-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AMnTnvvUn1IRHNXPvzf0Nd9nkvfITZJKoVX0kwlIXWPGd3rL+43mx7k3NcMDKUxB tenJrMfIWOgHuhl/7/GLiA== 0000906602-00-000036.txt : 20000331 0000906602-00-000036.hdr.sgml : 20000331 ACCESSION NUMBER: 0000906602-00-000036 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCAN OPTICS INC CENTRAL INDEX KEY: 0000087086 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 060851857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05265 FILM NUMBER: 588171 BUSINESS ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 BUSINESS PHONE: 8606457878 MAIL ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 10-K 1 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, 1999 --------------------------- ( )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 Number) incorporation or organization) 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: $14,543,166 as of March 27, 2000. The number of shares of common stock, $.02 par value, outstanding as of March 27, 2000 was 7,051,232. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement, relating to the 2000 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 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 client/server based information-processing systems and software-based products that use state of the art technology for imaging, automated data capture, document management, and workflow. The Company is a leader in applying technology to solve information capture and customer service challenges for government agencies and commercial businesses. For 31 years, the Company has provided innovative solutions to its customers, using advanced technology for imaging and automated data capture. The Company was among the first to develop Optical Character Recognition (OCR) technology for data capture and is a leading provider of image scanning systems worldwide. Building on its core competencies of high- speed paper handling, digital image processing, optical character recognition, and data entry, the Company has transitioned to become a provider of solutions that focus on the business needs of its customers. The Company's strategy is to provide a "Total Solution" to specific image, data capture, document management and workflow needs within its chosen lines of business. This allows the Company to position itself as a single source provider. The Company has three distinct divisions: Solutions and Products, Access Services and Manufacturing Services. The Company's Solutions and Products Division combines technology and expertise to develop cost-effective solutions for applications in the government, insurance, transportation, financial and order entry markets. The Company's ability to offer customized and integrated system solutions has helped customers all over the world to meet their productivity and profitability objectives. The Access Services Division of the Company provides third party and proprietary maintenance services nationwide, as well as to the UK and Canada. The division provides hardware and software maintenance support for equipment and software related to scanning, imaging, automated data capture, document processing and information management, as well as other forms of electro-mechanical equipment. Contract Manufacturing, a component of the Company's Manufacturing Services Division, formed in 1998 provides electro-mechanical assembly and test services for equipment such as mail processing systems, advanced security systems, large-format scanners, and other large-scale electro-mechanical devices. SOLUTIONS AND PRODUCTS DIVISION Solutions The Company's solutions employ high speed paper movement, image capture, ink jet printing, character recognition, multi-pocket document sorting, key-entry, image storage and retrieval, local area networking, communications software, software/hardware integration, application software development, and professional services. Scan-Optics' TAXexpress(TM), an automated image-based tax processing and data capture solution, consists of processing modules to handle income tax, sales tax and other tax returns. It applies the technologies of character recognition, data and image capture, data correction, and verification, transfer to a host system, image workflow, and archive capabilities. As a result, TAXexpress(TM) can achieve the principal goal of most tax and revenue departments in implementing an image-based tax processing system. Scan-Optics' ORDERexpress(TM) is an automated image-based data capture solution for "club" style order solicitation and order processing. ORDERexpress(TM) provides mark sense, machineprint, and handprint recognition, which are integral parts of most reply cards. It also offers processing modules to handle order reply cards, return non- orders, and process payments. This solution eliminates the need to manually sort and separately process orders from non-orders and name and address changes. Also available are hardware and application software to process mail-out announcements, return order documents and payments. Scan-Optics' PROOFexpress(TM) is an automated image-based solution for delivery, data capture, and storage and retrieval. It provides processing modules to handle waybills, delivery tickets, and other billing documents. It applies the technologies of character recognition, data and image capture, data correction and verification, and transfer to a host system. As a result, PROOFexpress(TM) can achieve the principal goal of most billing departments in implementing an image-based storage and retrieval system. Scan-Optics' ImageEMC++, developed as a result of the Company's experience with many of the nation's leading health insurance and other claim payment companies is a comprehensive business solution designed to efficiently process the paper forms and other documents these organizations receive. It minimizes the time and labor involved with processing single and multi- part health claims, enrollments, and other forms, as well as correspondence, re-pricing sheets and other general documents. Products 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 and 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 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 July 1996, the Company introduced a high-speed neural-network 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 that is resistant to overtraining making it an ideal candidate for character recognition systems. The Company has been involved in leveraging the power of neural recognition engines to achieve success with each operation. The Company's patented Context Edit analyzes data, conducts a database library search, compares fields character by character to locate a correct match, and then automatically updates the data batch with the correct information. With an extensive electronic postal/name library virtually every combination is considered but only the correct value is accepted. The Company released VistaCapture in 1998. VistaCapture represents a new paradigm for creating data entry applications. The VistaCapture product suite, an open-system solution based on Microsoft's VisualBasic, utilizes Microsoft ActiveX (OCX) technology. VistaCapture is designed for high- speed key-entry, key-from-image, and state-of-the-art character recognition (OCR/ICR) applications. During 1998, the Company announced the 7400 scanner. This scanner is a versatile, efficient, affordably priced desktop solution for businesses with single or multiple locations, each with its own data capture and forms scanning requirements. It can be used to add new scanning capabilities or to augment a larger solution and is ideal for businesses with low to mid range (40-70 ppm) scanner needs. The Company continues to support its traditional data entry products of Key Entry III and ImageKey. Typical applications range from "heads down" data entry to highly sophisticated multi-user "front-ends" for large corporate databases. In 1999, the Company announced a document management tool, DocWise, which was acquired through a licensing agreement with Bluebird Systems. DocWise provides an environment where users can capture, index, secure, store, access, distribute, and use the information contained in documents simply and efficiently. The Company added a new scanner series to its line in 1999 through the acquisition of certain product, technology rights, and assets from Photomatrix Corporation. The Vision Series 8000 is targeted at the mid- range requirements for scanning. Rated at 100 ppm to 200 ppm, the Series 8000 scanner family converts large volumes of documents into compressed electronic images. The Company considers product development to be a significant element in maintaining market share. During the years ended December 31, 1999, 1998, and 1997, the Company's research and development expenses were $5,688,000, $5,560,000, and $4,552,000, respectively. Some portion of these amounts was 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 that take advantage of the Company's core competencies. Core Competencies Key product disciplines utilize integration skills that leverage the core competencies of the Company to provide broad solution alternatives. These core competencies include: Document Scanning Image Enhancement Algorithms and Image Quality Character Recognition (OCR, ICR, Barcode, Mark Sense, etc.) Key-From-Image and Key-From-Paper Data Entry Open Object Storage and Retrieval, Workflow, Internet Access, COLD Line of Business Domain Knowledge Professional Services Network Services Value Added Engineering Services and Solutions Document Scanning The Company has addressed the high-speed, high-volume, page/document- processing marketplace since its inception. During 1992, the Company introduced the Series 9000 generation of scanners. This was followed in 1998 with the 9000T. These systems provide full-page document scanning, including options for front and back imaging, OCR reading, serialization, and sorting of documents in a single pass. During 1995, the Company introduced the Model 7800 scanner which captures images that can be utilized to improve customer service, order processing, and data capture. In 1998, the Company introduced the Model 7400 scanner, targeted at the mid-volume production market. In 1999, the Company added the Vision Series 8000 scanner to its line through the acquisition of certain product, technology rights, and assets from Photomatrix Corporation. The Series 8000 scanner, rated at 100 ppm to 200 ppm, converts large volumes of documents into compressed electronic images. Image Enhancement Algorithms and Image Quality Image enhancement starts at the scanner capture system. Various embedded algorithms are utilized to ensure a quality image is taken the first time. These algorithms include code for straightening a page, removing black "noise", adjusting the contrast, and trimming the image to the exact size of the document. The Company provides the fastest page capture and image system on the market today. This processing is carried forward into the Company's OCR, 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. Character Recognition The Company has developed and provided its own high-speed character recognition since 1968. OCR and its related technologies are able to lift data automatically from paper forms, without the need for manual keying of the data into the computer system. The Company's recognition technology has always included in-line recognition of machine printed, handprinted, and mark sense forms. In-line recognition occurs at very high speed, in real- time, as the paper is moving down the scanning transport. With the introduction of the Series 9000 system, the Company has expanded this recognition to include barcode, patch code, special educational test scoring 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. The Company's character recognition technology was enhanced in 1999 with its patented Context Edit capability that brings a new level of data purification to the integrated solutions. Key-From-Image and Key-From-Paper Data Entry The Company has been providing complete hardware and software solutions using Key-From-Image (KFI) and Key-From-Paper (KFP) data entry since 1976. This KFI and KFP 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 KFP, customers are able to lower their overall data capture and document processing costs while improving the level of data accuracy and availability. Open Object Storage and Retrieval, Workflow, Internet Access, Computer Output to Laser Disk (COLD) The Company's image storage and retrieval solution is based on industry standards and powerful "best in class" components backed by 31 years of experience in high-volume, mission-critical production systems. The solution is an imaging application development environment that is modular and scaleable in design. Due to an open architecture environment, all data, rules, indexes, and workflow processes are maintained in an ODBC- compliant or SQL database product. The product set also includes interactive workflow, internet and electronic access, and COLD capabilities. Line of Business Domain Knowledge The Company provides solutions that are proven, cost-effective, and production-ready. The Company has the domain knowledge to provide total solutions in the following industries: government, insurance, transportation, financial and order entry. That domain knowledge is utilized in the product suite of applications; TAXexpress(TM), ORDERexpress(TM), PROOFexpress(TM), and ImageEMC++. Professional Services In order to provide a total solution to the customer, the Company has provided a consultative approach to integrate solutions with proven Professional Services core competencies in the following areas: Paper Handling Application Expertise Project Management Installation Training Archival / Retrieval Custom Engineering Development Tools Forms Design Open Systems Neural Technology System Integration Microfilming OCR Technology Industry Standards Imaging Networking The Company has provided software solutions to its 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 government, insurance, transportation, financial, and order entry. These software solutions enable the Company to provide full production-ready application systems that can be tailored to the customer's specific needs. These targeted solutions are provided through professional services offered by the Company. 