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:
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[ ] 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 8, 1999
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of Scan-
Optics, Inc., scheduled to be held Thursday, May 20, 1999, 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 three directors, to approve the
Scan-Optics, Inc. 1999 Incentive and Non-Qualified Stock Option Plan, to
appoint independent auditors for the fiscal year ending December 31, 1999 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,
James C. Mavel
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER,
AND PRESIDENT
<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 20, 1999 at 1:30 p.m. (EDT) to consider and take
action on the following items:
1. To elect three directors to serve until the Annual Meeting of
Stockholders in 2002;
2. To approve the Scan-Optics, Inc. 1999 Incentive and Non-Qualified Stock
Option Plan;
3. To appoint independent auditors for the fiscal year ending December 31,
1999; 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 1, 1999 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 8, 1999
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 AS
PROMPTLY AS POSSIBLE.
<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 20, 1999 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. The Company has also retained D. F. King & Co., Inc. to assist
in soliciting proxies at a fee of $5,000 plus reimbursement of reasonable out-
of-pocket costs and expenses. This proxy statement and the accompanying form
of proxy is being mailed to stockholders on or about April 8, 1999.
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, FOR the adoption of the Scan-Optics, Inc. 1999 Incentive and Non-
Qualified Stock Option Plan and FOR the appointment of Ernst & Young LLP as
auditors for the fiscal year ending December 31, 1999.
OUTSTANDING VOTING SECURITIES
Only holders of Common Stock, $.02 par value ("Common Stock") at the close
of business on April 1, 1999 are entitled to notice of and to vote at the
meeting. On April 1, 1999, the record date, there were 7,391,232 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, 1999. 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 on the following page has sole voting and investment powers as to the
shares the person beneficially owns, except as otherwise indicated.
<PAGE>
<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 462,300 (1) 6.3%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
FMR Corp. Common Stock 500,000 (2) 6.8%
82 Devonshire Street
Boston, MA 02109
Heartland Advisors, Inc. Common Stock 550,000 (3) 7.4%
790 North Milwaukee Street
Milwaukee, WI 53202
The Killen Group, Inc. Common Stock 926,670 (4) 12.5%
1189 Lancaster Avenue
Berwyn, PA 19312
Edwin W. Schloss Common Stock 471,900 (5) 6.4%
52 Vanderbilt Avenue
New York, NY 10017
Walter J. Schloss Common Stock 455,900 (6) 6.2%
52 Vanderbilt Avenue
New York, NY 10017
Walter & Edwin Schloss Common Stock 441,900 (7) 6.0%
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 462,300 shares of the
Company's Common Stock as of December 31, 1998, 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 DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(2) Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and a registered investment advisor, is the
beneficial owner of 500,000 shares as a result of acting as investment
advisor to an investment company which owns such shares. Such investment
company, FMR Corp. and its Chairman, Edward C. Johnson, III, each has sole
power to dispose of such shares. The sole voting power with respect to such
shares resides with the investment company's board of trustees.
(3) Heartland Advisors, Inc., a registered investment advisor, is deemed to
have beneficial ownership of 550,000 shares of the Company's Common Stock as
of December 31, 1998, all of which shares are held in investment advisory
accounts of Heartland Advisors, Inc. Heartland Advisors, Inc. reports that
it has sole dispositive power but no voting power with respect to such
shares. The interests of one such account, Heartland Value Fund, a series
of Heartland Group, Inc., a registered investment company, relates to more
than 5% of the class.
(4) The Killen Group, Inc. has discretionary trading authority over 926,670
shares of Common Stock owned by clients whose shares are included in the
table. It has sole voting power with respect to 387,417 of such shares.
(5) Edwin W. Schloss has sole voting and dispositive powers with respect to the
30,000 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 dispositive powers with
respect to the 441,900 shares of Common Stock owned by Associates, thereby
increasing his beneficial ownership of the Common Stock to 471,900 shares,
or 6.4% of the Common Stock outstanding.
(6) Walter J. Schloss has sole voting and dispositive powers with respect to
the 14,000 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 dispositive powers with respect to
the 441,900 shares of Common Stock owned by Associates, thereby increasing
his beneficial ownership of the Common Stock to 455,900 shares, or 6.2% of
the Common Stock outstanding. In addition, Walter J. Schloss from time to
time possesses certain indicia of investment discretion over 10,000 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 10,000 shares, his
total beneficial ownership of the Common Stock would be 465,900 shares, or
6.3% of the Common Stock outstanding.
(7) Such entity has reported that it has sole voting and dispositive power with
respect to such shares, except that Edwin W. Schloss and Walter J. Schloss,
solely by reason of their positions as general partners of SMC, the general
partner of Associates, may be deemed to have shared voting and dispositive
powers with respect to such shares. See footnotes (5) and (6) 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 1998, 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
1998, 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 1998. The Nominating Committee is responsible for
screening and recommending candidates to serve on the Board. The Nominating
Committee met once in 1998.
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 $1,200
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, on May 15, 1997 and on May 21, 1998. 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 seven directors, two in the
class whose term will expire in 2000, two in the class whose term will expire
in 2001, and three in the class whose term will expire in 2002. At the 1999
Annual Meeting, three directors are to be elected to constitute the class whose
term will expire in 2002.
It is intended that the shares represented by the accompanying proxy will
be voted for the election of E. Bulkeley Griswold, John J. Holton and Robert H.
Steele as directors, 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 Delaware law, directors are elected by a plurality of the votes
cast. 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 I at this meeting to terms expiring in 2002:
Mr. E. Bulkeley Griswold, age 60, is President and General Partner of
MarketCorp Venture Associates L.P., a venture capital limited partnership with
which he has been associated since 1984. Mr. Griswold is also a director of
Bertucci's, NLC Insurance Companies, the New York Mercantile Exchange and a
director of a number of other privately held companies. He has been a Director
since 1989.
