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))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting materila Pursuant to Sec. 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) Aggregrate 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 of Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of Scan-
Optics, Inc., scheduled to be held Thursday, May 18, 2000, 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, 2000 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 18, 2000 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 2003;
2. To appoint independent auditors for the fiscal year ending December
31, 2000; 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 3, 2000
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 10, 2000
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 18, 2000 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. This proxy statement and the accompanying form
of proxy are being mailed to stockholders on or about April 10, 2000.
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, 2000.
OUTSTANDING VOTING SECURITIES
Only holders of Common Stock, $.02 par value ("Common Stock") at the
close of business on April 3, 2000 are entitled to notice of and to vote at
the meeting. On April 3, 2000, the record date, there were 7,439,732
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 3, 2000. 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 504,300 (1) 6.8%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Heartland Advisors, Inc. Common Stock 600,000 (2) 8.1%
789 North Water Street
Milwaukee, WI 53202
Edwin W. Schloss Common Stock 502,400 (3) 6.8%
350 Park Avenue
9th Floor
New York, NY 10022
Walter J. Schloss Common Stock 486,400 (4) 6.5%
350 Park Avenue
9th Floor
New York, NY 10022
Walter & Edwin Schloss Common Stock 472,400 (5) 6.3%
Associates, L.P.
350 Park Avenue
9th Floor
New York, NY 10022
</TABLE>
1. Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 504,300
shares of the Company's Common Stock as of December 31, 1999, 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. Heartland Advisors, Inc., a registered investment advisor, is deemed to
have beneficial ownership of 600,000 shares of the Company's Common
Stock as of December 31, 1999, 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.
3. 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 472,400 shares of Common Stock
owned by Associates, thereby increasing his beneficial ownership of the
Common Stock to 502,400 shares, or 6.8% of the Common Stock outstanding.
4. 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 472,400 shares of Common Stock
owned by Associates, thereby increasing his beneficial ownership of the
Common Stock to 486,400 shares, or 6.5% 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 496,400 shares, or
6.7% of the Common Stock outstanding.
5. 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 (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 1999, the Board of Directors met twelve 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
Logan Clarke, Jr. (Chairman), Richard J. Coburn and John J. Holton. The
Audit Committee is composed of Robert H. Steele (Chairman), E. Bulkeley
Griswold and Lyman C. Hamilton, Jr. The Nominating Committee is composed of
Messrs. Griswold (Chairman), Holton and Clarke.
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 1999, the Stock Options and Executive Compensation
Committee met once. The Audit Committee is responsible for reviewing the
adequacy of financial controls and the adequacy and accuracy of financial
reporting. The Audit Committee met three times during 1999. The
Nominating Committee is responsible for screening and recommending
candidates to serve on the Board. The Nominating Committee met once in
1999.
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, on May 21, 1998 and on May 20, 1999. 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 2001, three in the
class whose term will expire in 2002, and two in the class whose term will
expire in 2003. At the 2000 Annual Meeting, two directors are to be
elected to constitute the class whose term will expire in 2003.
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
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.
<PAGE>
Information Regarding Nominees and Continuing Directors
Nominees for election to Class III at this meeting to terms expiring in
2003:
Mr. Lyman C. Hamilton, Jr., age 73, 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 54, joined the Company on January 2, 1996 as
President and Chief Operating Officer. On December 31, 1996, Mr. Mavel was
promoted to Chief Executive Officer. On May 15, 1997, Mr. Mavel was
promoted to 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 72, 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 68, 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 2002:
Mr. E. Bulkeley Griswold, age 61, is Managing General Partner of L&L
Capital Partners, LLC, a corporate finance partnership. Mr. Griswold is
also a director of NLC Insurance Companies, the New York Mercantile
Exchange and a number of other privately held companies. He has been a
Director since 1989.
Mr. John J. Holton, age 67, 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 has been a Director
since 1998.
Mr. Robert H. Steele, age 61, 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.,
SmartServ Online, Inc. and the New York Mercantile Exchange. 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 3, 2000 of each
director, nominee and executive officer named in the Summary Compensation
Table contained elsewhere in this proxy statement.
