April 15, 1996
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of
Scan-Optics, Inc., scheduled to be held Wednesday, May 15, 1996, at the
Company's offices at 169 Progress Drive, Manchester, Connecticut, commencing at
1:30 p.m. Your Board of Directors and management look forward to meeting you
personally.
At the Meeting you will be asked to elect two directors, to approve an
amendment to the Scan-Optics, Inc. 1990 Stock Option Plan for Outside
Directors, to appoint independent auditors for the fiscal year ending December
31, 1996 and to transact such other business as may properly be brought before
the Meeting.
In addition to the specific matters to be acted upon, there will be a
report on the progress of the Company and an opportunity for questions of
general interest to the stockholders. Important information is contained in
the accompanying proxy statement which you are urged to read carefully.
Regardless of the number of shares you own, it is important that they
are represented and voted at the Meeting, whether or not you plan to attend.
Accordingly, you are requested to mark, sign, date and return the enclosed
proxy in the envelope provided at your earliest convenience.
Your interest and participation in the progress of the Company are
greatly appreciated.
Sincerely,
Richard I. Tanaka
CHAIRMAN OF THE
BOARD AND
CHIEF EXECUTIVE
OFFICER
<PAGE>
SCAN-OPTICS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Scan-Optics, Inc. (the "Company")
will be held at the Company's offices at 169 Progress Drive, Manchester,
Connecticut, on Wednesday, May 15, 1996 at 1:30 p.m. (EDT) to consider and take
action on the following items:
1. To elect two directors to serve until the Annual Meeting of
Stockholders in 1999;
2. To approve an amendment to the Scan-Optics, Inc. 1990 Stock Option
Plan for Outside Directors;
3. To appoint independent auditors for the fiscal year ending December
31, 1996; and
4. To transact such other business as may properly come before said
meeting or any adjournment thereof.
Only holders of Common Stock at the close of business on April 5, 1996
are entitled to notice of and to vote at the meeting or any adjournment
thereof. A list of stockholders entitled to vote at the meeting will be
available for examination by any stockholder for any purpose germane
to the meeting during ordinary business hours for ten days prior to the meeting
at the offices of the Company, 22 Prestige Park Circle, East Hartford,
Connecticut.
By Order of the Board of Directors
William H. Cuddy
SECRETARY
East Hartford, Connecticut
April 15, 1996
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE MEETING IN
PERSON, PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED
ENVELOPE AS PROMPTLY AS POSSIBLE.
<PAGE>
SCAN-OPTICS, INC.
22 PRESTIGE PARK CIRCLE
EAST HARTFORD, CONNECTICUT 06108
PROXY STATEMENT
This statement is furnished in connection with the solicitation of
proxies to be used at the Annual Meeting of Stockholders of Scan-Optics, Inc.,
a Delaware corporation, to be held at the Company's offices at 169 Progress
Drive, Manchester, Connecticut, on Wednesday, May 15, 1996 at 1:30 p.m.
The solicitation of proxies in the enclosed form is made on behalf of
the Board of Directors of the Company.
The cost of soliciting proxies on the accompanying form has been or
will be borne by the Company. In addition to solicitation by mail, the Company
will request banks, brokers and other custodians, nominees, and fiduciaries to
send proxy material to the beneficial owners and to secure their voting
instructions, if necessary. The Company will reimburse them for their expenses
in so doing. Directors, officers and regular employees of the Company, who
will receive no compensation for their services other than their regular
salaries, may solicit proxies personally, by telephone and by telegram from
stockholders. These proxy materials are first being mailed to stockholders on
or about April 15, 1996.
A stockholder signing and returning a proxy on the enclosed form has
the power to revoke it at any time before the shares subject to it are voted by
notifying the Secretary of the Company in writing of such revocation, or by
filing a duly executed proxy bearing a later date, or by attending the meeting
and voting in person. Properly executed proxies, not revoked, will be voted in
accordance with the instructions contained thereon. Unless a contrary
specification is made thereon, it is the intention of the attorneys named in
the enclosed proxy to vote FOR the nominees for election to the Board of
Directors, FOR the amendment to the 1990 Stock Option Plan for Outside
Directors, and FOR the appointment of Ernst & Young LLP as auditors for the
fiscal year ending December 31, 1996.
OUTSTANDING VOTING SECURITIES
Only holders of Common Stock, $.02 par value ("Common Stock") at the
close of business on April 5, 1996 are entitled to notice of and to vote at the
meeting. On April 5, 1996, the record date, there were 6,940,351 shares of
Common Stock outstanding. Each share of Common Stock is entitled to one vote
per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to each
person known to the Company to have beneficial ownership of more than 5% of a
class of the Company's outstanding voting stock as of April 1, 1996. In
preparing the following table, the Company relied on the information filed with
the Securities and Exchange Commission pursuant to Section 13(d) or 13(g)
of the Securities and Exchange Act of 1934, as amended, or information supplied
to the Company by such person or the representative of such person. Each
person listed below has sole voting and investment powers as to the shares the
person beneficially owns, except as otherwise indicated.