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. Network Services Network Services specializes in providing professional network integration services to customers of all sizes, from small companies with simple local area networks (LAN) to large organizations with enterprise-wide wide area networks (WAN). The Company offers solutions for every networking requirement including data, voice, and video. The Network Services staff is comprised of qualified professionals who have earned hardware and software vendor certifications such as the Novell CNE, Microsoft MCSE, Compaq ASE, IBM PSE, and others. The Company's employees are experienced with Ethernet, Fast Ethernet, Token-Ring, and FDDI networks utilizing the IPX/SPX, TCP/IP, and NetBIOS/NetBEUI protocols. The operating systems supported include Novell NetWare, Microsoft Windows NT, Windows 95, Windows 98, DOS/Windows, and OS/2. Value Added 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 healthcare 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 document 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 sweepstakes 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. Test scoring includes Optical Mark Read (OMR) and image presentment of text pages to knowledge workers for value added analysis and grading. ACCESS SERVICES DIVISION 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. In June of 1998, the Company acquired the hardware maintenance division of Access Corporation of Cincinnati, Ohio. This business was combined with Scan-Optics' existing hardware maintenance division to form Access Services, a separate division, dedicated to serving the Scan-Optics customer base and the third party maintenance marketplace. Service is provided through a network of over 140 service centers worldwide. The Company provides on-site service with response times of 2 to 24 hours based on the service plan selected by the customer. The Company focuses on comprehensive diagnostic routines, modular designs, preventive maintenance procedures and customer surveys to provide its users high system availability to perform mission critical applications. The Company's customers include government, healthcare organizations, transportation, subscription and catalog fulfillment companies, financial institutions and manufacturers in the U.S., Canada, Latin America, Europe and Asia. The Company maintains high standards of teamwork and customer satisfaction. CONTRACT MANUFACTURING SERVICES Through this component of the Manufacturing Services Division, the Company provides electro-mechanical assembly and test services under contracts with customers who develop and sell a variety of equipment. Beginning with the customer's plans, Scan-Optics manages each project from concept to completion. The capabilities provided include: Project Management Engineering and Prototyping Procurement and Materials Management Precision Machining, Sheetmetal Fabrication and Welding Networks/System Integration Systems Testing Just-in-Time/Kanban Delivery Systems Professional Services and Training Worldwide Field Service Strong Supplier Partnerships with: AGENCY STANDARDS CERTIFICATION (FCC, UL, LE, CSA) COMMERCIAL PAINTING AND METAL FINISHING PRINTED CIRCUIT BOARD ASSEMBLIES AND TESTING WIRE HARNESS AND CABLE ASSEMBLY AND TESTING SPECIALTY PACKAGING WORLDWIDE SHIPPING SIGNIFICANT CUSTOMERS In 1999, the Company derived 11% of its total revenue from one customer, the Kentucky Revenue Cabinet, a state government taxing authority. In 1998 and 1997, the Company derived 12% and 39%, respectively, of its total revenue from one customer, Toyo Officemation, Inc., one of the Company's distributors in Japan. CHANNELS OF DISTRIBUTION The Company sells directly to end-users and distributors. It also pools 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, 1999 was approximately $18.4 million. As of December 31, 1998, the backlog was approximately $26.4 million. The backlog consists of equipment, software and services to be sold and noncancelable rentals and maintenance due on existing rental and maintenance contracts over the next year. 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 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 subassemblies. The Company also purchases major standard components, including low speed scanners, jukeboxes, PCs, printers and servers. 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. Alternate sources for such components and subassemblies have been developed. Certain sole source items have been evaluated and the Company has determined that a minor engineering effort would be required to qualify a replacement. COMPETITION The Company's Solutions and Products Division competes with service providers who integrate systems with products from multiple vendors. The Company differentiates its solutions by offering a total system, including post installation support of hardware and software services along with manufacturing capabilities. The Company focuses on industry specific "application" areas with solutions utilizing image and data entry/data capture systems provided by the Company. A large portion of the revenue generated by the Access Services Division is from post installation hardware and software services on integrated systems installed by the Company's Solutions and Products Division. Due to the proprietary nature of these integrated systems, this division faces little competition for this business. The remaining revenue is generated by the field repair of electro-mechanical devices manufactured by Original Equipment Manufacturers, primarily of scanner products, that do not have their own field staff. The division competes with other third party maintenance providers for this revenue by using its reputation for quality and its over 30 years of experience in providing scanner repair. Contract Manufacturing, a component of the Manufacturing Services Division, provides electro-mechanical assembly and test services under contracts with customers who develop and sell a variety of equipment. The primary competition for this business is the customers themselves who can decide to manufacture the products instead of outsourcing them. Competition from other contract manufacturers is minimal due to the Company's expertise in the electo-mechanical field as well as the flexibility to handle various order requirements. ISO 9001 CERTIFICATION On November 12, 1999, the Company received ISO 9001 certification for its product development and manufacturing divisions. The scope of the certification is for the design and production of scanning equipment and contract manufacturing of electronic equipment excluding installation and servicing. PATENTS The Company currently has nine United States patents in force which expire between 2003 and 2018. The patents are on mechanical systems, electronic circuits, electronic systems and software algorithms, which are used throughout the product lines. The Company values the investments made in new technology and makes all efforts to protect its intellectual property. The Company expects to continue to apply for patents on its new technological developments when it believes they are significant. In November 1997, the Company licensed a patent to Imaging Business Machines, LLC. for their use in an image transport designed for processing airline tickets. In 1999, this same patent was licensed to Nale Corporation for use on its paper handling transports. EMPLOYEES As of December 31, 1999 the Company employed 315 persons, including 28 with administrative and support responsibilities, 35 in marketing and sales, 168 in software and service activities, 32 in engineering and 52 in manufacturing capacities. The Company considers its employee relations to be good. The Company has not experienced any work stoppages. FUNDED DEVELOPMENT AGREEMENTS During 1997, the Company completed a $636,000 product development agreement with a specific customer, which required various modifications and enhancements to the Company's Series 9000 product. The Company recorded all revenue related to this development agreement in 1997. 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. During 1998, the Company completed a $200,000 custom development project with a specific customer. The project involved adding fluorescent bar code printing and reading to the Series 9000 product and adding additional stacker modules to accommodate the document sorting requirement. The Company recorded all revenue related to this development agreement in 1998. 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. During 1999, the Company entered into four custom development agreements for specific customers. A $125,000 agreement involved the development of localization software for screen displays in Japanese. A $115,000 agreement was for recognition enhancements to a current product. A $75,000 agreement involved enhancements for the reading of Japanese stock certificates. A $58,000 agreement involved software developments for the processing of mortgage payments and taxes. The Company recorded all revenue related to these development agreements in 1999. These revenues offset the related costs incurred for this development. The ownership of these technologies remains with the Company. No royalties or other considerations are required as part of these agreements. EFFECTS OF ENVIRONMENTAL LAWS The effect of federal and state environmental regulations on the Company's operations is insignificant. BUSINESS SEGMENTS The Company views its business in three distinct revenue categories: solutions and products, Access Services and contract manufacturing services. Revenues are used by management as a guide to determine the effectiveness of the individual segment. The Company manages its operating expenses through a traditional functional perspective and accordingly does not report operating expenses on a segment basis.
Year Ended December 31 (thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Revenues Solutions and products $ 34,921 $ 40,174 $ 45,002 Access services 16,003 13,222 11,606 Contract manufacturing services 1,068 575 ---------------------------------------- Total revenues 51,992 53,971 56,608 Cost of solutions and products 27,656 24,438 26,822 Service expenses 12,817 9,590 8,040 ---------------------------------------- Gross profit margin 11,519 19,943 21,746 Operating expenses, net 19,934 16,709 16,055 ---------------------------------------- Income (loss) before income taxes $ (8,415) $ 3,234 $ 5,691 ======================================== Total assets $ 55,186 $ 52,992 $ 38,707 Total expenditures for additions to long-lived assets $ 596 $ 560 $ 1,139
Certain 1998 and 1997 amounts have been reclassified to conform to the current year presentation. Note: The Japanese health organization accounted for $5.7 million and $20.2 million in solutions and products sales in 1998 and 1997, respectively. There were no sales to this customer in 1999. Sales of product 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. Changes in the economic climates of foreign markets could have an unfavorable impact on future international sales. Export sales by geographic area (based on the location of the customer) were as follows:
(thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Latin America $ 77 2% $ 88 1% $ 2,207 8% Europe 1,982 41% 328 3% 37 Pacific Rim 2,743 57% 9,649 96% 24,894 92% ---------------------------------------------------- $ 4,802 $10,065 $ 27,138 ====================================================
Export sales represented 20%, 31%, and 66% of product sales for the three years ended December 31, 1999, 1998, and 1997, respectively. ITEM 2 - PROPERTIES The Company's world headquarters and manufacturing facility is located in a 84,000 square foot, one-story building in Manchester, Connecticut, leased for a term expiring in December 2006. The Company also leases 24,000 square feet of office space, under a lease expiring in December 2000, in Birmingham, Alabama, for professional services, software engineering and support, administration and equipment demonstration. The Company leases office space throughout the United States for sales, service and administrative functions. Scan-Optics, Ltd., a wholly owned subsidiary in the United Kingdom, also leases office space for administration and equipment demonstration. ITEM 3 - LEGAL PROCEEDINGS There are no lawsuits currently pending against the Company. Recently the Company has received notification from a customer that certain services performed for the customer were not completed on schedule. The Company believes that the work has been completed according to contract specification and has been substantially delivered to the customer. Although the ultimate outcome is uncertain, based on currently known facts, the Company believes that the resolution of this matter will not have a material adverse effect on the Company's financial position or annual operating results. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters during the fourth quarter of 1999 to a vote of the stockholders. EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT Officers of the Company are set forth in the schedule below.
