evaluation
procedures, collection procedures and non-public financial reports of the
Corporation. The Executive further agrees not to use any such confidential
information or trade secrets in competing with the Corporation at any time
during or after his employment by the Corporation.
8. Inventions and Discoveries.
(a) The Executive agrees that all inventions patentable or
otherwise, trade secrets, discoveries, improvements and ideas (hereinafter
collectively called "developments"), which he, alone or jointly with others,
may conceive, make, develop, or acquire during the period of his employment by
the Corporation (whether or not pursuant to this Agreement) or within one (1)
year thereafter, shall be the sole property of the Corporation.
(b) The Executive shall promptly and fully disclose all such
developments to the Board of Directors of the Corporation or to such persons as
the Board of Directors may designate, and shall not at any time during the
period of his employment or thereafter disclose to or use for the benefit of
any other person any of such developments. The Executive, at any time upon the
request of the Corporation, whether or not then in the Corporation's employ,
shall execute, acknowledge and deliver to the Corporation all instruments which
the Corporation shall prepare, give evidence and do all other things which are
necessary and desirable to enable the Corporation to file and prosecute
applications for, and to acquire, maintain and enforce, all letters patent,
trademark registrations or copyrights in all countries covering such
developments. The Executive shall not contest, or take any action which might
impair, the issuance, validity or scope of any of the foregoing.
(c) The Executive acknowledges that he shall not be entitled
to any further consideration or remuneration for the performance of his
obligations under this Section 8.
9. Covenants Not to Compete.
(a) The Executive covenants and agrees that, while he is
employed by the Corporation and, if the Corporation elects an extension
pursuant to Section 9(b), during the one (1) year period from and after the
termination of his employment with the Corporation, the Executive will not
(i) directly or indirectly in any manner or under any
circumstances or conditions whatsoever be or become interested, as an
individual, partner, principal, agent, employee, stockholder, officer,
director, trustee, or in any other capacity whatsoever, except as an owner of
not more than one percent (1%) of the voting or other equity stock of a public
corporation, in any other business similar to that of the Corporation or in any
way in competition with the business of the Corporation within the United
States of America, Canada, Japan and the other countries and jurisdictions in
which the Corporation then conducts its business;
(ii) directly or indirectly establish, conduct,
assist, or lend his name to any business organization which is then competing
or attempting to compete or which may compete with any line of business now or
during the term of this Agreement engaged in by the Corporation; or
(iii) directly or indirectly request, induce or
otherwise solicit or attempt to influence any employee of the Corporation to
leave such employment.
(b) At any time on or before the 15th day following the
termination of the Executive's employment with the Corporation, the Corporation
may, by giving written notice to the Executive, elect to extend the time in
which the covenants in Section 9(a) shall be binding upon the Executive for a
period of one-year from and after the termination of the Executive's employment
with the Corporation. If the Corporation so elects such an extension, then, in
addition to any severance pay that may otherwise be due the Executive pursuant
to this Agreement, the Corporation shall also pay the Executive a Non-
Competition Amount in an amount equal to the Executive's annual base salary at
the time of termination, payable in twelve equal monthly installments.
(c) The Executive covenants and agrees that, during the one (1)
year period from and after the termination of his employment with the
Corporation, the Executive will not directly or indirectly solicit from any
person, company or organization which was a client or customer of the
Corporation during any of the twelve (12) months immediately preceding such
termination, any business of any character similar to that done by the
Corporation at the time of such termination or use any trademark or trade
name which is similar to or might be confused with any trademark or trade name
used in the Corporation's business.
(d) If the Executive breaches any of the covenants in this
Section 9 and such breach remains uncured for more than ten (10) business days
after the receipt by the Executive of written notice from the Corporation of a
claimed breach and the nature of the claimed breach, then in addition to all
other remedies available to the Corporation, the Executive shall forfeit all
amounts otherwise due and unpaid under this Agreement.
