May , 2004
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Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders of
Scan-Optics, Inc. ("Scan-Optics"), scheduled to be held Thursday, June 30, 2004,
at Scan-Optics' 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.
This is a crucial meeting for Scan-Optics. In addition to voting on
standard annual meeting matters, you will be asked to approve an amendment and
restatement of the certificate of incorporation of Scan-Optics in connection
with the recapitalization of our Company to position Scan-Optics for future
growth.
The key elements of the proposed recapitalization, which is described in
detail in the enclosed proxy statement starting on page 27, are:
o the cancellation of $3.8 million of mandatorily redeemable preferred
stock with a redemption date of June 1, 2005 held by one of the
Scan-Optics' secured lenders, which redeemable preferred stock allows
the holder, under certain circumstances, to exercise 46.67% of the
voting power of Scan-Optics on a fully-diluted basis;
o the cancellation of a warrant held by one of the Scan-Optics' secured
lenders exercisable after December 31, 2004 for 33.2% of our
fully-diluted common stock as of the warrant's issuance date at $0.02
per share;
o the issuance of common stock to one of the Scan-Optics' secured
lenders so that following such issuance the lender will own 79.8% of
our fully-diluted common stock, subject to dilution for certain
options which are currently granted, or may in the future be granted,
to our key employees;
o the extension of the maturity of all of our indebtedness to our
secured lender under the Credit Agreement to March 30, 2007.
After having contacted a range of alternative providers of capital over the
last several months through the efforts of independent advisors, we have
determined that there are no viable alternatives reasonably likely, in the
timeframe necessary to support Scan-Optics' business plans, to provide terms to
Scan-Optics and its stockholders that are more advantageous than the
recapitalization plan described in this Proxy. If the holders of a majority of
our issued and outstanding common stock do not vote in favor of the amendment
and restatement of our certificate of incorporation, however, we will be unable
to complete the anticipated recapitalization. In such a case, our secured
obligations, which currently exceed $13.6 million, would be payable in full on
June 1, 2005. It is
doubtful that later negotiations with our lenders will result in more favorable
terms than described in this proxy statement.
It is of the utmost importance that each of you take a few moments to vote
your shares of stock. We have arranged for telephone and Internet voting
procedures in order to make voting as simple as possible. Please refer to your
proxy card or voting instruction sheet for information on how to vote over the
telephone or Internet. We very much appreciate your time and your support at
this critical juncture for Scan-Optics.
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 Scan-Optics are greatly
appreciated.
Sincerely,
James C. Mavel
Chairman of the Board,
Chief Executive Officer and President
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SCAN-OPTICS, INC.
Notice of Annual Meeting of Stockholders
The Annual Meeting of Stockholders of Scan-Optics, Inc. ("Scan-Optics")
will be held at the offices of Scan-Optics at 169 Progress Drive, Manchester,
Connecticut, on Thursday, June 30, 2004 at 1:30 p.m. (EDT) to consider and take
action on the following items:
1. To elect three directors to serve until the Annual Meeting of
Stockholders in 2007 (beginning on page 8);
2. To adopt an amended and restated certificate of incorporation to
increase the number of authorized shares of common stock from
15,000,000 shares to 65,000,000, to delete the terms of two series of
preferred stock formerly issued to ARK CLO 2000-1, Limited and which
will no longer be issued and outstanding after the proposed
recapitalization described in this proxy statement and to make certain
other changes noted herein (beginning on page 27);
3. To adopt the 2004 Incentive and Non-Qualified Stock Option Plan
(beginning on page 42);
4. To ratify the appointment of independent auditors for the fiscal year
ending December 31, 2004 (page 49); and
5. To transact such other business as may properly come before said
meeting or any adjournment thereof.
Only holders of our common stock at the close of business on May 17, 2004
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
Scan-Optics, 169 Progress Drive, Manchester, Connecticut.
By Order of the Board of Directors,
Richard D. Harris
Secretary
Manchester, Connecticut
May , 2004
----
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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.
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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 EXTREMELY 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 ("Scan-Optics" or the "Company"), to be held at the offices
of Scan-Optics at 169 Progress Drive, Manchester, Connecticut, on Thursday, June
30, 2004 at 1:30 p.m.
The solicitation of proxies on the accompanying form is made on behalf of
the Board of Directors of Scan-Optics.
The cost of soliciting proxies on the accompanying form has been or will
be borne by Scan-Optics. In addition to solicitation by mail, Scan-Optics 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. Scan-Optics will reimburse them for their expenses in so doing.
Directors, officers and regular employees of Scan-Optics, who will receive no
compensation for their services other than their regular salaries, may solicit
proxies personally, by telephone or otherwise from stockholders. In addition, we
have retained Georgeson Shareholder Communications, Inc. to assist in the
solicitation of proxies for a fee of approximately $7,500 plus expenses. This
proxy statement and the accompanying form of proxy are being mailed to
stockholders on or about May 24, 2004.
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 Scan-Optics 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 at the meeting or any
adjournment thereof. If this meeting is adjourned, you will be permitted to
change or revoke your proxy until such time as it is voted. 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 Amended and Restated Certificate of Incorporation, FOR the 2004
Incentive and Non-Qualified Stock Option Plan, and FOR the appointment of Ernst
& Young LLP as auditors for the fiscal year ending December 31, 2004.
It is of upmost importance that you take a few minutes to vote your shares
of stock. We have arranged for telephone and internet voting in order to make
voting as simple as possible. Please refer to your proxy card or voting
instruction form for instructions on telephone and internet voting.
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OUTSTANDING VOTING SECURITIES
Only holders of our common stock, $.02 par value, at the close of business
on May 17, 2004 are entitled to notice of and to vote at the meeting. On May 17,
2004, 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.
See "Election of Directors-Share Ownership of Management" for information
on beneficial ownership of common stock by directors and officers of Scan-Optics
and holders of more than 5% of our outstanding voting stock as of our record
date. See "Proposal Two - Approval of Amended and Restated Certificate of
Incorporation of Scan-Optics" on page 27 of this proxy statement for information
about the Recapitalization, which may be deemed to result in a change of control
of Scan-Optics.
QUORUM REQUIRED TO TRANSACT BUSINESS
At the close of business on May 17, 2004, 7,439,732 shares of common stock
were outstanding. Our by-laws require that a majority of the outstanding shares
on that date be present in person or by proxy at the meeting in order to
constitute a quorum to transact business. Shares as to which holders abstain
from voting as to a particular matter, and shares held in "street name" by
brokers or nominees who indicate on their proxies that they do not have
discretionary authority to vote those shares as to a particular matter (that is,
broker non-votes), will be counted in determining whether there is a quorum of
stockholders present at the meeting.
GOVERNANCE OF SCAN-OPTICS
In accordance with our By-Laws and Delaware law, responsibility for the
management of Scan-Optics is vested in its Board of Directors. During 2003, the
Board of Directors met ten times, one of which was a conference call. 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 and
all directors attended our 2003 annual meeting. Directors are generally expected
to attend our annual meeting of stockholders.
Stockholder Communications with the Board
Stockholders may communicate with any of our directors by writing to them
c/o Annmarie Gordon Daigle, Scan-Optics, Inc., 169 Progress Drive, Manchester,
Connecticut 06040. All communications will be relayed to the individual
director.
Ethics Policy
Scan-Optics is committed to maintaining the highest standards of business
and ethical conduct. In support of this commitment, Scan-Optics has adopted a
Policy Statement on Business Conduct and Ethics (the "Policy") that applies to
all directors, officers, employees and intermediaries of the Company and its
subsidiaries. A copy of the Policy is available, for your review, on our website
at www.scan-optics.com/corp financial.asp.
Board Committees
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The Board of Directors 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 responsible for
reviewing and supervising all ordinary and incentive compensation payments and
plans for executive officers of Scan-Optics and for approving grants of stock
options to employees under our employee stock option plans. The Stock Options
and Executive Compensation Committee met once during 2003. The Stock Options and
Executive Compensation Committee is composed of Messrs. Clarke, Coburn and
Holton (Chairman).
The Audit Committee is responsible for reviewing the adequacy of financial
controls and the adequacy and accuracy of financial reporting. The Audit
Committee met five times during 2003. The Audit Committee is composed of Messrs.
Takala (Chairman), Steele and Hamilton. The Audit Committee has been established
in accordance with 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended, and each of the Audit Committee members is "independent" as defined
under Rule 4200(a)(15) of the National Association of Securities Dealers'
listing standards. The Board of Directors has determined that Ralph J. Takala is
a financial expert serving on its audit committee and is independent, as that
term is used in Item 7(d)(3)(iv) of Schedule 14A promulgated under the
Securities Exchange Act of 1934, as amended.
The Nominating Committee is responsible for screening and recommending
candidates to serve on the Board. The Nominating Committee is composed of
Messrs. Griswold (Chairman), Coburn and Hamilton. Each of the Nominating
Committee members is "independent" as defined by Rule 4200(a)(15) of the
National Association of Securities Dealers' listing standards. The Nominating
Committee met once in 2003. The Nominating Committee is currently considering
whether to adopt a formal charter.
In identifying director candidates, other than those that may be proposed
by stockholders, the Nominating Committee solicits ideas for possible candidates
from a number of sources, including Board members, Company executives and
individuals personally known to Board members. In considering nominations for
Board membership, the Nominating Committee takes into account a number of
factors, including, but not limited to: educational background, professional
work experience, current and prior board service, character and actual and
potential conflicts of interest.
Directors' Compensation
Directors, other than those who are full-time employees of Scan-Optics or a
subsidiary, each receive a monthly fee of $750 and additional fees of $1,200 per
board meeting attended and $500 per committee meeting attended. Directors who
are full-time employees of Scan-Optics receive no remuneration for serving on
the Board of Directors or committees. Under the Scan-Optics, Inc. 1990 Stock
Option Plan for Outside Directors, each non-employee director automatically
receives an option to purchase 5,000 shares of common stock on the twelfth day
of June of each year during which the director is serving as a member of the
Board. The exercise price per share is equal to the fair market value of a share
of common stock on the date of grant ($.55 per share on June 12, 2003, the date
of last year's annual meeting, with respect to the most recently granted
director stock options). The options vest six months after the date of
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grant. The three directors who have been designated by ARK, described below
under "Proposal One - Election of Directors," will not be granted stock options
for serving as board members of Scan-Optics.
-7-
PROPOSAL ONE - ELECTION OF DIRECTORS
The Certificate of Incorporation of Scan-Optics 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 our Certificate of Incorporation, the Board of Directors has
voted to expand the number of members of the Board of Directors from eight to
nine and, in accordance with the Certificate of Incorporation, the newly-created
directorship will be apportioned to Class II of the Board of Directors such that
each class of directors shall consist of three directors. The Class II directors
are currently up for election and the term of the three newly elected directors
in Class II will expire in 2007. The term of the three directors in the Class
III will expire in 2005 and the term of the three directors in Class I will
expire in 2006.
It is a condition to the consummation of the Recapitalization pursuant to
the Subscription and Repurchase Agreement described under Proposal Two on page
27 of this proxy statement that three designees of ARK CLO 2000-1, Limited
("ARK"), consisting of Messrs. Schooley and Scinto and Ms. Tilton, be nominated
and elected as Class II directors whose term will expire in 2007. ARK is a
lender to Scan-Optics under a Credit Agreement described under Proposal Two on
page 27 of this proxy statement. Our Nominating Committee has met with each
nominee, to, among other things, confirm his or her willingness to serve if
elected.
It is also a condition to the closing of the Recapitalization that Messrs,
Griswold, Steele and Hamilton tender their resignation from the Board of
Directors and any committees of the Board of Directors on which they serve.
Therefore, upon consummation of the Recapitalization, the Board of Directors of
the Company will consist of six members, three of whom will be the ARK designees
nominated for election at the 2004 annual meeting, Messrs. Schooley and Scinto
and Ms. Tilton, and three of whom will be current directors continuing in
office, Messrs. Mavel, Takala and Holton. Pursuant to our Certificate of
Incorporation, any vacancy on the Board of Directors may be filled by the vote
of a majority of the directors then in office and any director elected to fill
such a vacancy will hold office for the unexpired term of his or her
predecessor. It is the intention of the parties that at the first Board of
Directors meeting following the closing of the Recapitalization, the Board of
Directors will vote to elect two new Directors to fill two of the three
vacancies, one of whom will be a director designated by the three ARK designees
to the Board and one of whom satisfies the independence requirements of the NASD
and will be designated by the other three directors. At this time there is no
plan to fill the remaining vacancy that will exist after the first Board of
Directors meeting following the closing of the Recapitalization.
It is intended that the shares represented by the accompanying proxy will
be voted for the election of Messrs. Schooley and Scinto and Ms. Tilton as
directors unless the proxy indicates that authority to vote for such nominees is
withheld. If a nominee is unable or declines to serve, which the Board of
Directors 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.
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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 Scan-Optics.
Information Regarding Director Nominees
Nominees for election to Class II at this meeting to terms expiring in 2007:
Mr. Scott Schooley, age 48, is the President and Managing Member of
Woodside Capital Management, LLC ("Woodside") an entity created to purchase
distressed senior secured loans. Mr. Schooley is also a member of the Governing
Board of Woodside and beneficially owns more that 5% of Woodside. Mr. Schooley
was formerly the President of Blackstone Cable, an entity he created to purchase
distressed cable television loans and cable television systems. In such
capacity, he managed loan purchases, receivership and bankruptcy proceedings,
acquisitions, transfers of ownership and operations of cable television assets.
Prior to the creation of Woodside and Blackstone Cable, he was a partner in the
law firm of Bingham Dana, LLP (currently Bingham McCutchen), where he
represented lenders and borrowers in a variety of financing, bankruptcy and
corporate transactions. Mr. Schooley is a director of Ancora Capital &
Management Group LLC, Petry Holding Inc. and Mother's Kitchen, Inc. and a
director and a member of the compensation committee of FPM, LLC
Ms. Lynn Tilton, age 45, has worked in the financial services industry for
over twenty years and has been involved with distressed asset management,
financial engineering, loan sales and trading, investment banking and senior
management. In 2000, Ms. Tilton founded Patriarch Partners, LLC (together with
its affiliates, "Patriarch") to develop and market innovative solutions for
distressed loan portfolios. Patriarch currently manages eight CDOs, two CLOs and
a private equity fund, together aggregating in excess of $4 billion of assets,
and currently oversees lending to approximately 500 companies. In addition,
Patriarch manages equity positions, including majority positions, in over 40
companies. Ms. Tilton's involvement in the distressed arena began in 1989 at
Oppenheimer & Co. as an asset manager for the Oppenheimer Horizon Fund. In
December, 1990, she joined Kidder, Peabody & Co., Inc. to head the effort in
distressed debt research and direct certain proprietary investments. From 1993
to 1994, Ms. Tilton was a Managing Director and Head of Sales at M.J. Whitman,
Inc. From 1994 through early-1998, she was a Managing Director, Principal and
Partner at Amroc Investments, Inc. where she led the sales desk, and negotiated
purchases and sales of distressed bank loans and bonds. Prior to her experience
in the distressed debt market, Ms. Tilton spent eight years in mergers and
acquisitions, corporate finance, and high yield finance. Ms. Tilton began her
career in mergers and acquisitions at Morgan Stanley & Co. and, continued her
career in corporate finance and merchant banking at Goldman, Sachs & Co. and
Merrill Lynch.
Mr. Michael Scinto, age 45, is a Managing Director of Patriarch Partners,
LLC. Mr. Scinto was formerly with Woodside, an entity created to purchase
distressed senior secured loans, and in such capacity he managed a portfolio of
loans to and investments in middle market companies. Prior to joining Woodside,
Mr. Scinto was with National Cooperative Bank, a
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nationally chartered bank focusing on the cooperatively organized business
sector, where he created their small business lending group. Mr. Scinto has also
served with financial institutions including Quest Equities, a sub-debt and
equity investment fund, Bank of New England and Fleet National Bank. Before
entering the financial services industry he was a lawyer with the Hartford,
Connecticut based firm of Fazzano & Dubay. Mr. Scinto is also a director of
Lakewest Group, LLC and Fetco Home Decor, Inc. and a director and a member of
the audit committee of Glenoit LLC
Recommendation of The Board of Directors.
The Board of Directors unanimously recommends that stockholders vote FOR
the election of the three Class II director nominees listed above. If not
otherwise specified, proxies will be voted FOR this proposal.
Information Regarding Continuing Directors
Class I directors whose present terms continue until 2005:
Mr. E. Bulkeley Griswold, age 65, 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, the Trust
Company of Connecticut and a number of other privately held companies. He has
been a member of the Board of Directors since 1989. It is a condition to the
closing of the Recapitalization that Mr. Griswold tender his resignation from
the Board of Directors.
Mr. John J. Holton, age 71, 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 Corporations) he had key assignments as President of Burroughs K.K.
JAPAN, Vice President and General Manager of American Pacific Division and
Strategic Account Management. Mr. Holton has been a member of the Board of
Directors since 1998.
Mr. Robert H. Steele, age 65, is Vice Chairman of the John Ryan Company, a
banking services company, which position he has held since 1998. He previously
held the positions of Executive Vice President during 1997 and Senior Vice
President from 1992 to 1997. Mr. Steele is also Chairman of Moore Medical
Corporation (a distributor of medical, surgical and pharmaceutical products),
and a director of NLC Insurance Companies and the New York Mercantile Exchange.
He has been a member of the Board of Directors since 1978. It is a condition to
the closing of the Recapitalization that Mr. Steele tender his resignation from
the Board of Directors.
Class III directors whose present terms continue until 2006:
Mr. Lyman C. Hamilton, Jr., age 77, is an investment manager and was
formerly Chief Executive Officer and President of InterDigital Communications
Corporation, a specialized communications company, from 1993 to 1994. He 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
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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
Videonet, Inc., a privately held provider of videoconferencing services. He has
been a member of the Board of Directors since 1985. It is a condition to the
closing of the Recapitalization that Mr. Hamilton tender his resignation from
the Board of Directors.
Mr. James C. Mavel, age 58, joined Scan-Optics 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
Corporation. He has been a member of the Board of Directors since 1996.
Mr. Ralph J. Takala, age 64, is an independent business advisor and
financial consultant. In connection with that role, he served as Interim Chief
Financial Officer of PictureTel Corporation, an SEC registrant, from 2000 to
2001. Previously, he served as a partner at Ernst & Young, LLP, an international
professional services firm, from 1978 to 1995. For a seven year period ending in
1988 at Ernst & Young, LLP, Mr. Takala served as engagement partner for
Scan-Optics. He has been a member of the Board of Directors since 2003.
Share Ownership of Management
The following table sets forth certain information regarding the beneficial
ownership of shares of common stock as of May 17, 2004 of each director, each
nominee for director, each executive officer named in the Summary Compensation
Table contained elsewhere in this proxy statement and the directors and
executive officers of the Company as a group. Other than our CEO, we know of no
persons with beneficial ownership of more than 5% of our voting stock as of May
17, 2004. Except as noted, each stockholder listed has sole voting and
investment power with respect to the shares shown as being beneficially owned by
such stockholder. The address for the individuals listed below is c/o
Scan-Optics, Inc., 169 Progress Drive, Manchester, Connecticut 06040, except
that the address for Messrs. Schooley and Scinto and Ms. Tilton is c/o Patriarch
Partners, LLC, 112 South Tryon Street, Suite 700, Charlotte, NC 28284.
Percentage
of Common Stock
Name Number of Shares (1) Outstanding
--------------------------- ---------------- -------------------
Logan Clarke, Jr. 50,600 *
Richard J. Coburn 55,200 *
Richard C. Goyette 215,232 2.8%
E. Bulkeley Griswold 86,500 1.2%
Lyman C. Hamilton, Jr. 55,000 *
John J. Holton 25,000 *
Joel K. Howser 175,749 2.3%
James C. Mavel 422,152 5.4%
Clarence W. Rife 202,754 2.7%
Robert H. Steele 78,000 1.0%
Ralph J. Takala 0
Michael J. Villano (2) 255,205 3.3%
Scott Schooley(3) 0
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Lynn Tilton (4) 0
Michael Scinto(5) 0
Directors and executive officers as a
group (14 persons) 1,760,069 19.5%
(*) Ownership is less than 1%.
(1) Includes the following number of shares subject to options exercisable
within 60 days of May 24, 2004: Logan Clarke, Jr., 50,000 shares; Richard
J. Coburn, 50,000 shares; Richard C. Goyette, 214,750 shares; E. Bulkeley
Griswold, 50,000 shares; Lyman C. Hamilton, Jr., 50,000 shares; John J.
Holton, 25,000 shares; Joel K. Howser, 174,667 shares; James C. Mavel,
361,667 shares; Clarence W. Rife, 199,467 shares; Robert H. Steele, 50,000
shares; Michael J. Villano, 243,083 shares (includes 50,000 options granted
to Mary Villano, Michael Villano's wife, on April 26, 2004); and all
directors and executive officers as a group, 1,605,300 shares.
(2) Mr. Villano is deceased, and all shares are held by his estate, except for
50,000 options that were granted to Mary Villano, Michael Villano's wife,
on April 26, 2004.
(3) Mr. Schooley is the President of Woodside Capital Management, LLC, a
company that, among other things, provides advisory services to ARK
(through Patriarch Partners, LLC) with respect to Scan-Optics.
(4) Under rules of the Securities and Exchange Commission relating to
beneficial ownership, neither Ms. Tilton nor ARK or its affiliates,
beneficially own any shares of common stock of Scan-Optics as of the record
date (i.e. May 17, 2004). Effective upon the Recapitalization described in
"Proposal Two - Approval of Amended and Restated Certificate of
Incorporation of Scan-Optics," ARK will beneficially own 36,256,407 shares
of common stock of Scan-Optics, of which 6,815,114 such shares will be
subject to repurchase by Scan-Optics upon exercise of outstanding options
under the 2001 Executive Officer Stock Plan, all as described under
Proposal Two. Ms. Tilton is the manager of and indirectly owns
substantially all of Patriarch Partners, LLC, the collateral manager of
ARK.
(5) Mr. Scinto is an employee of Patriarch Partners, LLC, the collateral
manager of ARK.
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EXECUTIVE COMPENSATION
Executive Officers
Our current executive officers, their ages, business experience over at
least the last five years and period of time as an officer of Scan-Optics are
described below.
Mr. James C. Mavel, age 58, joined Scan-Optics 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
Corporation. He has been a member of the Board of Directors since 1996.
Mr. Joseph P. Crouch, age 41, joined Scan-Optics in March 1999 and was
appointed to the position of Vice President - Manufacturing Services Division in
November 1999. Prior to joining the Company, Mr. Crouch was Director of
Manufacturing Operations for CalComp's Input Technologies Division. Mr. Crouch
had over ten years of contract manufacturing experience before joining the
Company.
Mr. Richard C. Goyette, age 52, joined Scan-Optics in March 1996 as Vice
President - Sales and Marketing. Prior to joining the Company, from 1993 through
1995, Mr. Goyette was Vice President of the Imaging Systems Division of Unisys.