Mr. John J. Holton, age 66, is Chairman of Yojna, Inc., a software
development and marketing company specializing in distribution of check images
to support financial institution applications, which position he has held since
1996. He had previously served as a Vice President of Unisys Corporation.
During his long career with Unisys (which resulted from the merger of Burroughs
and Sperry Corps.) he had key assignments as President of Burroughs K.K. JAPAN,
VP and General Manager of American Pacific Division and Strategic Account
Management. Mr. Holton was appointed to the Board of Directors in July, 1998.
Mr. Robert H. Steele, age 60, is Vice Chairman of the John Ryan Company, a
banking services company, which position he has held since 1998. He had
previously held the positions of Executive Vice President during 1997 and
Senior Vice President from 1992 to 1997. 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 Chairman of Moore Medical Corp., and a Director of
NLC Insurance Companies, Accent Color Sciences, Inc. and SmartServ Online, Inc.
He has been a Director since 1978.
Class III directors whose present terms continue until 2000:
Mr. Lyman C. Hamilton, Jr., age 72, 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
Polyvision Inc., IBNET, Inc. and Videonet, Inc. He has been a Director since
1985.
Mr. James C. Mavel, age 53, 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. On May 15, 1997, Mr. Mavel
was promoted to the title of Chairman of the Board of Directors. 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 2001:
Mr. Logan Clarke, Jr., age 71, 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, independent management consultant from 1991 to 1995, 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 67, 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.
Share Ownership of Management
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock as of April 1, 1999 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>
Logan Clarke, Jr. 45,600
Richard J. Coburn 35,200
Richard C. Goyette 22,038
E. Bulkeley Griswold 44,000
Lyman C. Hamilton, Jr. 47,000
Joel K. Howser 8,985
John J. Holton 0
James C. Mavel 103,705
Clarence W. Rife 64,854
Robert H. Steele 30,000
Michael J. Villano 49,571
</TABLE>
(1) Includes the following number of shares subject to options exercisable
within 60 days of April 1, 1999: Logan Clarke, Jr., 45,000 shares; Richard
J. Coburn, 35,000 shares; Richard C. Goyette, 21,666 shares; E. Bulkeley
Griswold, 26,500 shares; Lyman C. Hamilton, Jr., 45,000 shares; Joel K.
Howser, 7,666 shares: James C. Mavel, 53,333 shares; Clarence W. Rife,
61,666 shares; Robert H. Steele, 30,000 shares; and Michael J. Villano,
47,550 shares.
No director beneficially owned more than one percent of the Common Stock.
All directors and executive officers as a group (12 persons) beneficially
owned 455,369 shares of the Company's Common Stock, including 377,465 shares
subject to options exercisable within 60 days of April 1, 1999, which
constituted 4.9% of the outstanding Common Stock as of that date.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the cash and non-
cash compensation paid by the Company to the CEO as well as the four most
highly compensated executive officers of the Company in 1998 for services
rendered in all capacities during the fiscal years ended December 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
ANNUAL COMPENSATION AWARDS
Other
Annual Securities All Other
Compen- Underlying Compen-
Name and Salary Bonus sation Options sation
Principal Position Year ($) ($) ($) (#) ($)(1)
___________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Richard C. Goyette 1998 278,238 36,360 4,800 6,800
Vice President 1997 261,577 10,000 4,800 20,000 68,567
Sales and Marketing 1996 143,780 5,000 4,800 20,000 17,038
Joel K. Howser 1998 120,000 58,746 5,900 6,622
Vice President 1997 113,000 64,203 1,300 3,000 4,490
Product Development
James C. Mavel (2) 1998 235,000 180,679 10,248 6,800
Chairman of the Board, 1997 211,090 235,296 8,246 27,500 7,201
Chief Executive 1996 190,000 136,521 7,200 100,000 59,376
Officer and President
Clarence W. Rife 1998 135,751 58,746 4,800 6,580
Vice President 1997 161,986 120,792 4,800 15,000 6,788
Customer Relations 1996 136,224 87,980 4,800 6,382
Michael J. Villano 1998 120,000 88,746 4,800 6,580
Chief Financial Officer, 1997 130,200 120,151 4,800 22,500 5,735
Vice President 1996 110,000 83,430 4,800 5,457
and Treasurer
</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 executive's
household move.
(2) Mr. Mavel became Chief Executive Officer on December 31, 1996 and Chairman
of the Board of Directors on May 15, 1997.
Executive Employment Agreements
The Company entered into an employment agreement ("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 Employment 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 Employment
Agreement and did not cure the breach within ten 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 ten
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 ten 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 or
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. Goyette, Mr. Howser, 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 requirements. A "change in control" will also occur
if any person or entity acquires 22% or more of the voting power 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 two years 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
$2,500 per month. The agreement provides that payments under the disability
policy shall commence six months after a determination of disability has been
made and shall continue until Mr. Rife reaches the age of 65. The agreement
provides for automatic termination if (a) Mr. Rife resigns or otherwise
voluntarily terminates his employment other than by reason of disability or
retirement upon attaining the age of 65 or (b) his employment is terminated by
reason of gross misconduct.