(e) The parties hereto believe that the restrictive
covenants of this Section 9 are reasonable. However, if at any time it shall
be determined by any court of competent jurisdiction that this Section 9 or any
portion of it, as written, is unenforceable because the restrictions are
unreasonable, the parties hereto agree that such portions as shall have been
determined to be unreasonably restrictive shall thereupon be deemed so amended
as to make such restrictions reasonable in the determination of such court, and
the said covenants, as so modified, shall be enforceable between the parties to
the same extent as if such amendments had been made prior to the date of any
alleged breach of said covenants.
10. Remedies.
The Executive hereby acknowledges that his services are unique
and extraordinary, and are not readily replaceable, and hereby expressly agrees
that the Corporation in enforcing the covenants contained in Sections 7, 8 and
9, in addition to any other remedies provided for herein or otherwise available
at law, shall be entitled to apply to any court of equity having jurisdiction
for injunctive relief restraining him in the event of a breach, actual or
threatened, of the agreements and covenants contained in Section 7, 8 and 9.
11. Termination of Employment.
(a) Upon Death or Disability. The Executive's employment
under this Agreement shall terminate upon the death or disability (as
hereinafter defined) of the Executive. In such event, the Corporation shall
pay the Executive or his legal representative the accrued amounts specified in
Section 11(f), and the Corporation shall have no further obligations under this
Agreement. For purposes hereof, the Executive shall be deemed disabled if his
physical and/or mental condition medically is such that he personally is unable
to perform those duties he would otherwise be expected to continue to perform
as President and Chief Executive Officer of the Corporation and his
nonperformance of such duties can reasonably be expected to continue or does
continue for not less than three months. The final decision of total
disability hereunder shall be made by the Board of Directors of the
Corporation.
(b) By the Corporation for Cause. The Corporation may
terminate the Executive's employment upon written notice if the Executive,
prior to any termination by the Executive for Good Reason, has (i) breached his
obligations under this Agreement and such breach remains uncured for more than
ten (10) business days after receipt by the Executive of written notice from
the Corporation of a claimed breach and the nature of the claimed breach, (ii)
neglected or refused to attend to the material duties assigned to him by the
Board of Directors of the Corporation, and such neglect or refusal remain
uncured for more than ten (10) business days after receipt by the Executive of
written notice from the Corporation of the nature of the claimed neglect or
refusal, (iii) engaged in willful or reckless misconduct or gross negligence in
the performance of his duties under this Agreement, (iv) misappropriated any
property of, or committed fraud or embezzlement against, the Corporation or any
of its subsidiaries or (v) been convicted of any crime (other than minor
traffic violations) . If the Corporation terminates the Executive's employment
pursuant to clauses (i), (ii) or (v) of this Section 11 (b), then the
Corporation shall pay the Executive the accrued amounts specified in Section
11(f) and the Corporation shall have no further obligations under this
Agreement. Upon termination of the Executive's employment pursuant to clauses
(iii) or (iv) of this Section 11(b) the Executive shall forfeit all accrued and
unpaid amounts otherwise due him under this Agreement and the Corporation shall
have no further obligations under this Agreement.
(c) Otherwise by the Corporation. The Corporation in its
sole discretion may, upon thirty (30) days' written notice to the Executive,
terminate the Executive's employment under this Agreement for any reason not
otherwise specified in this Section 11 or for no reason at all. If the
Corporation terminates the Executive's employment pursuant to this Section
11(c), then the Corporation shall pay him the accrued amounts specified in
Section 11(f) and the severance pay specified in Section 11(g) and the
Corporation shall have no further obligations under this Agreement.
(d) By the Executive Upon Diminishment of Responsibility.
The Executive may, upon thirty (30) days' written notice to the Corporation,
terminate his employment under this Agreement if the Corporation has
significantly diminished his job responsibilities and such diminishment has not
been cured within ten (10) business days after receipt by the Corporation of
written notice from the Executive of a claimed diminishment in his job
responsibilities and the nature of the diminishment. If the Executive
terminates his employment pursuant to this Section 11(d), then the Corporation
shall pay him the accrued amounts specified in Section 11(f) and the
severance pay specified in Section 11(g) and the Corporation shall have no
further obligations under this Agreement.
