SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SCAN-OPTICS, INC.
................................................................................
(Name of Registrant as Specified In Its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
................................................................................
2) Aggregate number of securities to which transaction applies:
................................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
................................................................................
4) Proposed maximum aggregate value of transaction:
................................................................................
5) Total fee paid:
................................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
................................................................................
2) Form, Schedule or Registration Statement No.:
................................................................................
3) Filing Party:
................................................................................
4) Date Filed:
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<PAGE>
April 14, 1997
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of
Scan-Optics, Inc., scheduled to be held Thursday, May 15, 1997, 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 appoint
independent auditors for the fiscal year ending December 31, 1997 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,
/s/ Richard I. Tanaka /s/ James C. Mavel
Richard I. Tanaka James C. Mavel
Chairman of the Board President 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 Thursday, May 15, 1997 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 2000;
2. To appoint independent auditors for the fiscal year ending December
31, 1997; and
3. 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 4, 1997
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, 169 Progress Drive, Manchester, Connecticut.
By Order of the Board of Directors
William H. Cuddy
Secretary
Manchester, Connecticut
April 14, 1997
Directions to Scan-Optics' offices at 169 Progress Drive, Manchester,
Connecticut are as follows:
From I-84 Eastbound, take Exit 63. Turn left at traffic light onto Tolland
Turnpike. Turn right at first traffic light onto Parker Street, follow
directions below.
From I-84 Westbound, take Exit 63. Stay in the right lane, and turn right at
traffic light. Proceed to the third traffic light and turn right onto Parker
Street, follow directions below.
Follow Parker Street for 8/10th mile, then turn left onto Colonial Drive.
Turn left onto Progress Drive, Scan-Optics is about one half mile on the left.
A special parking area will be designated.
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
AT YOUR EARLIEST CONVENIENCE.
<PAGE>
SCAN-OPTICS, INC.
169 Progress Drive
Manchester, Connecticut 06040
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 Thursday, May 15, 1997 at 1:30 p.m.
The solicitation of proxies on the accompanying 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 14, 1997.
A stockholder signing and returning a proxy on the accompanying 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 and FOR the appointment of Ernst & Young LLP as auditors for the
fiscal year ending December 31, 1997.
OUTSTANDING VOTING SECURITIES
Only holders of Common Stock, $.02 par value ("Common Stock") at the
close of business on April 4, 1997 are entitled to notice of and to vote at the
meeting. On April 4, 1997, the record date, there were 6,988,218 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 the
Company's outstanding voting stock as of April 1, 1997. 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 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.
<TABLE>
<CAPTION>
Number
of Shares
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 409,000 (1) 6.5%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
The Killen Group, Inc. Common Stock 887,900 (2) 12.8%
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 791,600 (5) 11.4%
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 409,000 shares of
Common Stock as of December 31, 1996, 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 887,900
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
791,600 shares of Common Stock owned by Associates, thereby increasing his
beneficial ownership of the Common Stock to 835,800 shares, or 12.0% 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 791,600 shares of Common Stock owned by Associates, thereby increasing
his beneficial ownership of the Common Stock to 808,600 shares, or 11.6% of the
Common Stock outstanding. In addition, Walter J. Schloss from time to time
possesses certain indicia of investment discretion over 20,000 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 20,000 shares, his total beneficial
ownership of the Common Stock would be 828,600 shares, or 11.9% 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 1996, 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. 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 1996, the Stock Options and Executive Compensation Committee met six
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 1996. The Nominating Committee is responsible
for screening and recommending candidates to serve on the Board. The
Nominating Committee met once in 1996.
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 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 $750 and additional fees of $750
per Board meeting attended and $500 per committee meeting attended. 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. The 1990
plan was amended on May 15, 1996 to provide an additional 200,000 shares
available for grant, and a grant of 5,000 options for each outside director was
made on that date. The exercise price per share is 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 1998, two in the class whose term will expire
in 1999, and two in the class whose term will expire in 2000. At the 1997
Annual Meeting, two directors are to be elected to constitute the class whose
term will expire in 2000.