Options Granted in Last Fiscal Year
During 1998, no options were granted to the executive officers listed in
the Summary Compensation Table. In general, options granted for employees
under the Company's Stock Option Plans vest in installments of one-third
commencing one year after grant. Options for directors are vested six months
after the date of grant. The option exercise price is equal to the fair market
value of a share of Common Stock on the date of grant. Options vest in full
upon a reorganization, merger or consolidation in which the Company is not the
surviving corporation and upon other specified events.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table summarizes options exercised during 1998 and presents
the number of unexercised options and value of unexercised in-the-money options
held by the named executives at fiscal year-end:
<TABLE>
<CAPTION>
Number of Value*
Securities of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options Options
On Exercise Realized* at Fiscal at Fiscal
Name (#) ($) Year-end Year-end
________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Richard C. Goyette 0 0 21,666 (1) $ 3,753 (1)
11,667 (2) $ 0 (2)
Joel K. Howser 0 0 7,666 (1) $ 0 (1)
5,334 (2) $ 0 (2)
James C. Mavel 50,000 121,900 53,333 (1) $ 5,217 (1)
24,167 (2) $ 2,608 (2)
Clarence W. Rife 0 0 61,666 (1) $ 76,787 (1)
8,334 (2) $ 0 (2)
Michael J. Villano 0 0 47,550 (1) $ 33,104 (1)
12,500 (2) $ 0 (2)
(1) Exercisable
(2) Unexercisable
</TABLE>
*Values are calculated by subtracting the exercise or base price from the fair
market value of the Common Stock as of the exercise date, or in the case of
unexercised options, at fiscal year end.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN*
Among Scan-Optics, Inc., The Russell 2000 Index
and The NASDAQ Computer & Data Processing Services Index
<TABLE>
<CAPTION>
Performance Graph
Table I - Cumulative Value of $100 Investment
12/93 12/94 12/95 12/96 12/97 12/98
<S> <C> <C> <C> <C> <C> <C>
The Russell 2000 Index $100.00 $ 98.19 $126.11 $147.05 $179.90 $174.86
Nasdaq Computer & Data
Processing Index $100.00 $121.44 $184.92 $228.24 $280.39 $501.76
Scan-Optics, Inc. $100.00 $112.50 $ 57.50 $ 70.00 $170.00 $ 86.25
</TABLE>
*$100 Invested on 12/31/93 in stock or index-
including reinvestment of dividends.
Fiscal year ending December 31.
<PAGE>
Report of the Stock Options and Executive Compensation Committee
March 29, 1999
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. Special awards can be
granted to various management and other employees at the Committee's approval
with subsequent Board knowledge.
Sales volume and service revenue are important factors in the Company's
success. Therefore, commissions can constitute a meaningful portion of the
compensation of those executives who have direct responsibility for sales and
service. In 1998, commission payments for Mr. Rife, the executive with
significant service responsibilities, constituted approximately 8% of cash
compensation. In 1998, commission payments for Mr. Goyette, Vice President of
Sales and Marketing, constituted approximately 46% 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.
The Committee meets with the Chief Executive Officer (CEO) to evaluate the
performance of other executive officers and meets in the absence of the CEO 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.
At a September 9, 1998 meeting of the Committee the 1998 cash bonus and
contingent option plan was adopted. The plan adopted a modified approach to
the same general format used in the 1996 and 1997 compensation plans. Under
the 1996 and 1997 plans, cash bonus and stock options were granted to a group
of executives and employees based on achieving certain pre-tax profit goals
along with individual performance contributions as observed and recommended by
the CEO to the Committee. Further, in 1998, a specific set of management by
objectives (MBO's) were defined pertaining to the key job criteria of each of
the Company's management. Cash bonuses related to the above achievements of
$678,200 were awarded to forty-eight recipients totaling 17% of 1998 pre-tax
and pre-bonus income of $3,912,000. Of this total bonus, $92,500 was paid
according to the achievement of defined MBO goals to five individuals.
Further on December 14, 1998, the Executive Compensation Committee approved an
additional $111,000 holiday bonus to two hundred and three employees not
included in the previously defined 1998 cash bonus plan. This bonus was paid
as a special award to company employees for their continued outstanding
performance in the Company's operations and quality assurance areas in 1998.
On March 23, 1999, the Committee awarded 100,000 options to thirty-five people
in amounts ranging from 250 options to 20,000 options per individual in
connection with the 1998 contingent option plan. These options are contingent
upon stockholder approval of the Company's 1999 Incentive and Non-Qualified
Stock Option Plan (the "1999 Plan") as discussed below. The exercise price of
these options is $3.50 per share.
In addition, 113,200 stock options were repriced for fifty-four non-officer
employees as of November 3, 1998. These repriced options were priced at $3.69
per share and replaced options with former strike prices ranging from $4.75 to
$9.19 (averaging in the aggregate $6.90 per share). The repricing of 33,960
of such options is contingent upon stockholder approval of the 1999 Plan, as
discussed below. In the case of the replaced options that were fully vested on
November 3, 1998, the repriced options will not vest or be exercisable until
November 3, 1999. In the case of the replaced options that were not fully
vested on November 3, 1998, the repriced options will vest and become
exercisable in equal one-third installments beginning November 3, 1999.
The cash incentives, stock options and repriced stock options fulfilled the
Committee's compensation plan objectives. During the course of the year we
carefully measured the various compensation components, base salary, bonuses,
options, other fringe benefits against similar size, peer companies to assure
that Scan-Optics' executives and key employees are compensated in a fair
manner. We are satisfied that the current plan encompasses this objective.
Stock Options and
Executive Compensation Committee
E. Bulkeley Griswold, Chairman
Lyman C. Hamilton, Jr.
Robert H. Steele
CERTAIN TRANSACTIONS
During 1998, legal services were rendered to the Company by a law firm of
which William H. Cuddy, Secretary of the Company, is a partner.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors and officers and persons who own more than 10%
of its Common Stock to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities Exchange Commission. Those directors,
officers and stockholders are required to send the Company copies of all such
forms they file. Based solely on the Company's review of the copies of such
forms it has received and written representations from certain of such persons,
the Company believes that all of its officers and directors filed the required
forms on or before their due dates.
2. APPROVAL OF THE SCAN-OPTICS, INC. 1999 INCENTIVE AND NON-QUALIFIED STOCK
OPTION PLAN
At the Annual Meeting, the stockholders are being asked to approve the
adoption of the Company's 1999 Incentive and Non-Qualified Stock Option Plan
(the "1999 Plan" or the "Plan"). The summary of the 1999 Plan set forth below
is qualified in its entirety by the full text of the 1999 Plan, which is
attached hereto as Exhibit A.