(e) Otherwise By the Executive. The Executive may, upon
ninety (90) days' written notice to the Corporation, terminate his employment
under this Agreement for any reason not otherwise specified in this Section 11
or for no reason at all. If the Executive terminates his employment pursuant
to this Section 11 (e), then the Corporation shall pay him the accrued amounts
specified in Section 11(f) and the Corporation shall have no further
obligations under this Agreement.
(f) Accrued Amounts. If the Executive's employment under
this Agreement is terminated pursuant to Section 11 (a), 11(b) (i) , 11(b)
(ii), 11(b) (v) , 11(c), 11(d) or 11(e), then within thirty (30) days after the
date of such termination, the Corporation shall pay the Executive or his legal
representative the Executive's Base Pay and Incentive Pay to the extent such
amounts are accrued and unpaid on the date of such termination and all expense
reimbursements that are due under Section 5 and unpaid. For purposes of this
Agreement, one-twelfth (1/12) of the Executive's Base Pay shall accrue at the
end of each month of his employment under this Agreement and his Incentive Pay
shall accrue on the last day of the relevant calendar year.
(g) Severance Pay. If the Executive's employment is
terminated pursuant to Section 11(c) or 11(d), then (i) the Corporation shall
pay the Executive severance pay in an amount equal to the Executive's Base Pay
at the time of termination, payable in twelve equal monthly installments, and
(ii) during the one (1) year period following such termination the Executive
shall be entitled to continue to participate in all health and disability
insurance plans of the Corporation to the extent permitted under the general
terms and provisions of such plans and programs, with the Corporation and the
Executive each paying the same portion of the cost thereof as they did before
the termination of the Executive's employment. If the Executive's continued
participation in any group plans is not permitted, then in lieu thereof, the
Corporation shall acquire individual insurance policies providing comparable
coverage for the Executive, with the Corporation and the Executive sharing the
cost of such insurance in the same proportion as they shared the cost of the
Executive's health and disability insurance prior to the termination of the
Executive's employment. Notwithstanding the foregoing, the Corporation shall
not be required to pay for all such individual coverage an aggregate of more
than two (2) times the aggregate cost of all of the Executive's group coverage
at the time his employment terminated.
12. Termination Following a Change of Control (a) If, during the
Severance Period, the Executive's employment is terminated, the Executive will
be entitled to the benefits provided by Section 13 unless such termination is
by reason of one or more of the following events:
(i) Pursuant to Section 11(a);
(ii) Cause; or
(iii) The Executive's voluntary termination in circumstances
in which Good Reason does not exist.
(b) In the event of the occurrence of a Change of Control, the
Executive may terminate his employment during the Severance Period with the
right to severance compensation as provided in Section 13 upon the occurrence
of one or more of the following events (regardless of whether any other reason,
other than Cause as hereinabove provided, for termination exists or has
occurred, including, without limitation, other employment):
(i) An adverse change in the nature or scope of the
authorities, powers, functions, responsibilities, or duties
attached to the position with the Corporation which the
Executive held immediately prior to the Change of Control;
(ii) A reduction in the Executive's Base Pay as in
effect immediately prior to any Change of Control, or as it may
have been increased from time to time thereafter;
(iii) Any failure by the Corporation to continue in
effect any plan or arrangement providing Incentive Pay in which
the Executive is participating at the tine of a Change of
Control (or any other plans or arrangements providing
substantially similar benefits) or the taking of any action by
the Corporation which would adversely affect the Executive's
participation in any such plan or arrangement or reduce the
Executive's benefits under any such plan or arrangement in a
manner inconsistent with the practices of the Corporation prior
to the Change of Control;
(iv) Any failure by the Corporation to continue in
effect any Employee Benefits in which the Executive is
participating at the time of a Change of Control (or any other
plans or arrangements providing the Executive with substantially
similar benefits) or the taking of any action by the Corporation
which would adversely affect the Executive's participation
in or materially reduce the Executive's benefits under any
Employee Benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of a Change
of Control;
(v) The liquidation, dissolution, merger,
consolidation, or reorganization of the Corporation or transfer
of all or substantially all of its business and/or assets,
unless the successor or successors (by liquidation, merger,
consolidation, reorganization, transfer, or otherwise)
to which all or a significant portion of its business and/or
assets have been transferred (directly or by operation of law)
assumed all duties and obligations of the Corporation under this
Agreement pursuant to Section 18;
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the
Corporation or any successor thereto; or
(vii) Any action by the Corporation which causes the
Executive's services to be performed regularly at any office or
location greater than thirty-five (35) miles from the office or
location where the Executive was employed immediately preceding
the date of the Change of Control.
