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 JUNE 30, 1997
Commission File Number 0-15864
-------
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
15,898,054 shares of common stock were outstanding as of June 30, 1997
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996 3 - 4
Consolidated Statements of Operations --
Three months and six months ended
June 30, 1997 and 1996 5 - 6
Consolidated Statements of Cash Flow --
Six months ended
June 30, 1997 and 1996 7
Notes to Financial Statements --
June 30, 1997 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 11 - 12
PART II. OTHER INFORMATION
Item 1 through Item 6. 13 - 14
SIGNATURE PAGE 15
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,197 $ 1,081
Accounts receivable, less
allowance for doubtful accounts of
$180 and $189 975 844
Inventories 1,448 1,174
Prepaid expenses and other current
assets 220 91
-------- -------
TOTAL CURRENT ASSETS $ 6,840 $ 3,190
-------- -------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 998 864
OTHER ASSETS:
Other Non-Current Assets 83 38
-------- -------
TOTAL OTHER ASSETS $ 83 $ 38
-------- -------
TOTAL ASSETS $ 7,921 $ 4,092
-------- -------
See accompanying notes to financial statements.
3
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
JUNE 30, DECEMBER 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 806 $ 617
Dividend Payable 264 368
Deferred revenue 230 237
Current maturities, capital lease obligation 31 102
Current maturities of long term debt 64 62
-------- --------
TOTAL CURRENT LIABILITIES $ 1,395 $ 1,386
-------- --------
LONG TERM LIABILITIES
Notes Payable $ 5,200 --
Capital lease obligation, less current maturities 27 43
Long-term debt, less current maturities 74 107
-------- --------
TOTAL LONG TERM DEBT $ 5,301 $ 150
-------- --------
STOCKHOLDERS' EQUITY
Class A convertible preferred stock
authorized 1,000,000 shares, stock
outstanding 500,000 shares
(Series A), par value $2.00 1,000 1,000
Class A convertible preferred
stock outstanding 125,000 shares
(Series C), par value $10.00 1,020 1,250
Common stock, par value $0.001 Authorized
50,000,000 shares Outstanding
15,898,054 shares at June 30, 1997
and 14,780,766 shares at December 31, 1996 16 15
Additional paid-in capital 16,601 15,295
Notes receivable related parties (1,334) (1,681)
Deficit (16,078) (13,323)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,225 2,556
-------- --------
$ 7,921 $ 4,092
-------- --------
See accompanying notes to financial statements.
4
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---- ----
SALES $ 1,321 $ 1,160
LICENSE AND ROYALTY FEES 3 17
------------ ------------
Total revenues $ 1,324 $ 1,177
COST OF GOODS SOLD 866 533
------------ ------------
GROSS PROFIT 458 644
EXPENSES:
Research and development* 324 270
Sales and marketing* 648 412
General and administrative* 810 351
Total operating expenses 1,782 1,033
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (1,324) (389)
OTHER INCOME 55 15
Other Expense* (112) (266)
------------ ------------
Total other income (expense) (57) (251)
NET INCOME (LOSS) BEFORE INCOME TAX (1,381) (640)
INCOME TAX -- --
NET INCOME (LOSS) (1,381) (640)
PREFERRED DIVIDENDS (41) (30)
BALANCE APPLICABLE TO COMMON STOCK (1,422) (670)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.09) (.06)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 15,612,644 10,745,346
See accompanying notes to financial statements.
*See Management's Discussion
5
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---- ----
SALES $ 2,255 $ 2,388
LICENSE AND ROYALTY FEES 27 27
------------ ------------
Total revenues $ 2,282 $ 2,415
COST OF GOODS SOLD 1,746 1,186
------------ ------------
GROSS PROFIT 536 1,229
EXPENSES:
Research and development* 526 513
Sales and marketing* 1,125 778
General and administrative* 1,424 865
------------ ------------
Total operating expenses 3,075 2,156
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (2,539) (927)
OTHER INCOME 108 16
Other Expense* (229) (289)
------------ ------------
Total other income (expense) (121) (273)
NET INCOME (LOSS) BEFORE INCOME TAX (2,660) (1,200)
INCOME TAX -- --
NET INCOME (LOSS) (2,660) (1,200)
PREFERRED DIVIDENDS (96) (60)
BALANCE APPLICABLE TO COMMON STOCK (2,756) (1,260)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.18) (.12)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 15,612,644 10,745,346
See accompanying notes to financial statements.