It is intended that the shares represented by the accompanying proxy
will be voted for the election of Lyman C. Hamilton, Jr. and James C. Mavel,
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 as votes cast in the election of directors.
The following information 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.
Information Regarding Nominees and Continuing Directors
Nominees for election to Class III at this meeting to terms expiring in 2000:
Mr. Lyman C. Hamilton, Jr., age 70, 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 to 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., Polyvision Inc. and Compuflex. He has been
a Director since 1985.
Mr. James C. Mavel, age 51, joined the Company on January 2,
1996 as President and Chief Operating Officer. On December 31, 1996 Mr. Mavel
was promoted to the title of Chief Executive Officer. From 1991 to 1995 Mr.
Mavel was Vice President and General Manager of the Imaging Systems Division of
Unisys. He has been a Director since 1996.
Class II Directors whose present terms continue until 1998:
Mr. Logan Clarke, Jr., age 69, is an Independent Management Consultant.
He had previously served as Interim Executive Director, of Southeast Area
Technology Center, a business incubator and revolving loan fund from 1995 to
1996, 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 65, is Chairman, 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.
Class I directors whose present terms continue until 1999:
Mr. E. Bulkeley Griswold, age 58, 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 NLC Insurance Companies and a director of a number of other privately held
companies. He has been a Director since 1989.
Mr. Robert H. Steele, age 58, is an Executive 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.,
NLC Insurance Companies and Accent Color Sciences, Inc. He has been a Director
since 1978.
<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, 1997 of each
director, nominee and executive officer named in the Summary Compensation Table
contained elsewhere in this proxy statement.
<TABLE>
<CAPTION>
Name Number of Shares (1)
<S> <C>
Robert L. Bell 27,437
Logan Clarke, Jr. 35,600
Richard J. Coburn 35,200
E. Bulkeley Griswold 54,500
Richard C. Goyette 6,666
Lyman C. Hamilton, Jr. 37,000
James C. Mavel 25,000
Clarence W. Rife 62,120
Robert H. Steele 49,000 (2)
Richard I. Tanaka 192,078
Michael J. Villano 32,590
</TABLE>
(1) Includes the following number of shares subject to options exercisable
within 60 days of April 1, 1997: Robert L. Bell, 26,667 shares; Logan Clarke,
Jr., 35,000 shares; Richard J. Coburn, 35,000 shares; E. Bulkeley Griswold,
31,000 shares; Richard C. Goyette, 6,666 shares; Lyman C. Hamilton, Jr., 35,000
shares; James C. Mavel, 25,000 shares; Clarence W. Rife, 48,333 shares; Robert
H. Steele, 35,000 shares; Richard I. Tanaka, 189,460 shares; and Michael J.
Villano, 30,883 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 589,618 shares of the Company's Common Stock, including
529,983 shares subject to options exercisable within 60 days of April 1, 1997,
which constituted 7.9% 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 $100,000 in 1996 for services
rendered in all capacities during the fiscal years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
---------------------------- --------
Securities
Underlying All Other
Name and Salary Bonus Options Compensation
Principal Position Year ($) ($) (#) ($)(1)
- ------------------------ ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Robert L. Bell 1996 115,000 87,222 0 5,654
Vice President 1995 115,000 0 5,000 5,616
Business Development 1994 115,000 0 0 3,101
Richard C. Goyette 1996 108,333 5,000 20,000 2,795
Vice President
Sales and Marketing
James C. Mavel(2) 1996 190,000 136,521 100,000 4,284
President and
Chief Executive Officer
Clarence W. Rife 1996 136,224 87,980 0 6,382
Vice President 1995 136,677 0 10,000 6,129
Customer Relations 1994 119,403 0 6,000 4,342
Richard I. Tanaka 1996 200,000 0 0 16,930
Chairman of the Board 1995 200,000 0 0 15,978
1994 200,000 0 0 11,500
Michael J. Villano 1996 110,000 83,430 0 5,457
Chief Financial Officer 1995 106,250 0 10,000 5,208
and Vice President 1994 90,000 0 11,000 2,070
</TABLE>
(1) Includes employer match under the Company's Retirement Savings Plan, a
section 401(k) plan under the Internal Revenue Code of 1986, as amended, the
stock allocation under the Company's Employee Stock Ownership Plan, term life
insurance premiums paid by the Company for the benefit of the executive
officer and payment of relocation costs associated with the executives
household move.