From 1992 to 1993, he was Vice President of the Software Products Group of
Unisys. From 1990 to 1992 he was Vice President of Corporate Information
Productivity Systems of Unisys. He is currently Vice President - Sales and
Marketing.
Mr. Joel K. Howser, age 56, joined Scan-Optics in February 1997 as Vice
President - Marketing. In December of 1997, Mr. Howser assumed the
responsibility of Vice President - Product Development. Prior to joining the
Company, from 1989 through 1996, he was Director of Development for Unisys in
its image program. Mr. Howser had twenty years of experience in transaction
processing and OCR/image development prior to joining Unisys. He is currently
Vice President - Software Development.
Mr. Clarence W. Rife, age 64, has been employed by Scan-Optics since 1969
and was appointed to the position of Vice President in 1975. He is currently
Vice President - Access Services Division and Hardware Engineering.
Mr. Peter H. Stelling, age 53, joined Scan-Optics in 2003 as Vice President
of Finance and in 2004 was named Chief Financial Officer, Vice President,
Treasurer and Assistant Corporate Secretary. In his prior assignment, he was
Senior Vice president of Finance and Chief Financial Officer of Gale Group, an
operating unit of the Thomson Corporation. Prior to Gale, Mr. Stelling served as
Vice President of Finance at Chambers Engraving Group, a unit of
Dyson-Kissner-Moran, Inc, a New York based investment firm.
-13-
Summary Compensation Table
The following table sets forth information concerning the compensation paid
to the Chief Executive Officer and the four other most highly compensated
executive officers of Scan-Optics in 2003 for services rendered in all
capacities during the fiscal years ended December 31, 2003, 2002 and 2001.
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
Other Annual Securities All Other
Name and Salary Bonus Compensation Underlying Compensation ($)
Principal Position Year ($) ($)(1) ($) Options (#) (2)
- ----------------------------------- ------- ------------- ------------ ----------------- ------------------ -------------------
James C. Mavel 2003 316,250 118,500 17,042 (3) 125,000 22,302
Chairman of the Board, 2002 262,500 55,466 23,128 (4) 0 15,333
Chief Executive Officer, Director 2001 250,000 100,000 27,228 (5) 250,000 34,834
and President
Richard C. Goyette 2003 165,880 61,875 13,100 (6) 72,500 14,158
Vice President 2002 147,900 32,170 17,973 (7) 0 3,212
Sales and Marketing 2001 145,000 58,000 22,930 (8) 145,000 12,223
Joel K. Howser 2003 148,720 55,875 7,200 (9) 65,000 13,242
Vice President 2002 132,600 28,842 7,800 (9) 0 8,925
Software Development 2001 130,000 52,000 7,800 (9) 130,000 17,690
Clarence W. Rife 2003 148,720 55,875 7,200 (9) 65,000 20,691
Vice President 2002 132,600 28,842 7,800 (9) 0 16,023
Access Services Division 2001 130,000 52,000 11,318(10) 130,000 18,585
and Hardware Engineering
Michael J. Villano (11) 2003 189,451 66,375 12,849(12) 70,000 11,944
Chief Operating Officer, 2002 147,000 31,061 14,724(13) 0 11,779
Chief Financial Officer, 2001 140,000 56,000 15,056(14) 140,000 13,836
Treasurer
(1) Represents a cash bonus earned by such individuals in the applicable fiscal
year and paid during the next fiscal year.
(2) These amounts include an employer match under the Scan-Optics, Inc.
Retirement Savings Plan, a qualified plan under Section 401 of the Internal
Revenue Code of 1986 (the "Retirement Plan") and term life, disability and
other insurance premiums paid by Scan-Optics. For 2003, the respective
amounts are as follows: Mr. Mavel, $7,936 to Retirement Plan and $14,366 in
insurance premiums; Mr. Goyette, $7,557 to Retirement Plan and $6,601 in
insurance premiums; Mr. Howser, $6,802 to Retirement Plan and $6,440 in
insurance premiums; Mr. Rife, $6,802 to Retirement Plan and $13,889 in
insurance premiums; and Mr. Villano, $8,351 to Retirement Plan and $3,593
in insurance premiums.
(3) Auto allowance ($5,825), country club membership ($6,442) and tax
preparation services ($4,775).
-14-
(4) Auto allowance ($8,421), country club membership ($8,554) and tax
preparation services ($6,153).
(5) Auto allowance ($8,796), country club membership ($8,824) and tax
preparation services ($9,608).
(6) Auto allowance ($7,200) and tax preparation services ($5,900).
(7) Includes auto allowance ($7,800) and tax preparation services ($8,490).
(8) Auto allowance ($7,800), country club membership ($7,741) and tax
preparation services ($7,389).
(9) Auto allowance.
(10) Auto Allowance ($7,800) and country club membership ($3,518).
(11) Mr. Villano passed away in early 2004.
(12) Auto allowance ($7,200) and country club membership ($5,649).
(13) Auto allowance ($7,800) and country club membership ($6,924).
(14) Auto allowance ($7,800) and country club membership ($7,256).
Options Granted in Last Fiscal Year
The following table sets forth information on options granted in 2003 to
the executive officers listed in the Summary Compensation Table:
Individual Grants
-----------------------------------
% of Total
Options Exercise
Options Granted to or Grant Date
Granted Employees in Base Price Expiration Present Value
Name # Fiscal Year ($/Sh) Date ($) (1)
- ---------------------------------------------------------------------------------------------------------
James C. Mavel 125,000 17.4% .28 3/18/13 32,500
Richard C. Goyette 72,500 10.1% .28 3/18/13 18,850
Joel K. Howser 65,000 9.1% .28 3/18/13 16,900
Clarence W. Rife 65,000 9.1% .28 3/18/13 16,900
Michael J. Villano 70,000 9.8% .28 3/18/13 18,200
(1) Present value determination was made using a Black-Scholes option pricing
model. The actual value, if any, an executive may realize will depend on
the excess of the stock price over the exercise price on the date the
option is exercised, so that there is no assurance the value realized by an
executive will be at or near the value estimated by the Black-Scholes
model. The estimated values under that model are based on the following
assumptions:
-15-
1. Volatility 1.102
2. Interest Rate 3%
3. Time to Exercise 10 years
In general, options granted to the named executive officers under the
Company's Stock Option Plans vest in installments of one-third commencing one
year after grant. The option exercise price is equal to the fair market value of
a share of Common Stock on the date of grant. Options vest in full upon a
reorganization, merger or consolidation in which the Company is not the
surviving corporation and upon other specified events.
-16-
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table summarizes options exercised during 2003 and presents
the value of unexercised options held by the named executives at fiscal
year-end:
Number of Value*
Securities of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options Options
On Exercise Realized* at Fiscal at Fiscal
Name (#) ($) Year-End Year-End
- -----------------------------------------------------------------------------------------------
James C. Mavel 0 0 320,000 (1) $ 55,000 (1)
125,000 (2) $ 22,500 (2)
Richard C. Goyette 0 0 190,583 (1) $ 31,900 (1)
72,500 (2) $ 13,050 (2)
Joel K. Howser 0 0 153,000 (1) $ 28,600 (1)
65,000 (2) $ 11,700 (2)
Clarence W. Rife 0 0 183,800 (1) $ 30,156 (1)
65,000 (2) $ 11,700 (2)
Michael J. Villano 0 0 180,750 (1) $ 30,800 (1)
70,000 (2) $ 12,600 (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 fiscal year end ($0.46 per
share).
Executive Employment Agreements
Scan-Optics 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
Scan-Optics or Mr. Mavel. Under the Employment Agreement, Mr. Mavel is entitled
to severance benefits consisting of one-year's base pay and continued
participation for a year in our health and disability insurance plans if
Scan-Optics terminates Mr. Mavel's
-17-
employment without cause (as defined in the Employment Agreement) prior to a
change in control of Scan-Optics or if Mr. Mavel, prior to a change in control,
terminates his employment because Scan-Optics has significantly diminished his
job responsibilities.
Following a change in control of Scan-Optics, Mr. Mavel would be 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. 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; the failure of a
successor company to assume the obligations of Scan-Optics under the Employment
Agreement in connection with a liquidation, merger or consolidation of
Scan-Optics or a transfer of all or substantially all of its assets; or any
material breach of the agreement by Scan-Optics or any successor. Upon any such
termination of employment, Mr. Mavel will receive a lump sum payment equal to
the sum of (a) two and a half times his base pay, (b) two and a half times his
incentive payments from the preceding year (or the second or third preceding
year, if greater), (c) two and a half times Scan-Optics' 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 (d) the value of all his options
to acquire Scan-Optics stock that will not become exercisable on account of his
termination. The lump sum payment is 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. In addition, Mr. Mavel's health,
disability and life insurance coverages will continue for two years following
termination of employment.
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 Scan-Optics 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 our outstanding securities or if
over a two-year period the members of our Board of Directors at the beginning of
the period (together with any persons nominated by a two-thirds majority of such
directors) cease to constitute a majority of the Board. It is possible that the
Recapitalization may be deemed a change in control under this definition.
Executive Severance Agreements
Scan-Optics has adopted severance agreements for executive officers,
including but not limited to each of the named executive officers (other than
the CEO, discussed above) in the summary compensation table. These agreements
provide severance benefits in the event of an involuntary termination of
employment with Scan-Optics (except on account of death, disability or cause) or
a voluntary termination of employment with Scan-Optics where good reason exists,
in either case following a change in control of Scan-Optics. A change in control
is defined in the same way as in Mr. Mavel's Employment Agreement described
above. On an involuntary termination following a change in control, each
executive officer is entitled to a lump sum payment equal to the sum of (a) two
and a half times his base pay and commission pay, (b) two and a half times his
incentive payments from the preceding year (or the second or third preceding
year, if greater), (c) two and a half times Scan-Optics' matching contribution
to its Retirement Savings Plan that would be made if he deferred under such Plan
four percent (or such higher percentage as may be eligible for matching
contributions) of the amount of base
-18-
pay, commission pay and incentive pay, and (d) the value of all options to
acquire Scan-Optics common stock that will not become exercisable on account of
the executive officer's termination. The lump sum payment is 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. In
addition, the executive officer's insurance coverages will continue for two
years following termination. These benefits generally will be in addition to any
other benefits that executive officers are entitled to receive from Scan-Optics.
Executive Insurance Agreement
Under an insurance agreement with Mr. Rife, Scan-Optics is obligated to
provide certain retirement and disability benefits. If Mr. Rife dies while in
the employ of Scan-Optics but prior to attaining the age of 65, Scan-Optics 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. If he
retires from Scan-Optics upon attaining the age of 65, or thereafter,
Scan-Optics 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.
To provide for the adequate funding of its obligations under the agreement,
Scan-Optics 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. Scan-Optics
has purchased and is obligated to maintain for the benefit of Mr. Rife, at
Scan-Optics' 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 will commence six months after a
determination of disability has been made and will continue until Mr. Rife
reaches the age of 65. The agreement provides for automatic termination if Mr.
Rife resigns or otherwise voluntarily terminates his employment other than by
reason of disability or retirement upon attaining the age of 65, or if his
employment is terminated by reason of gross misconduct.
-19-
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock during the period from
January 1, 1999 through December 31, 2003, with the cumulative total return on
the Russell 2000 Index and the NASDAQ Computer & Data Processing Index. The
comparison assumes $100 was invested on January 1, 1999 in the Company's Common
Stock and in each of the foregoing indices and assumes reinvestment of
dividends, if any. The performance shown is not necessarily indicative of future
performance. To the extent that this proxy statement has been or will be
specifically incorporated by reference into any filing by the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, this section of the proxy statement shall not be deemed to be so
incorporated, unless specifically otherwise provided in any such filing.
-20-
[GRAPHIC OMITTED]
Cumulative Total Return
-----------------------------------------------------------------------
31-Dec-98 31-Dec-99 31-Dec-00 31-Dec-01 31-Dec-02 31-Dec-03
SCAN-OPTICS, INC. 100.00 42.62 4.09 6.30 7.08 12.07
RUSSELL 2000 100.00 121.26 117.59 120.52 95.83 141.11
NASDAQ COMPUTER & DATA PROCESSING 100.00 216.79 113.10 88.84 61.04 80.89
-21-
Report of the Board of Directors and the Stock Options
and Executive Compensation Committee
The following report shall not be deemed to be "soliciting material" or to
be "filed" with the Securities Exchange Commission, nor shall such information
be incorporated by reference into any future filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.
The Stock Options and Executive Compensation Committee is responsible for
making recommendations to the full Board of Directors with respect to the
compensation of our Chief Executive Officer and other executive officers of
Scan-Optics, and with respect to long- and short-term incentive compensation
awards. It also makes grants under our stock option plans for employees. The
members of the Stock Options and Executive Compensation Committee are Messrs.
Clarke, Coburn and Holton (Chairman). All members are non-employee directors,
and no member has any direct or indirect material interest in or relationship
with Scan-Optics outside of his position as director.
During 2003, the Stock Options and Executive Compensation Committee met
separately from the Board of Directors on one occasion, and other decisions were
made in joint session with the other members of the Board of Directors. Mr.
Mavel, the sole member of management who serves on the Board of Directors, did
not participate in decisions specifically concerning his compensation. The
policies of the Board and the Stock Options and Executive Compensation Committee
and their application in 2003 are described below.
The principal components of our executive compensation program are base
salary, bonus compensation and stock options. Actual salary changes are based on
performance. Bonus awards for executive officers and other key members of
management are paid only if Scan-Optics meets specified goals. Special awards
can be granted to various members of management and other key employees based on
merit.
Stock options are intended to align the interests of top management with
the interests of stockholders. The Committee has the authority to determine the
individuals to whom stock options are awarded, the terms on which option grants
are made, and the number of shares subject to each option.
The overall objective of our compensation program is to reward performance
in a manner that is competitive with comparable companies and that provides
incentives for managers to produce steadily improved results. Historically, we
have carefully measured the various compensation components - base salary,
bonuses, options and other fringe benefits - against those offered by peer
companies of similar size to ensure that Scan-Optics' executives and key
employees are compensated in a fair manner. In December 2002, we adopted a 2003
business plan which includes key financial performance goals to be met by the
Company that largely determines the amount of incentive compensation available
to the seven executive officers and twenty-three other members of management and
that includes various incentives for these officers and other members of
management if Scan-Optics exceeds the performance goals included in the plan. We
are satisfied that the compensation program included in our 2003 business plan
is consistent with the overall objective of providing fair and competitive
compensation that offers adequate incentives for the achievement of our
performance goals.
-22-
The Committee approved raises for the seven executive officers in June of
2003. The executive officers had not received a raise in the prior 3 years.
These raises represented cost of living and merit increase adjustments and
ranged from 4% to 10% of base salary.
In accordance with the 2003 business plan, the Committee approved awards of
bonus compensation and stock options for the achievement of the performance
goals included in the 2003 business plan. Achievement of the performance goals
was based on the consolidated financial statements of Scan-Optics as of and for
the year ended December 31, 2003, as audited by Ernst & Young. Under the plan, a
total of $721,000 in bonus compensation was earned, of which $470,000 was paid
to the seven executive officers and $251,000 was paid to the twenty-three other
key members of management.
In making decisions with respect to the Chief Executive Officer's
compensation, the Committee considers, in addition to the factors described
above, publicly available market data for similarly situated chief executive
officers in our geographic area.
Board of Directors and Stock Options and Executive Compensation Committee,
*Logan Clarke, Jr. Lyman C. Hamilton, Jr.
*Richard J. Coburn James C. Mavel
*John J. Holton, Chairman Robert H. Steele
E. Bulkeley Griswold Ralph J. Takala
(*) indicates members of the Stock Options and Executive Compensation Committee
-23-
Report of the Audit Committee
The following report, except for matters set forth under "Independent
Auditor Fee Information" and "Policy of Audit Committee on Pre-Approval of Audit
and Permissible Non-Audit Services of Independent Accountant," shall not be
deemed to be "soliciting material" or to be "filed" with the Securities Exchange
Commission, nor shall such information be incorporated by reference into any
future filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended.
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee (the "Committee") oversees, on behalf of the Board of
Directors, the quality and integrity of the accounting, auditing and financial
reporting practices of Scan-Optics. Management has the primary responsibility
for the financial statements and the reporting process, including the systems of
internal controls.
In discharging its oversight responsibility as to the audit process, the
Committee obtained from the independent auditors a formal written statement
describing all relationships between the auditors and Scan-Optics that might
bear on the auditors' independence consistent with the Independence Standards
Board Standard No. 1, "Independence Discussions with Audit Committees." The
Committee discussed with the auditors any relationships that may affect their
objectivity and independence, including fees for non-audit services, and
satisfied itself as to the auditor's independence. The Committee also discussed
with management and the independent auditors the quality and adequacy of
Scan-Optics' internal controls. The Committee reviewed with the independent
auditors their audit plan and audit scope.
The Committee discussed and reviewed with the independent auditors all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communications with Audit Committees" and, with and without management present,
discussed and reviewed the independent auditors' examination of the financial
statements.
The Committee discussed and reviewed the audited financial statements of
Scan-Optics as of and for the year ended December 31, 2003, with management and
the independent auditors. This review included a discussion of the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the financial
statements.
Based on the reviews and discussions described above, the Committee
recommended to the Board of Directors that the audited financial statements of
Scan-Optics be included in its Annual Report on Form 10-K for the year ended
December 31, 2003, for filing with the Securities and Exchange Commission, and
the Board of Directors approved this recommendation.
-24-
Independent Auditor Fee Information
Set forth below is a summary of the fees for professional services provided
by Ernst & Young LLP, in each of the last two fiscal years, in each of the
following categories.
2003 2002
-------------- ---------------
Audit Fees $ 159,000 $ 151,500
Audit-Related Fees 15,000 15,000
Tax Fees 65,385 61,745
All Other Fees 0 0
-------------- ---------------
Total Fees $ 239,385 $ 228,245
============== ===============
Audit fees were associated with the annual audit, reviews of the Company's
quarterly reports on Form 10-Q, and a statutory audit required internationally.
Audit-related fees were associated with the audit of the Company's 401(k) Plan
and the Employee Stock Ownership Plan. Tax fees included tax compliance, tax
advice and tax planning.
Policy of Audit Committee on Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Accountant
The Audit Committee pre-approves all audit and non-audit services provided
by the independent accountants prior to the engagement of the independent
accountants with respect to such services. All of the audit fees and services
described above were subject to advance approval of the Audit Committee.
Audit Committee,
Ralph J. Takala, Chairman
Robert H. Steele
Lyman C. Hamilton, Jr.
-25-
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and officers and persons who own more than 10% of our 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 us copies of all such forms they file. To our knowledge,
based on a review of copies of such forms we have received, we believe that all
of our officers and directors filed the required forms on or before their due
dates, except that none of our officers who were granted options in 2003 filed
Form 4 Statements of Changes in Beneficial Ownership to reflect options granted
in 2003. The Company is working with these officers to file Form 4 Statements of
Changes in Beneficial Ownership to reflect these grants.
-26-
PROPOSAL TWO - APPROVAL OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SCAN-OPTICS
General Information About the Proposed Recapitalization
On March 30, 2004, we entered into a Third Amended and Restated Credit
Agreement (the "Credit Agreement") with ARK CLO 2000-1, Limited ("ARK"), ZOHAR
CDO 2003-1, Limited ("Zohar," and together with ARK, the "Lenders") and
Patriarch Partners Agency Services, LLC, as agent (the "Agent"), to restructure
existing secured obligations of Scan-Optics to ARK which had a maturity date of
December 31, 2004, described under the heading "Terms of the Restructuring and
Recapitalization" on page 31 of this proxy statement and referred to in this
proxy statement as the "Restructuring."
Pursuant to the Credit Agreement, our Board of Directors has agreed to use
its best efforts, subject to its fiduciary duties, to effect a recapitalization
of Scan-Optics in exchange for an extension of the current maturity date (which
is June 1, 2005) of all obligations to the Lenders under the Credit Agreement
until March 30, 2007. The key elements of the proposed recapitalization are:
o cancellation of $3.8 million of mandatorily redeemable preferred stock
with a redemption date of June 1, 2005 held by ARK, which redeemable
preferred stock allows the holder, under certain circumstances, to
exercise 46.67% of the voting power of Scan-Optics on a fully-diluted
basis;
o cancellation of a warrant held by ARK exercisable after December 31,
2004 for 33.2% of our fully-diluted common stock as of the warrant's
issuance date at $0.02 per share; and
o issuance of common stock to ARK so that following such issuance ARK
will own 79.8% of our fully-diluted common stock, subject to dilution
for certain options which are currently granted, or may in the future
be granted, to our key employees.
The proposed recapitalization, which we will refer to as the
"Recapitalization" in this proxy statement, is described under the heading
"Terms of the Restructuring and Recapitalization" on page 31 of this proxy
statement.
Because our stock is not listed on a stock exchange or traded on Nasdaq, we
have no obligation to, and are not, submitting the Restructuring or the
Recapitalization to stockholders for approval. In order to complete the
Recapitalization, however, we must increase our authorized common stock by
amending our certificate of incorporation. Any amendment to our certificate of
incorporation must be approved by stockholders holding a majority of our issued
and outstanding common stock, the only class of our stock which currently has
voting rights. If you do not approve the amended and restated certificate of
incorporation attached to this proxy statement as Exhibit A, we will be unable
to complete the Recapitalization, with the consequences described below,
including the maturity of approximately $13.6 million in outstanding obligations
to ARK on June 1, 2005 unless we are able to negotiate modified terms.
-27-
In this section of the proxy statement, we describe the reasons for the
Restructuring and the proposed Recapitalization, the alternatives that we
considered, the specific terms of the Restructuring and proposed
Recapitalization, the effects of the proposed Recapitalization on Scan-Optics,
our stockholders and our management and the proposed amended and restated
certificate of incorporation which will, among other things, increase our
authorized common stock to enable us to complete the Recapitalization.
Background of the Recapitalization
Existing Credit Arrangements
----------------------------
Scan-Optics entered into a credit arrangement with Fleet National Bank,
formerly known as BankBoston, N.A., in 1999 pursuant to a Second Amended and
Restated Loan Agreement (the "Original Loan Agreement"). From the third quarter
of 1999 through the end of 2000, the Company was in default under the Original
Loan Agreement as a result of its failure to remain in compliance with certain
financial covenants. In January 2001, Fleet assigned record ownership of its
interest under the Original Loan Agreement to ARK, a structured finance vehicle
managed by Patriarch Partners, LLC ("Patriarch Partners"), and Scan-Optics
entered into a waiver agreement with ARK pursuant to which ARK agreed to waive
certain defaults under the Original Loan Agreement through July 1, 2001. During
2001, ARK entered into two additional waiver agreements, which provided
Scan-Optics temporary relief from compliance with the financial covenants of the
Original Loan Agreement. In December 2001 (the "2001 Restructuring"), the
Company restructured its loan agreements with ARK to, among other things,
forgive a portion of the outstanding term debt. Under the restructured credit
terms, Scan-Optics had available a $10 million revolving line of credit and a $2
million term loan, both accruing interest at prime plus 2% and due December 31,
2004, with the term loan subject to prepayment in an amount equal to 50% of
excess cash flow (cash flow not needed to pay financial obligations then due) in
any calendar quarter. As part of the 2001 Restructuring and in exchange for the
forgiveness of $6.5 million of term debt, Scan-Optics issued to ARK shares of
Series A preferred stock with a mandatory redemption on December 31, 2004 at
$3.8 million plus interest at prime plus 2% and a warrant representing the right
to purchase shares of common stock representing 33.2% of the then outstanding
common stock plus shares reserved under outstanding options, exercisable after
December 31, 2004 for $0.02 per share. Upon the exercise of the warrant, ARK
would be entitled to 46.67% of our fully-diluted voting power based on its
Series A preferred stock and, together with its right to vote 33.2% of the
common stock on a fully-diluted basis, would control well in excess of a
majority of our voting power. See "Effects of the Proposed Recapitalization -
Dilution" beginning on page 37 of this proxy statement.