Officer Name Age Principal Occupation: Since - ------------------------------------------------------------------------------- James C. Mavel 54 Chairman, Chief Executive Officer, President and Director 1996 Joseph P. Crouch 37 Vice President - Manufacturing Services Division 1999 William H. Cuddy 64 Corporate Secretary 1984 Marianna C. Emanuelson 38 Vice President - Human Resources 1997 Richard C. Goyette 48 Vice President - Solutions and Products Division 1996 Joel K. Howser 52 Vice President - Product Development 1998 Clarence W. Rife 60 Vice President - Access Services Division 1975 Michael J. Villano 40 Chief Financial Officer, Vice President and Treasurer 1992
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 Chief Executive Officer. In May 1997, Mr. Mavel was elected Chairman of the Board of Directors. 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. Crouch joined the Company in March 1999 and was elected to the position of Vice President - Manufacturing Services Division in November 1999. Prior to joining the Company, Mr. Crouch was Director of Manufacturing Operations for CalComp's Input Technologies Division. Mr. Crouch had over ten years of contract manufacturing experience before joining the Company. Mr. Cuddy has been a partner in the law firm of Day, Berry and Howard LLP since 1968. He was elected to the position of Corporate Secretary in September 1984. Ms. Emanuelson joined the Company in August 1994, and was elected to the position of Vice President in 1997. She is currently Vice President - Human Resources. 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 Division 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. He is currently Vice President - Solutions and Products Division. Mr. Howser joined the Company in February 1997 as Vice President - Marketing. In December of 1997, Mr. Howser assumed the responsibility of Vice President - Product Development. Prior to joining the Company, from 1989 through 1996, he was director of development for Unisys in its image program. Mr. Howser had twenty years of experience in transaction processing and OCR/image development prior to joining 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 - Access Services Division. 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. Mr. Villano was appointed Treasurer in May 1997. The executive officers are elected for a one year term effective at the conclusion of the Annual Meeting of Stockholders each year. There are no family relationships between any of the listed officers. 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 1,106 stockholders of record at December 31, 1999.
Quarter March 31 June 30 September 30 December 31 Ended HIGH LOW HIGH LOW HIGH LOW HIGH LOW - -------------------------------------------------------------------------------- 1999 5 1/2 3 1/2 4 3/8 3 1/8 4 7/16 2 3/4 2 7/8 1 1/8 1998 9 13/16 5 15/16 6 1/2 4 13/16 6 13/16 3 15/16 4 7/8 3 3/16
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.
ITEM 6 - SELECTED FINANCIAL DATA SCAN-OPTICS, INC. AND SUBSIDIARIES FIVE YEAR SUMMARY OF OPERATIONS SELECTED FINANCIAL DATA (thousands, except share data) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Total Revenues $ 51,992 $ 53,971 $ 56,608 $ 46,034 $ 42,084 ============================================================== Income (loss) before income taxes (8,415) 3,234 5,691 3,265 (1,327) Income taxes (benefit) (240) 1,105 (99) (9) (72) -------------------------------------------------------------- Net Income (Loss) (8,175) 2,129 5,790 3,274 (1,255) ============================================================== Basic earnings (loss) $ (1.17) $ 0.31 $ 0.87 $ 0.50 (.19) Basic weighted-average shares 6,979,651 6,921,331 6,632,248 6,530,244 6,512,475 Diluted earnings (loss) $ (1.17) $ 0.30 $ 0.82 $ 0.49 $ (.19) per share Diluted weighted-average shares 6,979,651 7,102,658 7,070,013 6,715,942 6,512,475 SELECTED BALANCE SHEET DATA Total assets $ 55,186 $ 52,992 $ 38,707 $ 31,121 $ 29,514 Working capital $ 4,727 $ 15,107 $ 24,643 $ 17,318 $ 14,239 Total stockholders' equity $ 22,081 $ 30,246 $ 27,733 $ 21,207 $ 17,751
The Company has not paid any dividends for the five year period ended December 31, 1999. The above financial data should be read in conjunction with the related consolidated financial statements and notes thereto. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share, see Notes to Consolidated Financial Statements. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The ability of Scan-Optics, Inc. (the "Company") to achieve the following expectations could be impacted by the effect of a weakening in the domestic and international economies which potentially impacts capital investments by customers, the cyclical nature of funding within federal and state government agencies, competition from similar products, the implementation of other technologies which may provide alternative solutions, and the stability of sole source suppliers. See also "Other Disclosures - Impact of Year 2000" below. The foregoing factors should not be construed as exhaustive. The Company has three major initiatives currently underway to improve revenue growth and profitability. They are to emphasize the "Business of Solutions" focus in targeted markets, to decrease market risk through expansion in the international marketplace, and to capitalize on existing core competencies of the Company. A fourth initiative that is currently on hold is to add long term value through the acquisition of key strategic products or enterprises. The inability of the Company to carry out these initiatives may have a materially adverse effect on revenue growth and earnings. The Company incurred a loss in 1999 mainly attributable to professional service revenue delays on some projects and expense overruns on others, which is being addressed with a comprehensive plan. This plan is to reduce annual expenses by $5 million, restructure the professional service organization, including the mix of contractors to employees, and add senior management, as well as additional project management controls and adherence to project implementation methodology. The first initiative is to provide cost effective solutions through the Company's development of target market data capture applications combined with its high speed transports and archival systems. The Company has refined its target market approach and chosen to focus primarily on the government and insurance markets, while continuing to address the transportation, financial and order entry markets. The Company expects to continue to emphasize its "Business of Solutions" 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 in these new markets. The Company achieved revenue growth of 9% with this initiative, primarily related to the government market in 1999. The second initiative is further expansion into the international marketplace. The Company has successfully supplied product to the Japanese market and has experienced strong sales activity in the past through relationships with highly qualified and productive distributors. The Company will continue to focus on developing strong relationships in Europe, Latin America and other Pacific Rim countries. During 1999, the Company had minimal achievements with this initiative. The revenue decline in the Asian marketplace, due to its economic challenge, was 72% or 31% if the Japanese Ministry of Health sales of $5.7 million are excluded from 1998 amounts. This was a significant disappointment to the Company during 1999. The economic environment in Latin America has also been an impediment to growth in these markets. The Company has been strengthening its relationships in Europe, which yielded an increase in sales of $1.6 million or 504% from 1998. The Company achieved these results with the addition of 5 Value Added Resellers in Europe as part of the acquisition of the scanner and maintenance division of Photomatrix Imaging Corporation (see below). The third initiative relates to leveraging the Company's core competencies in an effort to add revenues and profits. The Company believes that Access Services and contract manufacturing services have potential to sell their individual expertise, experience and cost effectiveness to other entities. In 1999, the Company was successful in obtaining a $1.5 million contract manufacturing order from MailCode, Inc., a manufacturer of mail processing equipment, of which $.5 million was recorded as revenue during the year. During 1999, Access Services signed agreements with 3 new hardware manufacturers for third party maintenance. These agreements comprise approximately 50 end-user customers. The Company has put on hold its initiative of long term growth through accretive acquisitions of key strategic products or enterprises. When the Company resolves the issues relating to the professional services organization, acquisitions will again be considered based upon their individual merit and benefit to the shareholders. During 1999, the Company completed an acquisition of the scanner and maintenance division of Photomatrix Imaging Corporation (PHRX), a supplier of high performance imaging products, for $3.9 million including assets acquired, liabilities assumed and related acquisition expenses. The transaction included the purchase of certain product, technology rights and assets. The Company signed a licensing agreement with Bluebird Systems for a suite of document management software products that encompass object management and workflow for $2.2 million. The Company entered into a joint marketing agreement with Wausau Financial Systems (WFS) to resell their item, image and remittance processing solutions for financial and commercial businesses. WFS is recognized as a leader within the payment processing marketplace. The Company also executed a joint marketing agreement with Agissar Corporation to sell their mail extraction products and performance monitoring systems. During 1998, the Company completed two acquisitions, Southern Computer Systems (SCS), a software and solutions provider and the hardware maintenance division of Access Corporation. RESULTS OF OPERATIONS - 1999 VS. 1998 Total revenues decreased $2 million or 4% from 1998 to 1999. Product sales decreased $9.2 million or 28% from the prior year. The Company's core business sales decreased $3.5 million or 13% from 1998 to 1999. The core business includes all domestic and international sales except those for health claims processing to the Japanese government. The Japanese Ministry of Health sales accounted for $5.7 million of product sales in 1998. There were no sales to this customer in 1999. North American sales decreased $3.9 million or 17% due mainly to Y2K concerns in the second half of 1999 that deferred purchase decisions by some potential customers as well as the internal focus of the sales organization on improving customer satisfaction and helping manage deliverables related to the professional services implementations underway in the third and fourth quarters of 1999. Total international sales decreased $5.3 million or 52% from 1998. International sales in the Pacific Rim that relate to the core business declined 31% or $1.2 million due to the continued slowdown in the Japanese economy and sales to Europe increased $1.6 million or 504%. Latin American sales remained consistent with the prior year mainly due to the continued