(2) Mr. Mavel became Chief Executive Officer on December 31, 1996.
<PAGE>
Executive Employment Agreements
Under an employment agreement with Richard I. Tanaka, Chairman of the
Board of Directors 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.
The Company and Mr. Tanaka executed an amendment to his employment
agreement on December 9, 1996 to provide for a management transition. The
amendment provides that he would cease to be Chief Executive Officer by
December 31,1996, that he will continue as Chairman of the Board of Directors
until the 1997 Annual Meeting of Stockholders and will continue as an executive
employee for twelve months thereafter. During that period, he will not have
specific assigned duties but will be available to assist and consult with the
Company on specific issues related to customers and products, which may include
product direction, the international market and relations with distributors and
customers in the Japanese market. His salary and benefits will remain in
effect during that twelve-month period at levels not less than those existing
on the date of the amendment and his stock options will remain in place in
accordance with their terms. He will not receive any severance pay or the
continuation of health and disability coverage and other benefits following
the end of that twelve-month period.
The Company entered into an employment agreement effective as of
December 31, 1996 with James C. Mavel to serve as its President and Chief
Executive Officer and in such other executive capacities as the Board of
Directors may designate from time to time. The term of Mr. Mavel's employment
extends until either party terminates it. The agreement provides for a base
annual salary of $200,000 or such greater amount as the Board of Directors may
from time to time determine, annual incentive compensation, involving both
potential cash and stock option benefits, as the Stock Options and Executive
Compensation Committee of the Board of Directors may determine, life insurance
in the face amount of $550,000, use of an automobile, health and disability
insurance benefits, participation in other benefits available generally to
executive employees as the Board Of Directors may determine, and certain other
personal benefits. Mr. Mavel's employment terminates automatically upon death
or after three months of disability, and may also be terminated by the Company
or Mr. Mavel. Generally, upon termination, Mr. Mavel or his beneficiary
(as applicable) would be entitled to receive accrued and unpaid amounts under
the Employment Agreement, unless termination was because he had breached his
obligations under the agreement and did not cure the breach within
10 days after notice from the Company, neglected or refused to attend to the
material duties assigned to him by the Board of Directors and did not cure such
neglect or refusal within 10 days after notice from the Company, engaged in
willful or reckless misconduct or gross negligence in the performance of his
duties, misappropriated Company property, committed fraud or embezzlement
against the Company or was convicted of any crime (other than minor traffic
violations). (The foregoing acts are referred to as Cause.) Moreover, severance
benefits consisting of one year's base pay and continued participation for a
year in the Company's health and disability insurance plans are owed if the
Company terminates Mr. Mavel's employment without Cause prior to a change
in control or if Mr. Mavel, prior to a change in control, terminates his
employment because the Company has significantly diminished his job
responsibilities and has not cured such diminishment within 10 days after
notice from him.
