SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SCAN-OPTICS, INC.
................................................................................
(Name of Registrant as Specified In Its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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April 13, 1998
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of Scan-
Optics, Inc., scheduled to be held Thursday, May 21, 1998, at the Company's
offices at 169 Progress Drive, Manchester, Connecticut, commencing at 1:30 p.m.
Your Board of Directors and management look forward to meeting you personally.
At the Meeting you will be asked to elect two directors, to approve the
Scan-Optics, Inc. 1998 Incentive and Non-Qualified Stock Option Plan, to
appoint independent auditors for the fiscal year ending December 31, 1998 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 21, 1998 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 2001;
2. To approve the Scan-Optics, Inc. 1998 Incentive and Non-Qualified Stock
Option Plan;
3. To appoint independent auditors for the fiscal year ending December 31,
1998; and
4. To transact such other business as may properly come before said meeting
or any adjournment thereof.
Only holders of Common Stock at the close of business on April 1, 1998 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 13, 1998
____________________________
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 21, 1998 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 is being
mailed to stockholders on or about April 13, 1998.
A stockholder signing and returning a proxy on the accompanying form has the
power to revoke it at any time before the shares subject to it are voted by
notifying the Secretary of the Company in writing of such revocation, or by
filing a duly executed proxy bearing a later date, or by attending the meeting
and voting in person. Properly executed proxies, not revoked, will be voted in
accordance with the instructions contained thereon. Unless a contrary
specification is made thereon, it is the intention of the attorneys named in
the enclosed proxy to vote FOR the nominees for election to the Board of
Directors, FOR the adoption of Scan-Optics, Inc. 1998 Incentive and Non-
Qualified Stock Option Plan and FOR the appointment of Ernst & Young, LLP as
auditors for the fiscal year ending December 31, 1998.
OUTSTANDING VOTING SECURITIES
Only holders of Common Stock, $.02 par value ("Common Stock") at the close
of business on April 1, 1998 are entitled to notice of and to vote at the
meeting. On April 1, 1998, the record date, there were 7,236,789 shares of
Common Stock outstanding. Each share of Common Stock is entitled to one vote
per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to each
person known to the Company to have beneficial ownership of more than 5% of the
Company's outstanding voting stock as of April 1, 1998. In preparing the
following table, the Company relied on the information filed with the
Securities and Exchange Commission pursuant to Section 13(d) or 13(g) of the
Securities Exchange Act of 1934, as amended, or information supplied to the
Company by such person or the representative of such person. Each person
listed below has sole voting and investment powers as to the shares the person
beneficially owns, except as otherwise indicated.
Number
of Shares
Name and Address Title of Beneficially Percent
of Beneficial Owner Class Owned Owned of Class
- ------------------- ----------- ------------ --------
Dimensional Fund Advisors Inc. Common Stock 424,900 (1) 5.9%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
FMR Corp. Common Stock 435,000 (2) 6.0%
82 Devonshire Street
Boston, MA 02109
The Killen Group, Inc. Common Stock 780,920 (3) 10.8%
1199 Lancaster Avenue
Berwyn, PA 19312
Edwin W. Schloss Common Stock 435,600 (4) 6.0%
52 Vanderbilt Avenue
New York, NY 10017
Walter J. Schloss Common Stock 419,600 (5) 5.8%
52 Vanderbilt Avenue
New York, NY 10017
Walter & Edwin Schloss Common Stock 405,600 (6) 5.6%
Associates, L.P.
52 Vanderbilt Avenue
New York, NY 10017
(1) Dimensional Fund Advisors Inc. ("Dimensional" ), a registered investment
advisor, is deemed to have beneficial ownership of 424,900 shares of Scan-
Optics, Inc. Common Stock as of December 31, 1997, all of which shares are
held in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
(2) Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and a registered investment advisor is the
beneficial owner of 435,000 shares as a result of acting as investment
advisor to an investment company which owns such shares. Such investment
company, FMR Corp. and its Chairman, Edward C. Johnson, III, each has sole
power to dispose of such shares. The sole voting power with respect to such
shares resides with the investment company's board of trustees.
(3) The Killen Group, Inc. has discretionary trading authority over 780,920
shares of Common Stock owned by clients whose shares are included in the
table. It has sole voting power with respect to 350,570 of such shares.
(4) 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 405,600 shares of Common Stock owned by Associates, thereby
increasing his beneficial ownership of the Common Stock to 435,600 shares,
or 6.0% of the Common Stock outstanding.
(5) 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 investment powers with respect to
the 405,600 shares of Common Stock owned by Associates, thereby increasing
his beneficial ownership of the Common Stock to 419,600 shares, or 5.8% 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 20,000 shares, his
total beneficial ownership of the Common Stock would be 429,600 shares, or
6.1% of the Common Stock outstanding.
(6) 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 power voting and
dispositive powers with respect to such shares.
See footnotes (4) and (5) 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 1997, the Board of Directors met thirteen times.
All directors attended at least 75% of the aggregate of the number of meetings
of the Board of Directors and of committees of the Board on which they served.