<PAGE>
NUMBER
OF SHARES
<TABLE>
<CAPTION>
NAME AND ADDRESS TITLE OF BENEFICIALLY PERCENT
OF BENEFICIAL OWNER CLASS OWNED OWNED OF CLASS
<S> <C> <C> <C>
Dimensional Fund Advisors Inc. Common Stock 451,200(1) 6.5%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
The Killen Group, Inc. Common Stock 779,600(2) 11.2%
1189 Lancaster Avenue
Berwyn, PA 19312
Edwin W. Schloss Common Stock 44,200(3) 0.6%
52 Vanderbilt Avenue
New York, NY 10017
Walter J. Schloss Common Stock 17,000(4) 0.2%
52 Vanderbilt Avenue
New York, NY 10017
Walter & Edwin Schloss Common Stock 866,000(5) 12.5%
Associates, L.P.
52 Vanderbilt Avenue
New York, NY 10017
</TABLE>
(1) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 451,200 shares of Common
Stock as of December 31, 1995, all of which shares are held in portfolios
of DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of The DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and the DFA Participating Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional serves as investment manager. Dimensional has sole
voting power as to 250,000 shares and sole dispositive power as to all such
shares. Dimensional disclaims beneficial ownership of all such shares.
(2) The Killen Group, Inc. has discretionary trading authority over 779,600
shares of Common Stock owned by clients whose shares are included in the
table.
(3) Edwin W. Schloss has sole voting and investment powers with respect to the
44,200 shares of Common Stock, which he individually owns. In addition, by
reason of his position as one of the general partners of Schloss Management
Company ("SMC") which is the general partner of Walter & Edwin Schloss
Associates, L.P. ("Associates") (listed in the above table), Edwin W.
Schloss may be deemed to have shared voting and investment powers with
respect to the 866,000 shares of Common Stock owned by Associates, thereby
increasing his beneficial ownership of the Common Stock to 910,200 shares,
or 13.1% of the Common Stock outstanding.
(4) Walter J. Schloss has sole voting and investment powers with respect to the
17,000 shares of Common Stock, which he individually owns. In addition, by
reason of his position as one of the general partners of SMC which is the
general partner of Associates (listed in the above table), Walter J.
Schloss may be deemed to have shared voting and investment powers with
respect to the 866,000 shares of Common Stock owned by Associates, thereby
increasing his beneficial ownership of the Common Stock to 883,000 shares,
or 12.7% of the Common Stock outstanding. In addition, Walter J. Schloss
from time to time possesses certain indicia of investment discretion over
29,000 shares of Common Stock held in the accounts of his clients,
but he has no voting power, and he disclaims beneficial ownership, with
respect to such shares. If he were deemed to have beneficial ownership of
such 29,000 shares, his total beneficial ownership of the Common Stock
would be 912,000 shares, or 13.2% of the Common Stock outstanding.
(5) Such entity may be deemed to have shared voting and investment powers with
Walter J. Schloss and Edwin W. Schloss with respect to the shares owned by
it. See footnotes 3 and 4 above.
See "Election of Directors - Share Ownership of Management" for information
on beneficial ownership of Common Stock by directors and officers of the
Company.
GOVERNANCE OF THE COMPANY
In accordance with the Company's By-Laws and the applicable laws of
Delaware, responsibility for the management of the Company is vested in its
Board of Directors. During 1995, the Board of Directors met eleven times. All
directors attended at least 75% of the aggregate of the number of meetings of
the Board of Directors and of committees of the Board on which they served.
The Board has delegated responsibilities with respect to management
compensation and employee stock option plans to the Stock Options and Executive
Compensation Committee, responsibilities with respect to certain audit matters
to the Audit Committee and responsibilities with respect to recommending
candidates to serve on the Board to the Nominating Committee.
The Stock Options and Executive Compensation Committee is composed of
E. Bulkeley Griswold (Chairman), Robert H. Steele and Lyman C. Hamilton, Jr.
The Audit Committee is composed of Logan Clarke, Jr. (Chairman), Richard J.
Coburn and E. Bulkeley Griswold. Richard Hodgson was chairman of the Audit
Committee until his resignation from the Board of Directors on September 18,
1995. The Nominating Committee is composed of Messrs. Hamilton (Chairman),
Coburn and Steele.
The Stock Options and Executive Compensation Committee is responsible
for reviewing and supervising all ordinary and incentive compensation payments
and plans for certain officers of the Company and for approving grants of stock
options to employees under the Company's employee stock option plans. During
1995, the Stock Options and Executive Compensation Committee met three times.
