SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 0-15864
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SCAN-GRAPHICS, INC.
------------------------------------------------------
(exact name of registrant as specified in its charter)
PENNSYLVANIA 95-4091769
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
649 NORTH LEWIS ROAD, LIMERICK, PENNSYLVANIA 19468-1234
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-495-3003
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by the check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
17,029,835 shares of common stock were outstanding as of September 30, 1997
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996 3 - 4
Consolidated Statements of Operations --
Three months and Nine months ended
September 30, 1997 and 1996 5 - 6
Consolidated Statements of Cash Flows --
Nine months ended September 30, 1997 and 1996 7
Notes to Financial Statements --
September 30, 1997 8 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 15
PART II. OTHER INFORMATION
Item 1 through Item 6. 16
SIGNATURE PAGE 17
2
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,225 $1,081
Accounts receivable, less
allowance for doubtful accounts of
$108 and $189 840 844
Interest Receivable 61 -0-
Inventories 1,788 1,174
Prepaid expenses and other current
assets 125 91
------ ------
TOTAL CURRENT ASSETS $5,039 $3,190
------ ------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,123 864
OTHER ASSETS 70 38
------ ------
TOTAL ASSETS $6,232 $4,092
------ ------
See accompanying notes to consolidated financial statements.
3
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,331 $ 617
Interest Payable - Private Placement 119 -0-
Dividend Payable -0- 368
Deferred revenue 50 237
Current maturities, capital lease obligation 37 102
Current maturities of long term debt 66 62
-------- --------
TOTAL CURRENT LIABILITIES $ 1,603 $ 1,386
-------- --------
LONG TERM LIABILITIES
Convertible Notes Payable $ 4,680 --
Capital lease obligation, less current maturities 56 43
Long-term debt, less current maturities 57 107
-------- --------
TOTAL LONG TERM DEBT $ 4,793 $ 150
-------- --------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Class A convertible preferred
authorized 1,000,000 shares,
Series A, par value $2.00
Outstanding 500,000 shares 1,000 1,000
Series C, par value $10.00
Outstanding 125,000 shares
at December 31, 1996 -0- 1,250
Common stock, par value $0.001
Authorized 50,000,000 shares
Outstanding 17,029,835 shares at
September 30, 1997 and 14,780,766
shares at December 31, 1996 17 15
Additional paid-in capital 18,577 15,295
Notes receivable related parties (1,340) (1,681)
Deficit (18,418) (13,323)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (164) 2,556
-------- --------
$ 6,232 $ 4,092
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
------------ ------------
SALES $ 1,331 $ 1,375
LICENSE AND ROYALTY FEES 6 13
------------ ------------
Total revenues $ 1,337 $ 1,388
COST OF GOODS SOLD 1,002 784
------------ ------------
GROSS PROFIT 335 604
------------ ------------
OPERATING EXPENSES:
Research and development 580 232
Sales and marketing 889 539
General and administrative 902 301
------------ ------------
Total operating expenses 2,371 1,072
------------ ------------
OPERATING (LOSS) BEFORE
OTHER INCOME (EXPENSE) (2,036) (468)
------------ ------------
Other Income 68 19
Other Expense (317) (40)
------------ ------------
Total Other (Expense) (249) (21)
------------ ------------
(LOSS) BEFORE INCOME TAXES (2,285) (489)
INCOME TAXES -- --
------------ ------------
NET (LOSS) (2,285) (489)
PREFERRED STOCK DIVIDENDS (56) (105)
------------ ------------
BALANCE APPLICABLE TO COMMON STOCK (2,341) (594)
============ ============
(LOSS) PER SHARE OF COMMON STOCK:
Primary (.15) (.06)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 16,298,733 10,775,990
See accompanying notes to consolidated financial statements.
5
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------------ ------------
SALES $ 3,589 $ 3,762
LICENSE AND ROYALTY FEES 31 40
------------ ------------
Total revenues $ 3,620 $ 3,802
COST OF GOODS SOLD 2,749 1,970
------------ ------------
GROSS PROFIT 871 1,832
------------ ------------
OPERATING EXPENSES:
Research and development 1,106 744
Sales and marketing 2,014 1,317
General and administrative 2,327 1,166
------------ ------------
Total operating expenses 5,447 3,227
------------ ------------
OPERATING (LOSS) BEFORE
OTHER INCOME (EXPENSE) (4,576) (1,395)
------------ ------------
Other Income 177 35
Other Expense (540) (329)
------------ ------------
Total Other (Expense) (363) (294)
------------ ------------
(LOSS) BEFORE INCOME TAXES (4,939) (1,689)
INCOME TAXES -- --
------------ ------------
NET (LOSS) (4,939) (1,689)
PREFERRED STOCK DIVIDENDS (165) (165)
BALANCE APPLICABLE TO COMMON STOCK (5,104) (1,854)
============ ============
(LOSS) PER SHARE OF COMMON STOCK:
Primary (.32) (.17)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 15,843,743 10,775,990
See accompanying notes to consolidated financial statements.
6
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $(4,939) $(1,689)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 282 243
Decrease in notes and accounts receivable 4 60
(Increase) in interest receivable (91) -0-
(Increase) in inventories (614) (56)
(Increase) in other current assets (34) (47)
(Increase) in other assets (32) (23)
Increase(decrease) in accounts payable
and accrued expenses 714 (277)
Increase in interest payable 119 -0-
Increase(decrease)in deferred revenue (187) 163
------- -------
Total adjustments 161 63
------- -------
Net cash used in operating activities (4,778) (1,626)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (496) (371)
Capitalized trademarks & patents (11) (4)
------- -------
Net Cash used in investing activities (507) (375)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (46) (10)
Payment of preferred stock dividends (320) --
Payment of loans payable-officers -- (59)
Payment of notes payable-officers -- (259)
Payment of capital lease obligations (97) (114)
Proceeds from capital lease obligations 45 -0-
Proceeds from issuance of notes payable 5,200 3,100
Proceeds from exercise of common stock
warrants/options 1,420 1,334
Proceeds from subscription receivables 347 --
Payment of expenses, stock issuance (108) (361)
Repurchase of subsidiary stock (12) --
------- -------
Net cash provided by financing activities 6,429 3,631
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 1,144 1,630
CASH AND CASH EQUIVALENTS, at beginning of year 1,081 189
------- -------
CASH AND CASH EQUIVALENTS, at September 30 2,225 1,819
======= =======
See accompanying notes to consolidated financial statements.