decline in economic conditions in the Latin American countries. Service revenues increased $7.1 million from 1998 to 1999. Hardware maintenance and support revenue increased $2.8 million or 21% due to the June 1999 acquisition of the assets of PHRX as well as continued growth of the third party maintenance business. Professional service revenue increased $4.3 million or 58% due to an increase in the focus on the "Business of Solutions", the marketing campaign to provide greater customer value in the target markets, as well as the acquisition of SCS, in June of 1998, which had a full year of revenue in 1999 compared to a half year in 1998. Engineering revenues increased $.3 million from 1998 to 1999 due to an increase in customer funded development contracts from 1998 levels. (See Note I of the Notes to Consolidated Financial Statements.) Cost of product sales decreased $3.3 million or 17% from 1998 to 1999. Cost of product sales as a percentage of product sales increased 8% from 59% in 1998 to 67% in 1999. The percentage increase is due to decreased manufacturing production volumes, lower margins on commodity items sold as part of the total customer solution and increased contract manufacturing revenue which carries a lower margin. Service expenses increased by $9.7 million in 1999. Customer service expenses increased $3.2 million or 34% due to the acquisition of the assets of PHRX in June of 1999, a full year of expenses associated with the acquisition of the hardware maintenance division of Access Corporation compared to a half year of expenses in 1998 and the growth of the third party maintenance business. Professional service expenses increased $6.5 million from 1998 to 1999 due in part to the increase in revenue as well as a full year of expense associated with the purchase of SCS which occurred in June of 1998. However, the expenses associated with professional services integration projects were significantly higher than anticipated in the second half of 1999 because of project management problems and the expense of hiring outside contractors to assist in project completions. This has been addressed with a management change and a comprehensive plan to improve system design, project management and customer implementations. Sales and marketing expenses increased by $1 million in 1999 due to the acquisition of the assets of PHRX and a full year of expenses associated with the acquisition of SCS compared to a half year of expenses in 1998 and commission expenses. Research and development expenses increased $.1 million from 1998 due mostly to the acquisition of PHRX assets offset by a reduction in headcount in the fourth quarter of 1999. The Company is continuing to refine its focus on software products and solutions, and as a result, certain development skills related to hardware platforms were no longer required. General and administrative expenses increased $1 million in 1999 compared to the prior year. The increase is mainly due to the amortization of goodwill for the SCS acquisition, expenses related to the non-compete agreements with the principals of SCS, outside services, expenses associated with tax planning activities, and legal expenses related to acquisition activities. Interest expense increased $.9 million due to the funding requirements related to the acquisition of PHRX assets completed during the second quarter, the purchase of the source code license from Bluebird Systems and the loss reported by the Company which required additional borrowings under the credit agreement. Income taxes decreased $1.3 million from 1998. The Company's effective tax benefit rate for 1999 was 3% as the current income tax benefit of $.9 million was limited to amounts that are recoverable for taxes paid in prior years for which a tax carryback is available, offset by a valuation allowance of $.7 million for net deferred tax assets. RESULTS OF OPERATIONS - 1998 VS. 1997 Total revenues decreased $2.6 million or 5% from 1997 to 1998. Product sales decreased $8.4 million or 20% from the prior year. The Company's core business sales increased $6.1 million or 29% from 1997 to 1998. The core business includes all domestic and international sales except those for health claims processing to the Japanese government. North American sales increased $8.7 million or 61%. SCS provided $4.8 million of this increase. International sales decreased $17.1 million or 85% from 1997. International sales in the Pacific Rim that relate to the core business declined 17% or $.8 million and sales to Europe and Latin America decreased 81% or $1.8 million mainly due to the decline in economic conditions in the Latin American countries. Sales to the Japanese government decreased $14.5 million or 72%. Service revenues increased $6.5 million from 1997 to 1998. Hardware maintenance and support revenue increased $1.8 million or 16% due to the June 30, 1998 acquisition of the hardware maintenance division of Access Corporation. Professional service revenue increased $4.7 million or 193% due to an increase in the focus on "Business of Solutions", the marketing campaign to provide greater customer value in the target markets, as well as the acquisition of SCS, which came with a professional services organization of a similar size to that of Scan-Optics. Engineering revenues decreased $.6 million from 1997 to 1998 due to a decline in customer funded development contracts from 1997 levels. (See Note I of the Notes to Consolidated Financial Statements.) Cost of product sales decreased $5.7 million or 23% from 1997 to 1998. Cost of product sales as a percentage of product sales decreased 2% from 61% in 1997 to 59% in 1998. The decrease is mainly due to a change in sales mix from 1997 to 1998 relating to the significant reduction in sales to the Japanese distributor. Service expenses increased by $4.3 million in 1998. Customer service expenses increased $1.5 million due to the acquisition of the hardware maintenance division of Access Corporation on June 30, 1998. Professional service expenses increased $2.8 million from 1997 to 1998 due to the acquisition of SCS on June 16, 1998. Sales and marketing expenses decreased by $.3 million in 1998 principally due to a reduction in salaries and related expenses of $.5 million related to a reorganization of the sales department, a specific accounts receivable provision of $.4 million recorded in 1997, offset by an increase in commission expense of $.3 million related to the increase in North American sales, and an increase related to SCS of $.3 million. Research and development expenses increased $1 million from 1997 due in part to increases in salary and benefit expenses of $.3 million and travel of $.2 million offset by a reduction in outside services of $.2 million. In addition, SCS added $.7 million to engineering expense in the second half of 1998. During 1998 the Company invested in its core technologies of imaging, recognition, paper handling and data entry, as well as its continued investment in application software to meet the requirements of its target markets. General and administrative expenses increased $.2 million in 1998 compared to the prior year. The increase is mainly due to SCS. Interest expense increased $.4 million due to the funding requirements related to the acquisitions completed during the second quarter of 1998. Income taxes increased $1.2 million from 1997 due to the full utilization of U.S. net operating loss carryforwards in 1997. The Company's effective tax rate for 1998 was 34%. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $.2 million from 1998 to 1999 for the reasons discussed below. At December 31, 1999, the Company had $17.4 million in outstanding borrowings against its $19.5 million available borrowings. The average borrowing level for 1999 was $15.5 million compared to $4.9 million for 1998. The increase in borrowing level is directly related to the acquisition completed in the second quarter of 1999 for $2.1 million, the payments of $1.8 million related to the purchase of a source code license from Bluebird Systems for $2.2 million in 1999, as well as the loss the Company reported in 1999. The Company is operating under a credit agreement with Fleet National Bank (Agreement). The Agreement contains covenants which, among other things, require the maintenance of specified working capital, debt to equity ratios, net income levels, tangible net worth levels and backlog levels. The Company is currently in default of these covenants and was for the last two quarters of 1999. The circumstances surrounding this Agreement have changed significantly over the last few months as BankBoston, the prior lender, merged with Fleet National Bank on October 1, 1999. The Company has held preliminary discussions with Fleet National Bank and has begun to negotiate the revision of the Agreement to meet the current operating conditions as well as to obtain waivers for the covenant defaults. At this time, no agreement has been reached. The Company has determined that the projected operating cash flow for 2000 is adequate to fund operations provided that there is the availability of a line of credit or other financing arrangement of a similar size, terms and conditions as currently exist. If negotiations on the revision of the Agreement with Fleet National Bank are not complete by the end of the second quarter, the Company will continue to negotiate with other bank and finance companies, as well as review other business and financing options. Operating activities used $3.5 million of cash in 1999 compared to $3.6 million in 1998. The non-cash expenses in 1999 were $5.3 million compared to $3.5 million in 1998. The non-cash items relate to depreciation of fixed assets which is discussed in net plant and equipment below, amortization of customer service spare parts inventory, amortization of goodwill, provisions for losses on accounts receivable, provisions for inventory obsolescence and deferred taxes. Other components of operating activities are discussed below. Net accounts receivable increased $1 million from December 31, 1998. There are several factors associated with the net increase in accounts receivables. Unbilled receivables relating to professional service revenue increased $5 million from December 1998, and this increase was offset by a decrease in fourth quarter revenue of $8.1 million from 1998 to 1999. Professional service project delays have adversely affected milestone payments. Also, the Company has experienced a slowdown in the collection of receivables as a result of the transition from a product based supplier, which traditionally has quicker payment time frames, to a more complete solutions provider which typically has extended payment terms and slower payment experience. In addition, large state government installations have extended payment periods. The Company is addressing these issues with more pre-sales communications and contract terms that better fit the solutions business. Refundable and recoverable income taxes were $2 million at December 31, 1999 due to the refund of 1999 estimated payments made and the carryback of a portion of the 1999 loss. At December 31, 1999, the Company has U.S. federal and state operating loss carryforwards of approximately $9,700,000 and $12,300,000, respectively. The U.S. federal and state net operating loss carryforwards expire in 2014 and 