Under his employment agreement, Mr. Mavel is entitled to enhanced
severance benefits, similar to those available to other executive officers and
described below, if his employment terminates involuntarily (except on account
of death or disability or for Cause) or he terminates his employment for Good
Reason after 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 requirements. A change in
control would also occur if any person or entity acquires 22% or more of
the voting power of the Company's outstanding securities or if during a 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. Good
Reason is defined to include an adverse change in Mr. Mavel's powers,
responsibilities or duties, a reduction in his base pay, discontinuance or a
reduction of his participation in an incentive pay plan or arrangement or
employee benefits in which he was participating, liquidation, merger,
consolidation of the Company or a transfer of all or substantially all of its
assets unless the successor assumes all of the Company's obligations
under the employment agreement, or any material breach of the agreement by the
Company or any successor. In the event of such a termination of employment, the
benefits to be provided are (1) a lump sum payment equal to the sum of (a) two
and a half times the sum of his base pay and two and a half times the preceding
year's (or the second or third preceding year's, if greater) incentive
payments, (b) two and a half times the Company's matching contribution to its
Retirement Savings Plan that would be made if he deferred four percent (or such
higher percentage as may be eligible for matching contributions) of the amount
of his base pay and incentive pay, and (c) the value of all options to
acquire Company stock that will not become exercisable on account of his
termination, such lump sum payment being subject to reduction if necessary to
avoid the imposition of an excise tax under the federal income tax law
limitations on so-called "golden parachute" payments, and (2) the continuation
of health, disability and life insurance coverages for two years following
termination of employment.
Executive Severance Agreements
The Company has adopted severance agreements for Executive Officers
including Mr. Bell, Mr. Goyette, Mr. Rife and Mr. Villano. 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 or 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 may
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
reduction if necessary to avoid the imposition of an excise tax under federal
income tax law limitations on so-called "golden parachute" payments, 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
$2,500 per month. The agreement provides that payments under the disability
policy shall commence six months after a determination of disability has been
made and shall continue until Mr. Rife reaches the age of 65. The agreement
provides for automatic termination if (a) Mr. Rife resigns or otherwise
voluntarily terminates his employment other than by reason of disability or
retirement upon attaining the age of 65 or (b) his employment is terminated by
reason of gross misconduct.
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth information on options granted in 1996
to the executive officers listed in the Summary Compensation Table:
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
------------------------------------------------- ---------
% of Total
Options Exercise
Options Granted to or Grant Date
Granted Employees in Base Price Expiration Present Value
Name # Fiscal Year ($/Sh) Date ($)(1)
- --------------------- -------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Robert L. Bell 0
Richard C. Goyette 20,000 13.4 3.25 3/24/06 1.70
James C. Mavel 75,000 50.3 3.50 2/04/06 1.83
James C. Mavel 25,000 16.8 3.50 12/30/06 1.83
Clarence W. Rife 0
Richard I. Tanaka 0
Michael J. Villano 0
</TABLE>
(1) Present value determination was made using a Black-Scholes option
pricing model. The actual value, if any, an executive may realize will depend
on the excess of the stock price over the exercise price on the date the option
is exercised, so that there is no assurance the value realized by an executive
will be at or near the value estimated by the Black-Scholes model. The
estimated values under that model are based on the following assumptions:
1. Volatility .449 to .592
2. Interest Rate 7%
3. Time to Exercise 10 years
In general, options granted under the Company's Stock Option
Plans vest in installments of one-third commencing one year after grant. The
option exercise price is equal to the fair market value of a share of Common
Stock on the date of grant. Options vest in full upon a reorganization, merger
or consolidation in which the Company is not the surviving corporation and upon
other specified events.
<PAGE>
Aggregated Options Exercises in Last Fiscal Year and
Fiscal Year-End Options Values
The following table summarizes options exercised during 1996
and presents the value of unexercised options held by the named executives at
fiscal year-end:
<TABLE>
<CAPTION>
Number of Value*
Securities of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value* Options Options
On Exercise Realized at Fiscal at Fiscal
Name (#) ($) Year-End Year-End ($)
- -------------------- --------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Robert L. Bell 0 0 26,667 (1) 93,335 (1)
3,333 (2) 11,666 (2)
Richard C. Goyette 0 0 0 (1) 0 (1)
20,000 (2) 70,000 (2)
James C. Mavel 0 0 0 (1) 0 (1)
100,000 (2) 350,000 (2)
Clarence W. Rife 0 0 46,333 (1) 162,165 (1)
8,667 (2) 30,335 (2)
Richard I. Tanaka 0 0 189,640 (1) 663,740 (1)
Michael J. Villano 0 0 27,216 (1) 95,256 (1)
10,334 (2) 36,169 (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.