7
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands except share and per share data)
Note #1
The accompanying consolidated financial statements are unaudited and include the
accounts of Scan-Graphics, Inc. (the "Company") and its wholly owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) have been made which are necessary to present fairly the financial
position of the Company as of September 30, 1997 and the results of its
operations for the nine month periods ended September 30, 1997 and 1996. The
results of operations experienced for the nine month period ended September 30,
1997 are not necessarily indicative of the results to be experienced for the
fiscal year ending December 31, 1997.
Note #2 Inventories:
Inventories at September 30, 1997 and December 31, 1996 consist of the
following:
September 30, December 31,
1997 1996
------------- ------------
Raw materials $ 913 $ 523
Work-in-process 215 263
Finished products 660 388
------ ------
$1,788 $1,174
====== ======
Note #3 Property and Equipment:
Property and equipment consists of:
September 30, December 31,
1997 1996
------------- ------------
Equipment under capital lease $ 402 $ 415
Machinery & Equipment 2,865 2,492
Furniture & Fixtures 231 110
Autos & Trucks 12 12
Leasehold Improvements 125 94
Software 266 253
------ ------
3,901 3,376
Less accumulated
depreciation and amortization 2,778 2,512
------ ------
Net Property & Equipment $1,123 $ 864
====== ======
Note #4 Commitments and Contingencies:
The Company will be obligated to pay six months to two years of annual
salary to certain officers and employees of the Company if the Company
is acquired or merged and the acquirer chooses to terminate their
services. If any of these events were to occur, the aggregate
potential severance pay at September 30, 1997 would have been $1,195.
8
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands except share and per share data)
Note #5 Long-Term Liabilities:
Notes payable consisting of $5,200 in convertible debentures were
issued in May and June, 1997 under a Regulation D Exemption to a
private investment group. A total of 52 units were sold, each unit
consisting of a $100 note maturing between May and June 1999 and one
warrant to purchase 17,308 shares of common stock. Interest accrues at
7% per annum and is convertible into the Company's common stock on the
same terms as the note principal or, at the Company's option, payable
in cash quarterly.
The conversion price of the debentures is determined using the average
of the closing bid prices five days prior to conversion. The
debentures (principal and interest) are convertible into the Company's
common stock at the lower of $7.00 per share conversion price, or if
the conversion price is less than $4.00, at a 10% discount to the
average closing bid price for the five days prior to conversion. If
the conversion is greater than $4.00, but less than $7.00, the
discount is increased by 1% for every $.20 increase in the conversion
price. Debenture conversions are limited to $520 in any month.
In August and September 1997, all note holders converted ten percent
of their respective note balances, plus accrued interest thereon, into
common stock. This resulted in the $4,680 note balance at September
30, 1997.
The Company has the right to force conversion in one-third increments
of the warrants (if unexercised) if the stock price exceeds $8.00,
$10.00, and $12.00, respectively, for any thirty days over a period of
forty-five days. Otherwise, the warrants expire at the end of such
period.
Other long term debt consists of the following:
September 30, December 31,
1997 1996
------------- ------------
Note Payable, payable in monthly
installments including interest
at 8.75% through July 1999. This
note payable is non-recourse to
the Company, is based upon the
credit standing of a customer of
the Company and is further
collateralized by the equipment $123 $169
Less current maturities 66 62
---- ----
Long-term debt $ 57 $107
==== ====
9
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands except share and per share data)
Note #5 Long Term Liabilities: (Continued)
As of September 30, 1997, long-term debt matures as follows:
1997 $16
1998 $68
1999 $39
At September 30, 1997, equipment with a net book value of $96 has been
capitalized under capital leases.
Future minimum lease payments under capitalized leases over subsequent
twelve month periods are summarized as follows:
Period Ending September 30,
---------------------------
1998 $ 47
1999 33
2000 13
2001 13
2002 9
----
Total minimum lease payments 115
Less amounts representing interest 22
----
93
Less current maturities 37
----
$ 56
====
Note #6 Stockholders' Equity
During the third quarter, 1997, four directors and nine outside
investors converted 125,000 shares of Class A Series C preferred stock
and accumulated dividends of $201 into 949,352 shares of common stock
in accordance with their subscription agreements. As a result, there
are no outstanding shares of this class of preferred stock at
September 30, 1997.
The debenture conversion of $520 detailed in Note #5 resulted in
205,033 shares of common stock being issued. In addition, 13,548 B
warrants associated with the 1996 private placement were exercised,
resulting in a like number of common shares being issued.
In conjunction with the convertible debenture financing detailed in
Note #5, the Company issued in June, 1997, 3,000,016 common stock
warrants to the private placement group exercisable at $4.00 and
expiring June 1, 2001.
During the third quarter 1997, one director and officer, twelve
employees, and one consultant exercised common stock options and
warrants resulting in 141,179 shares of common stock being issued.
10
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(In Thousands except share and per share data)
Note #6 Stockholders' Equity (Continued)
During the third quarter 1997, options to acquire 200,000 shares of
common stock were issued to employees of the Company.
Effective September 1, 1997, the President and Chief Executive Officer
of the Company elected to forego any cash compensation for one year.
With Board approval, he was issued 250,000 warrants in lieu of cash
salary, each warrant providing the right to purchase one share of
Company stock at an exercise price of 25% over the closing bid price
of the stock on August 26, 1997. These warrants vest September 1,
1998.
Note #7 Litigation Settlement
Subsequent to the close of the quarter ended September 30, 1997, the
International Arbitration Tribunal in Paris, France, found the Company
liable for damages due to its failure to perform its obligations under
a March 30, 1990 agreement. Plaintiff was awarded $231, which was paid
in October 1997. This expense of approximately $141 has been reflected
in the Consolidated Statement of Operations for the three months ended
September 30, 1997. The balance of the settlement was recorded in
1996.