The Board has delegated responsibilities with respect to management
compensation and employee stock option plans to the Stock Options and Executive
Compensation Committee, responsibilities with respect to certain audit matters
to the Audit Committee and responsibilities with respect to recommending
candidates to serve on the Board to the Nominating Committee.
The Stock Options and Executive Compensation Committee is composed of E.
Bulkeley Griswold (Chairman), Robert H. Steele and Lyman C. Hamilton, Jr. The
Audit Committee is composed of Logan Clarke, Jr. (Chairman), Richard J. Coburn
and E. Bulkeley Griswold. The Nominating Committee is composed of Messrs.
Hamilton (Chairman), Coburn and Steele.
The Stock Options and Executive Compensation Committee is responsible for
reviewing and supervising all ordinary and incentive compensation payments and
plans for certain officers of the Company and for approving grants of stock
options to employees under the Company's employee stock option plans. During
1997, the Stock Options and Executive Compensation Committee met three times.
The Audit Committee is responsible for reviewing the adequacy of financial
controls and the adequacy and accuracy of financial reporting. The Audit
Committee met twice during 1997. The Nominating Committee is responsible for
screening and recommending candidates to serve on the Board. The Nominating
Committee met once in 1997.
Pursuant to the Company's By-Laws, nominations for directors may be made
by any stockholder entitled to vote for the election of directors at the
meeting who complies with the following notice procedures and who is a
stockholder of record at the time of giving such notice. To be timely, a
stockholder's notice must be delivered to or mailed to and received at the
principal executive offices of the Company not less than 40 days nor more than
90 days prior to the meeting; provided, however, that if less than 50 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so delivered or
received not later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the meeting was mailed
or the day on which such public disclosure was made. A stockholder's notice to
the Secretary must set forth (a) as to each person the stockholder proposes to
nominate for election or re-election as a director, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; (b) such
person's written consent to being named in a proxy statement as a nominee and
to serving as a director if elected; and (c) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Company's books, of
such stockholder and any other stockholder known by such stockholder to be
supporting such nomination and (ii) the class and number of shares of the
Company which are beneficially owned by such stockholder. A stockholder making
such a nomination must also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to such matter.
Directors, other than those who are full-time employees of the Company or
a subsidiary, each receive a monthly fee of $750 and additional fees of $750
per Board meeting attended and $500 per committee meeting attended. Directors
who are full-time employees of the Company receive no remuneration for serving
on the Board of Directors or committees. Under the Scan-Optics, Inc. 1990
Stock Option Plan for Outside Directors, each non-employee director received an
option to purchase 5,000 shares of Common Stock on June 12, 1990, the effective
date of the plan, and on June 12, 1991, 1992, 1993, 1994 and 1995. The 1990
plan was amended on May 15, 1996 to provide an additional 200,000 shares
available for grant, and a grant of 5,000 options for each outside director was
made on that date and on May 15, 1997. The exercise price per share is equal to
the fair market value of a share of Common Stock on the date of grant.
1. ELECTION OF DIRECTORS
The Certificate of Incorporation of the Company provides for a Board of
Directors which is divided into three classes, as nearly equal in size as
possible, with one class elected each year for a three-year term, to hold
office until the end of such term and until successors have been elected and
qualified. Pursuant to the Certificate of Incorporation, the Board of
Directors has determined that the Company will have six directors, two in the
class whose term will expire in 1999, two in the class whose term will expire
in 2000, and two in the class whose term will expire in 2001. At the 1998
Annual Meeting, two directors are to be elected to constitute the class whose
term will expire in 2001.
It is intended that the shares represented by the accompanying proxy will
be voted for the election of Logan Clarke, Jr. and Richard J. Coburn, 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 II at this meeting to terms expiring in 2001:
Mr. Logan Clarke, Jr., age 70, is an independent management consultant.
He had previously served as Interim Executive Director of Southeast Area
Technology Center, a business incubator and revolving loan fund from 1995 to
1996, acting President of Hartford College for Women from 1990 to 1991 and as
Executive Vice President of Society for Savings, a savings bank, from 1986 to
1990. He has been a Director since 1981.
Mr. Richard J. Coburn, age 66, is Chairman of Accent Color Sciences, Inc.,
a manufacturer of color printing systems. Previously he served as President of
KCR Technology, Inc., a manufacturer of high speed printers, from 1983 to 1991.
Except for a short period in 1980, he has been a Director since 1968.
Class I directors whose present terms continue until 1999:
Mr. E. Bulkeley Griswold, age 59, is Managing General Partner of
MarketCorp Ventures L.P., a venture capital limited partnership with which he
has been associated since 1984. Mr. Griswold is also a director of Bertucci's
and NLC Insurance Companies and a director of a number of other privately held
companies. He has been a Director since 1989.
Mr. Robert H. Steele, age 59, is Vice Chairman of the John Ryan Company,
a banking services company. He was President of RHS Consulting from 1990 to
1991 and from 1985 to 1990 was Chairman and CEO of Dollar Dry Dock Bank. Mr.