(c) Any termination of the Executive's employment will be
communicated by Notice of Termination given in accordance with Section
19 of this Agreement.
13. Severance Compensation.
(a) If, following the occurrence of a Change of Control, the
Executive's employment is terminated by the Corporation during the
Severance Period other than in the circumstances set forth in Section
12(a)(i), 12(a)(ii), or 12(a)(iii) or if the Executive terminates his
employment for Good Reason:
(i) The Corporation will pay to the Executive in a
lump sum in cash within five business days after the later of
the date on which he receives the determination of the
Accounting Firm required in Section 14 hereof or the Date of
Termination an amount (the "Severance Payment") equal to the sum
of (A) 2.5 times the Base Pay at the highest rate in effect
at any time within the 90-day period preceding the date the
Notice of Termination was given or, if higher, at the highest
rate in effect at any time within the 90-day period preceding
the date of the first occurrence of a Change of Control, plus
(B) an amount equal to 2.5 times the greatest amount of
Incentive Pay received by the Executive during any year from
and including the third year prior to the first occurrence of a
Change of Control, plus (C) an amount equal to 2.5 times the
matching contribution that would be made by the Corporation to
the Scan-Optics, Inc. Retirement Savings Plan on Executive's
behalf if the Executive deferred under such Plan four percent
(adjusted for any applicable limitation under the Internal
Revenue Code of 1986, as amended) of the sum of Base Pay
and Incentive Pay (at the rates used in (A) and (B) above) or
such higher percentage as may then be eligible for Corporation
matching contributions, plus (D) an amount equal to the value
(determined as of the Date of Termination and assuming
exercisability as of such date) of all options granted to the
Executive to acquire Corporation common stock that will not
become exercisable as a result of Executive's termination;
and
(ii) For two years following the Date of Termination,
the Executive shall be eligible for participation in and shall
receive all benefits under such benefit plans, practices,
policies and programs of the Corporation that provide medical,
prescription, dental, disability, accident and life insurance
coverage, with the costs of such participation to be paid
by the Corporation to the same extent as prior to the
Executive's termination. In the event that such continued
participation is not allowed under the terms and provisions of
such plans or programs, then in lieu thereof, the Corporation
shall acquire individual insurance policies providing comparable
coverage for the Executive; provided that if any such individual
coverage is unavailable, the Corporation shall pay to the
Executive an amount equal to the contributions that would have
been made by the Corporation for such coverage on the
Executive's behalf if the Executive had remained in the employ
of the Corporation for two years following the Date of
Termination.
(b) There will be no right of set-off or counterclaim in respect of
any claim, debt, or obligation against any payment to or benefit for the
Executive provided for in this Section 13.
(c) Without limiting the rights of the Executive at law or in
equity, if the Corporation fails to make any payment or provide any benefit
required to be made or provided under this Agreement on a timely basis, the
Corporation will pay interest on the amount or value thereof at an annualized
rate of interest equal to the so-called composite "prime rate" as quoted from
time to time during the relevant period in the Northeast Edition of The Wall
Street Journal. Such interest will be payable as it accrues on demand. Any
change in such prime rate will be effective on and as of the date of such
change.
(d) Notwithstanding any other provision hereof, the parties'
respective rights and obligations under this Section 13 and under Sections 14
and 16 will survive any termination or expiration of this Agreement following a
Change of Control or any termination of employment following a Change of
Control for any reason whatsoever.