2005, respectively. At December 31, 1999, the Company has approximately $470,000, $3,100,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively, which are scheduled to expire periodically between 2000 and 2006. Total inventories decreased $1.4 million from 1998 levels. Manufacturing inventories decreased $2 million during the year due to a decrease in finished goods inventory of $1.5 million, a decrease in work-in-process inventory of $.2 million and a decrease in materials and component parts inventory of $.3 million, all due to the Company's focused effort to reduce inventory levels. These decreases were achieved even with the acquisition of certain PHRX manufacturing inventories during the second quarter of 1999. The manufacturing inventory reduction was offset by an increase in customer service inventory of $.6 million which was directly attributable to the PHRX acquisition. Net plant and equipment decreased $.5 million in 1999. This decrease is mainly due to recorded depreciation of $1.1 million which is partially offset by additions of $.6 million. The additions include $.4 million related to internal computer equipment and the capitalization of test time related to the implementation of the internal corporate information system and $.2 million of other operating capital requirements. Software license increased by $2 million due to the source code licensing agreement signed with Bluebird Systems of Carlsbad, California, of $2.2 million less the amortization recorded during the year. Goodwill increased by $.4 million due to the acquisition in June of 1999 of PHRX assets offset by goodwill amortization recorded during 1999. The acquisition was accounted for as a purchase and the excess cost over the fair value of the net assets acquired of $1.6 million is being amortized over an average period of twelve and one-half years. Southern Computer Systems (SCS), a privately held company, was purchased in June of 1998. The transaction was accounted for as a purchase and the excess cost over the fair value of the net assets acquired of $9.2 million is being amortized over a twenty-year period. The acquisition of the maintenance division of Access Corporation, which also occurred in June of 1998, was accounted for as a purchase and the excess cost over fair value of the net assets acquired of $3.5 million is being amortized over a five-year period. Other assets decreased by $.2 million mainly due to the non-compete agreements with the principals of SCS. Accounts payable increased $2.6 million from December 31, 1998 as a result of the Company's cash availability and the timing of purchases of commodity items during the fourth quarter. Salaries and wages decreased $.2 million from 1998 mainly due to the 1998 executive incentive compensation accrual that was paid in 1999. There was no executive incentive compensation for 1999. Taxes other than income taxes increased by $.4 million due to timing of accruals and related payments. Customer deposits increased $1.3 million from 1998 due to deposits received in 1999 on various solution transactions. Other liabilities increased $.9 million from 1998 mainly due to accruals related to professional service consulting expenses and accruals for the source code licensing agreement with Bluebird. OTHER DISCLOSURES Impact of Year 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $150,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Impact of Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new Statement effective January 1, 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to the Outlook section of Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, and to Note A of the Notes to Consolidated Financial Statements. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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. The accompanying financial statements have been prepared assuming that Scan-Optics, Inc. will continue as a going concern. As more fully described in Notes A and F, the Company has incurred operating losses in 1999 and has not complied with certain covenants of loan agreements and is currently negotiating with its lender. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes A and F. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP Hartford, Connecticut February 14, 2000, except for Note F, as to which the date is March 27, 2000
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 (thousands, except share data) 1999 1998 Assets Current assets: Cash and cash equivalents $ 38 $ 216 Accounts receivable less allowance of $308 in 1999 and $206 in 1998 18,713 22,725 Unbilled receivables - contracts in progress 5,023 Refundable income taxes 1,282 Recoverable income taxes 740 Inventories 10,033 11,478 Deferred taxes 960 Deferred costs, net of revenues 530 502 Prepaid expenses and other 976 1,012 ---------------- Total current assets 37,335 36,893 Plant and Equipment: Equipment 13,735 13,601 Leasehold improvements 5,146 4,815 Office furniture and fixtures 1,312 1,307 ---------------- 20,193 19,723 Less allowances for depreciation and 17,337 16,367 amortization ---------------- 2,856 3,356 Software license, net of accumulated amortization of $185 in 1999 2,040 Goodwill, net of accumulated amortization of $1,828 in 1999 and $577 in 1998 12,523 12,110 Other assets 432 633 ---------------- Total Assets $ 55,186 $ 52,992 ================
December 31 (thousands, except share data) 1999 1998 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 8,079 $ 5,487 Notes payable to bank 17,437 11,524 Salaries and wages 1,800 2,007 Taxes other than income taxes 1,110 691 Customer deposits 1,353 99 Other 2,829 1,978 ----------------- Total current liabilities 32,608 21,786 Deferred taxes 263 Other liabilities 497 697 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, 7,396,232 shares in 1999 and 7,370,482 shares in 1998 148 147 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 35,568 35,501 Retained-earnings deficit (10,415) (2,240) Accumulated other comprehensive loss (574) (516) ----------------- 24,727 32,892 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 ----------------- Total stockholders' equity 22,081 30,246 ----------------- Total Liabilities and Stockholders' Equity $ 55,186 $ 52,992 ================= See accompanying notes.
SCAN-OPTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31 (Thousands, except share data) 1999 1998 1997 - ---------------------------------------------------------------------------------- Revenues Product sales $ 23,800 $ 32,988 $ 41,361 Service revenues 27,642 20,577 14,124 Engineering revenues 537 284 876 Other operating revenues 13 122 247 ----------------------------------- Total revenues 51,992 53,971 56,608 Costs and Expenses Cost of product sales 16,056 19,335 25,066 Service expenses 24,417 14,693 10,400 Sales and marketing expenses 7,980 7,011 7,297 Research and development expenses 5,688 5,560 4,552 General and administrative expenses 4,950 3,903 3,737 Interest expense 1,276 397 14 ----------------------------------- Total costs and expenses 60,367 50,899 51,066 ----------------------------------- Operating income (loss) (8,375) 3,072 5,542 Other income (loss), net (40) 162 149 ----------------------------------- Income (loss) before income taxes (8,415) 3,234 5,691 Income tax expense (benefit) (240) 1,105 (99) ----------------------------------- Net Income (Loss) $ (8,175) $ 2,129 $ 5,790 =================================== Basic earnings (loss) per share $ (1.17) $ .31 $ .87 =================================== Basic weighted-average shares 6,979,651 6,921,331 6,632,248 Diluted earnings (loss) per share $ (1.17) $ .30 $ .82 =================================== Diluted weighted-average shares 6,979,651 7,102,658 7,070,013 See accompanying notes.
SCAN-OPTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Capital in Accumulated Retained- Other Unearned Common Stock Excess of Earnings Comprehen ESOP Treasury --------------- sive (thousands, except share Shares Amount Par Value Deficit Loss Compens Stock Total data) ation - ----------------------------------------------------------------------------------------------------- Balance January 1, 1997 6,945,101 $ 139 $ 34,297 $(10,159) $ (292) $ (132) $(2,646) $ 21,207 Issuance of common stock upon exercise of stock options 273,354 5 728 733 Unearned ESOP compensation amortization 132 132 Net income 5,790 5,790 Currency translation adjustments (129) (129) ------ Comprehensive income 5,661 - ----------------------------------------------------------------------------------------------------- Balance December 31, 1997 7,218,455 144 35,025 (4,369) (421) (2,646) 27,733 Issuance of common stock upon exercise of stock options 152,027 3 476 479 Net income 2,129 2,129 Curency translation adjustments (95) (95) ------ Comprehensive income 2,034 - ----------------------------------------------------------------------------------------------------- Balance December 31, 1998 7,370,482 147 35,501 (2,240) (516) (2,646) 30,246 Issuance of common stock upon exercise of stock options 25,750 1 67 68 Net loss (8,175) (8,175) Currency translation adjustments (58) (58) ------ Comprehensive loss (8,233) - ----------------------------------------------------------------------------------------------------- Balance December 31, 1999 7,396,232 $ 148 $ 35,568 $(10,415) $ (574) $ $(2,646) $ 22,081
See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (thousands) 1999 1998 1997 - --------------------------------------------------------------------------------- Operating activities Net income (loss) $ (8,175) $ 2,129 $ 5,790 Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Depreciation 1,115 1,392 1,269 Amortization 1,912 1,687 1,396 Amortization of goodwill 1,251 577 Provision for losses on accounts receivable 94 424 Provision for inventory obsolescence 229 700 Deferred taxes 697 (145) (552) Changes in operating assets and liabilities: Accounts receivable (586) (6,176) (6,857) Refundable income taxes (1,282) Recoverable income taxes (740) Inventories 450 (618) 277 Prepaid expenses and other 112 (51) 305 Software license (2,225) Accounts payable 1,790 2,890 (399) Accrued salaries and wages (424) 49 44 Taxes other than income taxes 419 (53) 62 Income taxes (35) (498) 326 Deferred costs, net of revenues (28) (1,849) 734 Customer deposits 1,254 (2,466) 242 Other 699 (442) (335) ------------------------------- Net cash (used) provided by operating activities (3,473) (3,574) 3,426 Investing activities Business acquisitions, net of cash acquired (2,111) (12,042) Purchases of plant and equipment, net (575) (557) (954) ------------------------------- Net cash used by investing activities (2,686) (12,599) (954) Financing activities Proceeds from issuance of common stock 68 479 733 Proceeds from borrowings 51,941 22,045 7,741 Principal payments on borrowings (46,028) (10,521) (7,839) ------------------------------- Net cash provided by financing activities 5,981 12,003 635 (Decrease) increase in cash and cash (178) (4,170) 3,107 equivalents Cash and cash equivalents at beginning of year 216 4,386 1,279 ------------------------------- Cash and cash equivalents at end of year $ 38 $ 216 $ 4,386 =============================== Supplemental cash flow information Interest paid $ 1,229 $ 320 $ 18 =============================== Income taxes paid $ 1,183 $ 1,754 $ 159 =============================== See accompanying notes.