The Company's 1990 Incentive and Non-Qualified Stock Option Plan (the
"1990 Plan") is scheduled to terminate by its terms on June 12, 2000.
Currently, only 26,872 shares remain available for issuance pursuant to the
1990 Plan, and no further options may be granted under the 1990 Plan subsequent
to June 12, 2000. The Board believes that, in order to attract and retain the
best available personnel for positions of responsibility, to provide additional
incentive to the employees of the Company and to promote the success of the
Company's business, it is necessary to grant options to purchase Common Stock
to the Company's employees. Accordingly, on March 23, 1999 the Board of
Directors adopted the 1999 Plan, and the stockholders are being asked to
approve its adoption.
ADMINISTRATION. The 1999 Plan is administered by the Stock Options and
Executive Compensation Committee of the Company's Board of Directors (the
"Committee"). The Committee is composed of not less than two non-employee
directors as that term is defined under the rules promulgated by the Securities
and Exchange Commission. Members of the Board of Directors may only serve on
the Committee if they are non-employees for purposes of Rule 16b-3 under the
Securities and Exchange Act of 1934, as amended, and "Outside Directors" as
defined in Treasury Regulations <section>1.162-27(e)(3). The Committee will
determine those individuals to whom options will be granted under the 1999
Plan.
INCENTIVE AND NON-QUALIFIED OPTIONS. Options granted under the 1999 Plan
may be either incentive stock options ("Incentive Options") intended to meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified stock options ("Non-Qualified Options").
ELIGIBILITY. One or more options may be granted under the 1999 Plan by
the Committee to such officers or key employees of the Company, or of a parent
or subsidiary of the Company (of which there are presently five subsidiaries),
at such time or times and in such amounts as the Committee determines. A
member of the Board of Directors is eligible to participate in the 1999 Plan
only if such Board member is also an employee of the Company. No employee may
be granted Incentive Options that first become exercisable in a calendar year
(under all incentive stock option plans of the Company) covering shares with an
aggregate market value on the date of grant of more than $100,000. In addition,
the aggregate amount of Common Stock subject to options granted to a single
employee in any calendar year may not exceed 100,000 shares. Approximately 300
persons will be eligible to participate in the 1999 Plan.
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 500,000 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.
OPTION PRICE. The price at which shares may be purchased pursuant to an
Incentive Option is not less than 100% of the fair market value of the shares
of Common Stock on the date the Incentive Option is granted. The price at
which shares may be purchased pursuant to a Non-Qualified Option is not less
than 85% of the fair market value of the shares of Common Stock on the date the
Non-Qualified Option is granted. The Committee may grant to optionees, in
exchange for the surrender and cancellation of outstanding options, new options
having prices lower than the option price of the option so surrendered and
canceled only if certain conditions and requirements specified in the 1999 Plan
are met.
EXERCISE OF OPTIONS. No option may be exercised after the expiration of
ten years from the date it is granted. No option may be granted under the 1999
Plan after March 22, 2009.
Each optionee to whom an option is granted must agree in writing, as a
condition to the granting of the option, to remain in the continuous employ of
the Company for one year from the date of the grant of the option. Each option
shall be exercisable thereafter on a cumulative basis as determined by the
Committee. Under certain conditions, such as the receipt of approval from the
Committee, or in the event of certain mergers, reorganizations, sales of assets
or termination of the business of the Company, the time at which an option is
exercisable may be accelerated to allow an exercise of the option, in whole or
in part, at a time earlier than that otherwise provided at the time of the
original grant of the option. The exercisability of an option may not,
however, be accelerated to a date which is less than six months after the date
of grant of the option, except in the case of death or disability.
The option price for the number of shares with respect to which the option
is exercised shall be paid in full to the Company upon exercise of an option.
The optionee may pay all or part of the option price by delivering shares of
the Company's Common Stock which shall be credited against the option price at
the fair market value of such stock on the date of exercise. In addition, the
optionee may use the shares received upon the exercise of an option to pay the
option price to acquire additional shares. This technique allows optionees to
exercise the option which they have been granted by using any appreciation
present in the shares which they own.
Under the 1999 Plan, optionees have the opportunity to satisfy withholding
tax obligations, in whole or in part, either by having the Company withhold
from the shares to be issued upon exercise that number of shares that would
satisfy the withholding amount due or by delivering to the Company already-
owned Common Stock to satisfy the withholding amount (see "Federal Income Tax
Consequences" below).
Incentive Options, and, unless otherwise determined by the Committee, Non-
Qualified Options are not transferable by the optionee otherwise than by will
or under the laws of descent and distribution, and are exercisable, during the
optionee's lifetime, only by the optionee.
Except as described below, options shall terminate, unless exercised, upon
the earlier of the date of expiration of the option or three months after the
date of severance of the employment relationship between the optionee and the
Company, or a parent or subsidiary of the Company; provided, however, that all
options held by an optionee shall terminate immediately upon receipt by an
optionee of notice of termination if the optionee is terminated for deliberate,
willful or gross misconduct as determined by the Company.
If, before the date of expiration of the option, the optionee retires from
the employ of the Company, or a parent or subsidiary of the Company, for
reasons of age or disability, the option shall terminate on the earlier of such
date of expiration or one year after the date of such retirement. In the event
of such retirement, the optionee shall have the right prior to the termination
of such option to exercise the option to the extent to which the optionee was
entitled to exercise such option immediately prior to such retirement. If the
retired optionee shall die before the termination of the option, the optionee's
executors, administrators or any person or persons to whom the option may be
transferred by will or by laws of descent and distribution shall have the
right, at any time prior to the earlier of the date of the expiration of the
option or the end of the one-year period beginning on the date of the
optionee's death, to exercise the option to the same extent as said retired
optionee.