Note #8 Supplemental Disclosures of Cash Flow Information:
Nine Month Ended September 30,
------------------------------
1997 1996
------ ------
Cash paid during the period
for interest $ 27 $ 131
------ ------
Non-cash financing and investing
activities are as follows:
Capitalized lease obligations
incurred to lease new equipment $ 45 $ 146
------ ------
Declaration of preferred
stock cash dividend $ 165 $ 165
------ ------
Common stock subscriptions
receivable $ 13 $ -0-
------ ------
Conversion of preferred to
common stock $1,250 $ -0-
------ ------
Conversion of notes payable to
common stock $ 520 $ 500
------ ------
11
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Liquidity and Capital Resources
At September 30, 1997, cash and cash equivalents increased to $2,225, a $1,144
increase compared to the December 31, 1996 amount of $1,081. The above change in
cash and cash equivalents is explained as follows.
As of September 30, 1997, the cash flows from operating activities resulted in a
net use of cash of $4,778. The Company has experienced a lower than expected
sales volume in its respective business units as it has simultaneously staffed
each with executive, sales and marketing, and technical personnel required to
create markets and revenue streams. The Tangent Imaging Systems business unit
accounts for approximately twenty percent of this cash usage. While its Color
operation is recovering from a slow first half with substantial international
reseller sales, its Monochrome unit continues to build an inventory backlog in
anticipation of the newspaper industry's acceptance of its new CF1300 scanner.
The Sedona GeoServices business unit has added nearly fifty personnel this year
in developing a mapping production center for U.S. Geological Survey
quadrangles, whose operation is building data inventory for anticipated sales
before year end. Sedona GeoServices' operating expenses are nearly two and one
half times those for the comparable period last year, and as such, represent
half of this cash usage. The Technology Resource Centers, (TRC) has created a
data conversion facility in Limerick, Pennsylvania to secure commercial,
Department of Defense, and Commonwealth of Pennsylvania contracts. While TRC
represents less than $300 of this cash consumption, virtually no sales have been
recorded. Corporate staffing and related expenses have consumed nearly $1,200
year-to-date.
As of September 30, 1997, the cash flows from investing activities resulted in a
net use of cash of $507. The use of cash was due primarily to purchases of
equipment and fixtures for Sedona's new Limerick facility and TRC's conversion
center.
As of September 30, 1997, the cash flows from financing activities resulted in
net cash provided by financing activities of $6,429. The increase in cash was
principally provided by the $5,200 convertible debt infusion and the exercise of
common stock options and warrants by directors, officers, employees, and
investors involved in the March 1996 convertible debenture private placement
($1,420).
Subsequent to the end of the third quarter, 314,800 B warrants issued under the
1996 private placement were exercised yielding $1,259 to the Company.
The Company entered into a two year consulting agreement in April 1997 with a
New York investment capital firm, and has issued 2,100,000 warrants on the same
terms as the individual investors participating in the $5,200 private placement.
12
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Results of Operations
Net Revenue for the three months ended September 30, 1997 decreased to $1,337, a
3.7% decrease compared to the three months ended September 30, 1996, amount of
$1,388. Revenue in excess of 10% of revenue to one customer accounted for
approximately 29.4% of net revenue for the three months ended September 30,
1997, compared to revenue in excess of 10% of revenue to one customer which
accounted for approximately 20.9% of net revenue for the three months ended
September 30, 1996.
Sales have remained flat as compared to the three month ended September 30,
1996, as Sedona GeoServices and the Technology Resource Centers are not yet
generating significant revenue ($175 for the quarter). Tangent Imaging Systems'
(TIS) loss of sales in the low-end monochrome/grayscale market caused a $149
decrease in revenue for the three month period ended September 30, 1997, as
compared to the same period in 1996. TIS' revenues fell short by only $25 as
compared to the same period in 1996.
Net Revenue for the nine months ended September 30, 1997 decreased to $3,620, a
4.8% decrease compared to the nine months ended September 30, 1996 amount of
$3,802. Revenue in excess of 10% of revenue to one customer accounted for
approximately 22.3% of net revenue for the nine months ended September 30, 1997,
compared to revenue in excess of 10% of revenue to one customer which accounted
for approximately 14.9% of net revenue for the nine months ended September 30,
1996.
Demand for the Company's low cost scanners has diminished in 1997, with
year-to-date monochrome/grayscale revenue lagging $671 behind revenue for the
comparable period in 1996. This has been principally offset by TIS' increased
sale of the 36" sheetfeed scanner, with revenue for the nine month period ended
September 30, 1997, exceeding that for the same prior year period by $242; and
Sedona GeoServices' incremental sales in 1997 versus 1996 year-to-date account
for the balance ($187) of the offset.
Gross Margin percentages for the three months ended September 30, 1997 and 1996
were 25.1% and 43.5% of revenue, respectively.
Gross Margin percentages for the nine months ended September 30, 1997 and 1996
were 24.1% and 48.2% of revenue, respectively.
The production operations of Sedona GeoServices and the TRC are incurring normal
monthly costs, while corresponding sales levels have been typical of start-up
operations. This accounts for almost half of the gross margin deterioration from
1996 to 1997, on both a quarter and year-to-date basis (the two units combined
generating negative gross profit of $109 and $311, respectively, for the quarter
and period ended September 30,1997). TIS Monochrome's introduction of the CF
1300, with the diminished volume in the lower cost scanners, damaged margins in
the first half of the year as production capacity was severely under-utilized.
TIS' gross margins for color and monochrome/grayscale units were 40.4% and
33.2%, respectively for the quarter ended September 30, 1997. On a year-to-date
basis, TIS Color has generated a gross margin of 43.8% versus 64% for the period
ending September 30, 1996. This is due to increased volume with lower margin
resellers and also premiums paid for certain components and boards.
13
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Results of Operations (Continued)
The margin on the Color units is expected to continue to improve over the near
term. TIS Monochrome's year-to-date gross margin at September 30, 1997, was 7.4%
versus 20.8% for the same period in 1996. The aforementioned reduction of the
lower cost sales base, combined with the re-engineering of a new, high end unit
for the newspaper industry, has resulted in higher production costs per unit
sold in 1997. Management is currently assessing both the price positioning and
marketing of the new scanner to improve margins. An inventory of the new units
is available for anticipated fourth quarter sales.