The Audit Committee is responsible for reviewing the adequacy of financial
controls and the adequacy and accuracy of financial reporting. The Audit
Committee met twice during 1995. The Nominating Committee is responsible for
screening and recommending candidates to serve on the Board. The Nominating
Committee met once in 1995.
Pursuant to the Company's By-Laws, nominations for directors may be
made by any stockholder entitled to vote for the election of directors at the
meeting who complies with the following notice procedures and who is a
stockholder of record at the time of giving such notice. To be timely, a
stockholder's notice must be delivered to or mailed to and received at the
principal executive offices of the Company not less than 40 days nor more than
90 days prior to the meeting; provided, however, that if less than 50 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so delivered or
received not later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the meeting was mailed
or the day on which such public disclosure was made. A stockholder's notice to
the Secretary must set forth (a) as to each person the stockholder proposes to
nominate for election or re-election as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities and Exchange Act of 1934, as amended; (b)
such person's written consent to being named in a proxy statement as a nominee
and to serving as a director if elected; and (c) as to the stockholder
giving the notice, (i) the name and address, as they appear on the Company's
books, of such stockholder and any other stockholder known by such stockholder
to be supporting such nomination and (ii) the class and number of shares of the
Company which are beneficially owned by such stockholder. A stockholder making
such a nomination must also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to such matter.
Directors, other than those who are full-time employees of the Company
or a subsidiary, each receive a monthly fee of $500 and additional fees of $500
per Board meeting attended and $300 per committee meeting attended; provided,
however, that no fee is paid for attendance at any committee meeting or
meetings held on the same day as a Board meeting nor is a director paid
for attendance at more than one committee meeting held on a single day.
Directors who are full-time employees of the Company receive no remuneration
for serving on the Board of Directors or committees. Under the Scan-Optics,
Inc. 1990 Stock Option Plan for Outside Directors, each non-employee director
received an option to purchase 5,000 shares of Common Stock on June 12,
1990, the effective date of the plan, and on June 12, 1991, 1992, 1993, 1994
and 1995 at an exercise price per share equal to the fair market value of a
share of Common Stock on the date of grant.
1. ELECTION OF DIRECTORS
The Certificate of Incorporation of the Company provides for a Board of
Directors which is divided into three classes, as nearly equal in size as
possible, with one class elected each year for a three-year term, to hold
office until the end of such term and until successors have been elected
and qualified. Pursuant to the Certificate of Incorporation, the Board of
Directors has determined that the Company will have six directors, two in the
class whose term will expire in 1997, two in the class whose term will expire
in 1998, and two in the class whose term will expire in 1999. At the
1996 Annual Meeting, two directors are to be elected to constitute the class
whose term will expire in 1999.
It is intended that the shares represented by the accompanying proxy
will be voted for the election of E. Bulkeley Griswold and Robert H. Steele,
unless the proxy indicates that authority to vote for such nominees is
withheld. In case a nominee is unable or declines to serve, which the
Board of Directors of the Company has no reason to expect, the attorneys named
in the proxy intend to vote for another person designated by the Board of
Directors.
Under state law, votes withheld and broker non-votes are not counted
votes cast in the election of directors.
The following table sets forth the nominees for election at this
meeting and each director continuing in office, their ages, business experience
over at least the last five years, other directorships and period of time as a
Director of the Company.
<PAGE>
INFORMATION REGARDING NOMINEES AND CONTINUING DIRECTORS
Nominees for election to Class I at this meeting to terms expiring in 1999:
MR. E. BULKELEY GRISWOLD, age 57, is Managing General Partner of
MarketCorp Ventures L.P., a venture capital limited partnership with which he
has been associated since 1984. Mr. Griswold is also a director of Bertucci's,
and a director of a number of other privately held companies. He has been a
Director since 1989.
MR. ROBERT H. STEELE, age 57, is a Senior Vice President of the John
Ryan Company, a banking services company. He was President of RHS Consulting
from 1990 to 1991 and from 1985 to 1990 was Chairman and CEO of Dollar Dry Dock
Bank. Mr. Steele is also a Director of Moore Medical Corp. and NLC Insurance
Companies. He has been a Director since 1978.
Class III Directors whose present terms continue until 1997:
MR. LYMAN C. HAMILTON, JR., age 69, is an Investment Manager and was
formerly Chief Executive Officer and President of InterDigital Communications
Corp., a specialized communications company, from 1993 to 1994. He had served
as Chairman and Chief Executive Officer of Alpine PolyVision, Inc., a flat
panel display manufacturer, from 1991 to 1993 and of Imperial Corporation of
America, a financial services organization, from 1989 to 1990 and as
Chairman and President of Tamco Enterprises, Inc., an investment company, from
1980 1989. He had previously served in various positions during a 17 year
association at ITT Corporation including President during 1977 and Chief
Executive Officer from 1978 to 1979. Mr. Hamilton is also a Director of Marine
Management Systems, Inc. and Compuflex. He has been a Director since 1985.