At March 31, 2004, the Company had more than $13.6 million in outstanding
borrowings, including the mandatorily redeemable preferred stock, under the
credit arrangements with ARK.
Reasons for the Recapitalization; Alternatives Considered
---------------------------------------------------------
In 2003, the Board of Directors of Scan-Optics began a series of
discussions regarding the credit arrangements with ARK, in light of the
scheduled maturity date of December 31, 2004 for all obligations under the
credit arrangements, aggregating approximately $12.7 million including the
mandatorily redeemable preferred stock. Based on its estimate of the projected
financial performance of the Company, the Board of Directors understood that a
refinancing would be required before the obligations to ARK became due under the
credit arrangements, because the Company was unlikely to have sufficient cash
flow to repay its obligations in full on maturity. The Board of Directors also
determined that any restructuring must enable the Company to
-28-
obtain an unqualified opinion from the Company's independent auditors regarding
the Company's status as a "going concern." The Company had received qualified
audit opinions twice before, for the years ended December 31, 2000 and December
31, 2001. During 2003, the Company became concerned that further qualified
opinions would have negative repercussions for certain domestic and foreign
customer relationships. Further, the Board of Directors believed that reducing
and restructuring the Company's indebtedness through a refinancing would provide
opportunities to further improve the financial position of the Company by
freeing up cash flow to invest in strategic business growth.
At a meeting held on September 15, 2003 and after interviews with a number
of investment banking firms by an ad hoc committee of the board, the Board of
Directors engaged Colchester Capital, LLC to advise the Company with respect to
a potential restructuring of the ARK credit arrangement as well as potential
alternative refinancings available to the Company. Colchester Capital is a
private investment and advisory firm which advises and considers investments in
companies which need fresh capital to resume their growth or are overleveraged
and need additional liquidity or restructuring and recapitalization. The firm
focuses on a wide range of industries, including the technology, industrial,
healthcare and consumer sectors and has experience with a broad range of
transactions including equity and debt financings, mergers and acquisitions and
restructurings and leveraged finance.
Representatives of Scan-Optics and Colchester Capital met with
representatives of Patriarch Partners on November 11, 2003. At this meeting,
Patriarch Partners advised us that ARK would be unwilling to forgive any
outstanding term or revolving debt. Patriarch Partners expressed ARK's
willingness to consider canceling ARK's $3.8 million redeemable preferred stock
and the warrant, extending the maturity on the obligations to ARK and expanding
its commitment under the revolving line of credit in exchange for a 79.8% voting
interest in Scan-Optics. A second meeting was scheduled to discuss the proposal
for the restructuring in greater detail.
During the period from November 2003 through March 2004, Colchester Capital
and Scan-Optics continued to discuss the terms of a possible restructuring with
ARK. A meeting was held with representatives of Patriarch Partners on November
26, 2003 and, after the November 26 meeting, a term sheet for a proposed
restructuring was prepared and provided to the Board of Directors. The Board of
Directors approved the term sheet on December 3, 2003 and the term sheet was
presented to Patriarch Partners immediately thereafter. Throughout the period
from December 2003 through March 2004, extensive negotiations were conducted
with Patriarch Partners regarding the terms of the proposed Restructuring, which
focused on the following primary goals: extending the maturity of the
obligations to ARK; reducing amortization during the term of the credit
arrangement; obtaining a term loan working capital facility to increase cash
flow available for our strategic growth; and modifying certain financial
covenants which, based on our 2004 business plan, would be unlikely to be
achieved for the second quarter of 2004.
During the period from November 2003 to March 2004, at the request of the
Board of Directors, Colchester Capital also explored alternatives to a
restructuring with ARK. It contacted a range of private equity funds and senior
lenders who specialize in financing small and mid-market company
recapitalizations to discuss refinancing the senior debt and mandatorily
redeemable preferred stock held by ARK as well as other potential alternative
financing arrangements for Scan-Optics. Although a number of the potential
financing sources met with us or conducted due diligence reviews, none provided
us with a term sheet. Further, in these preliminary conversations, the range of
terms proposed by the potential financing sources would have provided current
stockholders with less advantageous terms than the terms
-29-
ultimately negotiated in the proposed Recapitalization. We also had discussions
with a potential strategic buyer with whom Scan-Optics had held discussions in
the past. The buyer was not interested in either an investment in, or an
acquisition of, Scan-Optics.
We also considered refinancing alternatives under the Federal bankruptcy
laws but deemed a transaction with ARK superior to a reorganization under the
Federal bankruptcy laws since the latter would be likely to terminate the entire
equity interest of the stockholders of the Company. Under the Restructuring,
including the Recapitalization proposed herein, existing stockholders of the
Company will retain an approximately 20% interest in the Company before dilution
for management shares and options described in "Terms of the Restructuring and
Recapitalization."
The senior management and representatives of Colchester Capital reported
the results of their negotiations with ARK and their pursuit of potential
alternatives to a restructuring with ARK to the Board of Directors at a meeting
held on December 2, 2003. At formal meetings of the Board of Directors held on
January 26, 2004 and February 25, 2004 and at informal meetings conducted by
telephone at various times during the first quarter of 2004, the Board of
Directors discussed and evaluated various refinancing alternatives, including
the proposed Restructuring. During the afternoon of March 10, 2004, our Board of
Directors met to discuss the proposed Restructuring and the terms of the Credit
Agreement with our management, legal advisors and Colchester Capital. After full
discussion, the Board of Directors unanimously approved the Restructuring
pursuant to the Credit Agreement, including our obligation to use our best
efforts, subject to the fiduciary duties of the Board of Directors, to effect
the Recapitalization.
In determining whether to approve the Restructuring, the Board of Directors
considered several factors, including:
o if the Recapitalization is approved, the maturity of all of our
indebtedness to ARK and the other lenders under the Credit
Agreement would be extended to March 30, 2007, alleviating a
serious weakness in our current capital structure;
o if the Recapitalization is approved, our obligation to redeem the
existing Series B preferred stock for $3.8 million plus accrued
interest on June 1, 2005 would be terminated;
o ARK already has the contingent right to exercise well in excess
of a majority of our voting power upon exercise of its warrant
any time after December 31, 2004 and the exercise of its voting
rights under its Series A Preferred Stock, and consequently would
be able to exert significant voting power absent the
Recapitalization.
o the Recapitalization would eliminate the warrants and the Series
B preferred stock and simplify our capital structure, which may
generate increased investor interest;
o the addition of a term loan working capital facility of $1.5
million would provide us with additional working capital to
expand our business;
o under the restructured debt, our current obligation to prepay
term debt with 50% of our available cash flow not needed to pay
obligations would be replaced with a less onerous obligation to
pay $90,000 of such principal annually, which would allow us to
use such excess cash flow to expand our business;
-30-
o having contacted a range of alternative providers of capital
during the preceding four months through the efforts of
Colchester Capital, there were no viable alternatives reasonably
likely to provide more advantageous terms to the Company and its
stockholders in the timeframe necessary for the Company.
After considering these factors, the Board of Directors determined that the
terms of the Restructuring were in the best interests of Scan-Optics and its
stockholders and approved the Restructuring. In reaching its decision, the Board
of Directors did not assign specific weights to particular factors, but rather
considered all factors as a whole. This discussion of the material factors is
not meant to be exhaustive, but includes the material factors considered by the
Board of Directors in approving the Restructuring.
Terms of the Restructuring and Recapitalization
Terms of Restructuring
----------------------
The Credit Agreement with the Lenders includes the following Restructuring
terms:
o Our secured term debt of $2 million and revolving debt of $10
million, of which $1,589,000 and $7,411,000, respectively, were
outstanding immediately prior to the Restructuring, were
exchanged for a $9 million term loan and a $2.5 million revolving
loan. The new term loan is payable in annual amounts of $90,000
beginning April 1, 2005 with the balance due at maturity. There
have been no borrowings to date under the new $2.5 million
revolving credit facility, which can be used for working capital
and other general business purposes. Borrowings against both such
loans will continue to accrue interest at a rate of prime plus
2%. The maturity date for these loans was extended from December
31, 2004 to June 1, 2005.
o An additional $1.5 million term loan working capital facility was
made available to us, with Scan-Optics obligated to repay $2
million at maturity on June 1, 2005. The term loan working
capital facility will accrue interest on $2 million at the prime
rate. There have been no borrowings to date under the term loan
working capital facility.
o Our financial covenants with respect to backlog, capital
expenditures and EBITDA were modified to enhance the financial
flexibility of the Company. As modified, we may not permit our
backlog to be less than $10 million in any fiscal quarter, we may
not make any capital expenditures in excess of $375,000 in any
fiscal year and we may not permit our consolidated earnings
before interest, taxes, depreciation and amortization (EBITDA)
for any period consisting of four consecutive fiscal quarters
ending (i) on March 31, 2004 to be less than $2,500,000; (ii) on
June 30, 2004 to be less than $1,765,000; (iii) on September 30,
2004 to be less than $1,000,000; (iv) on December 31, 2004 to be
less than $571,000; (v) on March 31, 2005 to be less than
$100,000; (vi) on June 30, 2005 to be less than $208,000; (vii)
on September 30, 2005 to be less than $391,000; (viii) on
December 31, 2005 to be less than $307,000; and (ix) on or after
March 31, 2006 to be less than $1,069,000.
o We have exchanged the $3.8 million mandatorily redeemable Series
A preferred stock held by the Lenders for $3.8 million of
mandatorily redeemable Series B preferred stock, which Series B
preferred stock has substantially the same terms as the Series A,
except that the redemption date is extended from December 31,
2004 to June 1, 2005.
-31-
o We have agreed to use our best efforts, subject to the fiduciary
duties of the Board of Directors, to complete the
Recapitalization by July 1, 2004.
o Upon approval by our stockholders of the Recapitalization and the
satisfaction of all other closing conditions to the
Recapitalization, the maturity date for all of our secured
obligations to the Lenders will be further extended from June 1,
2005 to March 30, 2007.
Terms of Recapitalization
-------------------------
The Recapitalization includes the following elements, all of which will
occur simultaneously as part of a single integrated transaction which is
anticipated to occur shortly after our stockholders approve the amended and
restated certificate of incorporation:
o cancellation of the Series B Preferred Stock held by ARK, with a
face amount of $3.8 million and 46.67% of the voting power of the
Company, on a fully-diluted basis, if ARK were to exercise the
warrant;
o cancellation of the warrant held by ARK exercisable for common
stock equal to 33.2% of our fully-diluted common stock as of its
issuance date of December 31, 2001 for $0.02 per share;
o issuance by Scan-Optics of common stock to ARK so that following
such issuance ARK will own 79.8% of the fully-diluted common
stock of Scan-Optics, subject to dilution from the exercise of
options under the Amended and Restated 2001 Executive Officer
Stock Plan described below (the "2001 Executive Stock Plan"),
which represents approximately 15% of the issued and outstanding
common stock of the Company after the Recapitalization, and up to
5% additional dilution from stock options that may be granted in
the future under the 2004 Incentive and Non-Qualified Stock
Option Plan being submitted to our stockholders for approval at
our 2004 annual meeting (the "2004 Stock Plan"), as described in
"Proposal 3 - Approval of 2004 Incentive Plan" on page 42 of this
proxy statement, which could cumulatively reduce ARK's pro forma
fully-diluted common stock ownership to no less than 61.56%;
o termination of the master lease agreement dated as of August 2,
1999, as amended, and replacement of the $841,714 that we would
owe ARK under such agreement on June 1, 2005 with a new 4% Series
I cumulative redeemable preferred stock of Scan-Optics (the
"Series I Preferred Stock") which Scan-Optics must redeem on
March 30, 2007 or, if earlier, the occurrence of the maturity
date of the obligations under the Credit Agreement or the
repayment in full of the loans thereunder, for an amount equal to
$841,714 plus accrued and unpaid dividends and with other terms
specified in a Certificate of Designations which has been
approved by the Board of Directors, as permitted under our
Certificate of Incorporation and a copy of which is attached to
this proxy statement as Exhibit B, and which will be filed with
the Secretary of State of Delaware immediately following the
filing - of the amended and restated certificate of
incorporation;
o entering into such other agreements as ARK shall reasonably
request to effect the Recapitalization, including the
subscription agreement described immediately below.
-32-
Terms of the Common Stock Subscription Agreement
------------------------------------------------
Scan-Optics and ARK have entered into a subscription and repurchase
agreement attached to this proxy statement as Exhibit C, to consummate the
Recapitalization. The subscription and repurchase agreement includes the
following significant terms:
o We will issue an aggregate of 36,256,407 shares of common stock
to ARK. These shares will represent 79.8% of our fully-diluted
shares of common stock, assuming all outstanding options are
exercised and all shares are issued to the full extent of any
remaining plan reserves, other than under the 2004 Stock Plan
being proposed to our stockholders in Proposal 3 of this proxy
statement beginning on page 42 hereof and other than under the
2001 Executive Stock Plan.
o Of the 36,256,407 shares of common stock issued to ARK, an
aggregate of 6,815,114 such shares are subject to repurchase by
Scan-Optics at $0.02 per share. The shares subject to repurchase
represent the number of shares issuable to certain of our
executive officers upon the exercise of options granted to them
under the 2001 Executive Stock Plan, as these numbers are
adjusted so that the fully-diluted percentage of our equity
represented by the 2001 Executive Stock Plan after the
Recapitalization will be 15%. See "Interests of Scan-Optics Board
of Directors and Management in the Restructuring and
Recapitalization" on page 36 of this proxy statement. When any
options under the 2001 Executive Stock Plan are exercised in
accordance with the terms of the applicable option agreement, ARK
will transfer a like number of shares to Scan-Optics for $0.02
per share to cover the option exercise, reducing the number of
shares of common stock held by ARK. In this way, only ARK, and
none of the other stockholders of Scan-Optics, will suffer any
dilution upon the exercise of any such options.
o If ARK does not transfer sufficient shares to Scan-Optics to
enable Scan-Optics to issue the number of shares required upon
exercise of a stock option under the 2001 Executive Stock Plan,
Scan-Optics will issue such shares to the exercising option
holder from its authorized common stock and will then issue or
reserve additional shares, as the case may be, to each
stockholder, option holder, other holder of rights or convertible
securities, or stock plan reserve, other than to ARK and any
transferee of its shares, in order to dilute ARK's interest to
the fully-diluted equity in Scan-Optics it would have held had it
performed its obligations under the subscription agreement.
o An aggregate of 2,391,268 shares of common stock, equal to 5% of
our fully-diluted common stock after the completion of the
Recapitalization, will be reserved under the 2004 Stock Plan,
subject to approval of such plan by our stockholders at the
annual meeting as described in "Proposal 3 - Approval of 2004
Incentive Plan" on page 42 of this proxy statement. Any such
options or shares issued under the 2004 Incentive Plan will
dilute all of our stockholders, including ARK, pro rata based on
the number of shares of our common stock held by each such
stockholder.
o We will agree to enter into a registration rights agreement with
ARK containing unlimited demand and other registration rights, if
requested in the future by ARK.
o The Series B redeemable preferred stock and the warrant held by
ARK will be canceled upon the issuance of the common stock noted
above.
-33-
o 420,857 shares of the Series I Preferred Stock with a mandatory
redemption on the earlier of March 30, 2007 or, if earlier, the
maturity date of the indebtedness under the Credit Agreement or
the repayment in full of the loans thereunder for $841,714 plus
accrued but unpaid dividends at 4% per annum, will be issued in
cancellation of the lease obligations under the master lease
agreement described above.
o As noted under "Proposal 1 - Election of Directors," as a
condition to closing the Recapitalization, three board nominees
designated by the Lenders must have been elected to the
Scan-Optics Board of Directors: Lynn Tilton, Scott Schooley and
Michael Scinto. In addition, three directors of Scan-Optics shall
have tendered their resignations as of the closing of the
Recapitalization: E. Bulkeley Griswold, Robert H. Steele and
Lyman C. Hamilton, Jr. As a result, the Board of Directors will
consist of six members, including three designees of ARK, and
there will be an additional three vacancies. Pursuant to our
Certificate of Incorporation, any vacancy on the Board of
Directors may be filled by the vote of a majority of the
directors then in office and any director elected to fill such a
vacancy will hold office for the unexpired term of his or her
predecessor. It is the intention of the parties that at the first
Board of Directors meeting following the closing of the
Recapitalization, the Board of Directors will vote to elect two
new Directors to fill two of the three vacancies, one of whom
will be designated by the three ARK designees to the Board and
one of whom will be a director who satisfies the independence
requirements of the NASD and who is designated by the other three
directors. At this time there is no plan to fill the remaining
vacancy that will exist after the first Board of Directors
meeting following the closing of the Recapitalization.
o We make customary representations and warranties concerning our
capitalization and other relevant matters. ARK provides customary
securities law representations.
o The closing of the Recapitalization must occur by September 30,
2004, unless such date is extended by ARK.
Material Differences between the Series B Preferred Stock, Warrants and Common
Stock
As part of the Recapitalization, ARK's Series B preferred stock and
warrants will be canceled and ARK will receive common stock with 79.8% of the
voting power of Scan-Optics, subject to dilution for certain current and future
stock options. The material differences between the securities to be canceled
and the common stock to be issued to ARK are described below.
Differences between Series B Redeemable Preferred Stock and Common Stock
------------------------------------------------------------------------
o Liquidation Preference
----------------------
-> On a liquidation or sale of Scan-Optics (by sale of assets,
merger or similar means) the Series B preferred stock is entitled
to be paid $3.8 million plus accrued interest of prime plus 2%
from December 31, 2001, before the common stock will receive any
consideration. Once paid its liquidation preference, the Series B
preferred stock is entitled to no additional consideration.
-34-
-> After the Series B preferred stock has received its preference,
the common stockholders will share the remaining assets in
proportion to the aggregate number of shares of common stock held
by each holder.
o Mandatory Redemption
---------------------
-> The Series B preferred stock is mandatorily redeemable by us on
June 1, 2005, or an earlier event of default under the Credit
Agreement, for $3.8 million plus accrued interest of prime plus
2% from December 31, 2001.
-> The common stock has no mandatory redemption right.
o Voting Rights
-------------
-> The Series B preferred stock has no voting rights until the
warrant held by ARK is exercised, which cannot occur until the
earlier of January 1, 2005 or certain defaults under the Credit
Agreement. Thereafter, the Series B preferred stock is entitled
to that number of votes per share as will provide it with 46.67%
of our voting power on a fully-diluted basis, including all
outstanding options and warrants.
-> The common stock has one vote for each share.
o Protective Provisions
----------------------
-> Without approval of the holders of two-thirds of the Series B
preferred stock, we may not increase or decrease the authorized
number of Series B preferred stock or amend the certificate of
incorporation or by-laws to alter or change the rights or
preferences of the Series B preferred stock or any other security
that is senior to or on a parity with the Series B preferred
stock or to authorize, create or issue stock, or securities
convertible into stock, that is senior to or on a parity with the
Series B preferred stock.
-> The common stock has no protective provisions in the certificate
of incorporation, except for a requirement in Article TENTH of
our amended and restated Certificate of Incorporation that the
holders of at least 80% of our voting securities approve certain
transactions between Scan-Optics and significant stockholders not
approved by a disinterested majority of our board.
Terms of the Warrant
--------------------
ARK's warrant is exercisable from and after January 1, 2005 or an event of
default under the Credit Agreement and on or before December 31, 2010, for 33.2%
of our common stock on a fully-diluted basis as of December 31, 2001, including
all outstanding options and warrants, at an exercise price of $0.02 per share.
The number of shares issuable under the warrant are subject to adjustment for
stock dividends, recapitalizations and similar events as well as for common
stock or common stock equivalent issuances below the exercise price. If the
loans
-35-
under the Credit Agreement are repaid and Series B preferred stock redeemed, we
may repurchase the warrant for a purchase price equal to (a) $2.7 million plus
(b) interest on such amount at prime plus 2% from December 31, 2001, plus (c)
common stock in an amount equal to 30% of the common stock on a fully-diluted
basis immediately prior to the redemption.
Information About Patriarch
Patriarch offers a platform and securitization methodology that provides
financial institutions and funds with the opportunity to maximize their
potential returns on distressed and stressed loan portfolios and other assets.
Patriarch currently manages eight CDOs, two CLOs and a private equity fund,
together aggregating in excess of $4 billion of assets, and currently oversees
lending to approximately 500 companies. In addition, Patriarch manages equity
positions, including majority positions, in over 40 companies. Patriarch is an
experienced asset manager that provides comprehensive advice with respect to the
pricing, valuation, securitization, servicing and monitoring of distressed and
stressed assets and other assets. Patriarch's practice is based upon its
investment expertise, workout expertise, and the innovative pricing models that
it has created.
Consequences if Recapitalization is Not Approved
In the event that stockholders fail to approve the Recapitalization or the
Recapitalization fails to occur for any other reason, our secured obligations
(including our Series B mandatorily redeemable preferred stock), which exceed
$13.6 million as of March 30, 2004, will be due and payable on June 1, 2005
unless we are able to renegotiate the terms with the Lenders. We can provide no
assurance as to our ability to renegotiate terms that are favorable to
Scan-Optics and our stockholders or to repay such obligations as of such date.
If we were unable to refinance our obligations to the Lenders on or before June
1, 2005, we would be required to consider all available alternatives, including
seeking protection under the Federal bankruptcy laws. Further, as noted earlier,
our ability to obtain unqualified audit opinions may be an important
consideration to a number of our major customers. A failure to complete the
Recapitalization and extend the maturity of our debt would jeopardize our
ability to obtain such opinions in the future.
Interests of Scan-Optics Board of Directors and Management in the Restructuring
and Recapitalization
In considering the recommendations of the Board of Directors, our
stockholders should be aware that no person affiliated with ARK or Patriarch
Partners is a member of our Board of Directors. At our annual meeting, as a
condition to closing the Recapitalization, stockholders are being asked to vote
for three designees of the Lenders as new members of our Board of Directors, but
none of such designees has been a member of our Board of Directors during the
negotiation of the Restructuring.