Research and development expense as a percentage of revenue increased to 43.9%
for the nine months ended September 30, 1997 compared to 16.7% of revenue at
September 30, 1996. The $348 increase in research and development for the
quarter ended September 30, 1997 versus that of September 30, 1996 is a result
of sales and personnel additions in TIS needed to redesign the existing
generation of color/grayscale units, create a very high resolution monochrome
scanner for newspaper pre-press applications, develop scanning software for use
in the Windows NT platform (T-Scan), and research products for the color
reprographics market ($150); the balance of the increase relates to personnel
additions in Sedona ($311) for software development of Sedona DMTool(TM)
Lockheed Martins' WARSIM application, and SRV(TM)/SRV+ for Windows NT, and other
programming efforts. Research and development expense as a percentage of revenue
increased to 30.6% of revenue for the nine months ended September 30, 1997
compared to 19.7% of revenue at September 30, 1996 for the aforementioned
reasons.
Sales and Marketing expense as a percentage of revenue increased to 66.5% for
the three months ended September 30, 1997 compared to 38.8% at September 30,
1996. Sales and marketing expenses as a percentage of revenue increased to 55.6%
of revenue for the nine months ended September 30, 1997, compared to 34.6% at
September 30, 1996.
The $350 increment in sales and marketing expenses in the third quarter 1997
over those incurred in the third quarter of 1996 is the result of opening a
government sales office in Reston, Virginia ($50); creation of a sales and
marketing function within the Technology Resource Centers ($48), and Sedona
GeoServices' staffing of sales and marketing personnel in Limerick, PA, Florida
and Ohio ($354). Fifteen Sedona personnel were added in 1997 as compared to the
1996 third quarter headcount of two. These three increments in sales and
marketing expenses were offset by TIS' loss of commercial products sales
personnel ($97).
An increment of $697 in sales and marketing expenses has been incurred for the
year-to-date period ended September 30, 1997 over that for the comparable period
ended September 30, 1996 for the aforementioned reasons. Sedona GeoServices,
TRC, and Corporate represent $582, $76, and $112 respectively of the additional
expense, as offset by a $73 reduction in TIS Color products.
14
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Results of Operations (Continued)
General and administrative expense for the third quarter 1997 was 67.5% of
revenue compared to 21.7% at September 30, 1996. General and Administrative
expense for the nine months ended September 30, 1997 was 64.3% of revenue
compared to 30.7% at September 30, 1996. General and administration expenses for
the quarter and year-to-date period ended September 30, 1997 are $601 and $1,162
higher than those for the corresponding periods in 1996. The majority of the
increase has been the result of Corporate additions of personnel (President and
CEO, Finance Director, V. P. of Software Development, Controller) and personnel
related services (Investor Relations, Outside Services). Of $2,327 of general
and administrative expenses incurred for the nine months ended September 30,
1997, Corporate comprises $1,048 of the total, of which $715 is personnel
related. Corporate and Sedona GeoServices (addition of President, Finance
Director, etc.) are responsible for $510 and $1,252 (TIS favorable offset of
$100) of the quarterly and year-to-date cost increases noted above. Management
is currently evaluating reductions.
Inflation
There can be no assurance that the Company's business will not be affected by
inflation in the future; however, management believes the inflation did not have
a material effect on the results of operations or financial condition of the
Company during the period, presented herein.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings -
None
Item 2 - Changes in Securities - See Note #5 to the
Consolidated Financial Statements
Item 3 - Default Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of
Security Holders - None
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8K
A) None
B) None
Exhibit Document
- ----------------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
None
(4) Instruments defining the rights of security holders.
EX.1 - Private Placement Purchase Agreement, Convertible Note, Warrant,
and Consulting Agreement.
(10) Material Contracts:
None
(11) Statement re: computation of per share earnings.
Not applicable
(15) Letter re: unaudited financial information.
Not applicable
(18) Letter re: change in accounting principles.
Not applicable
(19) Report(s) furnished to security holders.
None
(22) Published report regarding matters submitted to
vote of security holders.
None
(24) Consents of experts and counsel.
None
(25) Power of attorney.
None
(28) Additional exhibits.
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,
Thereunto duly authorized.
SCAN-GRAPHICS, INC.
DATE: November 10, 1997 /S/ Laurence L. Osterwise
---------------------------- -------------------------
Laurence L. Osterwise
President and Chief Executive Officer
DATE: November 10, 1997 /S/ Denis P. Kelly
---------------------------- ------------------
Denis P. Kelly
Director, Corporate Finance
(Chief Accounting Officer)
17
EXHIBIT 1
06/27/97 3:01 PM
PRIVATE PLACEMENT PURCHASE AGREEMENT
Scangraphics, Inc.
700 Abbott Drive
Broomall PA 19008
re: Purchase of Units
Gentlemen:
1. The undersigned ("Subscriber") has reviewed the filings which Scangraphics,
Inc. (the "Company") has made with the Securities Exchange Commission during the
past 12 months. The Company represents and warrants to the Subscriber that all
such filings are correct and accurate in all material respects and in all
material respects state all facts necessary to make such filings not misleading.
Subscriber has had the opportunity to discuss the Company's affairs with the
Company's officers.
2. Sale of Units.
(a) The Company hereby sells to Subscriber, and Subscriber hereby purchases
from the Company, the number of Units set forth opposite Subscriber's name
below. The purchase price of each Unit is $100,000, and is payable in cash
concurrently with the execution and delivery hereof.
(b) Each Unit consists of one Convertible Note in the principal amount of
$100,000 (a "Note"), and one warrant (a "Warrant") to purchase 17,308
shares of common stock of the Company ("Common Stock") at an exercise price
of $4 per share. The Note and the Warrant are in the forms of Exhibits A
and B annexed hereto.
(c) The term "Purchasers" as used herein means subscribers who in the
aggregate are on this day purchasing Notes in the aggregate principal
amount of 52 Units under agreements of the same tenor as this Agreement.
The date as of which all Units have been sold is referred to herein as the
"Completion Date."
3. So long as Subscriber owns any Notes or Warrants, Subscriber will not
directly or indirectly (whether through affiliates or otherwise) engage in any
short sale of Common Stock other than any sales of shares which Subscriber
expects to receive upon conversion of the Note within the five business day
period after such sale.
4. Registration.
(a) The Company will utilize its diligent efforts to file, on or before the
30th day after the Completion Date, or as soon thereafter as is possible
with such diligent efforts, a registration statement on Form S-3 (the
"Registration Statement") for the public sale by Subscriber of the shares
which are issuable on conversion of the Notes and on exercise of the
Warrants. The shares to be covered by the Registration Statement are
collectively referred to as the "registered shares."