MR. RICHARD I. TANAKA, age 67, joined the Company in 1989 as Chairman
of the Board, Chief Executive Officer and President. In January 1996, Mr.
Tanaka relinquished the title of President. From 1987 to 1989 Mr. Tanaka was
President of Lundy Electronics and Systems, Inc., a computer and communications
product manufacturer. He has been a Director since 1989.
Class II Directors whose present terms continue until 1998:
MR. LOGAN CLARKE, JR., age 68, is an Independent Management Consultant.
He had previously served as acting President of Hartford College for Women from
1990 to 1991 and as Executive Vice President of Society for Savings, a savings
bank, from 1986 to 1990. He has been a Director since 1981.
MR. RICHARD J. COBURN, age 64, is Chief Executive Officer and President
of Accent Color Sciences, Inc., a manufacturer of color printing systems.
Previously he served as President of KCR Technology, Inc., a manufacturer of
high-speed printers, from 1983 to 1991. Except for a short period in 1980, he
has been a Director since 1968.
<PAGE>
SHARE OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock as of April 1, 1996 of each
director, nominee and executive officer named in the Summary Compensation Table
contained elsewhere in this proxy statement.
NAME NUMBER OF SHARES
(1)
Robert L. Bell ...........................................17,003
Logan Clarke, Jr. ........................................30,600
Richard J. Coburn ........................................41,200
E. Bulkeley Griswold .....................................54,000
Lyman C. Hamilton, Jr. ...................................32,000
Clarence W. Rife .........................................56,384
Robert H. Steele .........................................44,000 (2)
Richard I. Tanaka .......................................192,078
Michael J. Villano .......................................25,263
(1) Includes the following number of shares subject to options exercisable
within 60 days of April 1, 1996: Robert L. Bell, 16,665 shares; Logan Clarke,
Jr., 30,000 shares; Richard J. Coburn, 30,000 shares; E. Bulkeley Griswold,
30,000 shares; Lyman C. Hamilton, Jr., 30,000 shares; Clarence W. Rife, 43,000
shares; Robert H. Steele, 30,000 shares; Richard I. Tanaka, 189,460 shares,
Michael J. Villano, 23,883 shares.
(2) Mr. Steele disclaims beneficial ownership of 6,500 shares of stock owned by
his spouse, which shares are included in the table.
No director beneficially owned more than one percent of the Common
Stock, except Mr. Tanaka who beneficially owns 2.7% of the Common Stock
outstanding. All directors and executive officers as a group (12 persons)
beneficially owned 518,602 shares of the Company's Common Stock, including
448,008 shares subject to options exercisable within 60 days of April 1, 1996,
which constituted 7.0% of the outstanding Common Stock as of that date.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the cash and non
cash compensation paid by the Company to the CEO and the executive officers of
the Company whose salary and bonus exceeded $100,000 in 1995 for services
rendered in all capacities during the fiscal years ended December 31, 1995,
1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION UNDERLYINGALL OTHER
NAME AND SALARY BONUS OPTIONS
COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
<S> <C> <C> <C> <C> <C>
Robert L. Bell 1995 115,000 0 5,000 5,575
Vice President- 1994 115,000 0 0 3,101
Business Development 1993 43,125 0 25,000 397
Clarence W. Rife 1995 136,677 0 10,000 6,078
Vice President- 1994 119,403 0 6,000 4,342
Customer Relations 1993 120,337 0 5,000 3,506
Richard I. Tanaka 1995 200,000 0 0 15,932
Chairman and CEO 1994 200,000 0 0 11,167
1993 200,000 0 0 9,500
Michael J. Villano 1995 106,250 0 10,000 5,172
Chief Financial Officer 1994 90,000 0 11,000 2,070
and Vice President 1993 76,410 0 5,000 964
</TABLE>
(1) Includes employer match under the Company's Retirement Savings Plan, a
section 401 plan under the Internal Revenue Code of 1986, as amended,
the stock allocation under the Company's Employee Stock Ownership Plan
and term life insurance premiums paid by the Company for the benefit of
the executive officer.
EXECUTIVE EMPLOYMENT AGREEMENT
Under an employment agreement with Richard I. Tanaka, Chairman and
Chief Executive Officer of the Company ( the "Employment Agreement"), Mr.
Tanaka receives a base annual salary of $200,000, or such greater amount as the
Board of Directors may from time to time determine, and incentive compensation
not exceeding $200,000 per year, payable if certain management goals are met,
as well as health and disability insurance benefits, life insurance in the face
amount of $500,000, use of an automobile and certain other personal benefits.