Certain members of management, including Mr. Mavel who is also a member of
the Board of Directors, hold options under our 2001 Executive Stock Plan. These
options are being provided with special anti-dilution protection in connection
with the Recapitalization. Under our 2001 Executive Stock Plan, we granted an
aggregate of 1,025,000 options to executive officers on December 31, 2001 at an
exercise price of $0.26 per share, the fair market value of our stock on such
date, and options for an aggregate of 55,000 shares of our common stock on April
26, 2004 at an exercise price of $0.66 per share, the fair market value of our
stock on such date (collectively, the "Old Options").
-36-
In connection with the Recapitalization, the 2001 Stock Plan reserve is
being increased to 6,815,114 shares and each holder of options under the plan
will exchange his Old Options for new options exercisable for approximately 6.31
shares for each share issuable under the Old Options (each such adjusted option,
a "New Option") at an exercise price, at the election of each Old Option holder,
equal to (i) the exercise price of the Old Options proportionately adjusted for
the option share adjustment noted above (i.e., Old Option price/6.31) or (ii)
the greater of (x) the exercise price of the Old Options proportionately
adjusted for the option share adjustment noted above and (y) 20% of the fair
market value of a share of common stock on the date of grant of the New Options.
We currently anticipate that the New Options will be granted approximately ten
(10) trading days after the closing of the Recapitalization.
The Scan-Optics Board of Directors (with Mr. Mavel abstaining) approved the
exchange of Old Options for New Options and repricing of the Old Options in
order to provide our key management with an approximately 15% stake in our
enterprise, on a fully-diluted basis, and to ensure that the aggregate exercise
price payable under the New Options would not exceed the aggregate exercise
price under the Old Options if the holder were to elect alternative (i) noted
above. In making its decision, the Board of Directors was cognizant that the
Recapitalization would dilute all of our stockholders, but believed that
Scan-Optics has relied heavily, and will in the future continue to rely heavily,
on the skills and hard work of our management team and must provide them proper
incentives for the future efforts we will require of them.
Effects of the Proposed Recapitalization
Dilution
--------
As a result of the Recapitalization, holders of our common stock will incur
substantial dilution of their equity interest in Scan-Optics. The following
table sets forth certain record ownership of our common stock as of March 31,
2004 on a historical basis and as adjusted to give pro forma effect to the
Recapitalization, as if such transaction had occurred on March 31, 2004. The
chart has not been prepared in accordance with the rules of the SEC relating to
beneficial ownership. Instead, it includes shares of common stock underlying
employee and director options regardless of whether such options may be
exercised within sixty days, because our negotiations with ARK have been based
on a fully-diluted common stock number, regardless of whether any such options
are immediately exercisable.
-37-
Capitalization of Scan-Optics
Historical (3/31/04) Pro Forma Post-Recapitalization
Name of Holder/Group Number of Shares Percentage 1 Number of Shares Percentage 1,2
- -------------------- ---------------- ------------ ---------------- -------------
Common Issued and Outstanding (other than ARK) 7,439,732 48.73% 7,439,732 15.56%
Option Pool 2,852,955 3 18.69% -
Option Pool except for 2001 and 2004 Plans - 0.00% 1,737,955 3.63%
2001 Executive Stock Plan - 0.00% - 4
Total Old Capital 10,292,687 67.41% 9,177,687 19.19%
ARK Series B preferred - 5
ARK Warrant 4,975,000 32.59% 6 -
ARK Common - Non-Redeemable - 0.00% 29,441,293 61.56%
ARK Common - Redeemable if - 0.00% 6,815,114 14.25%
2001 Executive Options are Exercised
Total ARK 4,975,000 32.59% 36,256,407 75.81%
2004 Incentive Plan Pool - 0.00% 2,391,268 5.00%
TOTAL CAPITALIZATION 15,267,687 100.00% 47,825,362 100.00%
<FN>
1 The percentage of common stock is based on our fully-diluted common stock
on a historical basis and on a pro forma basis assuming the
Recapitalization, assuming exercise of all then outstanding options and
warrants and issuance of all shares in the option reserve.
2 Adjusted to reflect the Recapitalization, pursuant to which the Series B
Preferred stock and warrant held by ARK will be cancelled and we will issue
an aggregate of 36,256,407 shares of common stock to ARK. In connection
with the Recapitalization an aggregate of 6,815,114 of the shares of common
stock issued to ARK will be subject to repurchase by us, at $0.02 (par
value) per share, upon exercise of 2001 Executive Stock Option Plan. This
Chart assumes that none of such shares have been repurchased.
3 Includes the 2001 Executive Stock Option Plan, as well as all other
existing option plans.
4 As of the Recapitalization, the 2001 Executive Stock Plan reserve has been
increased to 6,815,114 shares and is reflected in the line item "ARK Common
- Redeemable." If all options under the 2001 Executive Stock Plan are
exercised, they will represent 14.25% of the fully-diluted common stock of
Scan-Optics and ARK's fully-diluted equity interest will represent 61.56%.
5 If we were not to redeem the Series B preferred stock held by ARK on June
1, 2005, such shares would be entitled to 46.67% of our voting power, on a
fully-diluted basis. This contingent voting power has not been reflected in
this chart.
6 ARK's warrant is exercisable for 33.2% of our fully-diluted common stock as
of December 31, 2001. Subsequent changes is our capitalization have
resulted in a slight change to the fully-diluted percentage represented by
the warrant.
</FN>
Effect on Price of Common Stock and Earnings Per Share
------------------------------------------------------
The Recapitalization contemplates the issuance of our common stock to ARK.
The price of the common stock is highly linked to our financial condition and
the number of shares outstanding. Because we are issuing a significant amount of
common stock in the Recapitalization, we do not know at what price the common
stock will trade following the consummation of such transactions. Further, the
net income or net loss per share will be proportionately lower as more shares of
common stock are issued and outstanding.
Board of Directors
------------------
As discussed under "Proposal 1 - Election of Directors," it is a condition
to closing that ARK's three designees be elected to our board and that three of
the current members of the Scan-Optics board resign effective on the
Recapitalization. As a consequence, our board will be reduced to six members,
three of whom will be ARK designees. In addition, at the first meeting of the
Board of Directors after the closing of the Recapitalization, the Board of
Directors intends to vote to elect two new directors to fill two of the three
vacancies, one of
-38-
whom will be designated by the three ARK designees to the Board and one of whom
will be designated by the other three directors. At future meetings of
stockholders, including a meeting which ARK may call as a greater than 40%
stockholder pursuant to our proposed amended and restated certificate of
incorporation, ARK would be able to elect sufficient directors to gain control
of the Board of Directors.
Tax Consequences to the Company
-------------------------------
o Net Operating Loss Limitations
The Recapitalization will result in an ownership change for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). This
will cause the portion of our consolidated federal net operating losses that
will be available to us for periods following the Recapitalization to be subject
to an annual limitation, which will equal the product of the value of our stock
immediately before the ownership change and the then applicable "long-term
tax-exempt rate" (e.g., 4.31% for ownership changes occurring in April, 2004).
As an example, assuming 7,439,732 shares of common stock with a fair market
value of $.46 per share are outstanding immediately prior to the ownership
change, then our federal net operating losses would be subject to an annual
limitation equal to $147,500 (7,439,732 x .46 x .0431). Additionally, there is a
substantial likelihood that any state net operating losses that will be
available to us for periods following the Recapitalization will also be subject
to limitation. Accordingly, our ability to use net operating losses to offset
future taxable income from operations will be materially limited.
o Scan-Optics Repurchase of Stock from ARK upon Exercise of Options under the
2001 Executive Stock Plan and Issuance of Additional Shares of Common Stock
as a Remedy
As discussed under "Terms of the Common Stock Subscription Agreement" on
page 33, of this proxy statement, we will repurchase shares of Common Stock from
ARK at $0.02 per share to satisfy option exercises from time to time under the
2001 Executive Stock Plan. Further, if ARK does not transfer sufficient shares
to us in satisfaction of its obligation upon exercise of options under the 2001
Executive Stock Plan, Scan-Optics must issue additional shares to all
stockholders and option holders, other than ARK and its transferees, in order to
put ARK in the fully-diluted equity percentage position that it would have been
in had it satisfied its obligations under the subscription agreement. The
repurchase of Scan-Optics' shares from ARK for par value in connection with the
exercise of options will not create any taxable income for Scan-Optics. In the
event that Scan-Optics issues additional shares to all stockholders, other than
ARK, in the event that ARK does not sell shares to Scan-Optics in connection
with the issuance of options as required, this will not create any taxable
income for Scan-Optics or our stockholders receiving such shares.
-39-
Approval of Our Amended and Restated Certificate of Incorporation
The Board of Directors has considered, deemed advisable and adopted a
resolution approving and recommending to the stockholders for their approval our
Amended and Restated Certificate of Incorporation in the form attached to this
proxy statement as Exhibit A (the "Amended Certificate"). The Amended
Certificate implements the following significant changes to our current
certificate of incorporation:
o replaces the detailed business purposes section with a simple
provision which provides that Scan-Optics may conduct any lawful
business, promote any lawful purpose and engage in any lawful act of
activity for which corporations may be organized under Delaware law.
o increases the number of shares of common stock authorized for issuance
from 15,000,000 to 65,000,000;
o deletes the terms of the Series A redeemable preferred stock and
Series B redeemable preferred stock and provides that the Certificate
of Designation for the Series I Preferred Stock, in the form attached
hereto as Exhibit B will be filed as of the date of the Amended
Certificate;
o deletes the terms of the Class A stock which was converted into shares
of common stock on September 2, 1994 on a share-for-share basis; and
o permits one or more stockholders holding at least forty percent of the
issued and outstanding capital stock of the Company to call a special
meeting of stockholders.
As of March 31, 2004, 7,439,732 shares of common stock were issued and
outstanding and at least 7,560,268 shares were reserved for issuance upon the
conversion of existing securities and exercise of options granted under various
stock-based employee benefit plans. Accordingly, as of March 31, 2004, there are
no shares of common stock available for future issuance.
Upon the consummation of the Recapitalization, we will be required to issue
an aggregate of 36,256,407 shares of common stock to ARK. In addition, the Board
of Directors considers it advisable to have additional shares available for
issuance under our employee benefits plans, including the 2,391,268 shares
reserved under the 2004 Incentive Plan, for use in the event we must issue
additional shares of common stock as a remedy if ARK does not transfer shares to
us to cover 2001 Executive Stock Plan Option exercises, for possible future
stock dividends or stock splits and for issuances required to meet our business
needs as they arise, without the delay or expense associated with holding a
special meeting of stockholders. As a result, the Board of Directors has
approved the Amended Certificate to increase the number of authorized shares of
common stock from 15,000,000 to 65,000,000. We have no present plans which would
result in the issuance of new shares of common stock, except upon consummation
of the Recapitalization and through our employee benefit plans.
If the Amended Certificate is adopted, we will issue additional shares of
common stock upon the consummation of the Recapitalization, without further
approval of the stockholders. The issuance of additional shares of common stock
pursuant to the Recapitalization will dilute the existing stockholders' equity
interest in us as shown under the heading "Effects of the Proposed
Recapitalization -- Dilution".
-40-
The issuances in the future of additional authorized shares will have the
effect of diluting the earnings per share and book value per share, as well as
the stock ownership and voting rights, of the currently outstanding shares of
common stock. In addition, the effective increase in the number of authorized
but unissued shares of our Common Stock may be construed as having an
anti-takeover effect. In light of the 79.8% voting control of ARK after the
Recapitalization, however, it is highly unlikely that the Company would ever
need to make use of such unissued shares for anti-takeover purposes. If the
Company ever decided to resort to such measures, however, we could, subject to
the fiduciary duties of the Board of Directors and applicable law, issue such
additional authorized shares to purchasers who might oppose a hostile takeover
bid or any efforts to amend or repeal certain provisions of our certificate of
incorporation or by-laws. Such a use of these additional authorized shares
should render more difficult, or discourage, an attempt to acquire control of us
through a transaction opposed by the Board of Directors.
No Appraisal Rights
-------------------
Under the Delaware General Corporation Law, our stockholders are not
entitled to appraisal rights with respect to the approval of the Amended
Certificate.
Vote Required
-------------
Approval of the Amended Certificate to increase the number of shares of
common stock authorized for issuance will require the affirmative vote of the
holders of a majority of the outstanding shares of common stock entitled to vote
thereon. As a result, abstentions and broker non-votes will have the effect of
votes against the proposal.
Recommendation of The Board of Directors
- ----------------------------------------
The Board of Directors unanimously recommends that stockholders vote FOR
approval of the Amended Certificate. If not otherwise specified, proxies will be
voted FOR this Proposal.
-41-
PROPOSAL THREE - APPROVAL OF THE SCAN-OPTICS, INC.
2004 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
On April 26, 2004, the Board of Directors approved the Scan-Optics, Inc.
2004 Incentive and Non-Qualified Stock Option Plan (the "2004 Plan"), contingent
upon the closing of the Recapitalization described in Proposal Two of this proxy
statement and subject to stockholder approval at this Annual Meeting. If
approved by stockholders, and contingent upon the closing of the
Recapitalization, the 2004 Plan will become effective on July 1, 2004.
The Board of Directors believes that the 2004 Plan will enable the Company
to attract and retain the best available personnel for positions of
responsibility, provide additional incentive to the employees of the Company and
promote the success of the Company's business. The following material features
of the 2004 Plan are described below. The full text of the Plan is attached
hereto as Exhibit D. The following description is qualified in its entirety by
reference to Exhibit D.
Administration.
- ---------------
The 2004 Plan is administered by the Stock Options and Executive
Compensation Committee of the Company's Board of Directors (the "Committee").
The Committee is composed of not less than two non-employee directors as that
term is defined under the rules promulgated by the Securities and Exchange
Commission. Members of the Board of Directors may only serve on the Committee if
they are non-employees for purposes of Rule 16b-3 under the Securities Exchange
Act of 1934, as amended, and "Outside Directors" as defined in Treasury
Regulations ss.1.162-27(e)(3). The Committee will have authority to: (i)
determine those individuals to whom options will be granted under the 2004 Plan;
(ii) determine the number of shares subject to each option granted; and (iii)
determine the terms and conditions of each option.
Types of Awards That May Be Made Under The 2004 Plan.
- ----------------------------------------------------
Options granted under the 2004 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"). The Committee has the right, with the
optionee's consent, to convert an Incentive Option to a Non-Qualified Option in
certain circumstances.
Eligibility.
- -----------
One or more options may be granted under the 2004 Plan by the Committee to
such officers or key employees of the Company, or of a parent or subsidiary of
the Company, 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
2004 Plan only if such Board member is also an employee of the Company. No
employee may be granted Incentive Options that first become exercisable in a
calendar year (under all incentive stock option plans of the Company) covering
shares with an aggregate market value on the date of grant of more than
$100,000. In addition, the aggregate amount of Common Stock subject to options
granted to a single employee in any calendar year may not exceed 100,000 shares.
As of May 6, 2004, approximately 16 individuals were eligible to participate in
the 2004 Plan.
-42-
Shares Subject to Options.
- --------------------------
If the 2004 Plan is adopted by the stockholders and the Recapitalization is
consummated, the stock subject to options will be shares of the Company's Common
Stock in an amount not to exceed an aggregate of 2,391,268 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 option is not
less than 100% of the fair market value of the shares of Common Stock on the
date the option is granted; provided, however, that the Committee may grant
Non-Qualified Options to certain individuals at less than 100% of the fair
market value (but not less than 85% of the fair market value) in lieu of salary
or cash bonus that would otherwise be paid to the individual. The Committee may
grant to optionees, in exchange for the surrender and cancellation of
outstanding options, new options having prices lower than the option price of
the option so surrendered and canceled only if certain conditions and
requirements specified in the 2004 Plan are met.
Exercise of Options.
- -------------------
No option may be exercised after the expiration of ten years from the date
it is granted. No option may be granted under the 2004 Plan after July 1, 2014.
Each option shall be exercisable in such installments during the period
prior to its expiration date as the Committee shall determine or may, if so
determined by the Committee, be exercisable in whole or in part at any time
prior to its expiration date. 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 2004 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).
-43-
Incentive Options, and, unless otherwise determined by the Committee,
Non-Qualified Options are not transferable by the optionee otherwise than by
will or under the laws of descent and distribution, and are exercisable, during
the optionee's lifetime, only by the optionee.
Except as described below, options shall terminate, unless exercised, upon
the earlier of the date of expiration of the option or three months after the
date of severance of the employment relationship between the optionee and the
Company, or a parent or subsidiary of the Company; provided, however, that all
options held by an optionee shall terminate immediately upon receipt by an
optionee of notice of termination if the optionee is terminated for deliberate,
willful or gross misconduct as determined by the Company.
If, before the date of expiration of the option, the optionee retires from
the employ of the Company, or a parent or subsidiary of the Company, for reasons
of age or disability, the option shall terminate on the earlier of such date of
expiration or one year after the date of such retirement. In the event of such
retirement, the optionee shall have the right prior to the termination of such
option to exercise the option to the extent to which the optionee was entitled
to exercise such option immediately prior to such retirement. If the retired
optionee shall die before the termination of the option, the optionee's
executors, administrators or any person or persons to whom the option may be
transferred by will or by laws of descent and distribution shall have the right,
at any time prior to the earlier of the date of the expiration of the option or
the end of the one-year period beginning on the date of the optionee's death, to
exercise the option to the same extent as said retired optionee.
In the event of death of the holder of an option while in the employ of the
Company, or a parent or subsidiary of the Company and before the date of
expiration of such option, such option shall terminate on the earlier of such
date of expiration or one year following the date of such death. After the death
of the optionee, the optionee's executors, administrators or any person or
persons to whom the option may be transferred by will or by the laws of descent
and distribution shall have the right, at any time prior to such termination, to
exercise the option to the same extent to which the deceased optionee was
entitled to exercise such option immediately prior to the deceased optionee's
death.
The Committee may, in its discretion, vary the provisions described in the
preceding three paragraphs with respect to Non-Qualified Options granted under
the Plan.
Modification.
- ------------
The Board of Directors may at any time amend, suspend or terminate the 2004
Plan; provided, however, that any material amendment of the Plan and any other
amendment of the Plan requiring stockholder approval under Section 422 of the
Internal Revenue Code of 1986, as amended, shall not be made without the
approval of the stockholders of the Company in accordance with the General
Corporation Law of the State of Delaware.
No amendment, suspension or termination of the 2004 Plan shall, without the
consent of the optionee, alter or impair any rights or obligation under any
outstanding option agreement.
Registration of Option Shares.
- ------------------------------
-44-
No shares will be issued and delivered upon exercise of any option unless a
registration statement under the Securities Act of 1933, as amended, with
respect to the shares of Common Stock to be reserved for issuance upon the
exercise of options to be granted under the 2004 Plan has become effective, and
unless all other applicable laws and regulations have been complied with.
Federal Income Tax Consequences.
- ------------------------------
Options granted under the 2004 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- or long-term capital gain (depending on how long the stock
was held) to the extent the stock is disposed of in a sale or taxable exchange
at a price in excess of the value of the stock on the date of exercise.
Short-term capital gains (on stock held for one year or less) are taxed at
ordinary income rates, and long-term capital gains (on stock held for more than
one year) are taxed at a maximum rate of 15%. 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
-45-
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 May 4, 2004, of the Company's Common Stock on
the OTC Bulletin Board was $0.69 per share.
Outstanding Options.
- -------------------
Options covering 2,652,683 shares of the Company's Common Stock were
outstanding on December 31, 2003 under the Company's existing stock option
plans. These options expire at various dates from 2004 through 2013 and are
exercisable at option prices ranging from $ .24 to $ 9.19 per share.
Required Vote.
- -------------
The affirmative vote of a majority of the votes cast at the meeting is
required for approval of the 2004 Plan. Both abstentions and broker non-votes
will be treated as votes not cast and will therefore have no effect on the vote.
-46-
Recommendation of The Board of Directors.
- ------------------------------------------
The Board of Directors unanimously recommends that stockholders vote FOR
the proposal to approve the 2004 Plan. If not otherwise specified, proxies will
be voted FOR this proposal.
-47-
Equity Compensation Plan Information
The following table provides information about shares of our common stock
that may be issued upon the exercise of options and rights under existing equity
compensation plans as of December 31, 2003.
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Number of Securities to Weighted average exercise Number of securities remaining
be issued upon exercise price of outstanding available for issuance under equity
of outstanding options, options, warrants and compensation plans (excluding
Plan Category warrants and rights rights securities reflected in column (a))
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Equity compensation plans
approved by security holders 1,625,683 $1.56 110,272
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Equity compensation plans
not approved by security
holders
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Senior 1,025,000 $0.24 90,000
Management
Options(1)
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Debt 4,975,000 $0.02 0
restructuring
warrants(2)
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
Total: 7,625,683 $1.39 200,272
- ------------------------------ --------------------------- ---------------------------- --------------------------------------
(1) The Company's equity compensation plan that was not approved by
stockholders is the 2001 Senior Executive Stock Option Plan. Under the
Plan, individuals who were senior executive officers of the Company as
of December 31, 2001 were eligible to receive a grant of a
non-qualified stock option to purchase one share of common stock for
each dollar of such individual's annual salary as of December 31,
2001; provided, however, that the individual was required to remain
employed until June 30, 2002 before the right to exercise the option
accrued. The exercise price for such options was $0.24, the closing
price of the common stock on December 31, 2001. This plan was amended
and restated by our Board of Directors on April 26, 2004 to permit
option grants to executive officers who were employed by Scan-Optics
after December 31, 2001 and to make certain other changes to the plan
and, effective upon the consummation of the Recapitalization, to
increase the number of shares available thereunder to 6,815,114
shares. Options were granted on April 26, 2004 to two executive
officers for an aggregate of 55,000 shares of common stock at $0.66,
the closing price of the common stock on such date.
(2) Common stock of the Company that could be acquired pursuant to a
warrant that was issued to ARK as part of the Company's 2001 debt
restructuring. The warrants represent the right to purchase up to
4,975,000 shares of common stock of the Company.
-48-
PROPOSAL FOUR - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee has appointed, subject to stockholder approval, Ernst &
Young LLP to serve as our independent auditors for the fiscal year ending
December 31, 2004, Ernst & Young LLP has been our independent auditor since
1979. Under Delaware law and our By-Laws, the affirmative vote of a majority of
the votes cast at the meeting will be required to ratify the appointment.
Abstentions and broker non-votes will have no effect on the outcome of the vote.
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.
The Board of Directors unanimously recommends that stockholders vote FOR
the ratification of Ernst & Young LLP as our independent auditors for the fiscal
year ending December 31, 2004. If not otherwise specified, proxies will be voted
FOR this proposal.
FIVE - 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.
ANNUAL REPORT
Each stockholder of record as of May 17, 2004 is receiving in this mailing
a copy of our annual report for the year ended December 31, 2003. The following
portions of the annual report on are incorporated by reference into this proxy
statement.