Name Number of Shares (1)
--------------------- ----------------
Logan Clarke, Jr. 50,600
Richard J. Coburn 45,200
Richard C. Goyette 32,788
E. Bulkeley Griswold 68,000
Lyman C. Hamilton, Jr. 52,000
John J. Holton 5,000
Joel K. Howser 16,652
James C. Mavel 137,886
Clarence W. Rife 43,938
Robert H. Steele 63,000
Michael J. Villano 71,154
(1) Includes the following number of shares subject to options
exercisable within 60 days of April 3, 2000: Logan Clarke, Jr.,
50,000 shares; Richard J. Coburn, 40,000 shares; Richard C.
Goyette, 32,416 shares; E. Bulkeley Griswold, 31,500 shares; Lyman
C. Hamilton, Jr., 45,000 shares; John J. Holton, 5,000 shares;
Joel K. Howser, 15,333 shares; James C. Mavel, 77,500 shares;
Clarence W. Rife, 40,750 shares; Robert H. Steele, 35,000 shares;
and Michael J. Villano, 59,133 shares.
No director beneficially owned more than one percent of the Common
Stock. All directors and executive officers as a group (13 persons)
beneficially owned 594,300 shares of the Company's Common Stock,
including 437,382 shares subject to options exercisable within 60 days
of April 3, 2000, which constituted 5.6% 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 as well as the other four
most highly compensated executive officers of the Company in 1999 for
services rendered in all capacities during the fiscal years ended December
31, 1999, 1998 and 1997.
<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 1999 215,746 10,000 7,200 12,250 9,566
Vice President 1998 278,238 36,360 4,800 6,800
Solutions and Products 1997 261,577 10,000 4,800 20,000 68,567
Division
Joel K. Howser 1999 118,333 10,000 7,300 10,000 9,983
Vice President 1998 120,000 58,746 5,900 6,622
Product Development 1997 113,000 64,203 1,300 3,000 4,490
James C. Mavel 1999 238,333 50,000 10,248 20,000 16,565
Chairman of the Board, 1998 235,000 180,679 8,200 6,800
Chief Executive 1997 211,090 235,296 8,246 27,500 7,201
Officer and President
Clarence W. Rife 1999 123,688 10,000 7,200 12,250 10,241
Vice President 1998 135,751 58,746 4,800 6,580
Access Services Division 1997 161,986 120,792 4,800 15,000 6,788
Michael J. Villano 1999 132,500 35,000 7,200 12,250 7,807
Chief Financial Officer, 1998 120,000 88,746 4,800 6,580
Vice President and 1997 130,200 120,151 4,800 22,500 5,735
Treasurer
</TABLE>
(1)Includes employer match under the Company's Retirement Savings Plan, a
section 401 plan under the Internal Revenue Code of 1986, as amended,
the stock allocation under the Company's Employee Stock Ownership Plan,
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.
<PAGE>
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 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
$2,500 per month. The agreement provides that payments under the
disability policy shall commence six months after a determination of
disability has been made and shall continue until Mr. Rife reaches the age
of 65. The agreement provides for automatic termination if (a) Mr. Rife
resigns or otherwise voluntarily terminates his employment other than by
reason of disability or retirement upon attaining the age of 65 or (b) his
employment is terminated by reason of gross misconduct.
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth information on options granted in 1999
to the executive officers listed in the Summary Compensation Table:
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
----------------- ----------
% of Total
Options Exercise
Options Granted to or Grant Date
Granted Employees in Base Price Expiration Present Value
Name # Fiscal Year ($/sh) Date ($)(1)
- ----------------- -------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Richard C. Goyette 12,250 11.1% $ 3.50 3/21/09 $ 2.64
Joel K. Howser 10,000 9.1% 3.50 3/21/09 2.64
James C. Mavel 20,000 18.2% 3.50 3/21/09 2.64
Clarence W. Rife 12,250 11.1% 3.50 3/21/09 2.64
Michael J. Villano 12,250 11.1% 3.50 3/21/09 2.64
</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 .582
2. Interest Rate 7%
3. Time to Exercise 10 years
In general, options granted to 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.