*See Management's Discussion
6
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands except share and per share data)
SIX MONTHS SIX MONTHS
1997 1996
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $(2,660) $(1,200)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 196 290
(Increase) decrease in notes and
accounts receivable (131) 95
(Increase) decrease in inventories (275) (166)
(Increase) decrease in other current assets (129) (324)
(Increase) decrease in other assets (45) 17
Increase (decrease) in accounts payable
and accrued expenses 189 (215)
Increase (decrease)in deferred revenue (7) 216
Total adjustments (202) (87)
Net cash provided (used) by operating
activities (2,862) (1,287)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (321) (95)
Capitalized trademarks & patents (8) (14)
Net Cash (used) in investing activities (329) (109)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (30) --
Payment of preferred dividends (201) --
Payment of loans payable-officers -- (59)
Payment of notes payable-officers -- (259)
Payment of capital lease obligations (87) --
Proceeds from issuance of notes payable 5,200 3,100
Proceeds from exercise of common stock
warrants/options 1,161 289
Proceeds from subscription receivables 347 --
Payment of expenses, stock issuance (71) --
Repurchase of subsidiary stock (12) --
Net cash provided(used) by financing activities 6,307 3,071
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 3,116 1,675
CASH AND CASH EQUIVALENTS,
at beginning of year 1,081 189
CASH AND CASH EQUIVALENTS,
at June 30 4,197 1,864
See accompanying notes to financial statements.
7
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 (In
Thousands except share and per share data)
Note #1
In the opinion of management all adjustments are of a normal recurring nature
and have been made to present fairly its financial position at June 30, 1997 and
the results of operations for the periods indicated. The operating results for
the periods are not necessarily indicative of results to be expected.
Note #2 Inventories:
Inventories at June 30, 1997 and December 31, 1996 consist of
the following:
June 30 December 31,
1997 1996
------- ------------
Raw materials $ 557 $ 523
Work-in-process 338 263
Finished products 553 388
------ ------
$1,448 $1,174
------ ------
Note #3 Property and Equipment:
Property and equipment consists of:
June 30, December 31,
1997 1996
-------- ------------
Equipment under capital lease $ 415 $ 415
Machinery & Equipment 2,776 2,492
Furniture & Fixtures 140 110
Autos & Trucks 12 12
Leasehold Improvements 99 94
Software 256 253
------ ------
$3,698 $3,376
Less accumulated
depreciation and amortization 2,700 2,512
------ ------
Net Fixed Assets $ 998 $ 864
------ ------
Note #4 Commitments and Contingencies:
The Company will be obligated to pay one 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. In this event, the aggregate
potential severance pay at June 30, 1997 is $1,060.
8
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(In Thousands except share and per share data)
Note #5 Long-Term Liabilities:
Notes payable consist of $5,200 in convertible debentures
issued under Regulation D Exemption to a private investment
group which mature in May and June 1999. 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.
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.
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.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
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. $ 138 $ 169
Less current maturities 64 62
------ ------
Long-term debt $ 74 $ 107
</TABLE>
As of June 30, 1997, long-term debt matures as follows:
1997 $31
1998 $68
1999 $39
At June 30, 1997, equipment with a net book value of $105 has
been capitalized under capital leases.
9
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
(In Thousands except share and per share data)
Note #6 Stockholders' Equity
During the second quarter 1997, one officer, one employee, and
one consultant exercised common stock options and warrants
resulting in 28,334 shares of common stock issued.