SCAN-OPTICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - DESCRIPTION OF BUSINESS The Company combines technology, experience and expertise to develop cost- effective solutions for applications that include, insurance, government, transportation, financial and order entry. The Company's systems, software and services are marketed worldwide to commercial and government organizations either directly by the Company's sales organization or through distributors. The Company also markets with system integrators and specialized niche suppliers. 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. Future Operations: The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a net loss of $8.2 million in 1999, primarily related to professional services integration project expenses which were significantly higher than anticipated in the second half of 1999 because of project management problems and the expense of hiring outside contractors to assist in project completions. Furthermore, as discussed in Note F to the consolidated financial statements, the Company is currently in default under its credit agreement. These matters raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Management has developed a plan to reduce annual expenses by $5 million, to restructure the professional service organization, including the mix of contractors to employees, and to add senior management, as well as additional project management controls and adherence to project implementation methodology. Also, the Company has determined that the projected operating cash flow for 2000 is adequate to fund operations provided that there is the availability of a line of credit or other financing arrangement of a similar size, terms and conditions as currently exist. The Company has held preliminary discussions with Fleet National Bank and has begun to negotiate the revision of the credit agreement to meet the current operating conditions as well as to obtain waivers for the covenant defaults. However, at this time, no agreement has been reached. Management will continue to negotiate with other bank and finance companies, as well as review other business and financing options as a potential alternative to Fleet National Bank. NOTE B - ACCOUNTING POLICIES 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. The Company periodically reviews for obsolete and slow-moving inventory based on historical usage, future requirements and anticipated spare parts demand. 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. Intangibles: Goodwill relating to the acquisitions completed in 1998 and 1999 represents the excess cost over fair value of tangible and identifiable intangible net assets acquired. It is amortized on a straight-line basis over 5 to 20 years. Software license acquired in 1999 is amortized on a straight-line basis over 3 years. Impairment of Long-Lived Assets: The Company records impairment losses on goodwill and on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than net book value. The Company also evaluates the amortization periods of assets, including goodwill and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. Revenue Recognition: Revenues relating to sales of certain equipment (principally optical character recognition equipment) are recognized upon acceptance, shipment, or installation depending on the contract specifications. 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 under systems integration and professional services contracts are recognized on the basis of the ratio of earned revenue to total contract price, after considering accumulated costs and estimated costs to complete each contract or when services have been performed and accepted, depending on the nature of the project. Under fixed price contracts, the Company may encounter, and on certain contracts from time to time has encountered, cost overruns caused project management problems and the expense of hiring outside contractors to assist in project completions, as well as changes to previously agreed upon project designs. Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the estimates indicate a loss, such loss is provided for when identified. Revenues from maintenance services are recognized as earned. 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. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine that the ultimate realization of net deferred tax assets is more likely than not. In making such determination, the Company considers estimated future reversals of existing temporary differences, estimated future earnings and available tax planning strategies. To the extent that the estimates of these items are reduced or not realized, the amount of the deferred tax assets considered realizable could be adversely affected. 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. Therefore, the Company has elected the disclosure provisions only of FASB Statement No. 123. Earnings (Loss) Per Share: Basic and diluted earnings (loss) per share is calculated in accordance with FASB Statement No. 128, Earnings Per Share. For 1999, the computation of diluted earnings (loss) per share was antidilutive, therefore, the amounts reported for basic and diluted earnings (loss) per share were the same. 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 in other comprehensive loss, a component of Stockholders' Equity. Reclassifications: Certain 1998 and 1997 amounts have been reclassified to conform to the current year presentation. Impact of Recently Issued Accounting Standards: In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new Statement effective January 1, 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. NOTE C - ACQUISITION ACTIVITIES The Company completed two acquisitions during June 1998. The first was Southern Computer Systems (SCS), a privately held company, for $7 million in cash. The Company acquired cash and accounts receivable of $.4 million, fixed assets of $.3 million and other assets of $.1 million. The Company also assumed certain liabilities as follows: accounts payable of $.5 million, salary and benefits accruals of $.2 million, deferred revenue of $.1 million, note payable to Scan-Optics, Inc. of $.5 million, acquisition related expenses for investment banker and legal services of $.4 million and bank debt of $1.4 million. Immediately following the closing, the bank debt was repaid. The operations of SCS are included in the consolidated statement of operations from the date of acquisition. The transaction was accounted for as a purchase and the excess cost over fair value of the net assets acquired of $9.2 million is being amortized over a twenty year period. The proforma unaudited results of operations for the years ended December 31, 1998 and December 31, 1997, assuming consummation of the purchase as of January 1, 1997, are as follows: December 31 (thousands, except per share amounts) 1998 1997 - ------------------------------------------------------------------- Total revenue $ 55,732 $ 63,076 Net income (loss) (1,459) 4,680 Basic earnings (loss) per share (.21) .71 Diluted earnings (loss) per share $ (.21) $ .66 The Company entered into consulting and non-competition agreements with the two principals of SCS. The agreements call for eight quarterly payments of $50,000 per principal, beginning in the fourth quarter of 1998. The agreements provide for consulting services to be performed by the principals as well as preventing the principals from becoming directly involved with a competing business in the Image Data Capture marketplace. The amount of the quarterly payments is being amortized over a two-year period. The second acquisition was the maintenance division of Access Corporation for $3.3 million in cash. The Company acquired accounts receivable of $.5 million. The Company also assumed a liability for deferred revenue of $.5 million and acquisition related expenses for investment banker and legal services of $.2 million. The operations of the maintenance division of Access Corporation are included in the consolidated statement of operations from the date of acquisition. The transaction was accounted for as a purchase and the excess cost over fair value of the net assets acquired of $3.5 million is being amortized over a five year period. During June 1999, the Company completed the acquisition of the product rights and certain assets of the Photomatrix Imaging Corporation, a subsidiary of Photomatrix, Inc., for $2.1 million in cash. The Company acquired accounts receivable net of reserves of $1 million, manufacturing and customer service inventory net of reserves of $1.2 million and other assets of $.1 million. The Company also assumed liabilities for accounts payable of $.8 million, deferred revenue of $.5 million, salary and benefits accruals of $.2 million and acquisition related expenses of $.3 million. The acquisition was accounted for as a purchase and the operations are included in the consolidated statement of operations from the date of acquisition. The Company reported goodwill related to the transaction of $1.6 million which will be amortized over an average period of twelve and one-half years. The Company determines the amount of goodwill and the amortization period based upon a review of the acquired business and its earnings potential. NOTE D - UNBILLED RECEIVABLES - CONTRACTS IN PROGRESS Amounts billed under contracts in progress and included in accounts receivable at December 31, 1999 amounted to $.5 million. Unbilled amounts of $5 million are recoverable from the customer upon completion of the phase or milestone. The Company estimates that substantially all unbilled amounts will be collected in 2000. NOTE E - INVENTORIES The components of inventories were as follows: December 31 (thousands) 1999 1998 - ------------------------------------------------------------- Finished goods $ 363 $ 1,885 Work-in-process 1,927 2,129 Service parts 4,429 3,808 Materials and component parts 3,314 3,656 ------------------ $ 10,033 $11,478 ================== NOTE F - CREDIT ARRANGEMENTS On May 10, 1999, the Company amended its credit agreement (the "Agreement") with a bank to extend the maturity date to May 10, 2002 and to reduce the line from $13 million to $10 million. The unused portion of the line is subject to a commitment fee of 3/8% per annum. The available balance on the line of credit was $2.1 million and $1.5 million at December 31, 1999 and December 31, 1998, respectively. The weighted average interest rate on borrowings during 1999 and 1998 was 8.3% and 8.1%, respectively. Additionally, on May 10, 1999, a five-year term loan in the amount of $10 million was established to better match the cash expenditures for acquisitions with the cash flow that results from the acquired businesses. The outstanding balance on the term loan at December 31, 1999 was $9.5 million, all of which is classified as a current liability on the consolidated balance sheet due to the covenant defaults noted below. Both the line of credit and the term loan bear interest at prime. The Company is operating under a credit agreement with Fleet National Bank (Agreement). The Agreement contains covenants which, among other things, require the maintenance of specified working capital, debt to equity ratios, net income levels, tangible net worth levels and backlog levels. The Company is currently in default of these covenants and was for the last two quarters of 1999. The circumstances surrounding this Agreement have changed significantly over the last few months as BankBoston, the prior lender, merged with Fleet National Bank on October 1, 1999. The Company has held preliminary discussions with Fleet National Bank and has begun to negotiate the revision of the Agreement to meet the current operating conditions as well as to obtain waivers for the covenant defaults. At this time, no agreement has been reached. The Company has determined that the projected operating cash flow for 2000 is adequate to fund operations provided that there is the availability of a line of credit or other financing arrangement of a similar size, terms and conditions as currently exist. If negotiations on the revision of the Agreement with Fleet National Bank are not complete by the end of the second quarter, the Company will continue to negotiate with other bank and finance companies, as well as review other business and financing options. The carrying value of the notes payable to bank approximates its fair value. NOTE G - 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. At December 31, 1999, the Company had reserved 1,323,005 shares of common stock for the issuance or exercise of stock options. There are no shares reserved for the exercise of warrants. Class A Convertible 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 Convertible stock were converted to common stock. No shares were outstanding at December 31, 1999 and 1998. NOTE H - 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 85% of the fair market value of the shares at date of grant. 