14. Excise and Other Taxes.
The Executive shall bear all expense of, and be solely responsible for,
all federal, state, local or foreign taxes due with respect to any payment
received hereunder, including, without limitation, any excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code");
provided, however, that the Severance Payment shall be reduced to the extent
necessary so that no portion thereof shall be subject to the excise tax imposed
by Section 4999 of the Code. The foregoing determination will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive and reasonably acceptable to the Corporation (which may, but will not
be required to be, the Company's independent auditors). The Executive will
direct the Accounting Firm to submit its determination and detailed supporting
calculations to both the Corporation and the Executive within fifteen (15)
days after the Date of Termination. If the Accounting Firm determines that
such reduction is required by this Section 14, the Corporation shall pay such
reduced amount to the Executive in accordance with Section 13(a)(i). If the
Accounting Firm determines that no reduction is necessary under this Section
14, it will, at the same time as it makes such determination, furnish the
Corporation and the Executive an opinion that the Executive will not be liable
for any excise tax under Section 4999 of the Code. The Corporation and the
Executive will each provide the Accounting Firm access to and copies of any
books, records, and documents in the possession of the Corporation or the
Executive, as the case may be, reasonably requested by the Accounting Firm, and
otherwise cooperate with the Accounting Firm in connection with the preparation
and issuance of the determinations and calculations contemplated by this
Section 14. The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by this
Section 14 will be borne by the Corporation.
15. No Mitigation Obligation.
The Corporation hereby acknowledges that it will be difficult, and may
be impossible, for the Executive to find reasonably comparable employment
following the Date of Termination. The payment of severance compensation by
the Corporation to the Executive in accordance with the terms of this Agreement
will be liquidated damages, and the Executive will not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor will any profits, income, earnings, or other
benefits from any source whatsoever create any mitigation, offset, reduction,
or any other obligation on the part of the Executive hereunder or otherwise.
16. Legal Fees and Expenses.
If the Corporation has failed to comply with any of its obligations
under this Agreement or in the event that the Corporation or any other person
takes or threatens to take any action to declare this Agreement void or
unenforceable, or institutes any litigation or other action or proceeding
designed to deny, or to recover from, the Executive the benefits provided or
intended to be provided to the Executive hereunder, the Corporation irrevocably
authorizes the Executive from time to time to retain counsel of the Executive's
choice, at the expense of the Corporation to the extent hereafter provided, to
advise and represent the Executive in connection with any such interpretation,
enforcement, or defense, including, without limitation, the initiation or
defense of any litigation, arbitration or other legal action, whether by or
against the Corporation or any member of the Board, officer, stockholder, or
other person or entity affiliated with the Corporation, in any jurisdiction.
If the Executive prevails, in whole or in part, in connection with any such
litigation, arbitration or other legal action, the Corporation will pay and be
solely financially responsible for any and all attorneys' and related fees' and
expenses incurred by the Executive in connection with such litigation.
17. Withholding of Taxes.
Except as otherwise provided in this Agreement, the Corporation may
withhold from any amounts payable under this Agreement all federal, state,
city, or other taxes as the Corporation is required to withhold pursuant to any
law or government regulation or ruling.
18. Successors and Binding Agreement: (a) The Corporation
will require any successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization, or otherwise) to all or substantially all of the
business and/or assets of the Corporation, by agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the Corporation would be
required to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Corporation and any successor
to the Corporation, including, without limitation, any persons acquiring
directly or indirectly all or substantially all of the business and/or
assets of the Corporation whether by purchase, merger, consolidation,
reorganization, or otherwise (and such successor will thereafter be deemed the
"Corporation" for the purposes of this Agreement), but will not otherwise be
assignable, transferable, or delegable by the Corporation.
(b) This Agreement will inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, and/or legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer, or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 18(a) and 18(b). Without limiting the generality or
effect of the foregoing, the Executive's right to receive payments hereunder
will not be assignable, transferable, or delegable, whether by pledge, creation
of a security interest, or otherwise, other than by a transfer by will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 18(c), the Corporation will
have no liability to pay any amount so attempted to be assigned, transferred,
or delegated.
19. Notice.
Any notice permitted or required under this Agreement shall be
deemed to have been given three (3) days after written notice is sent by
registered mail or one (1) day after written notice is sent by overnight
"Express Mail" or overnight courier service, addressed as follows: (a) if to the
Corporation, at 169 Progress Drive, Manchester, Connecticut 06040-2294,
Attention: Corporate Secretary; and (b) if to the Executive, at 9 Pheasant
Crossing, Glastonbury, Connecticut 06033. Any party may, in accordance with the
provisions of this Section, give written notice of change of address, in which
event all such notices shall be given as above provided at such changed address,
except that notices of changes of address will be effective only upon receipt.