In the event of death of the holder of an option while in the employ of
the Company, or a parent or subsidiary of the Company and before the date of
expiration of such option, such option shall terminate on the earlier of such
date of expiration or one year following the date of such death. After the
death of the optionee, the optionee's executors, administrators or any person
or persons to whom the option may be transferred by will or by the laws of
descent and distribution shall have the right, at any time prior to such
termination, to exercise the option to the same extent to which the deceased
optionee was entitled to exercise such option immediately prior to the deceased
optionee's death.
MODIFICATION. The Board of Directors may amend, suspend or terminate the
1999 Plan at any time, subject to applicable law.
REGISTRATION OF OPTION SHARES. No shares will be issued and delivered
upon exercise of any option unless a registration statement under the
Securities Act of 1933, as amended, with respect to the shares of Common Stock
to be reserved for issuance upon the exercise of options to be granted under
the 1999 Plan has become effective, and unless all other applicable laws and
regulations have been complied with.
FEDERAL INCOME TAX CONSEQUENCES. Options granted under the 1999 Plan may
be either Incentive Options or Non-Qualified Options. An Employee will not
recognize income for federal income tax purposes upon the grant of an Incentive
Option, or a Non-Qualified Option. If an optionee is employed by the Company
throughout the period ending three months (one year for disabled optionees and
no limit for deceased optionees) prior to exercise of an Incentive Option, no
income will be recognized upon the exercise of the option. However, the
difference between the option price and the fair market value of the Common
Stock acquired on the date of exercise will be included in income for purposes
of the alternative minimum tax to the extent provided by Section 56(b)(3) of
the Code. If no disposition of the stock acquired upon the qualifying exercise
of the Incentive Option occurs until after more than two years after the
Incentive Option was granted and more than one year after the transfer of such
stock to the optionee, any gain or loss recognized upon such disposition will
be treated as capital gain or loss.
The disposition of the stock acquired upon the exercise of an Incentive
Option within two years after the Incentive Option was granted or within one
year after the transfer of the stock to the optionee will be a disqualifying
disposition, and the optionee will generally recognize (i) ordinary
compensation income for federal income tax purposes in an amount equal to the
excess of the fair market value on the date of exercise of the stock acquired
over the option price and (ii) short- mid- or long-term capital gain (depending
on how long the stock was held) to the extent the stock is disposed of in a
sale or taxable exchange at a price in excess of the value of the stock on the
date of exercise. Short-term capital gains (on stock held for one year or less)
are taxed at ordinary income rates, and long-term capital gains (on stock held
for more than one year) are taxed at a maximum rate of 20%. If the amount
realized by the optionee upon such a disposition is less than the value of the
stock on the date of exercise, then the amount of income realized will be all
compensation income and will be limited to the excess of the amount realized on
the sale or exchange over the option price of the stock.
A participant who surrenders shares of stock in payment of the exercise
price of his or her Incentive Option generally will not recognize gain or loss
on his or her surrender of such shares. The surrender (either actually or by
attestation) of shares of stock previously acquired upon exercise of an
Incentive Option in payment of the exercise price of another Incentive Option
is, however, a "disposition" of such shares. If the Incentive Option holding
period requirements described above have not been satisfied with respect to
such shares, such disposition will be a disqualifying disposition that may
cause the participant to recognize ordinary income as discussed above.
All of the shares of stock received by a participant upon exercise of an
Incentive Option by surrendering shares of stock will be subject to the
Incentive Option holding period requirements. Of those shares, a number of
shares (the "Exchange Shares") equal to the number of shares of stock
surrendered by the participant will have the same tax basis for capital gains
purposes (increased by any ordinary income recognized as a result of any
disqualifying disposition of the surrendered shares if they were Incentive
Option shares) and the same capital gains holding period as the shares
surrendered. For purposes of determining ordinary income upon a subsequent
disqualifying disposition of the Exchange Shares, the amount paid for such
shares will be deemed to be the fair market value of the shares surrendered.
The balance of the shares received by the participant will have a tax basis
(and a deemed purchase price) of zero and a capital gains holding period
beginning on the date of the exercise. The Incentive Option holding period for
all shares will be the same as if the option had been exercised for cash.
Upon the exercise of a Non-Qualified 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.
The optionee's tax basis for the stock acquired upon exercise of a Non-
Qualified Option is increased by the amount of such taxable income. Any gain
or loss recognized by the optionee on the subsequent disposition of the stock
will be capital gain or loss.
A participant who surrenders (either actually or by attestation) shares of
stock in payment of the exercise price of a Non-Qualified Option will not
recognize gain or loss on his or her surrender of such shares. Such an
individual will recognize ordinary income on the exercise of the Non-Qualified
Option as described above. Of the shares received in such an exchange, that
number of shares equal to the number of shares surrendered will have the same
tax basis and capital gains holding period as the shares surrendered. The
balance of the shares received will have a tax basis equal to their fair market
value on the date of exercise, and the capital gains holding period will begin
on the date of exercise.
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 any deduction for federal income tax
purposes.
MARKET PRICE. The closing sale price as of April 1, 1999, of the
Company's Common Stock on the NASDAQ National Market System was $3.44 per
share.
OUTSTANDING OPTIONS. Options covering 688,433 shares of the Company's
Common Stock were outstanding on December 31, 1998 under the Company's existing
stock option plans. These options expire at various dates from 1999 through
2008 and are exercisable at option prices ranging from $ 1.50 to $ 9.19 per
share. In addition, there were an aggregate of 201,872 shares of the Company's
Common Stock available for which options may be granted under the 1990
Incentive and Non-Qualified Stock Option Plan (26,872 remaining shares), and
the 1990 Plan for Outside Directors (175,000 remaining shares).