Steele is also a Director of Moore Medical Corp., NLC Insurance Companies and
Accent Color Sciences, Inc. and SmartServ Online, Inc. He has been a Director
since 1978.
Class III directors whose present terms continue until 2000:
Mr. Lyman C. Hamilton, Jr., age 71, is an investment manager and was
formerly Chief Executive Officer and President of InterDigital Communications
Corp., a specialized communications company, from 1993 to 1994. He had served
as Chairman and Chief Executive Officer of Alpine PolyVision, Inc., a flat
panel display manufacturer, from 1991 to 1993 and of Imperial Corporation of
America, a financial services organization, from 1989 to 1990 and as Chairman
and President of Tamco Enterprises, Inc., an investment company, from 1980 to
1989. He had previously served in various positions during a 17 year
association at ITT Corporation including President during 1977 and Chief
Executive Officer from 1978 to 1979. Mr. Hamilton is also a Director of Marine
Management Systems, Inc., Polyvision Inc., IBNET, Inc. and Globaltel Resources.
He has been a Director since 1985.
Mr. James C. Mavel, age 52, joined the Company on January 2, 1996 as
President and Chief Operating Officer. On December 31, 1996, Mr. Mavel was
promoted to the title of Chief Executive Officer. On May 15, 1997, Mr. Mavel
was promoted to the title of Chairman of the Board of Directors. From 1991 to
1995 Mr. Mavel was Vice President and General Manager of the Imaging Systems
Division of Unisys. He has been a Director since 1996.
Share Ownership of Management
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock as of April 1, 1998 of each
director, nominee and executive officer named in the Summary Compensation Table
contained elsewhere in this proxy statement.
Name Number of Shares (1)
---- ----------------
Robert L. Bell 2,658
Logan Clarke, Jr. 40,600
Richard J. Coburn 30,200
Richard C. Goyette 8,706
E. Bulkeley Griswold 36,000
Lyman C. Hamilton, Jr. 42,000
James C. Mavel 61,205
Clarence W. Rife 56,522
Robert H. Steele 25,000
Michael J. Villano 38,738
(1) Includes the following number of shares subject to options exercisable
within 60 days of April 1, 1998: Robert L. Bell, 1,667 shares; Logan Clarke,
Jr., 40,000 shares; Richard J. Coburn, 30,000 shares; E. Bulkeley Griswold,
21,500 shares; Richard C. Goyette, 8,334 shares; Lyman C. Hamilton, Jr.,
40,000 shares; James C. Mavel, 60,833 shares; Clarence W. Rife, 53,334
shares; Robert H. Steele, 25,000 shares; and Michael J. Villano, 36,717
shares.
No director beneficially owned more than one percent of the Common Stock.
All directors and executive officers as a group (12 persons) beneficially
owned 365,720 shares of the Company's Common Stock, including 339,635 shares
subject to options exercisable within 60 days of April 1, 1998, which
constituted 4.8% of the outstanding Common Stock as of that date.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the cash and non
cash compensation paid by the Company to the CEO as well as the four most
highly compensated executive officers of the Company in 1997 for services
rendered in all capacities during the fiscal years ended December 31, 1997,
1996 and 1995.
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)
- ------------------ ---- ------ ----- ------- ----------- ---------
Robert L. Bell 1997 129,200 124,356 4,800 5,000 7,495
Vice President 1996 115,000 87,222 4,800 0 5,654
Business Development 1995 115,000 0 4,800 5,000 5,616
Richard C. Goyette
Vice President 1997 261,577 10,000 4,800 20,000 68,567
Sales and Marketing 1996 143,780 5,000 4,800 20,000 17,038
James C. Mavel (2)
Chairman of the Board, 1997 211,090 235,296 8,246 27,500 7,201
Chief Executive Officer 1996 190,000 136,521 7,200 100,000 59,376
and President
Clarence W. Rife 1997 161,986 120,792 4,800 15,000 6,788
Vice President 1996 136,224 87,980 4,800 0 6,382
Customer Relations 1995 136,677 0 4,800 10,000 6,129
Michael J. Villano 1997 130,200 120,151 4,800 22,500 5,735
Chief Financial Officer, 1996 110,000 83,430 4,800 0 5,457
Vice President and 1995 106,250 0 4,800 10,000 5,208
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.
(2) Mr. Mavel became Chief Executive Officer on December 31, 1996 and Chairman
of the Board of Directors on May 15, 1997.
Executive Employment Agreements
Under an employment agreement (the "Employment Agreement") with Richard I.
Tanaka, Chairman of the Board of Directors of the Company through May 15, 1997,
Mr. Tanaka received a base annual salary of $200,000, or such greater amount as
the Board of Directors may from time to time determine, and incentive
compensation not exceeding $200,000 per year, payable if certain management
goals were met, as well as health and disability insurance benefits, life
insurance in the face amount of $500,000, use of an automobile and certain
other personal benefits. Mr. Tanaka's employment under the Employment
Agreement terminates automatically upon death or after three months of
disability and may also be terminated by the Company or Mr. Tanaka. Generally,
upon termination, Mr. Tanaka or his beneficiary (as applicable) would be
entitled to receive accrued and unpaid amounts under the Employment Agreement,
unless termination was due to willful or reckless misconduct, gross negligence,
misappropriation, fraud or embezzlement (Cause). Moreover, under the original
agreement before its 1996 amendment (see below), severance benefits consisting
of one year's base salary and participation in the Company's health and
disability plans were payable upon termination of Mr. Tanaka's employment by
the Company without Cause prior to a change in control of the Company or
termination of employment by Mr. Tanaka for certain reasons prior to a change
in control.