20. Arbitration.
Any dispute that may arise between the parties hereunder, other
than a dispute in which the primary relief sought is an equitable remedy such
as an injunction, shall be submitted to binding arbitration in Hartford,
Connecticut in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association;
provided that any such dispute shall first be submitted to the Corporation's
Board of Directors in an effort to resolve such dispute without resort to
arbitration.
21. Entire Agreement.
This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supersedes and merges all prior
agreements between them relating thereto. The parties agree that no other
promises or inducement have been made unless contained in writing and attached
hereto or incorporated by reference. Neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated, except by a written
instrument signed by the parties hereto. Failure by any party to exercise any
right or privilege granted by this Agreement or to insist upon full performance
of all obligations or duties hereunder shall not be construed as a waiver of
any such rights, privileges, obligations or duties or as the creation of any
custom contrary thereto.
22. Applicable Law.
This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut applicable to agreements executed and
to be performed in such State, without giving effect to the principles of
conflicts of laws of such State, to the extent not preempted by applicable
federal law.
23. Validity.
If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable, or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances will not be affected, and the
provision so held to be invalid, unenforceable, or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid, or legal.
24. Non-Exclusivity of Rights.
Nothing in this Agreement will prevent or limit the Executive's present
or future participation in any benefit, bonus, incentive, or other plan or
program provided by the Corporation for which the Executive may qualify, nor
will this Agreement in any manner limit or otherwise affect such rights as the
Executive may have under any stock option or other agreements with the
Corporation. Amounts or benefits which are vested or which the Executive is
otherwise entitled to receive under any plan or program of the Corporation at
or subsequent to the Date of Termination will be payable in accordance
with such plan or program, except as otherwise expressly provided in this
Agreement; provided, however, that any amounts received by the Executive
pursuant to this Agreement shall be in lieu of (but, if necessary to give
effect to this provision, shall be reduced by) any benefits which the Executive
is entitled to receive or may become entitled to receive under any reduction-
in-force or severance pay plan or practice which the Corporation now has in
effect or may hereafter put into effect, and any severance benefits required
under federal or state law to be paid to the Executive.
25. Certain Defined Terms.
In addition to terms defined elsewhere herein, the following terms have
the following meanings when used in this Agreement with initial capital
letters:
(a) "Base Pay" means the Executive's annual aggregate base
salary from the Company at the time in question.
(b) "Change of Control" means a change in control of a
nature that would be required to be reported in response to Item 5(f)
of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Corporation is then subject to such reporting requirement; provided
that, without limitation, such a Change of Control shall be deemed to
have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 22% or more
of the combined voting power of the Corporation's then outstanding
securities; or (B) during any period of two consecutive years (not
including any period prior to the execution of this Agreement),
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation and any new directors, whose election by
the Board or nomination for election by the Corporation's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof.
(c) "Cause" means that, prior to any termination of
employment by the Executive for Good Reason, there shall have occurred
any of the events listed in clauses (i) through (v) of the first
sentence of Section 11(b).
(d) "Date of Termination" means the date of receipt of a
Notice of Termination or any later date specified therein, as the case
may be; provided, however, that if the Executive's employment is
terminated by the Corporation other than for Cause or for disability
pursuant to Section 11(a), the Date of Termination will be the date on
which the Executive receives a Notice of Termination from the
Corporation; and provided further, if the Executive's employment is
terminated by reason of death or disability pursuant to Section
11(a), the Date of Termination will be the last day of the month in
which occurs the date of death or the disability effective date, as the
case may be.
(e) "Employee Benefits" means the perquisites, benefits and
service credit for benefits as provided under the plans and programs
maintained by the Corporation, including, but not limited to, plans and
programs which are "employee benefit plans" under Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended, and any
amendment or successor to such plans or programs (whether insured,
funded or unfunded).
(f) "Good Reason" means the occurrence of any of the events
listed in Sections 12(b)(i) through 12(b)(vii), inclusive.