Mr. Tanaka's employment under the Employment Agreement terminates automatically
upon death or after three months of disability and may also be terminated by
the Company or Mr. Tanaka. Generally, upon termination, Mr. Tanaka or his
beneficiary (as applicable) would be entitled to receive accrued and unpaid
amounts under the Employment Agreement, unless termination was due to willful
or reckless misconduct, gross negligence, misappropriation, fraud or
embezzlement (Cause). Moreover, severance benefits consisting of one year's
base salary and participation in the Company's health and disability plans are
payable upon termination of Mr. Tanaka's employment by the Company without
Cause prior to a change in control of the Company or termination of employment
by Mr. Tanaka for certain reasons prior to a change in control.
EXECUTIVE SEVERANCE AGREEMENTS
The Company has adopted severance agreements for Executive Officers.
These agreements require the Company to provide certain benefits to Executive
Officers in the event of an involuntary termination of employment with the
Company (except on account of death, disability or cause) or a voluntary
termination of employment with the Company where good reason exists,
in either case following a "change in control" of the Company. A "change in
control" is defined as a change that would be required to be reported pursuant
to the proxy regulations under the Securities Exchange Act of 1934, as amended,
whether or not the Company is then subject to such reporting requirement. A
"change in control" will also occur if any person or entity acquires 22%
or more of the Company's outstanding securities, or if during any two-year
period the directors on the Company's Board of Directors who were such at the
beginning of the period and directors nominated or elected by a two-thirds
majority of such directors cease to constitute a majority of the Board. The
benefits to be provided in the event of an involuntary termination following a
change in control are (1) a lump sum payment equal to the sum of (a) two and a
half times the sum of the Executive Officers base pay and commission pay and
two and a half times the preceding year's (or the second of third preceding
year's if greater) executive incentive payments, (b) two and a half times the
Company matching contribution to the Scan-Optics, Inc. Retirement Savings Plan
that would be made if the Executive Officer deferred under such Plan four
percent (or such higher percentage as my be eligible for matching
contributions) of the amount of base pay, commission pay and incentive pay
considered in (a) above, and (c) the value of all options to acquire Company
common stock that will not become exercisable on account of the Executive
Officer's termination, such lump sum payment being subject to certain federal
income tax law limitations, and (2) the continuation of insurance coverage for
a period of 24 months following termination. These benefits generally will be
in addition to any other benefits that Executive Officers are entitled to
receive from the Company.
EXECUTIVE INSURANCE AGREEMENT
Under an insurance agreement with Mr. Rife, the Company is obligated to
provide certain benefits upon the happening of certain specified events. The
principal obligations of the Company under the agreement consist of the
following: (a) if Mr. Rife dies while in the employ of the Company but prior
to attaining the age of 65, the Company is obligated to pay his beneficiary
$50,000 per annum for each of the ten years following such death, with payment
to commence in the year of death; (b) if he retires from the Company upon
attaining the age of 65, or thereafter, the Company is obligated to pay him (or
his beneficiary in the event that he dies during the retirement period) $50,000
per annum for each of the ten years following such retirement, with payment to
commence in the year of retirement; (c) to provide for the adequate funding of
its obligations under the agreement, the Company has purchased and is obligated
to maintain at its expense an insurance policy on Mr. Rife's life in the face
amount of $310,000; and (d) the Company has purchased and is obligated to
maintain for the benefit of Mr. Rife, at the Company's expense, a disability
income policy which would provide disability benefits to him in the amount of
$2,500 per month. The agreement provides that payments under the disability
policy shall commence six months after a determination of disability has been
made and shall continue until Mr. Rife reaches the age of 65. The agreement
provides for automatic termination if (a) Mr. Rife resigns or otherwise
voluntarily terminates his employment other than by reason of disability or
retirement upon attaining the age of 65 or (b) his employment is terminated by
reason of gross misconduct.
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information on options granted in 1995
to the executive officers listed in the Summary Compensation Table:
INDIVIDUAL GRANTS
% OF TOTAL
OPTIONS EXERCISE
<TABLE>
<CAPTION>
OPTIONS GRANTED TO OR GRANT DATE
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME # FISCAL YEAR ($/SH) DATE ($)(1)
<S> <C> <C> <C> <C> <C>
Robert L. Bell 5,000 8.2 2.13 12/10/05 1.66
Clarence W. Rife 10,000 16.4 2.13 12/10/05 1.66
Richard I. Tanaka 0
Michael J. Villano 10,000 16.4 2.13 12/10/05 1.66
</TABLE>
(1) Present value determination was made using a Black-Scholes option
pricing model. The actual value, if any, an executive may realize will depend
on the excess of the stock price over the exercise price the date the option is
exercised, so that there is no assurance the value realized by an executive
will be at or near the value estimated by the Black-Scholes model. The
estimated values under that model are based on the following assumptions:
1. Volatility .639
2. Interest Rate 6.52%
3. Time to Exercise 10 years
In general, options granted under the Company's Stock Option Plans vest
in installments of one-third commencing one year after grant. The option
exercise price is equal to the fair market value of a share of Common Stock on
the date of grant. Options vest in full upon a reorganization, merger or
consolidation in which the Company is not the surviving corporation and upon
other specified events.