1. The consolidated financial statements of Scan-Optics as at and
for the year ended December 31, 2003, starting on page 31
thereof;
2. Management's discussion and analysis of financial condition and
results of operations, starting on page 19 thereof;
3. Supplementary financial information, starting on page 29 thereof;
and
4. Quantitative and qualitative disclosure about market risk,
starting on page 28 thereof.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the Annual Meeting of
Stockholders in 2005, must be received by Scan-Optics at its principal executive
offices no later than January 26, 2005 in order to be considered for inclusion
in Scan-Optics' proxy statement and form of proxy relating to the Annual Meeting
of Stockholders in 2005. Any such proposal must comply
-49-
with Rule 14a-8 promulgated by the Securities and Exchange Commission and the
notice provisions of our By-Laws.
In addition, with respect to the Annual Meeting of Stockholders in 2005, if
a stockholder does not provide notice to Scan-Optics of a stockholder proposal
by April 8, 2005, the attorneys named in the form of proxy mailed with our proxy
statement for that meeting will have discretionary authority to vote as they
determine on the proposal. If we change the date of the 2005 Annual Meeting by
more than 30 days from the date of the 2004 Annual Meeting, notice of the
stockholder proposal must be submitted a reasonable time before we begin to
print and mail our proxy materials for the meeting.
At each Annual Meeting, stockholders will be given an opportunity to
nominate candidates for election as directors. However, pursuant to our By-Laws,
stockholders may also nominate candidates for election as directors by timely
submitting their nomination to the Company. In order for a stockholder's
nomination to be considered timely, the notice must be received by the Secretary
of the Company at the principal executive offices of Scan-Optics not less than
40 days nor more than 90 days prior to the annual meeting. If stockholders have
less than 50 days' prior notice of the date of the meeting, however, a
stockholder nomination will be timely if received not later than the close of
business on the tenth day following the earlier of:
o the day on which notice of the date of the meeting was mailed or
o the day public disclosure of the meeting date was made.
A stockholder's notice must set forth:
o all information relating to the nominee that is required to be
disclosed in solicitations of proxies for election of directors
or is otherwise required pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended;
o the proposed nominee's written consent to being named in a proxy
statement as a nominee and to serving as a director if elected;
and
o as to the stockholder giving the notice, (i) the name and
address, as they appear on Scan-Optics 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 Scan-Optics which are beneficially owned by such
stockholder.
The Nominating Committee will review and consider director candidates proposed
by our stockholders on the same basis as other candidates.
Stockholders submitting a nomination for director must also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder. Stockholders may contact Scan-Optics for a
copy of the relevant By-Law provisions regarding the requirements for
stockholders to nominate director candidates.
RICHARD D. HARRIS
Secretary
May ___, 2004
-50-
SCAN-OPTICS, INC.
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
Your vote is important. Please vote immediately.
Vote-by-Internet Vote-by-Telephone
Log on to the Internet and go to OR Call toll-free
http://www.eproxyvote.com/scor 1-877-PRX-VOTE (1-877-779-8683)
If you vote over the Internet or by telephone, please do not mail your card.
[SCAOP - SCAN-OPTICS, INC.] [FILE NAME: ZSCAO1.ELX] [VERSION - (2)] [05/07/04]
[orig. 05/07/04]
DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL
Please mark #SCA
votes as in
this example. [X]
- ---------------------------------------
SCAN-OPTICS, INC.
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1. Election of Directors.
Nominees: (01) Scott Schooley, (02) Lynn Tilton and
(03) Michael Scinto
FOR ALL WITHHELD FROM
NOMINEES [ ] ALL NOMINEES [ ]
[ ]
-----------------------------------
For all nominees except as noted above
FOR AGAINST ABSTAIN
2. To adopt the amended and restated certificate of incorporation in the form
attached as Exhibit A to the proxy statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To adopt the Scan-Optics, Inc. 2004 Incentive and Non-Qualified Stock
Option Plan in the form attached as Exhibit D to the proxy statement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To ratify the appointment of Ernst & Young, LLP as independent auditors for
the fiscal year ending December 31, 2004.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the proxies are authorized to vote upon any other
business that may properly come before the meeting.
Mark box at right if an address change or comment has been noted on the
reverse side of this card. [ ]
Please be sure to sign and date this Proxy.
Signature Date
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Signature Date
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SCAN-OPTICS, INC.
Dear Stockholder,
Please take note of the important information enclosed with the Proxy Ballot.
There are a number of issues related to the management and operation of your
Company that require your immediate attention and approval. These are discussed
in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders, June 30,
2004.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Scan-Optics, Inc.
SCAN-OPTICS, INC.
169 Progress Drive
Manchester, Connecticut 06040
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON JUNE 30, 2004
The undersigned hereby appoints James C. Mavel and Peter H. Stelling, or either
of them, the proxy of the undersigned with full power of substitution, to vote,
as designated on the reverse side, all shares of capital stock of Scan-Optics,
Inc. (the "Company") held of record by the undersigned on May 17, 2004 at the
Annual Meeting of Stockholders to be held on June 30, 2004 and any adjournments
thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED BY THE
UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO A PARTICULAR PROPOSAL,
THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE PROPOSALS.
PLEASE MARK, SIGN, AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES OF AMERICA.
- --------------------------------------------------------------------------------
Please sign exactly as your name appears on the books of the Company. Joint
owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation, this signature should be that of an
authorized officer who should state his or her title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
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- ------------------------------ --------------------------------
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EXHIBIT A
AMENDED
AND
RESTATED
CERTIFICATE OF INCORPORATION
OF
SCAN-OPTICS, INC.
FIRST: The name of the corporation (hereinafter called the
"Corporation") is
SCAN-OPTICS, INC.
SECOND: The registered office of the Corporation in the state of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, and the name of the registered agent at such
address is The Corporation Trust Company.
THIRD: The purposes for which the Corporation is formed are to conduct
any lawful business, to promote any lawful purpose, and to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total authorized capital stock of the Corporation shall be
70,000,000 shares consisting of 65,000,000 shares of Common Stock, par value
$.02 per share (herein called the "Common Stock"), and 5,000,000 shares of
Preferred Stock, par value $.02 per share (herein called the "Preferred Stock").
I. Preferred Stock
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article FOURTH, to provide for the issuance of
the shares of Preferred Stock in series, and by filing a certificate pursuant to
the General Corporation Law of the State of Delaware, to establish from time to
time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof. The authority of
the Board with respect to each series of Preferred Stock shall include, but not
be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series;
and
(h) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment, before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution to holders
of those shares of Preferred Stock of all series shall be insufficient to pay
such holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
As of the date of this Amended and Restated Certificate of
Incorporation, the Corporation is filing a Certificate of Designations for
420,857 shares of 4% Series I Cumulative Redeemable Preferred Stock and,
consequently, the remaining authorized, but unissued shares of Preferred Stock
shall equal 4,579,143.
II. Common Stock
Except as otherwise provided by law or herein, the holders of Common
Stock shall have the sole voting power for the election of directors of the
Corporation. At every meeting of the shareholders each holder of Common Stock
shall be entitled to one vote per share, voting with the holders of any other
class of stock entitled to vote, without regard to class, on all matters to be
voted on by the shareholders of the Corporation.
When and as dividends are declared from time to time by the Board of
Directors of the Corporation out of the funds legally available therefor,
whether payable in cash, in property or in shares of stock of the Corporation,
the holders of Common Stock shall, after payment in full of all dividends to
which holders of Preferred Stock shall be entitled, be entitled to share
equally, share for share, in such dividends.
Subject to the requirements of law and this Certificate of
Incorporation, as amended from time to time, the holders of Common Stock shall
in the event of any liquidation, dissolution or
other winding up of the Corporation, whether voluntary or involuntary, and after
all holders of the Preferred Stock shall have been paid in full the amounts to
which they respectively shall be entitled, be entitled to receive all the
remaining assets of the Corporation of whatever kind, such assets to be
distributed pro rata to the holders of the Common Stock.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or an all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
Corporation, including the election of the Chairman of the Board of Directors,
if any, the President, the Treasurer, the Secretary, and other principal
officers of the Corporation, shall be vested in a Board of Directors of no fewer
than three nor more than nine directors. The directors of the Corporation shall
be divided into three classes, namely, Classes I, II, and III, as nearly equal
in number as possible, with each class consisting of no fewer than one nor more
than three directors. The exact number of directors constituting the Board of
Directors and each respective class thereof shall be fixed from time to time by
the Board of Directors within the limits specified in the two preceding
sentences. Class I directors elected at the 1984 Annual Meeting of Stockholders
shall initially serve until the third annual meeting following their election.
Class II directors elected at the 1984 Annual Meeting of Stockholders shall
initially serve until the second annual meeting following their election. Class
III directors elected at the 1984 Annual Meeting of Stockholders shall initially
serve until the next annual meeting following their election. At each annual
meeting of stockholders commencing with the 1985 annual meeting, the successors
to the class of directors whose term shall then expire shall be elected to hold
office for the term of three years and until their successors are elected and
qualified or until their earlier resignation or removal, so that the term of one
class of directors shall expire each year.
The persons receiving the greatest number of votes at the election shall be the
directors. If the Board of Directors increases or decreases the number of
directors which shall constitute the Board of Directors pursuant to this
Certificate of Incorporation, any newly-created directorships or any decrease in
directorships shall be apportioned among the classes of directors so as to make
all classes as nearly equal in number as possible. In the event that any vacancy
shall occur in the Board of Directors, whether because of death, resignation,
removal, newly-created directorships resulting from any increase in the
authorized number of directorships, or any other reason, such vacancy shall be
filled by the vote of a majority of the directors then in office, although less
than a quorum, at any meeting of the Board of Directors. A director elected to
fill a vacancy, other than a vacancy resulting from an increase in the number of
directorships, shall hold office for the unexpired term of his predecessor. A
director elected to fill a vacancy resulting from an increase in the number of
directorships shall be elected to such class of directors as a majority of the
directors then in office shall determine and shall hold office for the unexpired
term of such class. No election of directors need be by written ballot.
Notwithstanding any other provisions of this Certificate of Incorporation, the
By-Laws of the Corporation or otherwise (and notwithstanding, the fact that a
lesser percentage may be specified by law, this Certificate of Incorporation or
the By-Laws), the affirmative vote of the holders of at least 80 percent of the
voting power of the shares of stock of the Corporation entitled to vote thereon,
voting without regard to class, shall be required to amend, repeal, or adopt any
provision inconsistent with, this Paragraph 1 of Article SEVENTH.
2. The power to make, alter, or repeal the By-Laws, except a By-Law
classifying directors for election for staggered terms, and to adopt any new
By-Law shall be vested in the Board of Directors.
3. Whenever the Corporation shall be authorized to issue only one class
of stock, each outstanding share shall entitle the holder thereof to notice of,
and the right to vote at, any meeting of stockholders. Whenever the Corporation
shall be authorized to issue more than one class of stock, no outstanding share
of any class of stock which is denied voting power under the provisions of the
Certificate of Incorporation shall entitle the holder thereof to notice of, and
the right to vote, at any meeting of stockholders except as the provisions of
Sections 251, 252, and 253 of the General Corporation Law shall otherwise
require; provided, that no share of any such class which is otherwise denied
voting power shall entitle the holder thereof to vote upon the increase or
decrease in the number of authorized shares of said class.
4. No action by stockholders shall be taken except at an annual or
special meeting of stockholders and no action by stockholders shall be taken by
written consent. Notwithstanding any other provisions of this Certificate of
Incorporation, the By-Laws of the Corporation or otherwise (and notwithstanding,
the fact that a lesser percentage may be specified by law, this Certificate of
Incorporation or the By-Laws), the affirmative vote of the holders of at least
80 percent of the voting power of the shares of stock of the Corporation
entitled to vote thereon, voting without regard to class, shall be required to
amend, repeal, or adopt any provision inconsistent with, this Paragraph 4 of
Article SEVENTH.
5. The Board of Directors shall call a special meeting of stockholders
upon written request of one or more stockholders holding at least forty percent
of the issued and outstanding
capital stock of the Corporation entitled to vote at such meeting, which request
shall state the time, place and purposes of the proposed meeting.
EIGHTH: No contract or transaction between the Corporation and one or
more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or a committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purposes,
if:
1. The material facts as to his interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
applicable committee of the Board of Directors, and the Board or committee of
the Board of Directors in good faith authorizes the contract or transaction by a
vote sufficient for such purposes without counting the vote of the interested
director or directors; or
2. The material facts as to his interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or
3. The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, the
applicable committee thereof, or the stockholders.
4. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
thereof which authorizes the contract or transaction.
NINTH:
1. Elimination of Certain Liability of Directors. No director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she
is the legal representative, is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding
(or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. The right to indemnification
conferred in this Section 2(a) shall be a contract right and
shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that the payment of
such expenses incurred by a director, officer, employee or agent
in his or her capacity as a director, officer, employee or agent
(and not in any other capacity in which service was or is
rendered by such person while a director, officer, employee or
agent including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director, officer,
employee or agent to repay all amounts so advanced if it shall
ultimately be determined that such director, officer, employee or
agent is not entitled to be indemnified under this Section 2(a)
or otherwise.
(b) Right of Claimant to Bring Suit. If a claim under subsection (a)
of this Section is not paid in full by the Corporation within
thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim.
It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it
permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but
the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to
have made a determination prior to the commencement of such
action that indemnification of the claimant is
proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable
standards of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance
of its final disposition conferred in this Section shall not be
exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate
of Incorporation, By-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership,
joint venture, trust or other enterprise (including an employee
benefit plan) against any such expense, liability or loss,
whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the
Delaware General Corporation Law.
3. Effect of Amendment or Repeal. No amendment to or repeal of this
Article NINTH shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to or arising
out of any acts or omissions occurring prior to such amendment or repeal, nor
shall any such amendment or repeal apply to or have any effect on the right to
indemnification and payment of expenses of directors, officers, employees and
agents of the Corporation, including the right to payment of expenses incurred
in defending a proceeding in advance of its final disposition, conferred in this
Article NINTH for or with respect to or arising out of any acts or omissions or
alleged acts or omissions occurring prior to such amendment or repeal.
TENTH: The stockholder vote required to approve any Business
Combination shall be as set forth in this Article TENTH. The term "Business
Combination" is used as defined in Section 2 of this Article TENTH. All other
capitalized terms not otherwise defined in this Article TENTH or elsewhere in
this Certificate of Incorporation are used as defined in Section 4 of this
Article TENTH.
1. Higher Vote for Business Combinations. In addition to any
affirmative vote required by law or this Certificate of Incorporation, and
except as otherwise expressly provided in Section 3 of this Article TENTH:
A. any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation
(whether or not itself an Interested Stockholder) which is, or
after such merger or consolidation would be, an Affiliate of an
Interested Stockholder; or
B. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to
or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value of $1,000,000 or
more; or
C. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder
or any Affiliate of any Interested Stockholder in exchange for
cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value of $1,000,000 or more; or
D. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
E. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which in any such case has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder;
shall require the affirmative vote of (i) the holders of at least 80% of the
voting power of (a) the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors and (b) the
then outstanding shares of capital stock of the Corporation not entitled to vote
generally in the election of directors but entitled to vote generally on all
other matters on which stockholders generally are entitled to vote (such shares
described in clauses (a) and (b) referred to hereinafter collectively as the
"Voting Stock"), voting together as a single class, and (ii) the holders of at
least 66 2/3% of the voting power of the then outstanding Voting Stock,
exclusive of any shares held by or on behalf of such Interested Stockholder or
any Affiliate of such Interested Stockholder, voting together as a single class
(it being understood that for purposes of this Article TENTH, each share of the
Voting Stock shall have the number of votes granted to it pursuant to Article
FOURTH of this Certificate of Incorporation). Such affirmative votes shall be
required notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law, in this Certificate of Incorporation, or in
any agreement with any national securities exchange or otherwise.
4. Definition of "Business Combination". The term "Business
Combination" as used in this Article TENTH shall mean any transaction which is
referred to in any one or more of paragraphs A through E of Section 1 of this
Article TENTH.
5. When Higher Vote is Not Required. The provisions of Section 1 of
this Article TENTH shall not be applicable to any particular Business
Combination, and such Business Combination shall require only such affirmative
vote as is required by law, any other provision of this Certificate of
Incorporation, or otherwise, if in the case of a Business Combination that does
not involve any cash or other consideration being received by the
stockholders of the Corporation, solely in their capacities as stockholder, the
condition specified in the following paragraph A is met, or if in the case of
any other Business Combination, the conditions specified in either of the
following paragraphs A or B are met:
A. Approval by Disinterested Directors. The Business Combination
shall have been approved by a majority of the Disinterested
Directors.
B. Price and Procedure Requirements. All of the following conditions
shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business
Combination (the "Consummation Date") of the consideration
other than cash to be received per share by holders of
Common Stock in such Business Combination shall be an amount
at least equal to the higher of the following (it being
intended that the requirements of this paragraph B(i) shall
be required to be met with respect to all shares of Common
Stock outstanding, whether or not the Interested Stockholder
has previously acquired any shares of the Common Stock):
(a) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested
Stockholder for any shares of Common Stock acquired by
it (1) within the two-year period immediately prior to
the first public announcement of the proposal of the
Business Combination (the "Announcement Date") or (2)
in the transaction in which it became an Interested
Stockholder, whichever is higher; or
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder
(such latter date is referred to in this Article TENTH
as the "Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value
as of the Consummation Date of the consideration other than
cash to be received per share by holders of shares of any
class or series of outstanding Voting Stock, other than the
Common Stock, in such Business Combination shall be an
amount at least equal to the highest of the following (it
being intended that the requirements of this paragraph B(ii)
shall be required to be met with respect to all shares of
every such other class or series of outstanding Voting
Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class or
series of Voting Stock):
(a) (if applicable) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the
Interested Stockholder for any shares of such class or series of
Voting Stock acquired by it (1) within the two-year period immediately
prior to the Announcement Date or (2)
in the transaction in which it became an Interested Stockholder,
whichever is higher; or
(b) the Fair Market Value per share of such class or series of Voting
Stock on the Announcement Date or on the Determination Date, whichever
is higher; or
(c) (if applicable) the highest preferential amount per share to which the
holders of shares of such class or series of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation.
(iii) The consideration to be received by holders of a particular
class or series of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as the
Interested Stockholder has previously paid for shares of
such class or series of Voting Stock. If the Interested
Stockholder has paid for shares of any class or series of
Voting Stock with varying forms of consideration, the form
of consideration for such class or series of Voting Stock
shall be either cash or the form used to acquire the largest
number of shares of such class or series of Voting Stock
previously acquired by it.
(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (a) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on any
outstanding Preferred Stock; (b) there shall have been (1)
no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any subdivision
of the Common Stock), except as approved by a majority of
the Disinterested Directors, and (2) an increase in such
annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction
which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the
Disinterested Directors; and (c) such Interested Stockholder
shall not have become the beneficial owner of any additional
shares of Voting Stock except as part of the transaction
which results in such Interested Stockholder becoming an
Interested Stockholder.
(v) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have
received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation
(whether in anticipation of or in connection with such
Business Combination or otherwise).
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of
the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to
public stockholders of the Corporation at least 30 days
prior to the consummation of such Business Combination
(whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent
provisions).
4. Certain Definitions. For the purposes of this Article TENTH:
A. A "person" shall mean any individual, firm, corporation or other
entity.
B. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or
indirectly, of more than 10% of the combined voting
power of the then outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and
at any time within the two-year period immediately
prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the
combined voting power of the then outstanding Voting
Stock; or
(iii) is an assignee or has otherwise
succeeded to any shares of Voting Stock which were at
any time within the two-year period immediately prior
to the date in question beneficially owned by any
Interested Stockholder, if such assignment or
succession shall have occurred in the course of a
transaction or series of transactions not involving a
public offering within the meaning of the Securities
Act of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its
Affiliates or Associates beneficially owns, directly
or indirectly; or
(ii) which such person or any of its
Affiliates or Associates has (a) the right to acquire
(whether such right is exercisable immediately or
only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right
to vote pursuant to any agreement, arrangement or
understanding; or
(iii) which is beneficially owned, directly
or indirectly, by any other person with which such
person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of
any shares of Voting Stock.
D. For the purposes of determining whether a person is an Interested
Stockholder pursuant to paragraph B of this Section 4, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of paragraph C of this Section 4 but shall not include any other
shares of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
E. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on May 17, 1984.
F. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph B of this Section 4, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
G. "Disinterested Director" means any member of the Board of Directors
of the Corporation (the "Board") who is unaffiliated with the Interested
Stockholder and was a member of the Board prior to the time that the Interested
Stockholder became an Interested Stockholder, and any successor of a
Disinterested Director who is unaffiliated with the Interested Stockholder and
is recommended to succeed such Disinterested Director by a majority of
Disinterested Directors then on the Board.
H. "Fair Market Value" means: (i) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date in
question of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available the fair market value on the date in question of a share of such stock
as determined by a majority of the Disinterested Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by a majority of the
Disinterested Directors in good faith.
I. In the event of any Business Combination in which the Corporation is
the surviving corporation, the phrase "consideration other than cash to be
received" as used in paragraphs B(i) and (ii) of Section 3 of this Article TENTH
shall include the shares of Common
Stock and/or the shares of any other class or series of outstanding Voting Stock
retained by the holders of such shares.
5. Powers of Disinterested Directors. A majority of the Disinterested
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article TENTH, including without limitation
(A) whether a person is an Interested Stockholder, (B) the number of shares of
Voting Stock beneficially owned by any person, (C) whether a person is an
Affiliate or Associate of another, (D) whether the requirements of paragraph B
of Section 3 have been met with respect to any Business Combination, and (E)
whether the assets which are the subject of any Business Combination have, or
the consideration to be received for the issuance or transfer of securities by
the Corporation or any Subsidiary in any Business Combination has, an aggregate
Fair Market Value of $1,000,000 or more; and the good faith determination of a
majority of the Disinterested Directors on such matters shall be conclusive and
binding for all the purposes of this Article TENTH.
6. No Effect on Fiduciary Obligations of Interested Stockholders.
Nothing contained in this Article TENTH shall be construed to relieve the Board
of Directors or any Interested Stockholder from any fiduciary obligation imposed
by law.
7. Amendment, Repeal, etc. Notwithstanding any other provisions of this
Certificate of Incorporation, the By-Laws of the Corporation or otherwise (and
notwithstanding the fact that a lesser percentage may be specified by law, this
Certificate of Incorporation or By-Laws), the affirmative vote of the holders of
80% or more of the voting power of the shares of the then outstanding Voting
Stock, voting together as a single class, shall be required to amend, repeal, or
adopt any provisions inconsistent with, this Article TENTH of this Certificate
of Incorporation; provided, however, that the preceding provisions of this
Section 7 shall not be applicable to any amendment to this Article TENTH of this
Certificate of Incorporation, and such amendment shall require only such
affirmative vote as is required by law and any other provisions of this
Certificate of Incorporation, if such amendment shall have been approved by a
majority of the Disinterested Directors.