The Company and Mr. Tanaka executed an amendment to his Employment
Agreement on December 9, 1996 to provide for a management transition. The
amendment provides that he would cease to be Chief Executive Officer by
December 31, 1996, that he will continue as Chairman of the Board of Directors
until the 1997 Annual Meeting of Stockholders and will continue as an executive
employee for twelve months thereafter. During that period, he will not have
specific assigned duties but will be available to assist and consult with the
Company on specific issues related to customers and products, which may include
product direction, the international market and relations with distributors and
customers in the Japanese market. His salary and benefits will remain in
effect during that twelve-month period at levels not less than those existing
on the date of the amendment and his stock options will remain in place in
accordance with their terms. He will not receive any severance pay or the
continuation of health and disability coverage and other benefits following the
end of that twelve-month period.
The Company entered into an employment agreement ("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. Bell, Mr. Goyette, Mr. Rife and Mr. Villano. These agreements
require the Company to provide certain benefits to Executive Officers in the
event of an involuntary termination of employment with the Company (except on
account of death, disability or cause) or a voluntary termination of employment
with the Company where good reason exists, in either case following a "change
in control" of the Company. A "change in control" is defined as a change that
would be required to be reported pursuant to the proxy regulations under the
Securities Exchange Act of 1934, as amended, whether or not the Company is then
subject to such reporting 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 my be eligible for matching contributions) of the
amount of base pay, commission pay and incentive pay considered in (a) above,
and (c) the value of all options to acquire Company common stock that will not
become exercisable on account of the Executive Officer's termination, such lump
sum payment being subject to reduction if necessary to avoid the imposition of
an excise tax under federal income tax law limitations on so-called "golden
parachute" payments, and (2) the continuation of insurance coverage for a
period of 24 months following termination. These benefits generally will be in
addition to any other benefits that Executive Officers are entitled to receive
from the Company.
Executive Insurance Agreement
Under an insurance agreement with Mr. Rife, the Company is obligated to
provide certain benefits upon the happening of certain specified events. The
principal obligations of the Company under the agreement consist of the
following: (a) if Mr. Rife dies while in the employ of the Company but prior
to attaining the age of 65, the Company is obligated to pay his beneficiary
$50,000 per annum for each of the ten years following such death, with payment
to commence in the year of death; (b) if he retires from the Company upon
attaining the age of 65, or thereafter, the Company is obligated to pay him (or
his beneficiary in the event that he dies during the retirement period) $50,000
per annum for each of the ten years following such retirement, with payment to
commence in the year of retirement; (c) to provide for the adequate funding of
its obligations under the agreement, the Company has purchased and is obligated
to maintain at its expense an insurance policy on Mr. Rife's life in the face
amount of $310,000; and (d) the Company has purchased and is obligated to
maintain for the benefit of Mr. Rife, at the Company's expense, a disability
income policy which would provide disability benefits to him in the amount of
$2,500 per month. The agreement provides that payments under the disability
policy shall commence six months after a determination of disability has been
made and shall continue until Mr. Rife reaches the age of 65. The agreement
provides for automatic termination if (a) Mr. Rife resigns or otherwise
voluntarily terminates his employment other than by reason of disability or
retirement upon attaining the age of 65 or (b) his employment is terminated by
reason of gross misconduct.
Options Granted in Last Fiscal Year
The following table sets forth information on options granted in 1997 to
the executive officers listed in the Summary Compensation Table:
Grant Date
Individual Grants Value
--------------------------------------------- -------------
% of Total
Options Exercise
Options Granted to or Grant Date
Granted Employees in Base Price Expiration Present Value
Name # Fiscal Year ($/SH) Date ($)(1)
- ---- ------- ------------ ---------- ---------- -------------
Robert L. Bell 5,000 2.6 6.375 1/19/07 4.32
Richard C. Goyette 5,000 2.6 6.375 1/19/07 4.3
Richard C. Goyette 15,000 7.8 9.190 12/08/07 7.82
James C. Mavel 7,500 3.9 6.375 1/19/07 4.32
James C. Mavel 20,000 10.4 9.190 12/08/07 7.82
Clarence W. Rife 5,000 2.6 6.375 1/19/07 4.32
Clarence W. Rife 10,000 5.2 9.190 12/08/07 7.82
Michael J. Villano 7,500 3.9 6.375 1/19/07 4.32
Michael J. Villano 15,000 7.8 9.190 12/08/07 7.82
(1) Present value determination was made using a Black-Scholes option pricing
model. The actual value, if any, an executive may realize will depend on
the excess of the stock price over the exercise price on the date the option
is exercised, so that there is no assurance the value realized by an
executive will be at or near the value estimated by the Black-Scholes model.