(b) The Company shall use its diligent efforts to cause the Registration
Statement to become effective not later than 90 days after the date of
filing, and to remain effective for two years. The registration shall be
accompanied by blue sky clearances in such states as Subscriber may
reasonably request. The Company will not issue or commit to issue any
shares of capital stock or securities convertible into capital stock
1
<PAGE>
(other than upon exercise of options or warrants issued heretofore), or
borrow any money in public or private financings, until the close of
business on the 45th business day after the date on which the Registration
Statement is first declared effective.
(c) The Company shall pay all expenses of the registration hereunder, other
than Subscriber's underwriting discounts.
(d) The Company shall supply to Subscriber a reasonable number of copies of
all registration materials and prospectuses. The Company and Subscriber
shall execute and deliver to each other indemnity agreements which are
conventional in registered offerings of this type. The Subscriber shall
reasonably cooperate with the Company in the preparation and filing of the
Registration Statement and appropriate amendments thereto.
(e) Subscriber may transfer a proportionate part of its registration rights
to a limited number of permitted transferees of the Units or portions
thereof.
5. Securities Representations.
(a) Subscriber represents and warrants that it is purchasing the Units
solely for investment solely for its own account and not with a view to or
for the resale or distribution thereof except as permitted under the
Registration Statement.
(b) Subscriber understands that it may sell or otherwise transfer the Units
or the shares issuable on conversion of the Notes or the Warrants only if
such transaction is duly registered under the Securities Act of 1933, as
amended, under the Registration Statement or otherwise, or if Subscriber
shall have received the favorable opinion of counsel to the holder, which
opinion shall be reasonably satisfactory to counsel to the Company, to the
effect that such sale or other transfer may be made in the absence of
registration under the Securities Act of 1933, as amended, and registration
or qualification in every applicable state. The certificates representing
the aforesaid securities will be legended to reflect these restrictions,
and stop transfer instructions will apply. Subscriber realizes that the
Units are not a liquid investment.
(c) Subscriber has not relied upon the advice of a "Purchaser
Representative" (as defined in Regulation D of the Securities Act) in
evaluating the risks and merits of this investment. Subscriber has the
knowledge and experience to evaluate the Company and the risks and merits
relating thereto.
(d) Subscriber represents and warrants that Subscriber is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated
pursuant to the Securities Act of 1933, as amended, and shall be such on
the date any shares are issued to the holder; Subscriber acknowledges that
Subscriber is able to bear the economic risk of losing Subscriber's entire
investment in the shares and understands that an investment in the Company
involves substantial risks; Subscriber has the power and authority to enter
into this agreement, and the execution and delivery of, and performance
under this agreement shall not conflict with any rule, regulation, judgment
or agreement applicable to the Subscriber; and Subscriber has invested in
previous transactions involving restricted securities.
6. Miscellaneous.
This Agreement may not be changed or terminated except by written
agreement. It shall be binding on the parties and on their personal
representatives and permitted assigns. It sets forth all agreements of the
parties. It shall be enforceable by decrees of specific performance
(without posting bond or other security) as well as by other available
remedies. This Agreement shall be governed by, and construed in accordance
with, the laws of Pennsylvania. The federal and state courts sitting in the
City of Philadelphia shall have exclusive jurisdiction over all matters
relating to this Agreement. Trial by jury is expressly waived.
2
<PAGE>
All notices, requests, service of process, consents, and other
communications under this Agreement shall be in writing and shall be deemed
to have been delivered (i) on the date personally delivered or (ii) one day
after properly sent by Federal Express, addressed to the respective parties
at their address set forth in this Agreement or (iii) on the day
transmitted by facsimile so long as a confirmation copy is simultaneously
forwarded by Federal Express, in each case addressed to the respective
parties at their address set forth in this Agreement. Either party hereto
may designate a different address by providing written notice of such new
address to the other party hereto as provided above.
7. Each party hereto shall be responsible for its own expenses with regard to
the negotiation and execution of this Agreement.
Dated:
----------------------------
SUBSCRIBER:
signature:
------------------------
type or print name:
---------------
Address:
--------------------------
Fax No.
Social Security No:
---------------
Number of Units:
------------------
AGREED:
SCANGRAPHICS, INC.
BY
--------------------------------
3
<PAGE>
EXHIBIT A
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED,
HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR SALE, IN
WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THAT ACT COVERING THIS NOTE AND/OR THE COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SCANGRAPHICS, INC.,
THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
$
--------------
CONVERTIBLE NOTE
(the "Note")
SCANGRAPHICS, INC.
SCANGRAPHICS, INC., a Pennsylvania corporation (hereinafter called the
"Corporation"), hereby promises to pay to the order of _____________________
(hereinafter the "Holder") the principal sum of $ ______ on May 31, 1999. This
Note shall accrue interest at the rate of 7% per annum payable quarterly on the
first day of each calendar quarter commencing October 1, 1997 and on maturity.
1. This Note is being issued under a Private Placement Purchase Agreement
between the Company and the Holder (the "Subscription Agreement"). The term
"Registration Statement" shall have the meaning attributed thereto in the
Subscription Agreement, and the term "Effective Date" means the date on which
the Registration Statement shall be declared to be effective. "Completion Date"
shall have the meaning ascribed thereto in the Subscription Agreement.
2. Conversion Rights and Optional Redemption.
(a) The principal and accrued interest on this Note is convertible by
Subscriber from time to time after the 90th day after the Completion Date,
in whole or in part, into shares of common stock of the Company ("Common
Stock") at the lesser (the "Conversion Price") of $7.00 per share (the
"Cap") or the Applicable Percentage (as hereinafter defined) of the average
closing bid price (the "Average Price") of the Common Stock during the last
five trading days prior to conversion.
(b) The Applicable Percentage for any conversion is 90%, minus 1% for each
full $.20 by which the Conversion Price for such conversion is greater than
$4.00.
(c) In the event that the Holder elects to exercise its conversion rights
hereunder, such conversion shall be effective when Holder shall give to the
Company written notice of such election (which may be effected by
facsimile). Holder shall thereafter promptly surrender this Note to the
Company for cancellation against payment of interest accrued through the
date of conversion. The Company shall within five business days after
conversion deliver to Holder a certificate for the Common Stock acquired by
Holder upon such conversion.