ELEVENTH: From time to time any of the provisions of this Certificate
of Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article ELEVENTH.
Exhibit B
CERTIFICATE OT DESIGNATIONS
EXHIBIT B
SCAN-OPTICS, INC.
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, RIGHTS AND RESTRICTIONS
FOR
4% SERIES I CUMULATIVE REDEEMABLE PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, the undersigned officers of Scan-Optics, a Delaware corporation (the
"Corporation"), do hereby state and certify that pursuant to the authority
expressly vested in the Board of Directors of the Corporation by the Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation"), the
Board of Directors, by a vote taken at a meeting duly called and duly held on
April 26, 2004, duly adopted the following resolutions:
RESOLVED, that pursuant to Article Fourth of the Certificate of
Incorporation, the Board of Directors of the Corporation may provide for the
issuance of up to 5,000,000 shares of the Corporation's preferred stock, $.02
par value per share (the "Preferred Stock"); and further
RESOLVED, that the Board of Directors of the Corporation hereby
designates 420,857 shares of such Preferred Stock as "4% Series I Cumulative
Redeemable Preferred Stock" having a stated face amount of $2.00 per share (such
Preferred Stock is referred to herein as the "Series I Preferred Stock"); and
further
RESOLVED, that the rights, preferences, privileges and restrictions
granted to and imposed on the Series I Preferred Stock are as follows:
Section 1. Number of Shares. The maximum number of authorized shares of Series I
Preferred Stock shall be 420,857. All shares of Series I Preferred Stock shall
be identical with each other in all respects.
Section 2. Dividends. The holders of the Series I Preferred Stock shall be
entitled to receive cumulative dividends from the Issue Date of the Series I
Preferred Stock accruing at the rate of 4% per annum on the Face Redemption
Amount, which dividends shall be payable quarterly in arrears on March 31, June
30, September 30 and December 31 of each year, commencing on September 30, 2004
or, if any such date is not a Business Day, on the next succeeding business day
(each, a "Dividend Payment Date"). Dividends shall be payable in cash on each
Dividend Payment Date to the extent that the Corporation generates Excess Cash
Flow for such quarterly period. In the event that the Corporation generates
Excess Cash Flow which is insufficient to pay the entire amount of the dividends
payable on any Dividend Payment Date then the amount of any such Excess Cash
Flow shall be allocated pro rata among the holders of the Series I Preferred
Stock and any unpaid dividends on such Dividend Payment Date shall be accrued
for the quarterly period for which they relate. If the Corporation fails to
generate any Excess Cash Flow with respect to any Dividend Payment Date then all
dividends payable on such Dividend Payment Date shall be accrued for the
quarterly period to which they relate. No dividends shall be paid on any
Dividend Payment Date unless all dividends for all preceding dividend periods
have been paid or a sufficient sum set apart for the payment of any such accrued
and unpaid dividends. Any accrued and unpaid dividends may be paid at any time,
without reference to any regular Dividend Payment Date. Dividends payable on the
Series I Preferred Stock will be computed on the basis of a 360 day year of
twelve 30 day months and will be deemed to accrue on a daily basis. Dividends on
the Series I Preferred Stock will accrue whether or not the Corporation has
earnings or profits and whether or not there are funds legally available for the
payment of such dividends.
Section 3. Liquidation Preference.
(a) Priority of Distributions. In the event (x) of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
or (y) a Liquidating Event (as defined below) shall occur, the assets of the
Corporation that may be legally distributed to the Corporation's stockholders
shall be distributed to the Corporation's stockholders in the following order of
priority:
(i) first, the holders of the shares of Series I Preferred Stock shall
be entitled to receive, prior to and in preference to any distribution of any of
the assets of the Corporation to the holders of any other Preferred Stock or
Common Stock of the Corporation, an amount per share of Series I Preferred Stock
equal to $2.00 (as such number may be adjusted for stock splits, stock
dividends, combinations, recapitalizations, reorganizations and other similar
transactions), plus an amount equal to all accrued and unpaid dividends on the
Series I Preferred Stock through the date of such liquidation, dissolution,
winding up or Liquidating Event (such aggregate amount being referred to herein
as the "Liquidation Preference"); and
(ii) second, after payment in full of the Liquidation Preference to the
holders of the Series I Preferred Stock, the remaining assets of the Corporation
that may legally be distributed to the Corporation's stockholders shall be
distributed among the holders of any other series of preferred stock of the
Corporation, as applicable, in the manner provided by the Certificate of
Incorporation and thereafter ratably among the holders of the shares of Common
Stock in proportion to the aggregate number of shares owned by each such holder.
If, upon any such dissolution or distribution, the assets of the
Corporation distributable among the holders of the shares of Series I Preferred
Stock entitled to a preference shall be insufficient to pay in full the
Liquidation Preference, then such assets, or the proceeds thereof, shall be
distributed among the holders of the shares of Series I Preferred Stock ratably.
(b) Liquidating Events.
(i) For purposes hereof, a consolidation or merger of the Corporation,
a sale, lease or conveyance by the Corporation of at least 80% of its assets, or
any other transaction which results in the sale, transfer, assignment,
conveyance or other disposition of 50% or more of the voting power of the
Corporation to persons or entities other than the holders of the Series I
Preferred Stock shall be deemed to be a "Liquidating Event", unless the holders
of a majority of the then-outstanding shares of Series I Preferred Stock shall
otherwise agree.
(ii) This Corporation shall give each holder of Series I Preferred
Stock written notice of any transaction referred to in clause (i) above no later
than 10 business days prior to (A) the stockholders' meeting called to approve
such transaction, or (B) the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
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transaction. Such notice shall describe the material terms and conditions of the
impending transaction and the holders' rights under this Section, and the
Corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than 10 business
days after the Corporation has given the first notice provided for herein or
sooner than 5 business days after the Corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened or waived upon the written consent of the holders of a majority of
the then-outstanding shares of Series I Preferred Stock.
Section 4. Voting Rights; Protective Provisions.
(a) General Voting Rights. Except as otherwise required by law or
expressly set forth herein, the shares of Series I Preferred Stock shall be
non-voting and the holders of Series I Preferred Stock shall not be entitled to
vote on any matter to be voted on at any annual or special meeting of
stockholders of the Corporation.
(b) Protective Provisions. So long as any shares of Series I Preferred
Stock are outstanding, without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of two-thirds of the
then-outstanding shares of Series I Preferred Stock, voting together as a single
class, the Corporation shall not:
(i) increase or decrease the number of authorized shares of Series I
Preferred Stock;
(ii) amend, alter or repeal the Corporation's Certificate of
Incorporation, this Certificate of Designations or the Corporation's by-laws to
alter or change the rights, preferences or powers of the Series I Preferred
Stock, or any Senior Stock (as defined below) or Parity Stock (as defined below)
so as to adversely affect the Series I Preferred Stock;
(iii) authorize, create or issue any class or series, or any shares of
any class or series, of capital stock of the Corporation (A) having any
preference or priority as to dividends or conversion or upon redemption,
liquidation, dissolution or winding up over the Series I Preferred Stock (any
such capital stock being "Senior Stock") or (B) ranking on a parity (either as
to dividends or conversion or upon redemption, liquidation, dissolution or
winding up) with the Series I Preferred Stock (any such capital stock being
"Parity Stock"); or
(iv) reclassify, convert or exchange any of the Corporation's shares of
capital stock into Senior Stock or Parity Stock, or authorize, create or issue
any security exchangeable for, convertible into, or evidencing the right to
purchase any Senior Stock or Parity Stock.
Section 5. Redemption.
(a) Mandatory Redemption. On the earlier to occur of (i) March 30,
2007, and (ii) the occurrence of the Maturity Date (as defined in the Credit
Agreement) (such earlier date being the "Mandatory Redemption Date"), the
Corporation shall redeem all of the issued and outstanding shares of Series I
Preferred Stock by paying the holders of record thereof an amount in cash per
share equal to $2.00 (as such number may be adjusted for stock splits, stock
dividends, combinations, recapitalizations, reorganizations and other similar
transactions), plus an amount equal to all accrued and unpaid dividends on the
Series I Preferred Stock through the
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Mandatory Redemption Date (such aggregate amount being referred to herein as the
"Redemption Price").
(b) Early Redemption. In addition, following the payment in full of the
Loans (as defined in the Credit Agreement), the Corporation shall redeem all of
the issued and outstanding shares of Series I Preferred Stock by paying the
holders of record thereof an amount per share of Series I Preferred Stock equal
to the Redemption Price (the date upon which the Corporation actually redeems
the Series I Preferred Stock being the "Early Redemption Date").
(c) Redemption Terms. In order to receive payment of the Redemption
Price, the holder of any shares of Series I Preferred Stock redeemed pursuant to
this Section shall before or within 60 days after the Mandatory Redemption Date
or Early Redemption Date, as the case may be, surrender the certificate or
certificates representing such shares to the Corporation or provide a lost stock
affidavit and indemnification undertaking to the Corporation.
(d) Waiver. Notwithstanding anything in this Section 5 to the contrary,
the holders of a majority of the then outstanding shares of Series I Preferred
Stock may agree to waive any provision in this Section 5, including, but not
limited to, the Mandatory Redemption Date or the Early Redemption Date, by
notifying the Corporation in writing of any such waiver pursuant to this Section
5(d).
Section 6. Definitions. As used herein, the following terms have the
meanings stated below.
"Business Day" shall mean a day other than Saturday or Sunday or other
day on which commercial banks in New York, New York are authorized or required
by law or other governmental action to close.
"Capital Expenditures" means amounts paid or indebtedness incurred by
the Corporation or any of its subsidiaries in connection with the purchase or
lease by the Corporation or any of its subsidiaries of assets that would be
required to be capitalized and shown on the balance sheet of such person in
accordance with GAAP.
"Common Stock" shall mean the Common Stock, par value $0.02 per share,
of the Corporation as authorized on the date hereof, and also any capital stock
of any class of the Corporation hereafter authorized which shall not be limited
to a fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
"Consolidated Operating Cash Flow" means, for any period, an amount
equal to (a) the sum of (i) the earnings (or loss) from the operations of the
Corporation and its subsidiaries for such period, after payment or provision for
all expenses and other proper charges, but before payment or provision for any
income taxes or interest expense, plus (ii) depreciation and amortization for
such period, minus (b) cash payments for all taxes paid during such period,
minus (c) Capital Expenditures of the Corporation made during such period to the
extent permitted under the Credit Agreement.
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"Consolidated Financial Obligations" means, for any period, an amount
equal to the sum of all payments on Indebtedness that become due and payable or
that are to become due and payable during such period pursuant to any agreement
or instrument to which the Corporation or any of its subsidiaries is a party
relating to the borrowing of money or the obtaining of credit or in respect of
capitalized leases.
"Credit Agreement" means that certain Third Amended and Restated Credit
Agreement, dated as of March 30, 2004, among the Corporation, the guarantors
identified therein, the lenders identified therein and Patriarch Partners Agency
Services, LLC, as the same may be amended, modified and supplemented from time
to time in accordance with the terms thereof.
"Excess Cash Flow" means, for any period, the amount equal to
Consolidated Operating Cash Flow for such period minus the aggregate amount of
Consolidated Financial Obligations payable during such period.
"Face Redemption Amount" means an amount equal to $841,714.
"GAAP" means generally accepted accounting principles in the United
States as in effect from time to time, consistently applied throughout the
periods to which reference is made.
"Indebtedness" means, with respect to any person, all obligations of
such person, contingent or otherwise, that in accordance with GAAP should be
classified as liabilities, including, without limitations (a) all debt
obligations, (b) all liabilities secured by Liens, (c) all guarantees and (d)
all liabilities in respect of bankers' acceptances of letters of credit.
"Issue Date" means ________, 2004.
"Lien" means any encumbrance, mortgage, pledge, hypothecation, charge,
restriction or other security interest of any kind securing any obligation of
any person.
Section 7. Reacquired Shares. Any shares of Series I Preferred Stock
acquired by the Corporation in any manner shall be retired and canceled promptly
after the acquisition thereof and may not be reissued.
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In witness whereof, the Corporation has caused this Certificate to be
executed as of this __th day of _________, 2004.
SCAN-OPTICS, INC.
By:
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Name:
Title:
ATTEST:
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Name:
Title:
SUBSCRIPTION AND REPURCHASE AGREEMENT
EXHIBIT C
SUBSCRIPTION AND REPURCHASE AGREEMENT (this "Agreement"), dated as of
May ___, 2004, between SCAN-OPTICS, INC. (the "Company") and ARK CLO 2000-1,
LIMITED (the "Purchaser" and, together with the Company, individually, a
"Party," and collectively, the "Parties").
RECITALS
A. Purchaser and the Company are parties to the Credit Agreement
(defined below) relating to, among other things, certain Loans (defined below)
made by the Purchaser to the Company.
B. As consideration for the Purchaser's agreement to surrender to the
Company for cancellation certain warrants to purchase common stock of the
Company and certain preferred stock of the Company, extending the maturity date
of the Loans under the Credit Agreement and the termination of the Master
Agreement (defined below), the Company wishes to issue and sell to the
Purchaser, and the Purchaser wishes to purchase from the Company, the Securities
(as defined below), on the terms and subject to the conditions of this
Agreement.
C. The Company and the Purchaser now wish to enter into this Agreement
to provide for the acquisition of the Securities by the Purchaser and the
Purchaser's agreement to transfer certain of the Securities to the Company under
certain circumstances, all as set forth herein.
AGREEMENT
In consideration of the premises and the mutual covenants and the
agreements herein set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
Defined Terms
Section 1.01. Definitions. As used in this Agreement, the following terms have
the meanings stated:
"2004 Plan" has the meaning stated in Section 5.07(b).
"Affiliate" of a Person means any other Person that directly
or indirectly controls, is controlled by or is under common control
with, the Person or any of its Subsidiaries.
"Amended and Restated Certificate" has the meaning stated in
Section 4.01(f).
"Cancelled Preferred Stock" means that certain stock
certificate No. 1 issued by the Company to the Purchaser representing
380,000 shares of the Series B Redeemable Preferred Stock of the
Company.
"Cancelled Securities" means the Cancelled Preferred Stock and
the Cancelled Warrant.
"Cancelled Warrant" means that certain Warrant No. W-1 dated
as of December 31, 2001 issued by the Company to the Purchaser
entitling the holder thereof to purchase 33.20% of the Company's Common
Stock on a fully diluted basis as of December 31, 2001.
"Certificate of Designations" has the meaning stated in
Section 4.01(g).
"Closing" has the meaning stated in Section 3.01.
"Closing Date" has the meaning stated in Section 3.01.
"Common Stock" means the common stock, par value $.02 per
share, of the Company.
"Company" has the meaning stated in the Heading of this
Agreement and its successors.
"Company Indemnified Persons" has the meaning stated in
Section 8.01(b).
"Confidential Information" has the meaning stated in Section
7.01(c).
"Consents" means any approval, consent, authorization or order
of, notice to or registration or filing with, or any other action by,
any Governmental Body or other Person.
"Contract" means any agreement, contract, license, lease,
instrument, document, note, bond, mortgage, indenture, guarantee, or
other legally binding commitment or obligation, whether or not written,
each as amended or modified from time to time.
"Credit Agreement" means that certain Third Amended and
Restated Credit Agreement, dated as of March 30, 2004, among the
Company, the guarantors identified therein, the Purchaser and the other
lenders identified therein and Patriarch Partners Agency Service, LLC,
as the same may be amended, modified and supplemented from time to time
in accordance with the terms thereof.
"Dollars" and "$" refer to United States dollars and other
lawful currency of the United States of America from time to time in
effect.
"Existing Management" means any of Joseph P. Crouch, Richard
C. Goyette, Joel K. Howser, James C. Mavel, Clarence W. Rife, Michael
Villano, Alan W. Ware, Peter Stelling and any other management level
employees who are granted options under the Existing Management Option
Plan.
"Existing Management Option Agreements" means all of the stock
option agreements pursuant to the Existing Management Option Plan
covering the options
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granted to date to Existing Management and set
forth on Schedule A attached hereto and options that may be granted
from time to time in the future under such plan.
"Existing Management Option Plan" means the Company's amended
and restated 2001 executive officer stock plan covering 6,815,114
shares of Common Stock.
"Governmental Body" means any legislative, agency, bureau,
commission or court, whether federal, state, local, domestic or
foreign.
"Loans" shall have the meaning given to such term in the
Credit Agreement.
"Losses" has the meaning stated in Section 8.01(a).
"Master Agreement" means that certain Master Agreement, dated
as of August 2, 1999, as amended by that certain First Amendment to
Master Agreement dated as of December 31, 2001 and that certain Second
Amendment to Master Agreement dated as of March 30, 2004.
"Option Shares" means any shares of the Company's Common Stock
to be issued to any of the Existing Management upon the exercise of his
rights under any Existing Management Option Agreement.
"Outside Date" has the meaning stated in Section 3.01.
"Person" means an individual, a corporation, a partnership, a
limited liability company, an association, a trust or any other entity
or organization, including a Governmental Body.
"Purchaser" has the meaning stated in the heading of this
Agreement, and its successors and permitted assigns.
"Purchaser Common Stock" has the meaning stated in Section
2.01.
"Purchaser Indemnified Person" has the meaning stated in
Section 8.01(a).
"Purchaser Preferred Stock" has the meaning stated in Section
2.01.
"Recapitalization" has the meaning set forth in the Credit
Agreement.
"Regulation" means each applicable law, rule, regulation or
order by any Governmental Body and each judgment, injunction or order
of any Governmental Body.
"Required Consents" has the meaning stated in Section 5.04.
"Sale Agreements" means this Agreement, the Certificate of
Designations, and the Share Certificates.
"Securities" has the meaning stated in Section 2.01.
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"Securities Act" means the Securities Act of 1933, as amended,
and the related regulations and published interpretations.
"Series I Preferred Stock" means the Company's Preferred
Stock, par value $0.02 per share, designated as "4% Series I Cumulative
Redeemable Preferred Stock" pursuant to the Certificate of
Designations.
"Share Certificates" means the stock certificates representing
the Securities to be purchased by the Purchaser hereunder.
"Subsidiary" of a Person means any Person of which equity
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors, the general partner, the
manager or other persons performing similar functions are at the time
directly or indirectly owned by the Person. Unless the context
otherwise requires, references to one or more Subsidiaries are
references to Subsidiaries of the Company.
"Transactions" means the transactions contemplated by, or
described in, this Agreement and the other Sale Agreements, including,
without limitation, the issuance, sale, transfer, assignment,
conveyance and delivery of the Securities to the Purchaser.
ARTICLE II
Issuance and Sale of the Securities
-----------------------------------
Section 2.01. Issuance and Sale of the Securities. Upon the terms and
subject to the conditions set forth in this Agreement, at the Closing, the
Company will issue, sell, transfer, assign, convey and deliver to the Purchaser
(a) 420,857 shares of Series I Preferred Stock (the "Purchaser Preferred
Stock"), and (b) 36,256,407 shares of the Company's Common Stock (the "Purchaser
Common Stock" and collectively with the Purchaser Preferred Stock, the
"Securities"), and the Purchaser will purchase, acquire and accept from the
Company the Securities, for the consideration set forth in Section 2.02.
Section 2.02. The Consideration. Upon the terms and subject to the
conditions set forth in this Agreement, at the Closing, as payment in full of
the purchase price for the Securities and as an integral part of the
Recapitalization, (i) the Purchaser will surrender to the Company for
cancellation the Cancelled Preferred Stock and the Cancelled Warrant, (ii) the
Purchaser and the Company shall terminate and cancel the Master Agreement and
the Purchaser shall transfer to the Company (on an "as is" and "where is" basis,
without any representation or warranty whatsoever) all of its interests (if any)
in the personal property subject to such Master Agreement, and (iii) the
maturity date of the Loans shall be extended from June 1, 2005 to March 30,
2007.
ARTICLE III
The Closing
-----------
Section 3.01. Time and Place of the Closing. The closing of the
issuance, sale, transfer,
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assignment, conveyance and delivery of the Securities (the "Closing"), will be
deemed to take place at the offices of Richards Spears Kibbe & Orbe LLP, One
World Financial Center, New York, New York 10281, at 10:00 a.m. (New York City
time), as of the date on which all of the conditions to closing set forth in
this Agreement are satisfied or waived (the "Closing Date"), so long as the
conditions to closing set forth in this Agreement are satisfied or waived on or
prior to September 30, 2004 or such later date agreed to by the Purchaser (the
"Outside Date").
ARTICLE IV
Conditions to the Closing
-------------------------
Section 4.01. Conditions Precedent to the Obligations of the Purchaser.
The obligations of the Purchaser under this Agreement are expressly subject to
the fulfillment of each of the following conditions, unless waived by the
Purchaser in writing, at or before the Outside Date.
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement and in the other Sale Agreements
shall be true in all material respects on and as of the Closing Date. (b)
Performance of Agreements. The Company shall have performed and complied in all
material respects with all of its covenants and other obligations contained in
this Agreement and in the other Sale Agreements required to be performed or
complied with by the Company at or before the Closing Date.
(c) Consents. The Purchaser shall have received copies of all of the
Required Consents, which Required Consents shall have been duly obtained or made
and shall be effective on and as of the Closing Date.
(d) No Actions. There shall be no lawsuit, action, proceeding or claim
by any Governmental Body or by any other Person (i) challenging or seeking to
restrain or prohibit the Transactions, or (ii) seeking to obtain from the
Purchaser or any of its Affiliates in connection with the Transactions any
damages.
(e) Share Certificates. The Purchaser shall have received the Share
Certificates, registered in the names of the Purchaser, duly executed and
delivered by the Company.
(f) Amended and Restated Certificate of Incorporation. The Board of
Directors and the shareholders of the Company shall have adopted the Amended and
Restated Certificate of Incorporation, in the form of Exhibit 4.01(f) hereto
(the "Amended and Restated Certificate"), and such Amended and Restated
Certificate shall have been filed with, and accepted for filing by, the
Secretary of State of the State of Delaware.
(g) Certificate of Designations. The board of directors of the Company
shall have adopted the Certificate of Designations for the Series I Preferred
Stock, in the form of Exhibit 4.01(g) hereto (the "Certificate of
Designations"), and such Certificate of Designations shall have been filed with,
and accepted for filing by, the Secretary of State of the State of Delaware.
(h) Good Standing Certificate. The Purchaser shall have received a
certificate of the Secretary of State of the jurisdiction in which the Company
is organized, dated as of a recent
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date, as to the good standing of the Company.
(i) Opinion of Counsel. The Purchaser shall have received an opinion of
Day, Berry & Howard, counsel for the Company, in form and substance reasonably
satisfactory to the Purchaser.
(j) Election of Directors. Lynn Tilton, Michael Scinto and Scott
Schooley shall have been nominated and elected to the board of directors of the
Company at the 2004 Annual Stockholder Meeting.
(k) Resignation of Directors. Each of E. Bulkeley Griswold, Robert H.