The estimated values under that model are based on the following
assumptions:
1. Volatility .453 to .786
2. Interest Rate 7%
3. Time to Exercise 10 years
In general, options granted for employees under the Company's Stock Option
Plans vest in installments of one-third commencing one year after grant.
Options for directors are vested six months after the date of grant. The
option exercise price is equal to the fair market value of a share of Common
Stock on the date of grant. Options vest in full upon a reorganization, merger
or consolidation in which the Company is not the surviving corporation and upon
other specified events.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table summarizes options exercised during 1997 and presents
the value of unexercised options held by the named executives at fiscal year-
end:
Number of Value*
Securities of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options Options
On Exercise Realized* at Fiscal at Fiscal
Name (#) ($) Year-End Year-End
- ---- ----------- --------- ------------ -------------
Robert L. Bell 10,000 44,380 20,000 (1) $ 110,279 (1)
5,000 (2) $ 11,666 (2)
Richard C. Goyette 6,667 40,002 8,333 (1) $ 38,543 (1)
10,000 (2) $ 42,080 (2)
James C. Mavel 0 0 60,833 (1) $ 296,979 (1)
46,667 (2) $ 218,958 (2)
Clarence W. Rife 0 0 53,333 (1) $ 305,258 (1)
6,667 (2) $ 28,317 (2)
Michael J. Villano 0 0 36,717 (1) $ 171,873 (1)
8,333 (2) $ 31,858 (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.
COMPARISON OF FIVE YEAR CULULATIVE RETURN*
Among Scan-Optics, Inc., The Russell 2000 Index
and The NASDAQ Computer & Data Processing Services Index
Performance Graph
Table I - Cumulative Value of $100 Investment
- --------------------------------------------------------------------------------
12/92 12/93 12/94 12/95 12/96 12/97
The Russell 2000 Index $100.00 $118.91 $116.75 $149.95 $174.85 $213.91
Nasdaq Computer & Data
Processing Index $100.00 $105.83 $128.53 $195.74 $241.54 $296.70
Scan-Optics, Inc. $100.00 $166.67 $187.50 $ 96.83 $116.67 $283.33
*$100 Invested on 12/31/92 in stock or index-
including reinvestment of dividends.
Fiscal year ending December 31.
Report of the Stock Options and Executive Compensation Committee
The Stock Options and Executive Compensation Committee is responsible for
making recommendations to the full Board with respect to the compensation of
the Company's Chief Executive Officer and other Executive Officers of the
Company, and with respect to long and short-term incentive compensation awards.
It also makes grants under the Company's stock option plans for employees. The
members of the Stock Options and Executive Compensation Committee are E.
Bulkeley Griswold (Chairman), Robert H. Steele and Lyman C. Hamilton, Jr. All
members are non-employee directors, and none has any direct or indirect
material interest in or relationship with the Company outside of his position
as director.
The Company's executive compensation program is divided into four parts:
base salary, bonus, commissions, and stock options. Actual salary changes are
based on performance. Bonus awards for Executive Officers are based on the
Company meeting specified goals, which are described below. Special awards can
be granted to various management and other employees at the Executive
Compensation Committee's approval with subsequent Board knowledge.
Sales volume and service revenue are important factors in the Company's
success. Therefore, commissions constitute a significant portion of the
compensation of those executives who have direct responsibility for sales and
service. In 1997, commission payments for Mr. Rife, the executive with
significant service responsibilities, constituted approximately 14.1% of cash
compensation. In 1997, commission payments for Mr. Goyette, Vice President of
Sales and Marketing, constituted approximately 51.2% of cash compensation.
Stock compensation in the form of stock options is meant to align
interests of top management with that of shareholders. The Committee has the
authority to determine the individuals to whom stock options are awarded, the
terms on which option grants shall be made and the number of shares subject to
each option.
The Committee meets with the Chief Executive Officer (CEO) to evaluate the
performance of other executive officers and meets in the absence of the CEO to
evaluate his performance. The Committee reports the results of all evaluations
to the full Board.
The Committee's overall objective in its discussions of compensation is to
reward performance in a manner that is competitive with comparable companies
and which provides incentives to managers to produce steadily improved results.
At a November 27, 1996 meeting of the Executive Compensation Committee the
1997 cash bonus and contingent option plan was adopted. This plan adopted the
same general format as used in the 1996 compensation plan. Under this program,
cash bonus and stock options will be granted to a group of executives and
employees based on the Company achieving a pre-tax profit goal along with
individual performance contribution, as observed and recommended by the CEO to
the committee. Cash bonuses of $1,134,000 were awarded to forty-one
recipients, totaling 16.1% of 1997 pre-tax and pre-bonus income of $7,061,000.
The pre-tax income achievement was 41% above the Board approved budget for
1997, and was approximately 78% ahead of the actual 1996 reported pre-tax
income.
Further, on October 20, 1997, the Executive Compensation Committee
approved an additional $100,000 special cash bonus grant to employees not
included in the previously outlined 1997 cash bonus plan. This bonus was paid
as a special thank you for the outstanding performance of he Company in the 1996
and 1997 years.