In conjunction with the convertible debenture financing
detailed in Note 5, the Company has issued 3,000,016 common
stock warrants to the private placement group exercisable at
$4.00 and expiring June 1, 2001.
During the second quarter 1997, 200,000 and 50,000 common
stock warrants were issued to a sales consultant and an
officer of the Company. Common stock options of 345,000 were
issued to officers, employees and consultants of the Company
during the second quarter.
Note #7 Supplemental Disclosures of Cash Flow Information:
June 30, June 30,
1997 1996
---- ----
Cash paid during year for
interest $ 19 $ 31
----- ------
Non-cash financing activities are as follows:
Declaration of preferred
stock cash dividend $ 109 $ 60
------ ------
Subscriptions Receivable $ 8 $ -0-
------ ------
Conversion of Notes Payable to
Common stock $ -0- $ 500
------- ------
10
<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 (In Thousands except share and per share data)
At June 30, 1997, cash and cash equivalents increased to $4197, a $3116 increase
compared to the December 31, 1996 amount of $1,081. The above change in cash and
cash equivalents are explained as follows in the cash flow from operating,
investing and financing activities.
As of June 30, 1997, the cash flows from operating activities resulted in a net
use of cash of $2,862. This use of cash was primarily due to the Company's
significant additions of executive management in Corporate, Sedona GeoServices
and Tangent Imaging Systems (formerly the Scanner Division). Also, all three
business units continued in the second quarter to add technical and sales
personnel in order to identify market opportunities and generate revenue.
As of June 30, 1997, the cash flows from investing activities resulted in a net
use of cash of $329. The use of cash was due primarily to purchases of equipment
and fixtures at Sedona's new Limerick, PA facility ($263).
As of June 30, 1997, the cash flows from financing activities resulted in net
cash provided by financing activities of $6,307. The increase in cash was
provided by a $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 ($1,161).
In connection with a $5,200 private placement of its securities in April 1997,
the Company offered for sale 52 units, each of which consisted of a $100, 7%
convertible note due May or June 1999, and one warrant to purchase 17,308 shares
of common stock of the Company at an exercise price of $4.00 per share for a
period of four (4) years. The notes and any accrued interest are convertible
within two (2) years at a price per share equal to the lesser of $7.00 or the
applicable percentage of the average closing sales price (90%, minus 1% for each
full $.20 by which the conversion price for such conversion is greater than
$4.00) of the Company's common stock during the last five trading days prior to
conversion. If the conversion price is less than $4.00, a 10% discount to the
closing bid price for the 5 days prior to conversion is required.
In conjunction with this financing the Company has entered into a consulting
agreement 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.
The Company believes that proceeds from the private placement and funds
generated from operations will be sufficient to meet the Company's working
capital requirements for 1997.
Results of Operations (In Thousands except share and per share data)
Net Revenue for the three months ended June 30, 1997 increased to $1,324, a
12.5% increase compared to the three months ended June 30, 1996, amount of
$1,177. Revenue in excess of 10% of revenue to one customer accounted for
approximately 45.4% of net revenue for the three months ended June 30, 1997
(three customers), compared to revenue in excess of 10% of revenue to one
customer which accounted for approximately 21.9% of net revenue for the three
months ended June 30, 1996.
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)
Results of Operations(In Thousands except share and per share data) Continued
Net Revenue for the six months ended June 30, 1997 decreased to $2,282, a 5.5%
decrease compared to the six months ended June 30, 1996, amount of $2,415.
Revenue in excess of 10% of revenue to one customer accounted for approximately
32.6% (two customers) of net revenue for the six months ended June 30, 1997,
compared to revenue in excess of 10% of revenue to one customer which accounted
for approximately 10.7% of net revenue for the six months ended June 30, 1996.
Gross Margin percentages for the three months ended June 30, 1997 and 1996 were
34.6% and 54.7% of revenue, respectively.
Gross Margin percentages for the six months ended June 30, 1997 and 1996 were
23.5% and 50.9% of revenue, respectively.
