-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KgzTYlx2IVV3fpsSK9bsSqcha/OmI+ee3DRoq+pd42ndVpiEulU8Jxsnt3XVcDB6 FOi70ErLt4VS5j1H7iPMCA== 0000906602-00-000038.txt : 20000414 0000906602-00-000038.hdr.sgml : 20000414 ACCESSION NUMBER: 0000906602-00-000038 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000518 FILED AS OF DATE: 20000413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCAN OPTICS INC CENTRAL INDEX KEY: 0000087086 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 060851857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 000-05265 FILM NUMBER: 600596 BUSINESS ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 BUSINESS PHONE: 8606457878 MAIL ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 DEF 14A 1 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: 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 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. 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.
Number of Shares Name and Address Title of Beneficially Percent Of Beneficial Owner Class Owned Owned of Class ------------------- ----------- ------------ -------- 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
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. 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. 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. 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.
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) - ------------------ ---- ------- ----- ------ ------- ------ 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
(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. 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 $2,500 per month. The agreement provides that payments under the disability policy shall commence six months after a determination of disability has been made and shall continue until Mr. Rife reaches the age of 65. The agreement provides for automatic termination if (a) Mr. Rife resigns or otherwise voluntarily terminates his employment other than by reason of disability or retirement upon attaining the age of 65 or (b) his employment is terminated by reason of gross misconduct. Options Granted in Last Fiscal Year The following table sets forth information on options granted in 1999 to the executive officers listed in the Summary Compensation Table:
Grant Date Individual Grants Value ----------------- ---------- % of Total Options Exercise Options Granted to or Grant Date Granted Employees in Base Price Expiration Present Value Name # Fiscal Year ($/sh) Date ($)(1) - ----------------- -------- ------------ ---------- ---------- ------------- 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
(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. 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:
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 - -------------------------------------------------------------------- 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)
(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. 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
12/94 12/95 12/96 12/97 12/98 12/99 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 II - NON-CUMULATIVE ANNUAL RETURN
12/94 12/95 12/96 12/97 12/98 12/99 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%)
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 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 -----END PRIVACY-ENHANCED MESSAGE-----