Steele and Lyman C. Hamilton, Jr. shall have tendered his resignation as a
member of the Board of Directors of the Company.
Section 4.02. Conditions Precedent to the Obligations of the Company.
The obligations of the Company under this Agreement are expressly subject to the
fulfillment of each of the following conditions, unless waived by the Company in
writing, at or before the Outside Date.
(a) Representations and Warranties. The representations and warranties
of the Purchaser set forth in this Agreement and in the other Sale Agreements
shall be true in all material respects on and as of the Outside Date with the
same force and effect as though made on and as of the Outside Date, effective as
of the Closing Date.
(b) Performance of Agreements. The Purchaser shall have performed and
complied in all material respects with all of its covenants and other
obligations set forth in this Agreement and in the other Sale Agreements
required to be performed or complied with by the Purchaser at or before the
Outside Date.
(c) Consents. The Company shall have received copies of all of the
Required Consents which Required Consents shall have been duly obtained or made
and shall be effective on and as of the Outside Date.
(d) No Actions. There shall be no lawsuit, action, claim or proceeding
by any Governmental Body or by any other Person (i) challenging or seeking to
restrain or prohibit the Transactions, or (ii) seeking to obtain from the
Company or any of its Affiliates in connection with the Transactions any damages
that are material in relation to the Company or any of its Affiliates.
(e) Cancellation of Cancelled Warrants, Cancelled Preferred Stock and
Master Loan Agreement. The Company shall have received the original Cancelled
Warrant and Cancelled Preferred Stock Certificate, and the Purchaser and the
Company shall have executed this Agreement.
ARTICLE V
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants to the Purchaser as of the
date hereof and as of the Outside Date, effective as of the Closing Date, as
follows:
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Section 5.01. Existence and Power. Each of the Company and its
Subsidiaries (a) is a corporation or limited liability company, as the case may
be, duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) is duly qualified under the laws of each
jurisdiction in which qualification is required to own, lease or license their
assets and properties or to carry on their business, and (c) has all necessary
corporate or limited liability company power and authority, as the case may be,
required to own, lease or license their assets and properties, to conduct their
businesses and to execute and deliver this Agreement and the other Sale
Agreements to which it is a Party and to consummate the Transactions.
Section 5.02. Authorization; Binding Effect. The execution and delivery
by the Company of this Agreement and the other Sale Agreements, the performance
by the Company of its obligations under this Agreement and the other Sale
Agreements and the consummation of the Transactions by the Company has been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement is, and the other Sale Agreements are, or will be, when executed and
delivered in accordance with this Agreement, the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
their terms, except that such enforcement (a) may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting creditors' rights generally and
(b) is subject to the availability of equitable remedies, as determined in the
discretion of the court before which such a proceeding may be brought.
Section 5.03. Contravention. Neither the execution, delivery and
performance of this Agreement or the other Sale Agreements by the Company nor
the consummation of the Transactions by the Company will (with or without notice
or lapse of time or both) (a) violate or breach any provision of the Company's
or any of its Subsidiaries' organizational or governing documents, (b) violate
or breach any Regulation by which the Company, any of its Subsidiaries or any of
their assets or properties may be bound or affected, or (c) breach or result in
a default under, result in the acceleration of, or give rise to a right of
termination, cancellation, modification or acceleration or require any notice
under, any material Contract to which the Company or any of its Subsidiaries is
a party or by which the Company, any of its Subsidiaries or any of their assets
or properties, including, without limitation, the Securities, may be bound or
affected.
Section 5.04. Required Consents. The Company has obtained all Consents
(all such Consents being the "Required Consents") which are required or
advisable in connection with (a) the due execution and delivery by the Company
of this Agreement and the other Sale Agreements and the performance of the
Company's obligations thereunder, and (b) the consummation of the Transactions
by the Company, including, without limitation, the issuance, sale, transfer,
assignment, conveyance and delivery of the Securities to the Purchaser
hereunder.
Section 5.05. Litigation. There is no lawsuit, action, claim or
proceeding against the Company or any of its Subsidiaries that questions the
validity of this Agreement or any of the other Sale Agreements or that involves
or relates to any of the Transactions.
Section 5.06. The Securities.
(a) Series I Preferred Stock. (i) The shares of Series I Preferred
Stock purchased by the Purchaser hereunder will have the terms and provisions
set forth in the Certificate of
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Designations.
(b) Title to the Securities. Upon delivery to the Purchaser at the
Closing of the Share Certificates with respect to the Securities for the
issuance, sale, transfer, assignment, conveyance and delivery to the Purchaser,
(A) the Purchaser will become the sole record owner of such Securities and good
and marketable title to such Securities will pass to the Purchaser, free and
clear of any liens, claims, encumbrances or security interests of any kind,
other than those created by the Purchaser or as expressly set forth in Section
7.04 below, and (B) such Securities will be duly authorized, validly issued,
fully paid and nonassessable.
Section 5.07. Capitalization.
(a) Authorized, Issued and Outstanding Shares. As of the Closing Date,
immediately following the issuance and sale of the Securities pursuant to this
Agreement, the authorized capital stock of the Company will consist of (i)
5,000,000 shares of Preferred Stock, par value $.02, of which 420,857 have been
designated Series I Preferred Redeemable Preferred Stock, all of which will be
issued and outstanding (for the avoidance of doubt, no other shares of Preferred
Stock shall, as of the Closing Date, be designated, issued or outstanding), and
(ii) 65,000,000 shares of Common Stock, par value $.02, of which 43,696,139
shares will be issued and outstanding. All of the issued and outstanding shares
of Common Stock and Preferred Stock have been duly authorized, validly issued
and are fully paid and nonassessable. As of the Closing Date, except as set
forth above, the Company will not have any equity securities issued and
outstanding, except for the options listed in clause (b) below.
(b) Rights, Options, Etc. Except for (i) currently outstanding options
to purchase 556,500 shares of Common Stock granted to the Company's employees
pursuant to the Company's employee stock incentive plans, (ii) currently
outstanding options to purchase 791,183 shares of Common Stock granted to
officers of the Company, (iii) currently outstanding options to purchase 280,000
shares of Common Stock granted to directors of the Company and (iv) currently
outstanding options to purchase 1,080,000 shares of Common Stock (which will,
after the option exchange under the Existing Management Option Plan, scheduled
to occur on or before the date which is ten (10) trading days after the Closing
Date, (the "Option Exchange") be exercisable for 6,815,114 shares of Common
Stock) granted to executive officers of the Company, pursuant to the six stock
option plans for key employees, officers and directors of the Company,
(collectively the "Options") there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements or agreements of any kind for the purchase or
acquisition from the Company of any of its securities. As of the Closing Date,
there are in addition an aggregate of 2,501,540 shares of Common Stock reserved
under stock option plans of the Company and not covered by existing options (or
in the case of the Existing Management Option Agreements, to be covered by such
agreements after the Option Exchange), comprised of (x) 110,272 shares of Common
Stock reserved for future grants under all of the Company's stock option plans
(other than the Existing Management Option Plan) in existence prior to the
Recapitalization and (y) 2,391,268 shares of Common Stock reserved for future
grants under the 2004 Incentive and Non-Qualified Stock Option Plan ("2004
Plan") adopted in connection with the Recapitalization. The Company is not a
party to or subject to any agreement or understanding, and, to the best of the
Company's knowledge, there is no agreement or understanding between any persons
that affects or relates to
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the voting or giving of written consents with respect to any security or the
voting by a director of the Company.
Section 5.08. No Brokers. The Company has not engaged or employed any
finder, broker, agent or other intermediary in connection with the Transactions.
There are no fees, commissions or compensation payable by the Purchaser to any
Person engaged or retained by, through or on behalf of the Company in connection
with the consummation of the Transactions.
Section 5.09. Securities Laws. The Company has not offered to sell any
portion of the Securities or any interest therein in a manner which violates any
applicable securities law or would require the issuance and sale hereunder to be
registered under the Securities Act.
Section 5.10. Misstatements. No representation or warranty contained in
this Agreement or any other Sale Agreement, contained or will contain, as the
case may be, any material misstatement of fact or omitted or will omit, as the
case may be, to state a material fact or any fact necessary to make the
statement contained therein not materially misleading.
ARTICLE VI
Representations and Warranties of the Purchaser
-----------------------------------------------
The Purchaser hereby represents and warrants to the Company as of the
date of this Agreement and as of the Outside Date, effective as of the Closing
Date, as follows:
Section 6.01. Existence and Power. The Purchaser (a) is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and (b) has all necessary power and authority
to execute and deliver the Sale Agreements and to consummate the Transactions.
Section 6.02. Authorization; Binding Effect. The execution and delivery
by the Purchaser of this Agreement and the other Sale Agreements, the
performance by the Purchaser of its obligations under this Agreement and the
other Sale Agreements and the consummation of the Transactions by the Purchaser
has been duly authorized by all necessary action on the part of the Purchaser.
This Agreement and each of the other Sale Agreements is, or will be, when
executed and delivered in accordance with this Agreement, legal, valid and
binding obligations of the Purchaser enforceable against the Purchaser in
accordance with its terms, except that such enforcement (a) may be limited by
bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights
generally and (b) is subject to the availability of equitable remedies, as
determined in the discretion of the court before which such a proceeding may be
brought.
Section 6.03. Contravention. Neither the execution, delivery and
performance of this Agreement and the other Sale Agreements by the Purchaser nor
the consummation of the Transactions by the Purchaser will (with or without
notice or lapse of time or both) (a) violate or breach any provision of the
Purchaser's organizational or governing documents, (b) violate or breach any
Regulation by which the Purchaser or any of its properties may be bound or
affected, or (c) breach or result in a default under any material Contract to
which the Purchaser is a party or by which the Purchaser or any of its
properties may be bound or affected.
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Section 6.04. Consents. Except for the Required Consents, all Consents
have been obtained which are required or advisable in connection with (a) the
due execution and delivery by the Purchaser of this Agreement and the other Sale
Agreements and the performance of the Purchaser's obligations thereunder and (b)
the consummation of the Transactions by the Purchaser.
Section 6.05. Litigation. There is no lawsuit, action, claim or
proceeding against the Purchaser that involves any of the Transactions or any
material property owned, licensed, leased or used by the Purchaser that,
individually or in the aggregate, if determined adversely to the Purchaser,
would materially and adversely affect the ability of the Purchaser to perform
its obligations under this Agreement or the other Sale Agreements.
Section 6.06. Investment Representations.
(a) Purchase for Own Account. The Securities will be acquired for the
Purchaser's own account, not as a nominee or agent, and not with a view to the
distribution of any part thereof in violation of applicable securities laws.
(b) No Registration. The Purchaser understands and acknowledges that
the Securities are not being registered under the Securities Act, or any state
securities laws on the grounds that the issuance thereof is exempt under Section
4(2) of the Securities Act, and such state securities laws as a transaction by
an issuer not involving any public offering, and that reliance on such exemption
is predicated in part on the representations by the Purchaser herein. The
Purchaser understands that the Securities cannot be sold unless they are
subsequently registered under the Securities Act and applicable state securities
laws or an exemption from such registration is available.
(c) Accredited Investor. The Purchaser is an "accredited investor" as
defined in Rule 501(a) of the Securities Act.
(d) Legend. The Purchaser agrees that the Company will obtain "stop
transfer" orders with respect to the Securities purchased by the Purchaser
hereunder to ensure that the Purchaser abides by the transfer restrictions
applicable to the Securities. In addition, the Purchaser agrees that the
Securities will bear the following legends for so long as applicable under
applicable securities laws:
"The Securities represented by this certificate have not been
registered or qualified under the Securities Act of 1933, as amended
(the "1933 Act"), or under any state securities laws and such
Securities have been issued to the holder in reliance upon certain
exemptions from registration and qualification provided in the 1933 Act
and the rules and regulations thereunder and the applicable state
securities laws. Accordingly, neither such Securities or nor any
interest therein may be offered, sold, pledged, assigned or otherwise
transferred unless (1) a registration statement with respect thereto is
effective under the 1933 Act and any applicable state securities laws
or (2) such Securities are offered, sold, pledged, assigned, or
transferred in the manner pursuant to a valid exemption therefrom."
The Repurchase Shares that are subject to repurchase by the Company
pursuant to
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Section 7.04 of this Agreement shall also bear the following legend
for so long as such repurchase rights are applicable.
"The shares of stock represented by this certificate are
subject to restrictions upon transfer and a right of repurchase by the
Company set forth in a certain Subscription and Repurchase Agreement
between the Company and the registered owner of this certificate. The
Company will furnish a copy of such agreement to the holder of this
certificate upon written request and without charge."
ARTICLE VII
Covenants
Section 7.01. Confidentiality.
---------------
(a) Confidentiality. Each of the Company and the Purchaser will not,
and will cause its respective shareholders, partners, managers, members,
directors, officers, employees, agents, counsel, accountants, advisors,
Affiliates and other representatives not to, directly or indirectly, disclose,
reveal, divulge, publish or otherwise make known to any Person any Confidential
Information for any reason or purpose whatsoever, other than disclosures to such
Person's directors, officers, employees, agents, counsel, accountants, lenders,
potential lenders, investors, potential investors, investment managers and other
authorized representatives who need to know such Confidential Information and
are advised of the confidential nature of the Confidential Information.
(b) Permitted Disclosure. Notwithstanding the provisions of Section
7.01(a) above (i) the Purchaser shall be permitted to disclose Confidential
Information to any Person in connection with the Transfer, or proposed Transfer,
of the Securities, any portion thereof, or any interest therein, including,
without limitation, any potential transferee in connection with any such
Transfer or proposed Transfer, and to use the Confidential Information in
connection with any such proposed Transfer, so long as the proposed transferee
agrees to maintain the confidentiality of such information, (ii) the Company and
the Purchaser shall be permitted to disclose Confidential Information as
required by applicable Regulation or a subpoena or court order by a court of
competent jurisdiction, and (iii) the Company and the Purchaser shall be
permitted to disclose Confidential Information to the extent necessary to obtain
the Required Consents or otherwise effectuate the Transactions.
(c) "Confidential Information". For purposes of this Agreement, the
term "Confidential Information" means any non-public information about the
Company delivered to such Person; provided, however, that "Confidential
Information" does not include information which (A) is in the public domain at
the time it is received by the Purchaser, or (B) which becomes public through no
fault of the Purchaser or any other Person.
Section 7.02. Further Assurances. Promptly upon the reasonable request
by the Purchaser, the Company shall (a) correct any defect or error that may be
discovered in this Agreement or in any other Sale Agreement or in the execution,
delivery, acknowledgment or recordation of this Agreement or any other Sale
Agreement, (b) execute, acknowledge, deliver, record, file and register, any and
all such further acts, conveyances, assignments, notices of
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assignment, transfers, certificates, assurances, endorsements and other
instruments, and (c) take all such action, in each case, as such requesting
party may require from time to time.
Section 7.03. Expenses. The Company shall be responsible for and pay
the Purchaser's and its own legal, accounting and other fees and expenses
arising from the due diligence review, and the negotiation, preparation and
execution of this Agreement and the other Sale Agreements.
Section 7.04. Repurchase by the Company.
(a) Repurchase. Upon the exercise by any of the Existing Management of
his rights under any of the Existing Management Option Agreements to receive
Option Shares, the Company shall repurchase from the Purchaser, and the
Purchaser hereby agrees to sell, transfer and deliver to the Company, the same
number of shares of Common Stock, at a price of $.02 per share, as are issued to
the Existing Management as Option Shares. This repurchase right shall apply to
no more than 6,815,114 shares of Purchaser's Common Stock (the "Repurchase
Shares"), as adjusted for stock dividends, stock splits, reverse splits or
combinations, recapitalizations or other similar events; provided, that such
adjustment for any such event that would result in an increase of the number of
shares of Common Stock issued and outstanding shall only occur if both (i) the
Repurchase Shares shall have received the benefit of any such event (except in
the case of an issuance of shares under Section 7.04(c)) and (ii) the Existing
Management Option Agreements shall have provided commensurate anti-dilution
protection for the Option Shares to be issued thereunder; and provided, further,
any reverse split, recombination or other similar event that acts to reduce the
number of Repurchase Shares available under this Section 7.04 shall so reduce
the number of such Repurchase Shares notwithstanding the effect such event has
on the number of Option Shares issuable under the Existing Management Option
Agreements. The Company and the Purchaser agree that the intent of the preceding
sentence is to ensure that no more than 18.8% of the Purchaser Common Stock
shall constitute Repurchase Shares subject to repurchase by the Company pursuant
to this Section 7.04.
(b) Restriction on Sale. The Purchaser shall not sell, transfer, assign
or convey any of the Repurchase Shares without the prior written consent of the
Company; provided, that, after the third anniversary of the date of this
Agreement, to the extent that any Existing Management Option Agreement
terminates and Option Shares are no longer issuable thereunder, or to the extent
that any Option Shares cease to be issuable under any of the Existing Management
Option Agreements or to the extent that options under the Existing Management
Option Agreements are never granted with respect to such Option Shares, this
Section 7.04 shall no longer apply to an equal number of shares of Purchaser
Common Stock and that number of shares of the Purchaser Common Stock shall no
longer constitute Repurchase Shares subject to repurchase by the Company
hereunder and shall no longer be subject to the restriction on transfer set
forth in this Section 7.04(b). At any time that any shares of Purchaser Common
Stock no longer constitute Repurchase Shares, the Company shall issue new
certificates to the Purchaser for such shares not bearing the legend relating to
Repurchase Shares set forth in Section 6.06(d).
(c) Remedy. If, at any time the Purchaser does not transfer the
applicable Option Shares of the Company as required by Section 7.04(a) within
thirty (30) days of the Company's delivery to the Purchaser of written notice of
the exercise by the Existing Management member (such person for purposes of
Section 7.04, a ("Optionee"), of his rights under the Existing Management Option
Agreement to receive Option Shares in accordance with the terms of the Existing
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Management Option Agreement (compliance by such Optionee to include, without
limitation, as applicable, the (x) exercise of the vested portion of such Option
only within the term of the Option, (y) payment to the Company of the exercise
price therefor and (z) payment to the Company of all applicable Federal, state
and local withholding taxes required to be paid by the Company upon such
exercise), then the Company shall promptly (but in any event within sixty (60)
days after the end of such thirty day period): (I) (x) issue the Option Shares
issuable upon exercise of such Existing Management Option Agreement to such
Optionee and (y) issue additional securities of the Company such that (i) each
stockholder of the Company (including the Optionee who had received Option
Shares pursuant to this remedy provision) receives additional Common Stock, and
(ii) each holder of options or rights convertible into or exercisable for shares
of Common Stock of the Company receives additional options or rights, in each
case other than the Purchaser and any of its permitted transferees holding
Purchaser Common Stock (collectively, the "Purchaser Common Stockholders"), such
that, after such additional issuances, the Purchaser Common Stockholders shall
have the percentage ownership of Common Stock of the Company, as would have
resulted had the Purchaser transferred the number of Repurchase Shares to the
Company in accordance with the requirements of Section 7.04(a) hereof, and (II)
increase the number of shares of Common Stock allocated to the 2004 Plan such
that the 2004 Plan shall have for issuance the same percentage of shares of the
Common Stock of the Company as it would have had had the Purchaser transferred
the number of Repurchase Shares to the Company in accordance with the
requirements of Section 7.04(a) hereof.
(d) Transfer to Trust. In the event that the Purchaser's Class A Notes
no longer have an investment grade rating, the Purchaser shall transfer any
remaining Repurchase Shares to a trust which shall hold such Repurchase Shares
subject to an agreement embodying the provisions of this Section 7.04. The trust
shall have no business other than holding such Repurchase Shares. The Purchaser
shall be the sole beneficial owner of such trust and shall have the right to
appoint the trustee of the trust. Any expenses of the trust and the trustee
shall be paid by the Company.
Section 7.05. Registration Rights. After the Closing, the Company shall
enter into a registration rights agreement with the Purchaser which provides the
Purchaser unlimited demand registration rights and other customary terms
reasonably acceptable to the Purchaser and the Company. The Company shall
reimburse the Purchaser for all its costs and expenses (including reasonable
attorney's fees and expenses) incurred in negotiating such registration rights
agreement.
Section 7.06. Satisfaction of Recapitalization Covenant. The Purchaser
acknowledges and agrees that upon satisfaction of the conditions to closing set
forth in Article IV hereof and the issuance and sale of the Securities to the
Purchaser at the Closing, the Company shall have satisfied the covenant set
forth in Section 5.1(h)(i) of the Credit Agreement.
ARTICLE VIII
Indemnification
Section 8.01. Indemnification.
---------------
(a) Indemnification by the Company. The Company will indemnify and defend
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the Purchaser and its Affiliates and each of their respective
shareholders, partners, members, managers, directors, officers,
employees, agents, attorneys and Affiliates (collectively, the
"Purchaser Indemnified Persons") against and hold each Purchaser
Indemnified Person harmless from any and all liabilities, obligations,
losses, damages, costs, expenses, claims and reasonable attorneys' fees
and expenses (collectively, "Losses"), that the Purchaser Indemnified
Persons may incur due to:
(i) any inaccuracy or breach of any of the representations and warranties
of the Company contained in this Agreement or any other Sale Agreement;
and/or
(ii) the nonfulfillment or breach of any covenant, undertaking, agreement or
other obligation of the Company contained in this Agreement or any
other Sale Agreement.
(b) Indemnification by the Purchaser. The Purchaser will indemnify and
defend the Company and its Affiliates and each of their respective
shareholders, partners, members, managers, directors, officers,
employees, agents, attorneys and Affiliates (collectively, the "Company
Indemnified Persons") against and hold each Seller Indemnified Person
harmless from any and all Losses that the Seller Indemnified Persons
may incur due to:
(i) any inaccuracy or breach of any of the representations and warranties
of the Purchaser contained in this Agreement or any other Sale
Agreement; and/or
(ii) the nonfulfillment or breach of any covenant, undertaking, agreement or
other obligation of the Purchaser contained in this Agreement or any
other Sale Agreement.
ARTICLE IX
Miscellaneous
Section 9.01. Notices. All notices, requests, demands and other
communications to any party or given under this Agreement will be in writing and
delivered personally, by overnight delivery or courier, by registered mail or by
telecopier (with confirmation received) to the parties at the address or
telecopy number specified for such parties on the signature pages hereto (or at
such other address or telecopy number as may be specified by a party in writing
given at least five business days prior thereto). All notices, requests, demands
and other communications will be deemed delivered when actually received.
Section 9.02. Counterparts. This Agreement may be executed
simultaneously in one or more counterparts, and by different parties hereto in
separate counterparts, each of which when executed will be deemed an original,
but all of which taken together will constitute one and the same instrument.
Section 9.03. Amendment of Agreement. This Agreement may not be amended,
modified or waived except by an instrument in writing signed on behalf of each
of the parties hereto; provided, that, Section 7.04 may not be amended and no
provision thereof waived except by an instrument in writing signed on behalf of
each of the parties hereto and either (i) a majority in number of the Existing
Management or (ii) Existing Management party to Existing Management Option
Agreements covering a majority in number of the Option Shares.