In addition to the 50,000 options set aside as part of the 1997 contingent
option plan adopted on November 27, 1996, an additional 50,000 options were
further set aside and approved by Committee on October 20, 1997, to be awarded
as the CEO recommended, however, the Committee instructed the CEO that at least
10,000 of these options would be granted to the CEO, so long as the 1997 pre-tax
profit plan was achieved or exceeded.
In total, the 100,000 stock options were awarded to twenty-five Scan-
Optics managers and employees, effective January 14, 1998. The number of stock
options ranged from 500 to as high as 20,000 per individual.
Both the cash incentive and stock option awards embraced the Committee's
compensation plan objectives: (1) to provide meaningful cash incentives to at
least nineteen executives and other deserved employees, so long as budgeted
pre-tax income is achieved or exceeded; (2) to weight the senior executive
awards more heavily than the total award group; (3) to provide only modest cash
bonuses for slight under achievement of a defined budget goal; and (4) to
accelerate bonus payments for profits exceeding the defined pre-tax income
budget. All the while, the Committee has intended to keep these cash and stock
options bonus awards comparable to other companies in similar industries.
Stock Options and
Executive Compensation Committee
E. Bulkeley Griswold, Chairman
Lyman C. Hamilton, Jr.
Robert H. Steele
CERTAIN TRANSACTIONS
During 1997, 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, except that Marianna C. Emanuelson
filed late her Form 3 report which was required following her election as an
officer.
2. APPROVAL OF THE SCAN-OPTICS, INC. 1998 INCENTIVE
AND NON-QUALIFIED STOCK OPTION PLAN
The Board of Directors has adopted the 1998 Incentive and Non-Qualified
Stock Option Plan (the "1998 Plan" or the "Plan"). The following discussion is
a summary of the 1998 Plan and is qualified in its entirety by reference to
Exhibit A.
ADMINISTRATION. The 1998 Plan is administered by the Stock Options and
Executive Compensation Committee of the Company's Board of Directors (the
"Committee"). The Committee is composed of not less than two non-employee
directors as that term is defined under the rules promulgated by the Securities
and Exchange Commission. The Committee will determine those individuals to whom
options will be granted under the 1998 Plan.
INCENTIVE AND NON-QUALIFIED OPTIONS. Options granted under the 1998 Plan
may be either incentive stock options ("Incentive Options") intended to meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified stock options ("Non-Qualified Options").
ELIGIBILITY. One or more options may be granted under the 1998 Plan by
the Committee to such officers or key employees of the Company, or of a parent
or subsidiary of the Company (of which there are presently five subsidiaries),
at such time or times and in such amounts as the Committee determines. A
member of the Board of Directors is eligible to participate in the 1998 Plan
only if such Board member is also an employee of the Company. No employee may
be granted Incentive Options that first become exercisable in a calendar year
(under all incentive stock option plans of the Company) covering shares with an
aggregate market value on the date of grant of more than $100,000.
Approximately 300 persons will be eligible to participate in the 1998 Plan.
SHARES SUBJECT TO OPTIONS. If this Proposal 2 is adopted by the
shareholders, the stock subject to options will be shares of the Company's
Common Stock in an amount not to exceed an aggregate of 500,000 shares, subject
to adjustment to prevent dilution in the event of stock splits, stock dividends
or other changes in the Company's capitalization. Such shares may be treasury
shares or authorized but unissued shares. If any outstanding option expires or
terminates prior to its exercise in full, the shares of Common Stock allocable
to the unexercised portion of such option will become available for the grant
of other options.
OPTION PRICE. The price at which shares may be purchased pursuant to an
Incentive Option is not less than 100% of the fair market value of the shares
of Common Stock on the date the Incentive Option is granted. The price at
which shares may be purchased pursuant to a Non-Qualified Option is not less
than 85% of the fair market value of the shares of Common Stock on the date the
Non-Qualified Option is granted. The Committee, in its absolute discretion,
may grant to optionees, in exchange for the surrender and cancellation of
outstanding options, new options having prices lower than the option price of
the option so surrendered and canceled.
EXERCISE OF OPTIONS. No option may be exercised after the expiration of
ten years from the date it is granted. No option may be granted under the 1998
Plan after May 12, 2008.
Each optionee to whom an option is granted must agree in writing, as a
condition to the granting of the option, to remain in the continuous employ of
the Company for one year from the date of the grant of the option. Each option
shall be exercisable thereafter on a cumulative basis as determined by the
Committee. Under certain conditions, such as the receipt of approval from the
Committee, or in the event of certain mergers, reorganizations, sales of assets
or termination of the business of the Company, the time at which an option is
exercisable may be accelerated to allow an exercise of the option, in whole or
in part, at a time earlier than that otherwise provided at the time of the
original grant of the option. The exercisability of an option may not, however,
be accelerated to a date which is less than six months after the date of grant
of the option, except in the case of death or disability.
The option price for the number of shares with respect to which the option
is exercised shall be paid in full to the Company upon exercise of an option.