Research and development expense as a percentage of revenue increased to 24.5%
of revenue for the three months ended June 30, 1997 compared to 22.9% of revenue
at June 30, 1996. Research and development expense as a percentage of revenue
increased to 23.0% of revenue for the six months ended June 30, 1997 compared to
21.2% of revenue at June 30, 1996. While a large percentage of sales, Sedona
GeoServices has substantially incremented its engineering staff in the third
quarter and the scanner operations continue with higher costs in relation to
current sales with the recent introduction of the new CF 1300 unit. Software
imaging product development continues. On an actual expense comparison, research
and development expenses increased for the six months ended June 3, 1997,
compared to June 30, 1996, by only $13.
Sales and Marketing expense as a percentage of revenue increased to 48.9% of
sales for the three months ended June 30, 1997 compared to 35% at June 30, 1996.
Sales and marketing expenses as a percentage of revenue increased to 49.3% of
revenue for the six months ended June 30, 1997, compared to 32.2% at June 30,
1996. The Company has hired numerous sales and marketing personnel in all three
business units to pursue market opportunities.
General and Administrative expense for the second quarter 1997 was 61.2% of
revenue compared to 29.8% at June 30, 1996. General and Administrative expense
for the six months ended June 30, 1997 was 64.2% of revenue compared to 35.8% at
June 30, 1996. The full impact of those new executives hired in the fourth
quarter of 1996 has now been realized.
It is the management's objective to drive revenues with the increased
managerial, technical and sales staff recruited.
The lease for the Broomall, PA manufacturing facility expires August 31, 1997.
In anticipation of this, and in order to reduce overhead costs, the Company's
corporate offices and the Technology Resource Centers relocated to the Limerick,
PA facility in July, utilizing 5,000 square feet of additional space. The
manufacturing of monochrome scanners now takes place in 3,000 square feet of
leased space in Doylestown, PA.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings -
None
Item 2 - Changes in Securities - None
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.
None
(10) Material Contracts:
Exhibit 10.1 - Employment Agreement of Colin Matthews
Sedona GeoServices, Inc., President
(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.
Proposal No. 1
In Election of Directors to terms expiring in 1997:
<TABLE>
<CAPTION>
WITHHELD/
FOR AGAINST ABSTAIN
--- ------- ---------
<S> <C> <C> <C>
Andrew E. Trolio 16,705,542 10,920 31,716
R. Barry Borden 16,705,542 10,840 31,716
David S. Hirsch 16,705,542 11,040 31,716
Michael A. Mulshine 16,705,542 13,340 31,716
Laurence L. Osterwise 16,705,542 17,920 31,716
Jack A. Pellicci 16,705,542 10,340 31,716
James C. Sargent 16,705,542 24,840 31,716
</TABLE>
13
<PAGE>
Proposal No. 2
Approval of adoption of amendments to the 1992 Long-Term
Incentive Plan:
WITHHELD/
FOR AGAINST ABSTAIN
--- ------- ---------
9,052,713 267,045 62,735
Proposal No. 3
To ratify the appointment of BDO Seidman, LLP as independent
auditors of the Company for the current year:
WITHHELD/
FOR AGAINST ABSTAIN
--- ------- --------
16,597,047 24,286 125,775
(24) Consents of experts and counsel.
None
(25) Power of attorney.
None
(28) Additional exhibits.
None
14
<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: August 7, 1997 /S/ Laurence L. Osterwise
---------------------- --------------------------
Laurence L. Osterwise
President
DATE: August 7, 1997 /S/ Denis P. Kelly
---------------------- -------------------
Denis P. Kelly
Director, Corporate Finance
(Chief Accounting Officer)
15
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Agreement made as of this 1st day of April, 1997, by and between
Scangraphics, Inc., a Corporation of the Commonwealth of Pennsylvania (the
"Company"), and Colin B. Matthews (the "Employee").