(d) If the Effective Date has not occurred by the 121st day after the
Completion Date, then, in
4
<PAGE>
addition to the Holder's other remedies:
(i) the interest rate under the Note shall be increased to 12% per annum
(or, if less, the highest rate permitted by law) until the Effective
Date, and
(ii) at Holder's option, the Note shall not be repaid by the Company and
shall remain convertible and accrue interest, until such date as is
designated by Holder but not later than 180 days after the Effective
Date.
(e) If the Effective Date has not occurred by the 180th day after the
Completion Date, then, in addition to the Holder's other remedies, the interest
rate under the Note shall be further increased to 18% per annum (or, if less,
the highest rate permitted by law) until the Effective Date.
(f) The Company shall reserve for issuance on conversion and exercise of this
Note and the Warrant (as defined in the Subscription Agreement) 8,500,000 shares
of Common Stock. The Company shall use its best efforts promptly to list on
NASDAQ all shares of Common Stock which are issued upon conversion of this Note.
(g) Conversion of the Note is subject to the following restrictions:
(i) If the Effective Date shall have occurred on or before the 90th day
after the Completion Date, no more than 10% of the initial principal
amount of this Note shall be convertible in any calendar month (with
the unconverted portion of each month's installment being carried
forward to later months), provided that the restriction in this clause
(i) shall no longer apply if:
(A) the closing bid price of a share of Common Stock from and after
any day on which the closing bid price of the Common Stock was $7
or more on NASDAQ (or such other securities exchange where the
common stock may then be listed); or
(B) if L. L. Osterwise for any reason is no longer the CEO of the
Company.
(ii) The Note shall be convertible at any time only to the extent that
Holder would not as a result of such exercise beneficially own more
that 4.99% of the then outstanding Common Stock. Beneficial ownership
shall be defined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934. The opinion of counsel to Holder shall prevail
in the event of any dispute on the calculation of Holder's beneficial
ownership.
(h) Adjustments to Conversion Rights.
(i) If any capital reorganization or reclassification of the common stock,
or consolidation, or merger of the Company with or into another
corporation, or the sale or conveyance of all or substantially all of
its assets to another corporation shall be effected, then, as a
condition precedent of such reorganization or sale, the following
provision shall be made: The Holder of the Note shall from and after
the date of such reorganization or sale have the right to receive (in
lieu of the shares of common stock of the Company immediately
theretofore receivable with respect to the Note, upon the exercise of
conversion rights), such shares of stock, securities or assets as
would have been issued or payable with respect to or in exchange for
the number of outstanding shares of such common stock immediately
theretofore receivable with respect to the Note (assuming the Note
were then convertible). In any such case, appropriate provision shall
be made with
5
<PAGE>
respect to the rights and interests of the Holders to the end that
such conversion rights (including, without limitation, provisions for
appropriate adjustments) shall thereafter be applicable, as nearly as
may be practicable in relation to any shares of stock, securities or
assets thereafter deliverable upon the exercise thereof.
3. Redemption Rights. In the event that the Holder proposes to convert all or
any portion of the principal or interest of this Note at a conversion price of
less than $3, the Company shall at its option be entitled to redeem all or any
portion of the Note proposed to be converted. Such option shall be exercisable
by paying to the Holder, within three business days after the date of such
proposed conversion, 110% of the amount of principal and interest proposed to be
converted.
4. The Company covenants and agrees that all shares of Common Stock which may
be issued upon conversion of this Note will, upon issuance, be duly and validly
issued, fully paid and non-assessable and no personal liability will attach to
the holder thereof.
5. Purchase for Investment. The Holder, by acceptance hereof, acknowledges
that the Note (and the Common Stock into which the Note is convertible) has not
been registered under the Act, covenants and agrees with the Company that such
Holder is taking and holding this Note (and the Common Stock into which the Note
is convertible) for investment purposes and not with a view to, or for sale in
connection with, a distribution thereof and that this Note (and the Common Stock
into which the Note is convertible) may not be assigned, hypothecated or
otherwise disposed of in the absence of an effective registration statement
under the Act or an opinion of counsel for the Holder, which counsel shall be
reasonably satisfactory to the Company, to the effect that such disposition is
in compliance with the Act, and represents and warrants that such Holder is an
"accredited investor" that such Holder has, or with its representative has, such
knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks in respect of this Note (and the Common Stock
into which the Note is convertible) and is able to bear the economic risk of
such investment.
6. Events of Default and Acceleration of the Note.
(a) An "event of default" with respect to this Note shall exist if any of
the following shall occur, if:
(i) The Company shall breach or fail to comply with any provision of
this Note and such breach or failure shall continue for 15 days
after written notice by any Holder of any Note to the Company.
(ii) A receiver, liquidator or trustee of the Company or of a
substantial part of its properties shall be appointed by court
order and such order shall remain in effect for more than 15
days; or the Company shall be adjudicated bankrupt or insolvent;
or a substantial part of the property of the Company shall be
sequestered by court order and such order shall remain in effect
for more than 15 days; or a petition to reorganize the Company
under any bankruptcy, reorganization or insolvency law shall be
filed against the Company and shall not be dismissed within 45
days after such filing.
(iii) The Company shall file a petition in voluntary bankruptcy or
request reorganization under any provision of any bankruptcy,
reorganization or insolvency law, or shall consent to the filing
of any petition against it under any such law.
(iv) The Company shall make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts
generally as they become due, or consent to the appointment of a
receiver, trustee or liquidator of the Company, or of all or any
substantial part of its properties.
6
<PAGE>
(b) If an event of default referred to in clause (i) shall occur, the
Holder may, in addition to such Holder's other remedies, by written notice
to the Company, declare the principal amount of this Note, together with
all interest accrued thereon, to be due and payable immediately. Upon any
such declaration, such amount shall become immediately due and payable and
the Holder shall have all such rights and remedies provided for under the
terms of this Note and the Subscription Agreement. If an event of default
referred to in clauses (ii), (iii) or (iv) shall occur, the principal
amount of this Note, together with all interest accrued thereon, shall
become immediately due and payable and the Holder shall have all such
rights and remedies provided for under the terms of this Note and the
Subscription Agreement.