-14-
Section 9.04. Successors and Assigns; Assignability. This Agreement
will be binding upon and inures to the benefit of and be enforceable by the
respective successors and permitted assigns of the parties hereto. This
Agreement may not be assigned by the Company without the prior written consent
of the Purchaser. The Purchaser may assign its rights hereunder to any permitted
assignee of any of the Securities. Any assignment or attempted assignment in
contravention of this Section will be void ab initio and will not relieve the
assigning party of any obligation under this Agreement.
Section 9.05. Governing Law. This Agreement will be governed by, and
construed in accordance with, the laws of the state of New York applicable to
contracts executed in and to be performed entirely within that state, without
reference to conflicts of laws provisions.
Section 9.06. Integration. This Agreement and the other Sale Agreements
contain and constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede all prior negotiations, agreements and
understandings, whether written or oral, of the parties hereto.
Section 9.07. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
Section 9.08. No Third-Party Rights. This Agreement is not intended,
and will not be construed, to create any rights in any parties other than the
Company and the Purchaser, and no Person, other than assignees of the
Purchaser's rights hereunder, may assert any rights as third-party beneficiary
hereunder, except as provided in Article VIII, Section 9.03 or to assignees of
the Purchaser.
Section 9.09. Enforcement. Each Party hereby acknowledges and agrees
that the provisions of this Agreement are of a special and unique nature, the
loss of which cannot be accurately compensated for in damages by an action at
law, and that the breach or threatened breach of the provisions of this
Agreement by such Party would cause the other Party hereto irreparable harm and
that money damages would not be an adequate remedy for any breach or threatened
breach of the provisions of this Agreement by such Party. Therefore, each Party
hereby agrees that the other Party hereof shall be entitled to equitable relief,
including, without limitation, an injunction or injunctions (without the
requirement of posting a bond, other security or any similar requirement or
proving any actual damages), to prevent breaches or threatened breaches of this
Agreement by such Party and to specifically enforce the terms and provisions of
this Agreement, this being in addition to any other remedy to which such other
Party is or may be entitled at law or in equity.
Section 9.10. Submission to Jurisdiction. Each of the Company and the
Purchaser hereby (a) agrees that any lawsuit, action, claim or proceeding with
respect to this Agreement or
-15-
any other Sale Agreement may be brought only in the courts of the State of New
York or of the United States of America for the Southern District of New York,
(b) accepts for itself and in respect of its property, generally and
unconditionally, the exclusive jurisdiction of such courts, (c) irrevocably
waives any objection, including, without limitation, any objection to the laying
of venue or based on the grounds of forum non conveniens, which it may now or
hereafter have to the bringing of any Action in those jurisdictions, and (d)
irrevocably consents to the service of process of any of the courts referred to
above in any lawsuit, action, claim or proceeding by the mailing of copies of
the process to the parties hereto as provided in Section 9.01. Service effected
as provided in this manner will become effective ten calendar days after the
mailing of the process.
Section 9.11. Waiver of Jury Trial. Each of the Company and the
Purchaser hereby waives any right to a trial by jury in any lawsuit, action,
claim or proceeding to enforce or defend any right under this Agreement or any
other Sale Agreement or any amendment, instrument, document or agreement
delivered or to be delivered in connection with this Agreement or any other Sale
Agreement and agrees that any lawsuit, action, claim or proceeding will be tried
before a court and not before a jury.
Section 9.12. Ambiguities. This Agreement was negotiated between legal
counsel for the parties and any ambiguity in this Agreement shall not be
construed against the party who drafted this Agreement.
Section 9.13. No Waiver; Remedies. No failure or delay by any party in
exercising any right, power or privilege under this Agreement will operate as a
waiver of the right, power or privilege. A single or partial exercise of any
right, power or privilege will not preclude any other or further exercise of the
right, power or privilege or the exercise of any other right, power or
privilege. The rights and remedies provided in this Agreement and the other Sale
Agreements will be cumulative and not exclusive of any rights or remedies
provided by law.
Section 9.14. D&O Insurance. After the Closing Date, Purchaser shall
(so long as it is a majority shareholder of the Company's common stock) use
commercially reasonable efforts to ensure that the Company continues to maintain
directors and officers insurance ("D&O Insurance") coverage for each current and
former director and officer that is comparable to, or better than, the coverage
(if any) existing under the Company's D&O Insurance policy in effect as of the
Closing Date (as defined in the Credit Agreement).
-16-
In witness whereof, the parties have executed and delivered this
Agreement as of the date first written above.
COMPANY:
Address for Notices: SCAN-OPTICS, INC.
- -------------------
By:
169 Progress Drive ----------------------------
Manchester, CT 06040 Name:
Attention: Chief Financial Officer Title:
Facsimile: (860) 645-7995
with a copy to:
Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
Attention: Richard D. Harris
Facsimile: (860) 275-0343
PURCHASER:
Address for Notices: ARK CLO 2000-1 LIMITED
- -------------------
c/o Patriarch Partners, LLC By: Patriarch Partners, LLC,
112 South Tryon Street, Suite 700 its Collateral Manager
Charlotte, NC
Attention: Ms. Lynn Tilton
Facsimile No.: (704) 375-0358 By:
-----------------------------
Name:
with a copy to: Title:
Richards Spears Kibbe & Orbe LLP
One World Financial Center
New York, New York 10281
Attention: Mr. Eric O'Meara
Facsimile No.: (212) 530-1801
-17-
Schedule A
List of Existing Management Option Agreements
The following Options are covered by Existing Management Option Agreements as of
the date of this Agreement and shall be covered by the Company's repurchase
obligation specified in Section 7.04 of the Agreement.
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Name of Management Option Holder Date of Option Grant Number of Shares Covered by Number of Shares Covered
Grant (Pre-Recap) by Grant Upon Option
Exchange Post-Recap
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Joseph P. Crouch 12/31/01 100,000 631,029
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Richard C. Goyette 12/31/01 145,000 914,992
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Joel K. Howser 12/31/01 130,000 820,338
- --------------------------------- ------------------------- ----------------------------- ----------------------------
James C. Mavel 12/31/01 250,000 1,577,572
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Clarence C. Rife 12/31/01 130,000 820,338
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Michael Villano 12/31/01 140,000 883,441
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Alan W. Ware 12/31/01 130,000 820,338
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Peter Stelling 04/26/04 5,000 31,551
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Mary Villano 04/26/04 50,000 315,515
- --------------------------------- ------------------------- ----------------------------- ----------------------------
- --------------------------------- ------------------------- ----------------------------- ----------------------------
Total 1,080,000 6,815,114
- --------------------------------- ------------------------- ----------------------------- ----------------------------
-18-
Exhibit 4.01(f)
[Certificate of Incorporation]
-19-
Exhibit 4.01(g)
[Certificate of Designations]
-20-
EXHIBIT D
SCAN-OPTICS,INC.
2004 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
1. Purposes.
The purpose of the Scan-Optics, Inc. 2004 Incentive and Non-Qualified Stock
Option Plan (the "Plan") is to (a) secure for Scan-Optics, Inc. (the "Company")
and its stockholders the benefits arising from stock ownership by officers and
other key employees of the Company, and any parent or subsidiary of the Company,
who will be responsible for its future growth and continued success, and (b)
enable the Company to attract and retain the services of key employees by
providing them with an opportunity to become owners of Scan-Optics, Inc. Common
Stock under the terms and conditions and in the manner contemplated by this
Plan.
2. Administration.
The Plan shall be administered by the Stock Options and Executive Compensation
Committee of the Board of Directors (the "Committee"), consisting of not less
than two Directors appointed by the Board of Directors. Members of the Board of
Directors may only serve on the Committee if they are non-employee directors for
purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended,
and "outside directors" as defined in Treasury Regulations ss.1.162m-27(e)(3).
Any action of the Committee with respect to the administration of the Plan shall
be taken by majority vote.
Subject to the express provisions of the Plan, the Committee shall have
authority to (i) construe and interpret the Plan, (ii) prescribe, amend and
rescind rules and regulations relating to the Plan, (iii) determine the
individuals to whom and the time or times at which options shall be granted, the
number of shares to be subject to each option, the option price, and the
duration of each option, and (iv) make all other determinations necessary or
advisable for the administration of the Plan. All determinations and
interpretations made by the Committee shall be binding and conclusive on all
participants in the Plan and on their legal representatives and beneficiaries.
3. Maximum Number of Shares Subject to Plan.
Subject to adjustment as provided in Section 15 hereof, the shares of stock to
be offered under the Plan may be authorized but unissued shares of the Company's
Common Stock, par value $.02 per share (the "Common Stock"), or issued shares
which have been reacquired. The aggregate amount of Common Stock to be delivered
upon exercise of all options granted under the Plan shall not exceed 2,391,268
shares. If any option granted hereunder shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares subject thereto
shall again be available for the purpose of this Plan.
4. Incentive and Non-Qualified Options.
Options granted under the Plan may be either incentive stock options ("Incentive
Options") intended to meet the requirement of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options
("Non-Qualified Options"). The Committee shall have the right, with the consent
of the optionee, to convert an Incentive Option granted under the Plan to a
Non-Qualified Option pursuant to Section 13 hereof.
5. Eligibility and Participation.
Officers and other key employees of the Company or of any parent or subsidiary
of the Company, whether or not directors of the Company, shall be eligible to
participate in the Plan. Directors who are not also employees are not eligible
to participate in the Plan. An individual who has been granted an option may, if
he is otherwise eligible, be granted additional options. Nothing in the Plan
shall be deemed to give any employee any right to participate in this Plan or to
receive an options hereunder.
An optionee may be granted and hold more than one option, but the aggregate fair
market value (determined at the time the option is granted pursuant to Section 6
below) of the Common Stock for which any optionee may be granted Incentive
Options which are exercisable for the first time in any one calendar year (under
all incentive stock option plans of the Company and any parent or subsidiary of
the Company) shall not exceed $100,000. There shall be no limit on the aggregate
fair market value (as so determined) of the Common Stock for which any optionee
may be granted Non-Qualified Options. Notwithstanding the foregoing, the
aggregate amount of Common Stock subject to options granted to a single employee
in any calendar year shall not exceed 100,000 shares.
6. Purchase Price.
The purchase price of Common Stock covered by each option shall be determined by
the Committee, but the purchase price of Incentive Options shall not be less
than 100% of the fair market value of the Common Stock at the time such
Incentive Option is granted and the purchase price of Non-Qualified Options
shall not be less than 100% of the fair market value of the Common Stock at the
time such Non-Qualified Option is granted; provided, however, that the Committee
may set the purchase price of Non-Qualified Options granted to employees who are
not "covered employees" (as defined in Section 162(m) of the Code) at an amount
less than 100% of such market value, but not less than 85% of such market value
if the Committee expressly determines to grant the discount from 100% of such
fair market value in lieu of a reasonable amount of salary or cash bonus which
would otherwise be paid to the employee granted such Non-Qualified Options. The
fair market value of the Common Stock shall be determined pursuant to procedures
adopted by the Committee. Anything herein to the contrary notwithstanding, no
Incentive Option shall be granted to an employee if, at the time the Incentive
Option is granted, such employee owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, or a parent
or subsidiary of the Company, unless the Incentive Option price is at least 110%
of the fair market value of the Common Stock subject to the Incentive Option at
the time the Incentive Option is granted and the Incentive Option is not
exercisable after the expiration of five (5) years from the date the Incentive
Option is granted.
7. Duration and Time of Exercise of Options.
Each option and all rights thereunder shall expire on such date as the Committee
may determine, but in no event later than ten (10) years from the date on which
the option is granted, and shall be subject to earlier termination as provided
herein.
Each option shall be exercisable in such installments during the period prior to
its expiration date as the Committee shall determine, or may, if so determined
by the Committee, be exercisable either in whole or in part at any time prior to
its expiration date. If the option is made exercisable in installments and the
optionee shall not in any given installment period
-2-
purchase all of the shares which the optionee is entitled to purchase in such
installment period, then the optionee shall have the right cumulatively
thereafter to purchase any shares not so purchased and such right shall continue
until the expiration date or sooner termination of such option.
In the event of (a) a reorganization, merger or consolidation of the Company in
which the Company is not the surviving corporation, (b) the dissolution or
liquidation of the Company, or (c) a sale or lease of fifty percent (50%) or
more, computed on the basis of book value, of the Company's consolidated assets,
the time at which all options then outstanding may be exercised shall be
accelerated and all such options shall become exercisable in full on or before a
date fixed by the Committee prior to the effective time of such reorganization,
merger, consolidation, dissolution, liquidation, sale or lease, and upon such
effective time any unexercised options shall expire.
The Committee may, at any time, in its absolute discretion, accelerate the time
at which an outstanding option can be exercised, in whole or in part, provided,
however, that no such acceleration of the time for exercise shall be made if
such acceleration would result in a modification of an Incentive Option (within
the meaning of Section 424 of the Code), or cause such Incentive Option to fail
to continue to qualify as an incentive stock option under Section 422 of the
Code. Notwithstanding the provisions of this Section 7, the time at which an
outstanding option may be exercised may not be accelerated to a date which is
less than six (6) months after the date of grant of such option, except in the
case of death or disability.
8. Replacement and Substitute Options.
The Committee may, in its absolute discretion, grant to optionees, in exchange
for the surrender and cancellation of their outstanding options, new options
having option prices lower than the option price of the options so surrendered
and canceled (the "Replacement Options") and containing such other terms and
conditions as the Committee may deem appropriate, but only if (i) the Committee
determines that it needs to grant Replacement Options to retain key employees,
to provide necessary incentives to key employees or to further some other
important corporate purpose; (ii) Replacement Options are rarely granted and
only where extreme circumstances beyond management's control have substantially
diminished the value of the outstanding options to be exchanged for Replacement
Options; and (iii) the number of shares of Common Stock to be delivered upon
exercise of the Replacement Options does not exceed ten percent (10%) of the
number of shares of Common Stock to be delivered upon exercise of all options
authorized to be granted under the Plan. Notwithstanding the preceding sentence,
if, at a time when no additional shares of Common Stock are authorized to be
delivered upon exercise of options granted under the Plan, the Committee
determines that it needs to grant Replacement Options to employees who are not
executive officers before the next stockholders' meeting, it may grant
additional Replacement Options for a number of shares of Common Stock not
exceeding ten percent (10%) of the number of shares of Common Stock to be
delivered upon exercise of all options authorized to be granted under the Plan
if such grant of additional Replacement Options is made continent upon the
stockholder's authorization for such additional Replacement Options being
obtained at the next stockholders' meeting. Options may be granted under the
Plan and in substitution for stock options held by person who become or are to
become salaried employees of the Company or any parent or subsidiary of the
Company in any transaction to which Section 424(a) of the Code applies.
-3-
9. Exercise of Options.
Options shall be exercised by the delivery of written notice to the officer of
the Company designated by the Committee setting forth the number of shares with
respect to which the option is to be exercised, and specifying the address to
which the certificates for such shares are to be mailed. The option price shall
be paid in full at the time of exercise in cash by United States currency,
certified check or money order or by tendering to the Company (i) shares of
Common Stock having a fair market value on the date of exercise equal to the
option price (including shares that would otherwise be issued pursuant to such
exercise), or (ii) a combination of cash and shares of Common Stock valued at
such fair market value.
As promptly as practicable after receipt of such written notification of the
exercise of an option and payment, the Company shall deliver to the optionee
certificates for the number of shares with respect to which such option has been
so exercised, issued in the optionee's name.
10. Non-Transferability of Options.
An Incentive Option and, unless otherwise determined by the Committee, a
Non-Qualified Option granted under the Plan shall, by its terms, be
non-transferable by the optionee, either voluntarily or by operation of law,
otherwise than by will or the laws of descent and distribution, and shall be
exercisable during the optionee's lifetime only by the optionee, regardless of
any community property interest therein of the spouse of the optionee, or such
spouse's successors in interest.
11. Continuance of Employment.
Nothing contained in the Plan or in any option granted under the Plan shall
confer upon any optionee any right with respect to the continuation of
employment by the Company or any parent or subsidiary of the Company, or
interfere in any way with the right of the Company or any parent or subsidiary
of the Company (subject to the terms of any separate employment agreement to the
contrary) at any time to terminate such employment or to increase or decrease
the compensation of the optionee from the rate in existence at the time of
granting of an option.
12. Termination of Employment, Disability or Death of Optionee.
(a) Expect as may be otherwise expressly provided herein, options shall
terminate, unless exercised, three (3) months after the date of the severance of
the employment relationship between the optionee and the Company, or a parent or
subsidiary of the Company; provided, however, that all options held by an
optionee shall terminate immediately upon receipt by an optionee of the notice
of termination if the optionee is terminated for deliberate, willful or gross
misconduct as determined by the Company. Absence on leave approved by the
Committee shall not be considered a severance of employment.
(b) If, before the date of expiration of the option, the optionee shall retire
from the employ of the Company, or a parent or subsidiary of the Company, for
reasons of age pursuant to a pension or retirement plan of the Company, or a
parent or subsidiary of the Company, or for reasons of disability as defined in
Section 22(e)(3) of the Code, the option shall terminate on the earlier of such
date of expiration or one year after the date of such retirement. In the event
of such retirement, the optionee shall have the right prior to the termination
of such option to exercise the option to the extent to which the optionee was
entitled to exercise such option immediately prior to such retirement. If the
retired optionee shall die before the termination of
-4-
the option, the optionee's executors, administrators or any person or persons to
whom the option may be transferred by will or by the laws of descent and
distribution shall have the right, at any time within the earlier of the date of
expiration of the option or the one-year period beginning on the date of the
optionee's death, to exercise the option to the same extent as said retired
optionee.
(c) In the event of the death of the holder of an option while in the employ of
the Company, or a parent or subsidiary of the Company, and before the date of
expiration of such option, such option shall terminate on the earlier of such
date of expiration or one year following the date of such death. After the death
of the optionee, the optionee's executors, administrators or any person or
persons to whom the option may be transferred by will or by the laws of descent
and distribution shall have the right, at any time prior to such termination, to
exercise the option to the same extent to which the deceased optionee was
entitled to exercise such option immediately prior to the deceased optionee's
death.
(d) In the case of a Non-Qualified Option, the Committee may, in its discretion,
vary the terms set forth in Sections 12(a), 12(b) and 12(c) by providing for
different provisions in the applicable option agreement granting such
Non-Qualified Options.
13. Conversion of Incentive Options into Non-Qualified Options; Termination of
Incentive Options.
The Committee may, at the written request of the optionee, take such
actions as may be necessary to convert such optionee's Incentive Options (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such Incentive Options, regardless of whether the optionee is an
employee of the Company, or a parent or subsidiary of the Company, at the time
of such conversion. Such actions may include, but not be limited to, extending
the exercise period or reducing the exercise price of the appropriate
installments of such options. At the time of such conversion, the Committee
(with the consent of the optionee) may impose such conditions on the exercise of
the resulting Non-Qualified Options as the Committee in its discretion may
determine, provided that such conditions shall not be inconsistent with the
Plan. Nothing in the Plan shall be deemed to give any optionee the right to have
such optionee's Incentive Options converted into Non-Qualified Options, and no
such conversion shall occur until and unless the Committee takes appropriate
action. The Committee, with the consent of the optionee, may also terminate any
portion of any Incentive Options that has not been exercised at the time of such
termination.
14. Privilege of Stock Ownership.
No person entitled to exercise any option granted under the Plan shall have any
of the rights or privileges of a stockholder of the Company in respect of any
shares of stock issuable upon exercise of such option until certificates
representing such shares shall have been issued and delivered. No share shall be
issued and delivered upon exercise of any option unless and until, in the
opinion of counsel for the Company, any applicable registration requirements of
the Securities Act of 1993, any applicable listing requirements of any national
securities exchange on which stock of the same class is then listed, and any
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery, shall have been fully complied with.
-5-
15. Adjustments.
If the outstanding shares of Common Stock of the Company are increased, changed
into or exchanged for a different number or kind of shares or securities of the
Company as a result of a merger, reorganization, recapitalization,
reclassification, stock dividend, stock split or reverse stock split, an
appropriate and proportionate adjustment shall be made in the maximum number and
kind of shares as to which options may be granted under this Plan. A
corresponding adjustment changing the number or kind of shares allocated to
unexercised options or portion thereof, which shall have been granted prior to
any such change, shall likewise be made. Any such adjustment in the outstanding
options shall be made without change in the aggregate purchase price applicable
to the unexercised portion of the option but with a corresponding adjustment in
the price for each share covered by the option.
Adjustments under this Section shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under the Plan for any such adjustment.
16. Written Agreement.
Each option granted hereunder shall be embodied in a written Option Agreement
which shall be subject to the terms and conditions prescribed herein, and shall
be signed by the optionee and by an officer of the Company for and on behalf of
the Company. Incentive Options and Non-Qualified Options may not be granted in
the same Option Agreement. An Option Agreement shall contain such other
provisions as the Committee in its discretion shall deem advisable so long as
the same are not contrary or inconsistent with the terms and provisions of the
Plan.
17. Amendment and Termination of Plan.
The Board of Directors of the Company may at any time amend, suspend or
terminate the Plan; provided, however, that any material amendment of the Plan
and any other amendment of the Plan requiring stockholder approval under Section
422 of the Code shall not be made without the approval of the stockholders of
the Company in accordance with the General Corporation Law of the State of
Delaware.
No amendment, suspension or termination of the Plan shall, without the consent
of the optionee, alter or impair any rights or obligation under any outstanding
Option Agreement.
18. Withholding.
Any person exercising an option shall be required to pay in cash to the Company
the amount of any taxes the Company is required by law to withhold with respect
to the exercise of such option. Such payment shall be due on the date the
Company is required to withhold such taxes. Such payment may also be made at the
election of the optionee by the surrender of shares of Common Stock then owned
by the optionee, or the withholding of shares of Common Stock otherwise to be
issued to the optionee on exercise, in an amount that would satisfy the
withholding amount due. The value of such shares withheld or delivered shall be
equal to the fair market value of such shares on the date of exercise. In the
event that such payment is not made when due, the Company shall have the right
to deduct to the extent permitted by law, from any payment of any kind otherwise
due to such person from the Company, all or part of the amount required to be
withheld.
-6-
19. Effective Date of Plan.
Subject to stockholder approval of the Plan at the Company's 2004 Annual Meeting
of Stockholders, this Plan shall become effective on the date of the filing, if
any, of an amended and restated certificate of incorporation for the Company on
or before June 30, 2005 increasing the total authorized capital stock of the
Corporation to 70,000,000 shares consisting of 65,000,000 shares of Common
Stock, and 5,000,000 shares of preferred stock, par value $0.02 per share. No
options shall be granted pursuant to the Plan after the date that is ten years
from the effective date of the Plan.
20. Construction.
The plan and options granted hereunder shall be governed by and construed in
accordance with the laws of the State of Delaware and in accordance with such
federal laws as may be applicable.
-7-