<PAGE>
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS VALUES
The following table summarizes options exercised during 1995 and
presents the value of unexercised options held by the named executives at
fiscal year-end:
<TABLE>
<CAPTION>
NUMBER OF VALUE*
SECURITIES OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS OPTIONS
ON EXERCISE REALIZED* AT FISCAL AT FISCAL
NAME (#) ($) YEAR-END YEAR-END
<S> <C> <C> <C> <C>
Robert L. Bell 0 0 16,665 (1) $47,912 (1)
13,335 (2) $38,338 (2)
Clarence W. Rife 0 0 43,000 (1) $123,625 (1)
12,000 (2) $34,500 (2)
Richard I. Tanaka 0 0 189,640 (1) $545,215 (1)
Michael J. Villano 0 0 23,883 (1) $68,664 (1)
13,667 (2) $39,293 (2)
</TABLE>
(1) Exercisable
(2) Unexercisable
* Values are calculated by subtracting the exercise or base price from
the fair market value of the Common Stock as of the exercise date.
Note: A graphical presentation of the data below was printed as part of the
1996 Proxy.
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE RETURN*
AMONG SCAN-OPTICS, INC., THE RUSSELL 2000 INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING SERVICES INDEX
CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
12/90 12/91 12/92 12/93 12/94 12/95
<S> <C> <C> <C> <C> <C> <C> <C>
Scan-Optics, Inc. SOCR 100 300 218 364 409 209
Russell 2000 IR20 100 146 173 206 202 260
NASDAQ Computer & DP INAD 100 202 217 230 279 425
</TABLE>
*$100 invested on 12/31/90 in stock or index - including reinvestment of
dividends.
Fiscal year ending December 31.
<PAGE>
REPORT OF THE STOCK OPTIONS AND EXECUTIVE COMPENSATION
COMMITTEE
The Stock Options and Executive Compensation Committee is responsible
for making recommendations to the full Board with respect to the compensation
of the Company's Chief Executive Officer and other Executive Officers of the
Company, and with respect to long-and short-term incentive compensation awards.
It also makes grants under the Company's stock option plans for employees. The
members of the Stock Options and Executive Compensation Committee are E.
Bulkeley Griswold (Chairman), Robert H. Steele and Lyman C. Hamilton, Jr. All
members are non-employee directors, and none has any direct or indirect
material interest in or relationship with the Company outside of his position
as director.
The Company's executive compensation program is divided into four
parts: base salary, bonus, commissions, and stock options. Actual salary
changes are based on performance. Bonus awards for Executive Officers are
based on the Company meeting specified goals, which are described below.
Sales volume and service revenue are important factors in the Company's
success. Therefore, commissions constitute a significant portion of the
compensation of those executives who have direct responsibility for sales and
service. In 1995, commission payments for Mr. Rife, the executive with
significant service responsibilities, constituted approximately 15% of cash
compensation.
Stock compensation in the form of stock options is meant to align
interests of top management with that of shareholders. The Committee has the
authority to determine the individuals to whom stock options are awarded, the
terms at which option grants shall be made and the number of shares subject to
each option.
Compensation of the Company's Chief Executive Officer is a combination
of base salary and incentive bonus awards, both cash, and stock options. The
amount of the bonus for 1995 was based entirely on quantitative objectives, the
Company meeting specified pre-tax earnings targets, as more fully described
below.
The Committee meets with the Chief Executive Officer to evaluate the
performance of other executive officers and meets in the absence of the Chief
Executive Officer to evaluate his performance. The Committee reports the
results of all evaluations to the full Board.
The Committee's overall objective in its discussions of compensation is
to reward performance in a manner that is competitive with comparable companies
and which provides incentives to managers to produce steadily improved results.
In July 1994, after extensive deliberation, the Committee adopted a new
cash bonus and contingent stock option program for executives. Under this
program, bonus awards and option grants subsequent to July 1994 for Executive
Officers, including the Chief Executive Officer, were contingent on the Company
meeting specified pre-tax earnings targets. These pre-tax earnings targets
were approved by the full Board. Bonus eligibility for 1995 commenced with the
achievement of 70% of the earnings goals with awards to be in proportion to the
total achieved. Contingent stock options were to be earned on the same basis
as cash bonus awards.
The Company failed to achieve the pre-tax earnings goals established by
the Board for the 1995 bonus and contingent stock option program and,
therefore, no bonus payments are to be made in 1996 for 1995 performance and no
contingent stock options were earned for 1995. Although the specific
quantitative objectives for 1995 were not achieved, the Committee nevertheless
determined to make special option grants to certain Executive Officers and
other employees in late 1995 in order to recognize outstanding efforts in the
domestic and international sales, service and administrative areas.