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, 1999: Number of Option Price Shares Per Share - -------------------------------------------------------------------------------- Outstanding January 1, 1997 (567,991 exercisable) 858,714 $1.50 to $9.63 Granted 217,500 4.68 to 9.19 Exercised (255,354) 1.50 to 6.00 Canceled (3,467) 3.38 to 9.63 --------------------------- Outstanding December 31, 1997 (679,688 exercisable) 817,393 1.50 to 9.19 1998 ACTIVITY Granted 35,000 5.69 to 9.19 Exercised (152,027) 2.13 to 3.75 Canceled (11,933) 2.13 to 6.38 --------------------------- Outstanding December 31, 1998 (531,420 exercisable) 688,433 1.50 to 9.19 1999 ACTIVITY Granted 140,000 3.25 to 3.50 Exercised (25,750) 2.00 to 3.25 Canceled (47,700) 2.00 to 9.19 --------------------------- Outstanding December 31, 1999 (560,457 exercisable) 754,983 $1.50 to $9.19 ===========================
At December 31, 1999 there were 568,022 options available for grant of which 145,000 was reserved for the Directors. The weighted-average fair value of options granted was $3.45, $6.21 and $7.13 during 1999, 1998, and 1997, respectively. The weighted-average remaining contractual life of the options outstanding at December 31, 1999 was 8 years. 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 of .582 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 for key employees and 6 months for the Board of Directors. The Company's pro forma information follows:
December 31 (thousands, except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------- Net income (loss), as reported $(8,175) $ 2,129 $ 5,790 Stock option expense (693) (563) (351) -------------------------- Pro forma net income (loss) $(8,868) $ 1,566 $ 5,439 ========================== Basic earnings (loss) per share, as reported $ (1.17) $ .31 $ .87 Stock option expense (.10) (.08) (.05) -------------------------- Pro forma basic earnings (loss) per share $ (1.27) $ .23 $ .82 ========================== Diluted earnings (loss) per share, as reported $ (1.17) $ .30 $ .82 Stock option expense (.10) (.08) (.05) -------------------------- Pro forma diluted earnings (loss) per share $ (1.27) $ .22 $ .77 ==========================
NOTE I - RESEARCH AND DEVELOPMENT AGREEMENTS During 1997, the Company entered into a $636,000 product development agreement with a specific customer, which required various modifications and enhancements to the Company's Series 9000 product. The Company recorded all revenue related to this development agreement in 1997. 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. During 1998, the Company entered into a $200,000 custom development project with a specific customer. The project involved adding fluorescent bar code printing and reading to the Series 9000 product and adding additional stacker modules to accommodate the document sorting requirement. The Company recorded all revenue related to this development agreement in 1998. 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. During 1999, the Company entered into four custom development agreements for specific customers. A $125,000 agreement involved the development of localization software for screen displays in Japanese. A $115,000 agreement was for recognition enhancements to a current product. A $75,000 agreement involved enhancements for the reading of Japanese stock certificates. A $58,000 agreement involved software developments for the processing of mortgage payments and taxes. The Company recorded all revenue related to these development agreements in 1999. These revenues offset the related costs incurred for this development. The ownership of these technologies remains with the Company. No royalties or other considerations are required as part of these agreements. NOTE J - 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 6% contributed by the participant in 1999 and 1998 and 50% of the first 4% in 1997. The Company's contributions to this plan were $374,000, $329,000, and $215,000 in 1999, 1998, and 1997, 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 in 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. The Company did not allocate any additional shares to the Plan in 1999 or 1998. At December 31, 1998, all shares had been allocated. The Company, at its discretion, may make annual allocations to the Plan in the future. There were no expenses related to the Plan in 1999 and 1998. Expenses related to the Plan in 1997 were $132,481. NOTE K - INCOME TAXES At December 31, 1999, the Company has U.S. federal and state operating loss carryforwards of approximately $9,700,000 and $12,300,000, respectively. The U.S. federal and state net operating loss carryforwards expire in 2014 and 2005, respectively. At December 31, 1999, the Company has approximately $470,000, $3,100,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively, which are scheduled to expire periodically between 2000 and 2006. At December 31, 1998, the Company had approximately $450,000, $2,600,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively. For financial reporting purposes, a valuation allowance has been recorded for 1999 to fully offset deferred tax assets relating to U.S. federal, state, and foreign net operating loss carryforwards and other temporary differences. For 1998, the valuation allowance offset a significant portion of the deferred tax assets relating to the foreign net operating loss carryforwards and other temporary differences. Income (loss) before income taxes is set forth in the following tabulation:
Year Ended December 31 (thousands) 1999 1998 1997 - -------------------------------------------------------------- Domestic $ (7,806) $ 3,228 $ 6,649 Foreign (609) 6 (958) --------------------------- Income (loss) before income taxes $ (8,415) $ 3,234 $ 5,691 =========================== Income taxes (benefit) are summarized as follows: Year Ended December 31 (THOUSANDS) 1999 1998 1997 - -------------------------------------------------------------- Current (benefit): Federal $ (956) $ 944 $ 418 State 26 311 68 Foreign (7) (5) (33) --------------------------- Total current (benefit) $ (937) $ 1,250 $ 453 =========================== Deferred (benefit): Federal $ 620 (129) (491) State 77 (16) (61) --------------------------- Total deferred (benefit) $ 697 $ (145) (552) =========================== $ (240) $ 1,105 $ (99) ===========================
Significant components of the Company's deferred tax liabilities and assets were as follows:
December 31 (THOUSANDS) 1999 1998 - -------------------------------------------------------------- Deferred tax assets: Net operating loss carryforward $ 5,671 $ 1,475 Alternative minimum tax credit carryforward 168 Depreciation 92 92 Inventory valuation 163 174 Inventory 101 115 Deferred maintenance revenue 6 178 Accounts receivable reserves 113 26 Goodwill 71 59 Revenue recognition - systems undergoing acceptance testing 8 29 Vacation accrual 237 188 Other 13 162 ------------------- Total gross deferred tax assets 6,643 2,498 Deferred tax liabilities: Revenue recognition - milestone and retainer contracts (989) Depreciation and other (263) (84) ------------------- Total gross deferred tax liabilities (1,252) (84) Valuation allowance (5,391) (1,717) ------------------- Net deferred tax asset $ - $ 697 ===================
The 1999 change in the valuation allowance for deferred tax assets relates to operating loss carryforwards and all other deferred tax assets. A reconciliation of the statutory tax rate to the effective rate is as follows:
Year Ended December 31 1999 1998 1997 - ------------------------------------------------------------------------- Statutory federal income tax rate (34)% 34% 34% State income taxes, net of federal benefit 1 7 Adjustments to prior year taxes (3) Foreign sales corporation benefit (9) (5) Foreign income taxes (benefit) 2 (1) Net operating loss carryforward (benefit) 33 (30) Other (2) 2 ------------------------ Effective tax rate (3)% 34% (2)% ========================
NOTE L - LEASE COMMITMENTS The Company's principal lease commitments are for its corporate office and manufacturing facility in Manchester, Connecticut, and its professional services, software engineering and support, administration and equipment demonstration facility in Birmingham, Alabama. The Manchester lease expires on December 31, 2006 and the Birmingham lease expires on December 31, 2000. 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, 1999 are as follows: Minimum Rental (thousands) Payments - ------------------------------------------------------ 2000 $ 1,125 2001 849 2002 734 2003 605 2004 362 Thereafter 713 -------- Total minimum lease payments $ 4,388 ======== Rental expense for the years ended December 31, 1999, 1998, and 1997 was $966,000, $795,000, and $580,000, respectively. NOTE M - CONTINGENCIES There are no lawsuits currently pending against the Company. Recently the Company has received notification from a customer that certain services performed for the customer were not completed on schedule. The Company believes that the work has been completed according to contract specification and has been substantially delivered to the customer. Although the ultimate outcome is uncertain, based on currently known facts, the Company believes that the resolution of this matter will not have a material adverse effect on the Company's financial position or annual operating results. NOTE N - SEGMENT INFORMATION Business segment data and geographic area data for the years ended 1999, 1998 and 1997 as included in Item 1 of this report are an integral part of these financial statements. NOTE O - BILL AND HOLD TRANSACTIONS Revenues relating to sales of certain equipment (principally optical character recognition equipment) are recognized upon acceptance, shipment, or installation depending on the contract specifications. 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 1999, 1998 and 1997 included bill and hold transactions of $5.6 million, $3.7 million and $12.1 million, respectively. Accounts receivable included bill and hold receivables of $3.5 million, $1.7 million and $4.7 million at December 31, 1999, 1998, and 1997, respectively. NOTE P - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
December 31 (thousands, except share data) 1999 1998 1997 - ------------------------------------------------------------------------------ Numerator: Net Income (Loss) $ (8,175) $ 2,129 $ 5,790 ==================================== Denominator: Denominator for basic earnings per share (weighted-average shares) 6,979,651 6,921,331 6,632,248 Effect of dilutive securities: Employee stock options 181,327 437,765 Denominator for diluted earnings per share (adjusted weighted-average shares and assumed conversions) 6,979,651 7,102,658 7,070,013 ==================================== Basic earnings (loss) per share $ (1.17) $ .31 $ .87 ==================================== Diluted earnings (loss) per share $ (1.17) $ .30 $ .82 ====================================
NOTE Q - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1999 and 1998.