The optionee may pay all or part of the option price by delivering shares of
the Company's Common Stock which shall be credited against the option price at
the fair market value of such stock on the date of exercise. In addition, the
optionee may use the shares received upon the exercise of an option to pay the
option price to acquire additional shares. This technique allows optionees to
exercise the option which they have been granted by using any appreciation
present in the shares which they own.
Under the 1998 Plan, optionees have the opportunity to satisfy withholding
tax obligations, in whole or in part, either by having the Company withhold
from the shares to be issued upon exercise that number of shares that would
satisfy the withholding amount due or by delivering to the Company already-
owned Common Stock to satisfy the withholding amount (see "Federal Income Tax
Consequences" below).
Incentive Options, and, unless otherwise determined by the Committee, Non-
Qualified Options are not transferable by the optionee otherwise than by will
or under the laws of descent and distribution, and are exercisable, during the
optionee's lifetime, only by the optionee.
Options shall terminate, unless exercised, upon the earlier of the date of
expiration of the option or three months after the date of severance of the
employment relationship between the optionee and the Company, or a parent or
subsidiary of the Company; provided, however, that all options held by an
optionee shall terminate immediately upon receipt by an optionee of notice of
termination if the optionee is terminated for deliberate, willful or gross
misconduct as determined by the Company.
If, before the date of expiration of the option, the optionee retires from
the employ of the Company, or a parent or subsidiary of the Company, for
reasons of age or disability, the option shall terminate on the earlier of such
date of expiration or one year after the date of such retirement. In the event
of such retirement, the optionee shall have the right prior to the termination
of such option to exercise the option to the extent to which the optionee was
entitled to exercise such option immediately prior to such retirement. If the
retired optionee shall die before the termination of the option, the optionee's
executors, administrators or any person or persons to whom the option may be
transferred by will or by laws of descent and distribution shall have the
right, at any time prior to the earlier of the date of the expiration of the
option or the end of the one-year period beginning on the date of the
optionee's death, to exercise the option to the same extent as said retired
optionee.
In the event of death of the holder of an option while in the employ of
the Company, or a parent or subsidiary of the Company and before the date of
expiration of such option, such option shall terminate on the earlier of such
date of expiration or one year following the date of such death. After the
death of the optionee, the optionee's executors, administrators or any person
or persons to whom the option may be transferred by will or by the laws of
descent and distribution shall have the right, at any time prior to such
termination, to exercise the option to the same extent to which the deceased
optionee was entitled to exercise such option immediately prior to the deceased
optionee's death.
MODIFICATION. The Board of Directors may amend, suspend or terminate the
1998 Plan at any time; subject to applicable law.
REGISTRATION OF OPTION SHARES. No shares shall be issued and delivered
upon exercise of any option unless a registration statement under the
Securities Act of 1933, as amended, with respect to the shares of Common Stock
to be reserved for issuance upon the exercise of options to be granted under
the 1998 Plan has become effective, and unless all other applicable laws and
regulations have been complied with.
FEDERAL INCOME TAX CONSEQUENCES. Options granted under the 1998 Plan may
be either Incentive Options or Non-Qualified Options. An Employee will not
recognize income for federal income tax purposes upon the grant of an Incentive
Option, or a Non-Qualified Option. If an optionee is employed by the Company
throughout the period ending three months (one year for disabled optionees and
no limit for deceased optionees) prior to exercise of an Incentive Option, no
income will be recognized upon the exercise of the option. However, the
difference between the option price and the fair market value of the Common
Stock acquired on the date of exercise will be included in income for purposes
of the alternative minimum tax to the extent provided by Section 56(b)(3) of
the Code. If no disposition of the stock acquired upon the qualifying exercise
of the Incentive Option occurs until after more than two years after the
Incentive Option was granted and more than one year after the transfer of such
stock to the optionee, any gain or loss recognized upon such disposition will
be treated as capital gain or loss.
The disposition of the stock acquired upon the exercise of an Incentive
Option within two years after the Incentive Option was granted or within one
year after the transfer of the stock to the optionee will be a disqualifying
disposition, and the optionee will generally recognize (i) ordinary
compensation income for federal income tax purposes in an amount equal to the
excess of the fair market value on the date of exercise of the stock acquired
over the option price and (ii) short-, mid- or long-term capital gain (depending
on how long the stock was held) to the extent the stock is disposed of in a sale
or taxable exchange at a price in excess of the value of the stock on the date
of exercise. Short-term capital gains (on stock held for one year or less) are
taxed at ordinary income rates, mid-term capital gains (on stock held for more
than one year but less than 18 months) are taxed at a maximum rate of 28% and
long-term capital gains (on stock held for more than 18 months) are taxed at a
maximum rate of 20%. If the amount realized by the optionee upon such a
disposition is less than the value of the stock on the date of exercise, then
the amount of income realized will be all compensation income and will be
limited to the excess of the amount realized on the sale or exchange over the
option price of the stock.