STOCK OPTIONS AND
EXECUTIVE COMPENSATION COMMITTEE
E. Bulkeley Griswold, Chairman
Lyman C. Hamilton, Jr.
Robert H. Steele
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CERTAIN TRANSACTIONS
During 1995, legal services were rendered to the Company by a law firm
of which William H. Cuddy, Secretary of the Company, is a partner.
2. APPROVAL OF THE AMENDMENT OF THE SCAN-OPTICS, INC.
1990 STOCK OPTION PLAN FOR THE OUTSIDE DIRECTORS
The Board of Directors has adopted an amendment to the 1990 Stock
Option Plan for Outside Directors (the "Plan"), increasing the number of shares
to be issued under the 1990 plan from 200,000 shares to 400,000 shares (an
increase of 2.9% of the class issued and outstanding and extending the date
after which no options may be granted) under the Plan from June 12, 1996
to May 15, 2006. The following discussion is a summary of the 1990 Plan and
the proposed amendment.
PURPOSE. The purpose of the Plan is to attract and retain the
continued services of non-employee directors of the Company with the requisite
qualifications and to encourage such directors to secure or increase on
reasonable terms their stock ownership in the Company.
ADMINISTRATION. The Plan will be administered by the Stock Options and
Executive Compensation Committee (the "Committee"). Each member of the
Committee must be a disinterested person under Rule 16b-3. The Committee will
have the authority to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to it and to make all other determinations with
respect to the administration of the Plan. The Committee, however, will have
no discretion to determine the non-employee directors who will receive options,
the number of shares subject to options, the terms upon which the times at
which or the periods within which shares may be acquired of the options may be
acquired and exercised.
SHARES SUBJECT TO OPTIONS. If this Proposal 2 is adopted by the
shareholders, the stock subject to options will be shares of the Company's
Common Stock in an amount not to exceed an aggregate of 400,000 shares, subject
to adjustment to prevent dilution in the event of stock splits, stock dividends
or other changes in the Company's capitalization. Such shares may be treasury
shares or authorized but unissued shares. If any outstanding option expires or
terminates prior to its exercise in full, the shares of Common Stock allocable
to the unexercised portion of such option will become available for the grant
of other options.
ELIGIBILITY. Options may be granted only to members of the Board of
the Company who are not otherwise employees of the Company or any of its
subsidiaries on the date of grant and have not been employees of the Company or
subsidiaries at any time since the beginning of the preceding fiscal year.
Currently, five persons are to participating in the Plan.
GRANT OF OPTIONS. Under the Plan as amended, a director will receive
automatic grants of options to purchase 5,000 shares of Common Stock on each
anniversary of that date. Directors who are newly elected to the Board at an
annual meeting of the stockholders will receive an automatic grant of an option
to purchase 5,000 shares of Common stock on the first anniversary of the date
of such election. Such automatic grant, however, will not be made if the
director is not a participant on the applicable date or of the number of shares
available for grant under the Plan is not sufficient to make the automatic
grants required to be made pursuant to the Plan on the applicable date.
OPTION PRICE. The per share price to be paid by a participant upon the
exercise of an option will be equal to the fair market value of a share of the
Common Stock on the date of grant. On April 1, 1996, the closing sale price of
the Common Stock on the NASDAQ National Market System was $3.50 per share.
EXERCISE OF OPTIONS. No option may be exercised until six months after
it is granted, except as provided below. Options are exercisable for a period
of ten years from the date of the granting thereof. The number of shares which
may be purchased at any one time shall be 100 shares, a multiple thereof or the
total number at the time purchasable under the option. The exercise price
is payable in cash or by certified check, bank draft or postal or express money
order. No option may be assigned or transferred except by will and/or by the
laws of the descent and distribution and may be exercised during the life of
any participant only by the participant. If a participant dies or becomes
disabled, all options held by the participant which have not yet become
exercisable will become immediately exercisable.
TERMINATION. Except as otherwise provided in the following sentences,
if a participant terminates service as a director for any reason, any
outstanding option held by the participant will terminate on the earlier of the
date on which the option would otherwise expire or 90 days after such
termination. If a participant's service as a director is terminated by
disability or death, the participant or the representative of the participant's
estate or his beneficiaries to whom the option has been transferred will have
the right during the period commencing on the date of the participant's
disability or death and ending one year after such termination to exercise any
then outstanding options. If a participant's service as a director is
terminated for cause, any outstanding option held by the participant will
terminate as of the date of such termination for cause.
STOCKHOLDER RIGHTS. A participant entitled to shares as the result of
the exercise of an option will not be deemed to be or have rights as a
stockholder of the Company except to the extent a stock certificate is issued
for such shares and then only from the date the certificate is issued.
AMENDMENT; DURATION OF PLAN. The Board of Directors of the Company may
suspend or discontinue the Plan or revise it or amend it in any respect
whatsoever; provided, however, that any amendment requiring stockholder
approval under Rule 16b-3 shall not be made without the further approval of the
holders of at least a majority of the outstanding shares of Common Stock.