Following adoption of the 1999 Plan by the Board of Directors, the Stock
Option and Executive Compensation Committee approved the grant of 100,000
options under the 1999 Plan to thirty-five employees of the Company at an
exercise price of $3.50 per share, the fair market value of the Common Stock on
the date of the grant, which options are contingent upon approval by the
stockholders of the 1999 Plan. These options were granted to the following
executive officers named in the Summary Compensation Table above and groups:
Mr. Goyette (12,250 options), Mr. Howser (10,000 options), Mr. Mavel (20,000
options), Mr. Rife (12,250 options), Mr. Villano (12,250 options), all current
executive officers as a group (74,250 options), and all other employees as a
group (25,750 Options). If the 1999 Plan is approved by the stockholders,
these options will become exercisable as to one-third of the shares subject to
the options on each of March 23, 2000, March 23, 2001 and March 23, 2002,
respectively.
In addition, the repricing of 33,960 options for certain non-officer
employees of the Company, with prices ranging from $4.75 to $9.19 per share
(averaging in the aggregate $6.90 per share), to a price of $3.69 per share, as
described in the Report of the Stock Options and Executive Compensation
Committee, is also contingent upon approval by the stockholders of the 1999
Plan.
REQUIRED VOTE. The affirmative vote of the holders of a majority of the
shares of the Common Stock present in person or represented by proxy at the
meeting and entitled to vote is required for approval of the 1999 Plan.
Abstentions will have the effect of a negative vote, and broker non-votes will
be treated as shares not voted and will have no effect on the vote.
INTEREST OF CERTAIN PERSONS. Approval of the 1999 Plan will benefit the
executive officers of the Company, because each executive officer has received
a grant under the 1999 Plan contingent upon stockholder approval of the 1999
Plan, and will be eligible for future grants under the 1999 Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors
unanimously recommends that the stockholders vote FOR Proposal 2 to approve the
1999 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, 1999. Ernst & Young LLP has
been the Company's independent auditors 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
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 2000 must be received by the Company no later than December 14,
1999 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 2000. 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 8, 1999
<PAGE>
EXHIBIT A
SCAN-OPTICS, INC.
1999 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSES.
The purposes of this Stock Option Plan (the "Plan") are (a) to secure for
Scan-Optics, Inc. (the "Company") and its stockholders the benefits arising
from stock ownership by officers and other key employees of the Company, and
any parent or subsidiary of the Company, who will be responsible for its future
growth and continued success, and (b) to enable the Company to attract and
retain the services of key employees by providing them with an opportunity to
become owners of Scan-Optics, Inc. Common Stock under the terms and conditions
and in the manner contemplated by this Plan.
2. ADMINISTRATION.
The Plan shall be administered by the Stock Options and Executive
Compensation Committee of the Board of Directors (the "Committee"), consisting
of not less than two Directors appointed by the Board of Directors. Members of
the Board of Directors may only serve on the Committee if they are non-
employees for purposes of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended, and "outside directors" as defined in Treasury Regulations
<section>1.162-27(e)(3). Any action of the Committee with respect to the
administration of the Plan shall be taken by majority vote.
Subject to the express provisions of the Plan, the Committee shall have
authority to (i) construe and interpret the Plan, (ii) prescribe, amend and
rescind rules and regulations relating to the Plan, (iii) determine the
individuals to whom and the time or times at which options shall be granted,
the number of shares to be subject to each option, the option price, and the
duration of each option, and (iv) make all other determinations necessary or
advisable for the administration of the Plan. All determinations and
interpretations made by the Committee shall be binding and conclusive on all
participants in the Plan and on their legal representatives and beneficiaries.
3. MAXIMUM NUMBER OF SHARES SUBJECT TO PLAN.
Subject to adjustment as provided in Section 14 hereof, the shares of
stock to be offered under the Plan may be authorized but unissued shares of the
Company's Common Stock, $.02 par value, or issued shares which have been
reacquired. The aggregate amount of Common Stock to be delivered upon exercise
of all options granted under the Plan shall not exceed 500,000 shares. If any
option granted hereunder shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares subject thereto shall
again be available for the purpose of this Plan.
<PAGE>
4. INCENTIVE AND NON-QUALIFIED OPTIONS.
Options granted under the Plan may be either incentive stock options
("Incentive Options") intended to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock
options ("Non-Qualified Options").
5. ELIGIBILITY AND PARTICIPATION.
Officers and other key employees of the Company or of any parent or
subsidiary of the Company, whether or not directors of the Company, shall be
eligible to participate in the Plan. Directors who are not also employees are
not eligible to participate in the Plan. An individual who has been granted an
option may, if he is otherwise eligible, be granted additional options.
Nothing in the Plan shall be deemed to give any employee any right to
participate in this Plan or to receive an option hereunder.
An optionee may be granted and hold more than one option, but the
aggregate fair market value (determined at the time the option is granted
pursuant to Section 6 below) of the Common Stock for which any optionee may be
granted Incentive Options which are exercisable for the first time in any one
calendar year (under all incentive stock option plans of the Company and any
parent or subsidiary of the Company) shall not exceed $100,000. There shall be
no limit on the aggregate fair market value (as so determined) of the Common
Stock for which any optionee may be granted Non-Qualified Options.
Notwithstanding the foregoing, the aggregate amount of Common Stock subject to
options granted to a single employee in any calendar year shall not exceed
100,000 shares.