WITNESSETH:
1. Employment. The Company hereby agrees to employ Employee and Employee hereby
accepts employment by the Company for the period and the terms and conditions
hereinafter set forth.
2. Capacity and Duties.
a) Employee shall be employed by the Company in the capacity of
President of Sedona GeoServices. Inc. (a Subsidiary) and Employee shall have
such authority and shall perform such key executive duties and responsibilities
as may from time-to-time reasonably be specified by the Chief Operating Officer
of the Company with respect to the Company and its affiliates. It is the present
expectation of the parties that Employee will be re-elected during the entire
term of this Agreement to serve as President of Sedona GeoServices. Inc., and
Employee agrees to serve in such capacities without any compensation in addition
to that herein provided. Employee acknowledges that neither the Company nor its
Board of Directors is legally obligated to elect or re-elect Employee as
President of Sedona GeoServices. Inc.
1
<PAGE>
b) During the term of this Agreement, Employee shall devote his full
time, in exercising his best efforts to the performance of his duties hereunder.
c) Notwithstanding the foregoing, Employee shall be entitled to have
investments in other enterprises provided, however, that he shall not have any
investments or financial interest in any business enterprise which conducts
business activities competitive with any business activities conducted by the
Company now or at any time during the term of the Employee's employment
hereunder (other than an investment of no more than 5% of any class of equity
securities of a company the securities of which are traded on a national
securities exchange). However, in the event the Company enters into a new field
in which the Employee has previously invested, the Employee agrees to disclose
his investment, if said investment exceeds 5% of equity of the company in which
the Employee has invested. If the Employee is so requested by the Board of
Directors of the Company, the Employee shall divest himself of the said
investment within one year after said request.
3. Compensation. Employee's compensation shall be as reflected in Exhibit 1.
4. Expenses. Employee is authorized to incur reasonable expenses for promoting
the business of the Company and in carrying out his duties hereunder, including
without limitation, reasonable expenses for automobile, travel and similar
items. The Company shall reimburse Employee for all such ordinary and necessary
expenses upon the presentation by Employee from time-to-time of an itemized
account of such expenditures. Employee shall present an itemized account of
expenditures not less frequently than monthly.
2
<PAGE>
5. Term of Agreement; Separation.
a) The term of this Employment Agreement, shall be Two (2) years
commencing on the date hereof, and thereafter shall automatically continue from
year-to-year unless and until either party shall give notice to the other at
least three (3) months prior to the end of the original, or the then current
renewal term.
b) The Company may terminate this Employment Agreement for cause,
defined as follows:
1) Deliberate disclosure of Company secrets for consideration; or
2) Conviction of Employee of a felony involving moral turpitude,
or of any other law which may reasonably be deemed to cause a
detrimental effect upon the Company as a result of mutual association.
If the Company separates the Employee for cause, the Company will have
no further liability or obligation except to pay the Employee earned
and unpaid compensation.
c) The Company may separate the Employee; a) without cause, or b)
should the Employee die or become disabled such that the Employee has been
unable to perform any duties hereunder for ninety (90) days during any year of
this Employment Agreement or for any period of sixty (60) consecutive days. In
the event of such separation, the severance package described in Exhibit 1,
Section 5 applies.
d) In the event, at any time during the initial term of this Employment
Agreement, or any extension thereof, Employee shall be involuntarily removed as
President of Sedona
3
<PAGE>
GeoServices, Inc., then Employee may terminate this Employment Agreement and
receive severance in accordance with Exhibit 1, Section 5.
e) In the event of change of control of the Company, Employee may elect
to terminate his employment in which event he shall receive the severance
package described in Exhibit 1, Section 5. For these purposes, change of control
includes the following: Sale of a majority of the outstanding shares or assets
of the Company, Change in composition of more than 50% of the Board of Directors
as presently constituted, or should Laurence L. Osterwise cease as either Chief
Executive Officer or Chief Operating Officer.