Under Rule 16b-3 as currently in effect, stockholder approval would be
necessary if the Board (a) increased the aggregate number of shares which may
be issued under options pursuant to the provisions of the Plan (except for
adjustment provisions); (b) increased the maximum term of outstanding options;
(c) changed the class of employees eligible to receive options; or (d)
otherwise materially increased the benefits accruing to participants under the
Plan. Additionally, the Plan provides that the provisions of the Plan relating
to eligibility, the Committee, and the timing, amount and certain other terms
of grants may not be amended more than once every six months. No such
suspension, discontinuance, revision or amendment of the Plan may affect a
previously granted option without the holder's consent, unless necessary to
comply with applicable law.
Unless sooner terminated by the Board, the Plan will remain in effect
for a period of five years after the effective date of the Plan. No options
may be granted after the termination of the Plan.
FEDERAL INCOME TAX CONSEQUENCES. Except as described below, upon the
exercise of an option, an optionee will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Common Stock
on the date of exercise over the option price. Any gain or loss recognized by
the optionee on the subsequent disposition of the stock will be capital
gain or loss.
Optionees who are subject to Section 16(b) of the 1934 Act, will
generally not recognize ordinary compensation income until the earlier of the
date of disposition of the stock or six months after the date of exercise.
Such ordinary compensation income will be measured by the excess of the fair
market value of the shares of Common Stock with respect to which the option is
exercised, on the date income is recognized, over the option price. Such
optionee may, however, within 30 days after the transfer to the optionee of the
shares acquired pursuant to the exercise of an option, file an election with
the Internal Revenue Service to have the amount of such ordinary compensation
income determined as if the optionee were not subject to Section 16(b).
The Company will be entitled to a deduction for federal income tax
purposes at the same time and in the same amount as an optionee is required to
recognize ordinary compensation income as described above. To the extent that
an employee recognizes capital gain as described above, the Company will not be
entitled to a deduction for federal income tax purposes.
VOTE REQUIRED. The affirmative vote of the holders of a majority of
the voting power of the outstanding shares of the Common Stock is required for
the approval and effectiveness of the Plan. Abstentions and broker non-votes
are not counted in determining a majority vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Company's non-employee
directors would receive a benefit by the adoption of the Plan and, therefore,
have an interest in the Plan. The Board of Directors believes, however, that
adoption of the Plan would also be in the best interests of the Company and its
stockholders because it will enhance the Company's ability to attract and
retain qualified persons to serve as outside directors. Therefore, the Board
of Directors unanimously recommends that the stockholders vote for Proposal 2
to approve the amendment to the 1990 Plan.
3. APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors recommends that proxies be voted in favor of the
appointment of Ernst & Young LLP, certified public accountants, as independent
auditors for the fiscal year ending December 31, 1996. Ernst & Young LLP has
been the Company's independent auditor since 1979.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting where they will have an opportunity to make a statement if they
desire to do so and are expected to be available to answer appropriate
questions.
4. OTHER BUSINESS
The Board of Directors does not know of any matters to be presented at
the Annual Meeting other than those set forth in the Notice of Annual Meeting
of Stockholders. However, if any other matters properly come before such
meeting, the persons named in the enclosed proxy will have discretionary
authority to vote all proxies on such matters in accordance with their
judgment.
STOCKHOLDER PROPOSALS
Pursuant to the Company's By-Laws, only such business shall be
conducted, and only such proposals shall be acted upon, at an annual meeting as
shall be brought before the meeting by or at the direction of the Board of
Directors or by a stockholder who has given timely and proper notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
must be delivered to or mailed to and received at the principal executive
offices of the Company not less than 40 days nor more than 90 days prior to the
scheduled annual meeting; provided, however, that if less than 50 days' notice
or prior public disclosure of the date of the annual meeting is given or
made, notice by the stockholder to be timely must be so delivered or received
not later than close of business on the tenth day following the earlier of the
day on which such notice of the date of the annual meeting was mailed or the
day on which such public disclosure was made. A stockholder's notice to the
Secretary must set forth as to each matter the stockholder proposes to bring
before the annual meeting (i) a brief description of the proposal and the
reasons for conducting such business at the annual meeting, (ii) the name and
address, as they appear on the Company's books, of the stockholder, (iii) the
class and number of shares of the Company which are beneficially owned by the
stockholder and (iv) any material interest of the stockholder in such proposal.
Stockholder proposals intended to be presented at the Annual Meeting of
Stockholders in 1997 must be received by the Company no later than December 14,
1996 in order to be considered for inclusion in the Company's proxy statement
and form of proxy relating to the Annual Meeting of Stockholders in 1997. Any
such proposal must comply with Rule 14a-8 promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended.
WILLIAM H. CUDDY
Secretary
April 15, 1996
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