<PAGE>
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 Value of $100 Investment
<TABLE>
<CAPTION>
12/91 12/92 12/93 12/94 12/95 12/96
<S> <C> <C> <C> <C> <C> <C>
The Russell 2000 Index $100.00 $119.00 $141.00 $139.00 $178.00 $207.00
NASDAQ Computer & Data Processing Index $100.00 $108.00 $114.00 $138.00 $211.00 $260.00
Scan-Optics, Inc. $100.00 $73.00 $121.00 $136.00 $70.00 $85.00
</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-term 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 1996, commission payments for Mr. Rife, the executive with
significant service responsibilities, constituted approximately 9% of cash
compensation. In 1996, commission payments for Mr. Goyette, who joined the
Company on March 1, 1996 as Vice President of Sales and Marketing, constituted
approximately 24% 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 on which option grants shall be made and the number of shares subject to
each option.
On January 2, 1996 James C. Mavel was hired as the President
and Chief Operating Officer. He was eligible for the 1996 incentive bonus
awards, both cash and stock options. At inception of his employment he was
granted 75,000 stock options, effective February 6, 1996. Further, upon his
promotion to the title of President and Chief Executive Officer on December 31,
1996, he was awarded an additional 25,000 stock options. Mr. Goyette was
awarded 20,000 stock options on March 24, 1996.
The Committee meets with the Chief Executive Officer (CEO) and the
Chief Operating Officer (COO) to evaluate the performance of other executive
officers and meets in the absence of the both the CEO and COO to evaluate their
respective performances. 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.
On May 31, 1996 the Committee adopted a revised cash bonus and
contingent option plan for executives and other managers. Under this program,
cash bonuses and contingent stock options were granted to a group of executives
and employees based on the Company achieving a pre-tax profit goal along with
individual performance contributions, as observed and recommended by the CEO
and COO to the Committee. Cash bonuses of $754,000 were awarded to 32
recipients, totaling 18.8% of 1996 pre-tax and pre-bonus income of $4,019,000.
This income achievement was approximately 40% above the Board approved budget
for 1996. In addition, 50,000 stock options in the aggregate were also awarded
effective January 20, 1997 to 16 executives and employees as part of this
compensation award. The number of stock options ranged from 500 to as high as
7,500 per individual.
The Committee further awarded Mr. Mavel a special stock option grant
for 7,500 shares, effective January 20, 1997, in recognition of his excellent
performance in 1996. Mr. Mavel did not participate in the aforementioned
50,000 stock option award.
Both the cash incentive and stock option awards embraced the
Committee's compensation plan objectives: (1) to provide meaningful cash
incentives to at least 14 executive and other deserved employees, so long as
budgeted pre-tax income is achieved or exceeded; (2) to weight the senior
executive awards more heavily than the total award group; (3) to provide only
modest cash bonuses for slight under achievement of a defined budget goal; and
(4) to accelerate bonus payments for profits exceeding the defined pre-tax
income budget. All the while, the Committee has intended to keep these cash
and stock options bonus awards comparable to other companies in similar
industries.
Stock Options and
Executive Compensation Committee
E. Bulkeley Griswold, Chairman
Lyman C. Hamilton, Jr.
Robert H. Steele
CERTAIN TRANSACTIONS
During 1996, legal services were rendered to the Company by a law firm
of which William H. Cuddy, Secretary of the Company, is a partner.
2. 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, 1997. 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.
3. 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 the 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 1998 must be received by the Company no later than
December 15, 1997 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 1998. 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 14, 1997