6. PURCHASE PRICE.
<PAGE>
The purchase price of Common Stock covered by each option shall be determined
by the Committee, but the purchase price of Incentive Options shall not be less
than 100% of the fair market value of the Common Stock at the date such
Incentive Option is granted and the purchase price of Non-Qualified Options
shall not be less than 100% of the fair market value of the Common Stock at the
date such Non-Qualified Option is granted; provided, however, that the
Committee may set the purchase price of Non-Qualified Options granted to
employees who are not "covered employees" (as defined in Section 162(m) of the
Code) at an amount less than 100% of such market value, but not less than 85%
of such market value, if the Committee expressly determines to grant the
discount from 100% of such fair market value in lieu of a reasonable amount of
salary or cash bonus which would otherwise be paid to the employee granted such
Non-Qualified Options. The fair market value of the Common Stock shall be
determined pursuant to procedures adopted by the Committee. Anything herein to
the contrary notwithstanding, no Incentive Option shall be granted to an
employee if, at the time the Incentive Option is granted, such employee owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, or a parent or subsidiary of the Company,
unless the Incentive Option price is at least 110% of the fair market value of
the Common Stock subject to the Incentive Option at the time the Incentive
Option is granted and the Incentive Option is not exercisable after the
expiration of five (5) years from the date the Incentive Option is granted.
7. DURATION AND TIME OF EXERCISE OF OPTIONS.
Each option and all rights thereunder shall expire on such date as the
Committee may determine, but in no event later than ten (10) years from the
date on which the option is granted, and shall be subject to earlier
termination as provided herein.
Each optionee must remain within the continuous employ of the Company, or
a parent or subsidiary of the Company, for one year from the date of the grant
of an option before the right to exercise any part of such option shall accrue.
Thereafter, each option shall be exercisable in such installments during the
period prior to its expiration date as the Committee shall determine, or may,
if so determined by the Committee, be exercisable either in whole or in part at
any time prior to its expiration date. If the option is made exercisable in
installments and the optionee shall not in any given installment period
purchase all of the shares which the optionee is entitled to purchase in such
installment period, then the optionee shall have the right cumulatively
thereafter to purchase any shares not so purchased and such right shall
continue until the expiration date or sooner termination of such option.
In the event of (a) a reorganization, merger or consolidation of the
Company in which the Company is not the surviving corporation, (b) the
dissolution or liquidation of the Company, or (c) a sale or lease of fifty
percent (50%) or more, computed on the basis of book value, of the Company's
consolidated assets, the time at which all options then outstanding may be
exercised shall be accelerated and all such options shall become exercisable in
full on or before a date fixed by the Committee prior to the effective time of
such reorganization, merger, consolidation, dissolution, liquidation, sale or
lease, and upon such effective time any unexercised options shall expire.
The Committee may, at any time, in its absolute discretion, accelerate the
time at which an outstanding option can be exercised, in whole or in part,
provided, however, that no such acceleration of the time for exercise shall be
made if such acceleration would result in a modification of an Incentive Option
(within the meaning of section 424 of the Code), or cause such Incentive Option
to fail to continue to qualify as an incentive stock option under Section 422
of the Code. Notwithstanding the provisions of this Section 7, the time at
which an outstanding option may be exercised may not be accelerated to a date
which is less than six months after the date of grant of such option, except in
the case of death or disability.
8. REPLACEMENT AND SUBSTITUTE OPTIONS
<PAGE>
The Committee may grant to optionees, in exchange for the surrender and
cancellation of their outstanding options, new options having option prices
lower than the option price of the options so surrendered and canceled (the
"Replacement Options") and containing such other terms and conditions as the
Committee may deem appropriate, but only if: (i) the Committee determines that
it needs to grant Replacement Options to retain key employees, to provide
necessary incentives to key employees or to further some other important
corporate purpose; (ii) Replacement Options are rarely granted and only where
extreme circumstances beyond management's control have substantially diminished
the value of the outstanding options to be exchanged for Replacement Options;
and (iii) the number of shares of Common Stock to be delivered upon exercise of
the Replacement Options does not exceed ten percent (10%) of the number of
shares of Common Stock to be delivered upon exercise of all options authorized
to be granted under the Plan. Notwithstanding the preceding sentence, if, at a
time when no additional shares of Common Stock are authorized to be delivered
upon exercise of options granted under the Plan, the Committee determines that
it needs to grant Replacement Options to employees who are not executive
officers before the next stockholders' meeting, it may grant additional
Replacement Options for a number of shares of Common Stock not exceeding ten
percent (10%) of the number of shares of Common Stock to be delivered upon
exercise of all options authorized to be granted under the Plan if such grant
of additional Replacement Options is made contingent upon the stockholders'
authorization for such additional Replacement Options being obtained at the
next stockholders' meeting. Options may be granted under the Plan in
substitution for stock options held by persons who become or are to become
salaried employees of the Company or any parent or subsidiary of the Company in
any transaction to which Section 424(a) of the Code applies.
9. EXERCISE OF OPTIONS
Options shall be exercised by the delivery of written notice to the
officer of the Company designated by the Committee setting forth the number of
shares with respect to which the option is to be exercised, and specifying the
address to which the certificates for such shares are to be mailed. The option
price shall be paid in full at the time of exercise in cash by United States
currency, certified check or money order or by tendering to the Company (i)
shares of Common Stock having a fair market value on the date of exercise equal
to the option price (including shares that would otherwise be issued pursuant
to such exercise), or (ii) a combination of cash and such Common Stock valued
at such fair market value.
As promptly as practicable after receipt of such written notification of
the exercise of an option and payment, the Company shall deliver to the
optionee certificates for the number of shares with respect to which such
option has been so exercised, issued in the optionee's name.
10. NON-TRANSFERABILITY OF OPTIONS.
An Incentive Option and, unless otherwise determined by the Committee, a
Non-Qualified Option granted under the Plan shall, by its terms, be non-
transferable by the optionee, either voluntarily or by operation of law,
otherwise than by will or the laws of decent and distribution, and shall be
exercisable during the optionee's lifetime only by the optionee, regardless of
any community property interest therein of the spouse of the optionee, or such
spouse's successors in interest.