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table summarizes options exercised during 1999 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>
Richard C. Goyette 0 0 26,666 (1) $ 0 (1)
18,917 (2) $ 0 (2)
Joel K. Howser 0 0 8,667 (1) $ 0 (1)
14,333 (2) $ 0 (2)
James C. Mavel 0 0 68,333 (1) $ 0 (1)
29,167 (2) $ 0 (2)
Clarence W. Rife 0 0 65,000 (1) $ 0 (1)
17,250 (2) $ 0 (2)
Michael J. Villano 0 0 52,550 (1) $ 0 (1)
19,750 (2) $ 0 (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, or in the
case of unexercised options, at fiscal year end.
<PAGE>
COMPARISON OF FIVE YEAR TOTAL RETURN
Among Scan-Optics, Inc., The Russell 2000 Index
and The NASDAQ Computer & Data Processing Services Index
December 31, 1994 - December 31, 1999
TABLE 1 - CUMULATIVE VALUE OF $100 INVESTMENT
<TABLE>
<CAPTION>
12/94 12/95 12/96 12/97 12/98 12/99
<S> <C> <C> <C> <C> <C> <C>
THE RUSSELL 2000 INDEX $ 100.00 $ 127.49 $ 154.73 $ 203.91 $ 190.75 $ 187.92
NASDAQ COMPUTER & DATA
PROCESSING INDEX $ 100.00 $ 152.28 $ 187.95 $ 230.90 $ 412.23 $ 871.27
SCAN-OPTICS, INC. $ 100.00 $ 51.11 $ 62.22 $ 151.11 $ 67.78 $ 28.89
</TABLE>
TABLE II - NON-CUMULATIVE ANNUAL RETURN
<TABLE>
<CAPTION>
12/94 12/95 12/96 12/97 12/98 12/99
<S> <C> <C> <C> <C> <C> <C>
THE RUSSELL 2000 INDEX NA 27.49% 21.37% 31.78% (6.45%) (1.48%)
NASDAQ COMPUTER & DATA
PROCESSING INDEX NA 52.28% 23.42% 22.85% 78.53% 111.36%
SCAN-OPTICS, INC. NA (48.89%) 21.74% 142.86% (55.15%) (57.38%)
</TABLE>
<PAGE>
Report of the Stock Options and Executive Compensation Committee
March 28, 2000
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 Logan Clarke, Jr. (Chairman), Richard J. Coburn
and John J. Holton. 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 is an important factor in the Company's success. Therefore,
commissions can constitute a meaningful portion of the compensation of the
executive who has direct responsibility for sales. In 1999, commission
payments for Mr. Goyette, Vice President of Solutions and Products,
constituted approximately 36% 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 the December 14, 1998 meeting of the Committee the
1999 cash bonus and contingent option plan was adopted. The plan adopted a
modified approach to the same general format used in the 1996, 1997 and
1998 compensation plans. Under the 1996, 1997 and 1998 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 and 1999, a specific set of management by objectives
(MBO's) were defined pertaining to the key job criteria of each of the
Company's management. MBO cash awards were the only form of bonus, either
in cash or stock options, provided in 1999 due to the inadequate financial
results of the Company. MBO payments were made to six individuals for a
total of $120,000.
During the course of the year we carefully measured the various
compensation components, base salary, bonuses, options and 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
Logan Clarke, Jr., Chairman
Richard J. Coburn
John J. Holton
<PAGE>
CERTAIN TRANSACTIONS
During 1999, 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 Corporation believes that all of its
officers and directors filed the required forms on or before their due
dates.
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, 2000. 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 2001 must be received by the Company at its principal
executive offices no later than December 11, 2000 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 2001. 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.
In addition, with respect to the Annual Meeting of Stockholders in
2001, if a stockholder does not provide notice to the Company of a
stockholder proposal by February 24, 2001, the attorneys named in the form
of proxy mailed with the Company's proxy statement for that meeting will
have discretionary authority to vote as they determine on the proposal. If
the Company changes the date of the 2001 Annual Meeting by more than 30
days from the date of the 2000 Annual Meeting, those attorneys will have
that discretionary authority to vote unless the stockholder provides notice
of the stockholder proposal a reasonable time before the Company mails its
proxy materials for the meeting.
WILLIAM H. CUDDY
Secretary
April 10, 2000