A participant who surrenders shares of stock in payment of the exercise price of
his or her Incentive Option generally will not recognize gain or loss on his or
her surrender of such shares. The surrender (either actually or by attestation)
of shares of stock previously acquired upon exercise of an Incentive Option in
payment of the exercise price of another Incentive Option is, however, a
"disposition" of such shares. If the Incentive Option holding period
requirements described above have not been satisfied with respect to such
shares, such disposition will be a disqualifying disposition that may cause the
participant to recognize ordinary income as discussed above.
All of the shares of stock received by a participant upon exercise of an
Incentive Option by surrendering shares of stock will be subject to the
Incentive Option holding period requirements. Of those shares, a number of
shares (the "Exchange Shares") equal to the number of shares of stock
surrendered by the participant will have the same tax basis for capital gains
purposes (increased by any ordinary income recognized as a result of any
disqualifying disposition of the surrendered shares if they were Incentive
Option shares) and the same capital gains holding period as the shares
surrendered. For purposes of determining ordinary income upon a subsequent
disqualifying disposition of the Exchange Shares, the amount paid for such
shares will be deemed to be the fair market value of the shares surrendered.
The balance of the shares received by the participant will have a tax basis (and
a deemed purchase price) of zero and a capital gains holding period beginning on
the date of the exercise. The Incentive Option holding period for all shares
will be the same as if the option had been exercised for cash.
Upon the exercise of a Non-Qualified Option, an optionee will recognize
ordinary compensation income in an amount equal to the excess of the fair
market value of the Common Stock on the date of exercise over the option price.
The optionee's tax basis for the stock acquired upon exercise of a Non-Qualified
Option is increased by the amount of such taxable income. Any gain or loss
recognized by the optionee on the subsequent disposition of the stock will be
capital gain or loss.
A participant who surrenders (either actually or by attestation) shares of stock
in payment of the exercise price of a Non-Qualified Option will not recognize
gain or loss on his or her surrender of such shares. Such an individual will
recognize ordinary income on the exercise of the Non-Qualified Option as
described above. Of the shares received in such an exchange, that number of
shares equal to the number of shares surrendered will have the same tax basis
and capital gains holding period as the shares surrendered. The balance of the
shares received will have a tax basis equal to their fair market value on the
date of exercise, and the capital gains holding period will begin on the date of
exercise.
The Company will be entitled to a deduction for federal income tax
purposes at the same time and in the same amount as an optionee is required to
recognize ordinary compensation income as described above.
To the extent that an employee recognizes capital gain as described above,
the Company will not be entitled to any deduction for federal income tax
purposes.
MARKET PRICE. The closing sale price as of April 1, 1998, of the
Company's Common Stock on the NASDAQ National market System was $5.75 per
share.
OUTSTANDING OPTIONS. Options covering 817,393 shares of the Company's
Common Stock were outstanding on December 31, 1997 under the Company's existing
stock option plans. These options expire at various dates from 1998 through
2007 and are exercisable at option prices ranging from $ 1.50 to $ 9.19 per
share. In addition, there are 261,493 shares of the Company's Common Stock
available for which options may be granted under the 1990 Incentive and
Non-Qualified Stock Option Plan, and the 1990 Plan for Outside Directors.
REQUIRED VOTE. Under the terms of the 1998 Plan, as adopted by the Board
of Directors, the affirmative vote of the holders of a majority of the
outstanding shares of the Common Stock and the Class A Stock of the Company,
voting together as a class, is required for approval and effectiveness of the
amendment. Abstaining votes and broker non-votes are counted as votes cast in
tabulating the majority requirement and have the same effect as a vote cast
against this proposal.
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors
unanimously recommends that the stockholders vote FOR Proposal 2 to approve the
1998 Plan.
3. APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors recommends that proxies be voted in favor of the
appointment of Ernst & Young, LLP, certified public accountants, as independent
auditors for the fiscal year ending December 31, 1998. Ernst & Young, LLP has
been the Company's independent auditor since 1979.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting where they will have an opportunity to make a statement if they
desire to do so and are expected to be available to answer appropriate
questions.
4. OTHER BUSINESS
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than those set forth in the Notice of Annual Meeting of
Stockholders. However, if any other matters properly come before such meeting,
the persons named in the enclosed proxy will have discretionary authority to
vote all proxies on such matters in accordance with their judgment.
STOCKHOLDER PROPOSALS
Pursuant to the Company's By-Laws, only such business shall be conducted,
and only such proposals shall be acted upon, at an annual meeting as shall be
brought before the meeting by or at the direction of the Board of Directors or
by a stockholder who has given timely and proper notice thereof in writing to
the Secretary of the Company. To be timely, a stockholder's notice must be
delivered to or mailed to and received at the principal executive offices of
the Company not less than 40 days nor more than 90 days prior to the scheduled
annual meeting; provided, however, that if less than 50 days' notice or prior
public disclosure of the date of the annual meeting is given or made, notice by
the stockholder to be timely must be so delivered or received not later than
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 1999 must be received by the Company no later than December 13,
1998 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 1999. Any
such proposal must comply with Rule 14a-8 promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended.
WILLIAM H. CUDDY
Secretary
April 13, 1998