<PAGE>
11. CONTINUANCE OF EMPLOYMENT.
Each person to who an option is granted under the Plan must agree in
writing as a condition to the granting of the option to remain in the employ of
the Company or any parent or subsidiary of the Company following the date of
the granting of the option for a period of one year. Nothing contained in the
Plan or in any option granted under the Plan shall confer upon any optionee any
right with respect to the continuation of employment by the Company or any
parent or subsidiary of the Company, or interfere in any way with the right of
the Company or any parent or subsidiary of the Company (subject to the terms of
any separate employment agreement to the contrary) at any time to terminate
such employment or to increase or decrease the compensation of the optionee
from the rate in existence at the time of granting of an option.
12. TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH OF OPTIONEE.
Except as may be otherwise expressly provided herein, options shall
terminate, unless exercised, three (3) months after the date of the severance
of the employment relationship between the optionee and the Company, or a
parent or subsidiary of the Company; provided, however, that all options held
by an optionee shall terminate immediately upon receipt by an optionee of the
notice of termination if the optionee is terminated for deliberate, willful or
gross misconduct as determined by the Company. Absence on leave approved by
the Committee shall not be considered the severance of employment.
If, before the date of expiration of the option, the optionee shall retire
from the employ of the Company, or a parent or subsidiary of the Company, for
reasons of age pursuant to a pension or retirement plan of the Company, or a
parent or subsidiary of the Company, or for reasons of disability as defined in
Section 22(e)(3) of the Code, the option shall terminate on the earlier of such
date of expiration or one year after the date of such retirement. In the event
of such retirement, the optionee shall have the right prior to the termination
of such option to exercise the option to the extent to which the optionee was
entitled to exercise such option immediately prior to such retirement. If the
retired optionee shall die before the termination of the option, the optionee's
executors, administrators or any person or persons to whom the option may be
transferred by will or by the laws of descent and distribution shall have the
right, at any time within the earlier of the date of expiration of the option
or the one-year period beginning on the date of the optionee's death, to
exercise the option to the same extent as said retired optionee.
In the event of the death of the holder of an option while in the employ
of the Company, or a parent or subsidiary of the Company, and before the date
of expiration of such option, such option shall terminate on the earlier of
such date of expiration or one year following the date of such death. After
the death of the optionee, the optionee's executors, administrators or any
person or persons to whom the option may be transferred by will or by the laws
of descent and distribution shall have the right, at any time prior to such
termination, to exercise the option to the same extent to which the deceased
optionee was entitled to exercise such option immediately prior to the deceased
optionee's death.
<PAGE>
13. PRIVILEGE OF STOCK OWNERSHIP.
No person entitled to exercise any option granted under the Plan shall
have any of the rights or privileges of a stockholder of the Company in respect
of any shares of stock issuable upon exercise of such option until certificates
representing such shares shall have been issued and delivered. No share shall
be issued and delivered upon exercise of any option unless and until, in the
opinion of counsel for the Company, any applicable registration requirements of
the Securities Act of 1993, any applicable listing requirements of any national
securities exchange on which stock of the same class is then listed, and any
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery, shall have been fully complied with.
14. ADJUSTMENTS.
If the outstanding shares of Common Stock of the Company are increased,
changed into or exchanged for a different number or kind of shares or
securities of the Company as a result of a merger, reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse
stock split, an appropriate and proportionate adjustment shall be made in the
maximum number and kind of shares as to which options may be granted under this
Plan. A corresponding adjustment changing the number or kind of shares
allocated to unexercised options or portion thereof, which shall have been
granted prior to any such change, shall likewise be made. Any such adjustment
in the outstanding options shall be made without change in the aggregate
purchase price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share covered by the option.
Adjustments under this Section shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under the Plan for any such adjustment.
15. WRITTEN AGREEMENT.
Each option granted hereunder shall be embodied in a written Option
Agreement which shall be subject to the terms and conditions prescribed herein,
and shall be signed by the optionee and by an officer of the Company for and on
behalf of the Company. Incentive Options and Non-Options may not be granted in
the same Option Agreement. An Option Agreement shall contain such other
provisions as the Committee in its discretion shall deem advisable so long as
the same are not contrary or inconsistent with the terms and provisions of the
Plan.
16. AMENDMENT AND TERMINATION OF PLAN.
<PAGE>
The Board of Directors of the Company may at any time amend, suspend or
terminate the Plan; provided, however, that any material amendment of the Plan
and any other amendment of the Plan requiring stockholder approval under
Section 422 of the Code shall not be made without the approval of the
stockholders of the Company in accordance with the General Corporation Law of
the State of Delaware.
No amendment, suspension or termination of the Plan shall, without the
consent of the optionee, alter or impair any rights or obligation under any
outstanding Option Agreement.
17. WITHHOLDING.
Any person exercising an option shall be required to pay in cash to the
Company the amount of any taxes the Company is required by law to withhold with
respect to the exercise of such option. Such payment shall be due on the date
the Company is required to withhold such taxes. Such payment may also be made
at the election of the optionee by the surrender of shares of Common Stock then
owned by the optionee, or the withholding of shares of Common Stock otherwise
to be issued to the optionee on exercise, in an amount that would satisfy the
withholding amount due. The value of such shares withheld or delivered shall
be equal to the fair market value of such shares on the date of exercise. In
the event that such payment is not made when due, the Company shall have the
right to deduct to the extent permitted by law, from any payment of any kind
otherwise due to such person from the Company, all or part of the amount
required to be withheld.
18. EFFECTIVE DATE OF PLAN.
This Plan shall become effective on March 23, 1999, subject to its
approval by the stockholders of the Company at the 1999 Annual Meeting of
Stockholders. If the Plan is not so approved by the stockholders, the Plan and
all options granted hereunder shall be null and void and shall be of no effect.
No option shall be granted pursuant to the Plan after March 22, 2009.
19. CONSTRUCTION.
The plan and options granted hereunder shall be governed by and construed
in accordance with the laws of the State of Delaware and in accordance with
such federal laws as may be applicable.