7. Miscellaneous.
(a) All notices and other communications required or permitted to be given
hereunder shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by telegram, by
facsimile, recognized overnight mail carrier, telex or other standard form
of telecommunications, or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows: (a) if to the Holder, to
such address as such Holder shall furnish to the Company in accordance with
this Section, or (b) if to the Company, to it at its headquarters office,
or to such other address as the Company shall furnish to the Holder in
accordance with this Section.
(b) This note shall be governed and construed in accordance with the laws
of the Commonwealth of Pennsylvania applicable to agreements made and to be
performed entirely within such state.
(c) The Company waives protest, notice of protest, presentment, dishonor,
notice of dishonor and demand.
(d) If any provision of this Note shall for any reason be held to be
invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision hereof, but this Note shall be construed as if
such invalid or unenforceable provision had never been contained herein.
(e) The waiver of any event of default or the failure of the Holder to
exercise any right or remedy to which it may be entitled shall not be
deemed a waiver of any subsequent event of default or of the Holder's right
to exercise that or any other right or remedy to which the Holder is
entitled.
(f) The Holder of this Note shall be entitled to recover its legal and
other costs of collecting on this Note, and such costs shall be deemed
added to the principal amount of this Note.
(g) In addition to all other remedies to which the Holder may be entitled
hereunder, Holder shall also be entitled to decrees of specific performance
without posting bond or other security.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed on the
date set forth below
Dated :
--------------------
SCANGRAPHICS, INC.
By:
------------------------
7
<PAGE>
Exhibit B
Neither this Warrant nor the shares of Common Stock issuable on exercise of this
Warrant have been registered under the Securities Act of 1933. None of such
securities may be transferred in the absence of registration under such Act or
an opinion of counsel to the effect that such registration is not required.
SCANGRAPHICS, INC.
WARRANT
DATED:
Number of Shares:
Holder:
Address:
- ---------------------------------------
1. THIS CERTIFIES THAT the Holder is entitled to purchase from SCANGRAPHICS,
INC., a Pennsylvania corporation (hereinafter called the "Company"), at $4 per
share the number of shares of the Company's common stock ("Common Stock") set
forth above.
2. All rights granted under this Warrant shall expire on June 1, 2001, subject
to earlier termination as set forth in Section 3.
3. Early Expiration.
(a) The following terms shall have the following definitions:
(i) Effective Date means the date of the effectiveness of the
registration statement (the "Registration Statement") referred to
in a Subscription Agreement dated as of the date of this Warrant
(the "Subscription Agreement").
(ii) The "30-day Price" means the closing bid price (on NASDAQ or such
other securities exchange where the common stock may then be
listed) of the Common Stock on not less than 30 days in any
consecutive 45-day period (the "Test Period") which begins after
the Effective Date and through which the Registration Statement
continues to be effective.
(b) If any 30-day Price is not less than $8 per share in any Test Period,
then, as of the end of such Test Period, this Warrant shall expire as to
1/3 of the shares of Common Stock initially purchasable thereunder.
(c) If any 30-day Price is not less than $10 per share in any Test Period,
then, as of the end of such Test Period, this Warrant shall expire as to
2/3 of the shares of Common Stock initially purchasable thereunder on a
basis which is cumulative with any expiration theretofore occurring under
Section (b).
(d) If any 30-day Price is not less than $12 per share in any Test Period,
then, as of the end of such
8
<PAGE>
Test Period, then as of the last day of the Test Period, this Warrant shall
expire in full.
4. Notwithstanding anything to the contrary contained herein, Holder shall not
have the right to exercise this Warrant so long as and to the extent that at the
time of such exercise, such exercise would cause the Holder then to be the
"beneficial owner' of five percent (5%) or more of the Company's then
outstanding Common Stock. For purposes hereof, the term "beneficial owner" shall
have the meaning ascribed to it in Section 13(d) of the Securities Exchange Act
of 1934. The opinion of legal counsel to Holder, in form and substance
satisfactory to the Company and the Company's counsel, shall prevail in all
matters relating to the amount of Holder's beneficial ownership.
5. This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated, only if
registered by the Company under the Securities Act of 1933 (the "Act") or if the
Company has received from counsel to the Company a written opinion to the effect
that registration of the Warrant or the Underlying Shares is not necessary in
connection with such transfer, sale, assignment or hypothecation. The Warrant
and the Underlying Shares shall be appropriately legended to reflect this
restriction and stop transfer instructions shall apply. The Holder shall through
its counsel provide such information as is reasonably necessary in connection
with such opinion.
6. The holder of this warrant is entitled to certain registration rights under
the Subscription Agreement.
7. Any permitted assignment of this Warrant shall be effected by the Holder by
(i) executing the form of assignment at the end hereof, (ii) surrendering the
Warrant for cancellation at the office of the Company, accompanied by the
opinion of counsel to the Company referred to above; and (iii) unless in
connection with an effective registration statement which covers the sale of
this Warrant and or the shares underlying the Warrant, delivery to the Company
of a statement by the transferee (in a form acceptable to the Company and its
counsel) that such Warrant is being acquired by the Holder for investment and
not with a view to its distribution or resale; whereupon the Company shall
issue, in the name or names specified by the Holder (including the Holder) new
Warrants representing in the aggregate rights to purchase the same number of
Shares as are purchasable under the Warrant surrendered. Such Warrants shall be
exercisable immediately upon any such assignment of the number of Warrants
assigned. The transferor will pay all relevant transfer taxes. Replacement
warrants shall bear the same legend as is borne by this Warrant.
8. The term "Holder" should be deemed to include any permitted record
transferee of this Warrant.
9. The Company covenants and agrees that all shares of Common Stock which may
be issued upon exercise hereof will, upon issuance, be duly and validly issued,
fully paid and non-assessable and no personal liability will attach to the
holder thereof. The Company further covenants and agrees that, during the
periods within which this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common Stock
for issuance upon exercise of this Warrant and all other Warrants.
10. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
11. In the event that as a result of reorganization, merger, consolidation,
liquidation, recapitalization, stock split, combination of shares or stock
dividends payable with respect to such Common Stock, the outstanding shares of
Common Stock of the Company are at any time increased or decreased or changed
into or exchanged for a different number or kind of share or other security of
the Company or of another corporation, then appropriate adjustments in the
number and kind of such securities then subject to this Warrant shall be made
effective as of the date of such occurrence so that the position of the Holder
upon exercise will be the same as it would have been had it owned immediately
prior to the occurrence of such events the Common Stock subject to this Warrant.