(thousands, except per share amounts) March June September December - ----------------------------------------------------------------------------------- 1999 - ---- Revenues $13,232 $14,829 $ 12,456 $ 11,475 Cost of product sales and service expenses 9,019 9,658 10,524 11,272 Net income (loss) 80 63 (1,963) (6,355) Basic earnings (loss) per share .01 .01 (.28) (.91) Diluted earnings (loss) per share $ .01 $ .01 $ (.28) $ (.91) 1998 - ---- Revenues $12,892 $ 9,704 $ 11,822 $ 19,553 Cost of product sales and service expenses 8,668 5,864 7,319 12,177 Net income 428 140 274 1,287 Basic earnings per share .06 .02 .04 .19 Diluted earnings per share $ .06 $ .02 $ .04 $ .18
The fourth quarter of 1999 includes a $1.3 million reduction of the income tax benefit recorded for the nine month period ended September 30, 1999 and a valuation allowance was established for $.7 million for net deferred tax assets. 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 captions "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 18, 2000 and is incorporated herein by reference and made a part hereof. ITEM 11 - EXECUTIVE COMPENSATION This information is included in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 18, 2000 and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is included under the captions "Security Ownership of Certain Beneficial Owners" and "Share Ownership of Management" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 18, 2000 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 18, 2000 and is incorporated herein by reference. 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, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements - December 31, 1999 (2) The following consolidated financial statement schedule is included in Item 14(a): 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 The Scan-Optics, Inc. 1990 Incentive and Non- Qualified Stock Option Plan amendment included as Item 2 in the Company's Proxy Statement dated April 14, 1994 for the Annual Meeting of Stockholders held on May 18, 1994. *+10.7 The Scan-Optics, Inc. 1990 Stock Option Plan for Outside Directors amendment included as Item 2 in the Company's Proxy Statement dated April 15, 1996 for the Annual Meeting of Stockholders held on May 15, 1996. *+10.8 The Scan-Optics, Inc. 1999 Incentive and Non-Qualified Stock Option Plan included in Exhibit A in the Company's Proxy Statement dated April 8, 1999 for the Annual Meeting of Stockholders held on May 20, 1999. *+10.9 Employment agreement, effective as of December 31, 1996, between Scan-Optics, Inc. and James C. Mavel, included as Exhibit 10.10 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1996. +10.10 Executive severance agreement between Marianna C. Emanuelson and Scan-Optics, Inc. dated November 17, 1997, is included as Exhibit 10.10 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. +10.11 Executive severance agreement between Richard C. Goyette and Scan-Optics, Inc. dated November 17, 1997, is included as Exhibit 10.11 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. +10.12 Executive severance agreement between Clarence W. Rife and Scan-Optics, Inc. dated November 17, 1997, is included as Exhibit 10.12 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. +10.13 Executive severance agreement between Michael J. Villano and Scan-Optics, Inc. dated November 17, 1997, is included as Exhibit 10.13 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. +10.14 Executive severance agreement between Joel K. Howser and Scan-Optics, Inc. dated July 21, 1998, is included as Exhibit 10.14 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. +10.15 Executive severance agreement between Joseph P. Crouch and Scan-Optics, Inc. dated November 15, 1999, is included as Exhibit 10.15 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. 22. List of subsidiaries of the Company, included as Exhibit 22 in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1999. 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, 1999. (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. 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: /S/ James C. Mavel James C. Mavel Chairman, Chief Executive Officer, President and Director Date: March 27, 2000 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. /s/ James C. Mavel Chairman, Chief Executive Officer, James C. Mavel President and Director (Principal Executive Officer) Date: March 27, 2000 /s/ Michael J. Villano Chief Financial Officer, Vice President Michael J. Villano and Treasurer (Principal Financial and Accounting Officer) Date: March 27, 2000 /s/ Logan Clarke, Jr. Director March 27, 2000 Logan Clarke, Jr. /s/ Richard J. Coburn Director March 27, 2000 Richard J. Coburn /s/ E. Bulkeley Griswold Director March 27, 2000 E. Bulkeley Griswold /s/ Lyman C. Hamilton, Jr. Director March 27, 2000 Lyman C. Hamilton, Jr. John J. Holton Director March 27, 2000 /s/ Robert H. Steele Director March 27, 2000 Robert H. Steele A majority of the Directors
SCHEDULE II SCAN-OPTICS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions ----------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description Of Period Expenses Accounts Deductions Period - -------------------------------------------------------------------------------------- Year ended December 31, 1999: $ 206 $ 94 $ 56 (2) $ 48 (1) $ 308 Reserve for doubtful accounts Year ended December 31, 1998: $ 104 $ 149 (2) $ 47 (1) $ 206 Reserve for doubtful accounts Year ended December 31, 1997: $ 673 $ 424 $ 993 $ 104 Reserve for doubtful accounts
(1) Uncollectible accounts written off, net of recoveries. (2) Rpresents reclassifications from other accounts. The required information regarding the valuation allowance for deferred tax Assets is included in Note K. EX-10.10 2 EXHIBIT 10.10 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of November 17, 1997, by and between SCAN-OPTICS, INC. (the "Company") and Marianna C. Emanuelson (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company 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 Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. MISCELLANEOUS: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Marianna C. Emaneulson Marianna C. Emaneulson EX-10.11 3 EXHIBIT 10.11 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of November 17, 1997, by and between SCAN-OPTICS, INC. (the "Company") and Richard C. Goyette (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company 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 Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. MISCELLANEOUS: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Richard C. Goyette Richard C. Goyette EX-10.12 4 EXHIBIT 10.12 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of November 17, 1997, by and between SCAN-OPTICS, INC. (the "Company") and Clarence W. Rife (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company 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 Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. MISCELLANEOUS: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Clarence W. Rife Clarence W. Rife EX-10.13 5 EXHIBIT 10.13 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of November 17, 1997, by and between SCAN-OPTICS, INC. (the "Company") and Michael J. Villano (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company 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 Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. MISCELLANEOUS: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Michael J. Villano Michael J. Villano EX-10.14 6 EXHIBIT 10.14 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of July 21, 1998, by and between SCAN-OPTICS, INC. (the "Company") and Joel K. Howser (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company to the Scan-Optics, Inc. Retirement Savings Plan on the 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. MISCELLANEOUS: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Joel K. Howser Joel K. Howser (Executive Name) EX-10.15 7 EXHIBIT 10.15 - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement") is made as of November 15, 1999, by and between SCAN-OPTICS, INC. (the "Company") and Joseph P. Crouch (the "Executive"). RECITALS: A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. 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 fixed base salary from the Company at the time in question. (b) "Board" means the Board of Directors of the Company. (c) "Change of Control" means a change of 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 Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (i) 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 Company representing 22% or more of the combined voting power of the Company's then outstanding securities; or (ii) 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 and any new directors, whose election by the Board or nomination for election by the Company'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. (d) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Board. (e) "Commission Pay" means the average annual commissions paid to the Executive by the Company during the three year period ending at the time in question. (f) "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 is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives a Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), 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. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, 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). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "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 Company. (j) "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. (k) "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. (1) "Term" means (i) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (ii) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (iii) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (m) "Terminate", "Termination" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. 2. TERMINATION FOLLOWING A CHANGE OF CONTROL: (a) If, during the Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Section 3 unless such Termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive, as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) 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 during the Severance Period with the right to severance compensation as provided in Section 3 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 Company, 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 Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company 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 Company prior to the Change of Control; (iv) Any failure by the Company 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 Company 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 Company 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 Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company 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 will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. SEVERANCE COMPENSATION: (a) If, following the occurrence of a Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination an amount (the "Severance Payment") equal to the sum of (A) 2.5 times the sum of Base Pay and Commission Pay at the highest rates 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 rates 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 Company to the Scan-Optics, Inc. Retirement Savings Plan on the 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, Commission Pay and Incentive Pay (at the rates used in (A) and (B) above) or such higher percentage as may then be eligible for Company 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 Company 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 Company that provide medical, prescription, dental, disability, accident or life insurance coverage, with the costs of such participation to be paid by the Company 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 Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company 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 Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company 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 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. 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 Company (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 Company 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 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company 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 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. NO MITIGATION OBLIGATION: The Company 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 the severance compensation by the Company 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. 6. LEGAL FEES AND EXPENSES: If the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company 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 Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company 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 or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. If the Executive prevails, in whole or in part, in connection with any such litigation, the Company 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. 7. EMPLOYMENT RIGHTS: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to or following any Change of Control. 8. WITHHOLDING OF TAXES: Except as otherwise provided in this Agreement, the Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. SUCCESSORS AND BINDING AGREEMENT: (a) The Company 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 Company, 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 Company 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 Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (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 9(a) and 9(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 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. NOTICES: For all purposes of this Agreement, all communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Chairman of the Board) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. GOVERNING LAW: The validity, interpretation, construction, and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. 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. 13. 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 Company 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 Company. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company 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 Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any previous individual agreement of employment or severance agreement with the Company which would provide a benefit to the Executive upon the occurrence of, or the termination of employment following, a Change of Control (whether or not so defined in said individual agreement), and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. SCAN-OPTICS, INC. By /s/ James C. Mavel Name: James C. Mavel Title: Chairman, President and Chief Executive Officer /s/ Joseph P. Crouch Joseph P. Crouch (Executive Name) EX-22 8 EXHIBIT 22 - LIST OF SUBSIDIARIES OF THE COMPANY Scan-Optics Limited, a United Kingdom Corporation S.O. Investment Company, a Delaware Corporation Scan-Optics(Canada), Ltd., a Canadian Corporation Scan-Optics GMBH, a German Corporation Scan-Optics International, LTD, a Barbardos Corporation EX-23 9 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 February 14, 2000 (except Note F, as to which the date is March 27, 2000) 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, 1999. Ernst & Young LLP Hartford, Connecticut March 27, 2000 EX-27 10 ART. 5 FDS FOR SCAN-OPTICS
5 EXHIBIT 27. SCAN-OPTICS, INC. FINANCIAL DATA SCHEDULE 12-MOS 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 38,000 216,000 4,386,000 0 0 0 19,021,000 22,931,000 15,695,000 308,000 206,000 104,000 10,033,000 11,478,000 12,547,000 37,335,000 36,893,000 34,635,000 20,193,000 19,723,000 19,215,000 17,337,000 16,367,000 15,355,000 55,186,000 52,992,000 38,707,000 32,608,000 21,786,000 9,992,000 0 0 0 0 0 0 0 0 0 148,000 147,000 144,000 22,081,000 30,246,000 27,707,000 55,186,000 52,992,000 38,707,000 23,800,000 32,988,000 41,361,000 51,992,000 53,971,000 56,608,000 16,056,000 19,335,000 25,066,000 60,367,000 50,899,000 51,066,000 (40,000) 162,000 149,000 0 0 0 0 0 0 (8,415,000) 3,234,000 5,691,000 (240,000) 1,105,000 (99,000) (8,175,000) 2,129,000 5,790,000 0 0 0 0 0 0 0 0 0 (8,175,000) 2,129,000 5,790,000 (1.17) .31 .87 (1.17) .30 .82
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