(g) "Incentive Pay" means an annual amount equal to the
aggregate annual bonus, incentive compensation or performance pay, in
addition to Base Pay, made or to be made in regard to services rendered
in any calendar year or performance period pursuant to any bonus,
incentive compensation or performance pay plan of the Corporation.
(h) "Notice of Termination" means a written notice which (i)
indicates the specific provision in this Agreement relied upon, (ii)
sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for the termination under the provision so indicated,
and (iii) if the effective date of the termination is other than the
date of receipt of such notice, specifies the effective date of
termination (which date will be not more than sixty (60) days after the
giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to
a showing that the Executive is entitled to the benefits intended to be
provided by this Agreement will not constitute a waiver of any right of
the Executive hereunder or otherwise preclude the Executive from later
asserting such fact or circumstance in enforcing the Executive's rights
hereunder.
(i) "Severance Period" means the period of time commencing
on the date of an occurrence of a Change of Control and continuing
until the earlier of (i) the date which is two years following the
occurrence of the Change of Control and (ii) the Executive's death.
26. Counterparts.
This Agreement may be executed in several counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SCAN-OPTICS, INC.
ATTEST: /s/ William H. Cuddy By: /s/ E. Bulkeley Griswold
Secretary Name: E. Bulkeley Griswold
Title: Director, Chairman
Compensation Committee
WITNESS: /s/ Jeanne Taylor /s/ James C. Mavel
James C. Mavel
<PAGE>
EXHIBIT 11.
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(thousands, except share data)
Year Ended December 31
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Primary earnings per share
Average common shares outstanding 6,530,244 6,512,475 6,030,469
Average Class A common shares outstanding 427,232
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using the weighted average market
price for the year 185,218 107,795 401,843
---------- --------- ---------
Total 6,715,462 6,620,270 6,859,544
========== ========= =========
Net income (loss) $ 3,274 $ (1,255) $ 1,284
========== ========= =========
Earnings (loss) per share $ 0.49 $ (0.19) $ 0.19
========== ========= =========
</TABLE>
<PAGE>
EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-37253, Form S-8 No. 33-37829, Form S-8 No. 33-16362, Form S-8
No. 2-93268 and Form S-8 No. 2-65503) of Scan Optics, Inc. of our report dated
January 31, 1997, except for the second paragraph of Note C, as to which the
date is March 12, 1997, with respect to the consolidated financial statements
and schedule of Scan-Optics, Inc. and subsidiaries included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
Ernst & Young LLP
Hartford, Connecticut
March 24, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 1,279,000 281,000 178,000
<SECURITIES> 0 0 0
<RECEIVABLES> 9,262,000 10,297,000 9,124,000
<ALLOWANCES> 673,000 413,000 279,000
<INVENTORY> 14,920,000 13,746,000 14,223,000
<CURRENT-ASSETS> 26,735,000 25,585,000 24,608,000
<PP&E> 19,322,000 18,149,000 17,894,000
<DEPRECIATION> 15,147,000 14,340,000 13,272,000
<TOTAL-ASSETS> 31,121,000 29,514,000 29,619,000
<CURRENT-LIABILITIES> 9,417,000 11,346,000 10,593,000
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 139,000 139,000 138,000
<OTHER-SE> 21,068,000 17,612,000 18,593,000
<TOTAL-LIABILITY-AND-EQUITY> 31,121,000 29,514,000 29,619,000
<SALES> 30,275,000 27,642,000 26,988,000
<TOTAL-REVENUES> 46,034,000 42,084,000 43,889,000
<CGS> 19,622,000 19,487,000 17,584,000
<TOTAL-COSTS> 42,851,000 43,460,000 42,724,000
<OTHER-EXPENSES> 82,000 49,000 79,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 3,265,000 (1,327,000) 1,244,000
<INCOME-TAX> (9,000) (72,000) (40,000)
<INCOME-CONTINUING> 3,274,000 (1,255,000) 1,284,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,274,000 (1,255,000) 1,284,000
<EPS-PRIMARY> .49 (.19) .19
<EPS-DILUTED> .49 (.19) .19
</TABLE>