Such adjustment shall be made successively whenever any event listed above shall
occur and the Company will notify the Holder of the Warrant of each such
adjustment. Any fraction of a share resulting from any adjustment shall be
9
<PAGE>
eliminated and the price per share of the remaining shares subject to this
Warrant adjusted accordingly.
12. The rights represented by this Warrant may be exercised at any time within
the period above specified by (i) surrender of this Warrant (with the purchase
form at the end hereof properly executed) at the principal executive office of
the Company (or such other office or agency of the Company as it may designate
by notice in writing to the Holder at the address of the Holder appearing on the
books of the Company); (ii) payment to the Company of the exercise price for the
number of Shares specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any; and (iii) unless in connection with an
effective registration statement which covers the sale of the shares underlying
the Warrant, the delivery to the Company of a statement by the Holder (in a form
acceptable to the Company and its counsel) that such Shares are being acquired
by the Holder for investment and not with a view to their distribution or
resale.
13. The certificates for the Common Stock so purchased shall be delivered to
the Holder within a reasonable time, not exceeding five business days after all
requisite documentation has been provided, after the rights represented by this
Warrant shall have been so exercised, and shall bear a restrictive legend with
respect to any applicable securities laws.
14. This Warrant shall be governed by and construed in accordance with the laws
of the Commonwealth of Pennsylvania. The federal and state courts in the city of
Philadelphia shall have exclusive jurisdiction over this instrument and the
enforcement thereof. Service of process shall be effective if by certified mail,
return receipt requested. All notices shall be in writing and shall be deemed
given upon receipt by the parry to whom addressed. This instrument shall be
enforceable by decrees of specific performances well as other remedies.
IN WITNESS WHEREOF, Scangraphics, Inc. has caused this Warrant to be signed
by its duly authorized officers under Its corporate seal, and to be dated as of
the date set forth above.
SCANGRAPHICS, INC.
By
---------------------
10
<PAGE>
CONSULTING AGREEMENT
AGREEMENT dated as of April 8, 1997 by and between SCANGRAPHICS, INC., a
Pennsylvania corporation (the "Corporation") and BROAD CAPITAL ASSOCIATES INC.
(hereinafter referred to as the "Consultant").
In consideration of the mutual promises set forth below, the parties hereto
do hereby agree as follows:
1. (a) The Corporation has retained the Consultant to perform the
services hereinafter set forth.
(b) Consultant shall upon reasonable notice advise the Corporation
with respect to all business matters referred by the Corporation to Consultant.
Without limiting the generality of the foregoing, Consultant shall at the
Corporation's request:
(I) review the Corporation's managerial and marketing requirements;
(II) review budget and business plans;
(III) assist the Corporation in finding acquisition candidates and in
consummating acquisitions; and
(iv) assist the Corporation in investor relations.
In addition, at the Corporation's request Consultant shall meet with corporate
officials, confer with employees and business contacts of the Corporation, and
review and comment upon any material the Corporation submits to Consultant.
(c) The Consultant shall not be required to devote its full time and
attention to the performance of its time and attention as it deems at its sole
discretion reasonable or necessary for such purposes.
(d) Consultant shall be available to perform Consultant's services in
New York City or elsewhere, all as designated by Corporation.
2. (a) The term of this Agreement (the "Term") shall commence on this
date and shall terminate on the second anniversary hereof.
(b) The Term shall in all events terminates should Consultant's
services be terminated by the Corporation.
3 (a) As full compensation, the Company has executed and delivered to
the Consultant 2.1 Million warrants in the form of Exhibit B.
(b) Consultant acknowledges that it and its designees are acquiring
the Warrants and the shares which are issuable on exercise of the Warrants (the
"Underlying Securities") for investment and not with a view to or for resale in
connection with any distribution. No warrantholder will sell the Warrants or the
Underlying Securities unless they are registered under the Securities Act of
1933 or an exemption is available under such Act. The Warrants and the
Underlying Securities will be endorsed with a restrictive legend to reflect the
foregoing restrictions. The Warrants provide for registration of the Underlying
Securities on the terms set forth therein.
(c) To the extent permitted by law, there shall be no withholding or
payroll taxes.
<PAGE>
(d) Consultant shall be entitled to no other compensation or
reimbursement whatsoever. Without limiting the generality of the foregoing,
Consultant shall not be reimbursed for its expenses.
4. The Consultant covenants that it will not:
(a) during the Term and for one year thereafter, either directly or
indirectly own, manage, operate, control, be employed by, or connected in any
manner with, the ownership, management or control of any business engaged in any
business which competes with the business now conducted by the corporation; or
(b) during and after the Term, (except for the Corporation's benefit
during the Term of the consultancy) use or disclose any confidential or
proprietary information or the Corporation.
5. Any waiver, alternation or modification of any of the provisions of
this agreement or cancellation or replacement of this Agreement shall not be
valid unless in writing and signed by the parties. A waiver of the breach of any
provisions hereof or a default under any provision hereof shall not be deemed a
waiver of such provisions of any subsequent breach or default of any kind or
nature.
6. This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania. The Pennsylvania courts shall have exclusive jurisdiction over
this Agreement and the enforcement thereof. Service of process shall be
effective if by certified mail, return receipt requested. All notices shall be
in writing and shall be deemed given upon receipt by the party to whom
addressed. This Agreement shall be enforceable by decrees of specific
performances well as other remedies.
7. This Agreement shall inure to the benefit of, and bind, the parties
hereto and their respective legal representatives, successors and assigns.
8. Consultant is an independent contractor and cannot bind or be
obliged to bind, or incur any expense or commitment on behalf of the Corporation
or its subsidiaries or affiliates.
9. Consultant has been advised to retain his own counsel in connection
with this Agreement.
IN WITNESS WHEREOF, the Consultant has hereunder set his hand and seal and
the corporation has caused these presents to be duly executed and its corporate
seal to be affixed by an officer hereunto duly authorized as of the day of the
year first above set forth.
SCANGRAPHICS, INC.
BY:
-----------------------------
BROAD CAPITAL ASSOCIATES, INC.
BY:
-----------------------------
<PAGE>
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