6) Restrictions on Competition. Employee covenants and agrees that: (a) during
the initial term and any renewal terms of his employment hereunder and, (b) if,
but only if, this Employment Agreement is terminated by the Employee (as
hereinafter defined) during the initial term, or any renewal term hereof, for a
period on one (1) year after termination of his employment hereunder, he shall
not, directly or indirectly, engage in any business activities within the limits
of the Continental United States, the same as, or in competition with, business
activities carried on by the Company during the period of the Employee's
employment by the Company, or in the definitive planning stages at the time of
termination of Employee's employment.
The term "engage in" shall include, without being limited to,
activities as proprietor, partner, stockholder, principal, agent, employee or
consultant. However, nothing contained in this Paragraph shall prevent Employee
from having investments of the types permitted in Subparagraph 2 (c) hereof.
4
<PAGE>
These restrictions shall not apply if separation is by the Company
under Section 5c and 5d or if separation is by Employee under Section 5e of this
Employment Agreement.
7. Trade Secrets. During the term of employment under this Employment Agreement,
the Employee will have access to, and become familiar with, various trade
secrets, consisting of formulas, patterns, devices, secret inventions,
processes, compilation of information, records and specifications, which are
owned by the Company and which are regularly used in the operation of the
business of the Company.
The Employee shall not disclose any of the aforesaid trade secrets,
directly or indirectly, nor use them in any way, either during the term of this
Agreement or at any time thereafter, except as required in the course of his
employment by the Company.
All files, records, documents, drawings, specifications, equipment, and similar
items relating to the business of the Company, whether prepared by the Employee
or otherwise coming into his possession, shall remain the exclusive property of
the Company and be returned to the Company by request of the Company, provided
the same information is not available to the general public.
8. Miscellaneous Provisions.
a) Any notices pursuant to this Agreement shall be validly given or
served if in writing and delivered personally or sent by registered or certified
mail, postage prepaid, to the following addresses:
If to Company: SCAN-GRAPHICS, Inc.
5
<PAGE>
700 Abbott Drive
Broomall, PA 19008
Attn: President
If to Employee: Colin B. Matthews
Woodlynn Manor
2012 Kelly Court
Amissville, VA 20106
or to such other addresses as either party may hereafter designate to the other
in writing.
b) Notices delivered personally shall be deemed communicated as of the
actual receipt; notices mailed shall be deemed communicated as of five (5) days
after mailing.
c) If any provision of this Agreement shall be or become illegal or
unenforceable in whole or in part for any reason whatsoever, the remaining
provisions shall nevertheless be deemed valid, binding and subsisting.
d) The waiver by either party of a breach or violation of any provision
of this Employment Agreement shall not operate or be construed as a waiver of
any subsequent breach or violation thereof.
e) This writing represents the entire Employment Agreement and
understanding of the parties with respect to the subject matter hereof; it may
not be altered or amended except by agreement in writing.
f) The Employment Agreement has been made in and its validity,
performance and effect shall be determined in accordance with the laws of the
Commonwealth of Pennsylvania.
g) The headings of paragraphs in this Employment Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
6
<PAGE>
h) This Employment Agreement supersedes any earlier Employment
Agreement and as such is the only Employment Agreement in force.
IN WITNESS WHEREOF, and intending to be legally bound, the parties have executed
this Employment Agreement under seal on the day and year first above written.
SCAN-GRAPHICS, INC.
ATTEST: /s/ Victoria L. Tranchetter /s/ L.L. Osterwise
--------------------------- -------------------------
Secretary Chief Operating Offier
EMPLOYEE:
/s/ Colin B. Matthews
------------------------
Colin B. Matthews
7
<PAGE>
Scangraphics, Inc. Exhibit 1
COMPENSATION AND BENEFITS
COMPENSATION PLAN FOR ... Colin B. Matthews
POSITION: President of Sedona GeoServices, Inc. a Subsidiary of Scangraphics,
Inc.
1) BASE SALARY: $160,000 per year
2) INCENTIVE COMPENSATION: In addition to the Base Salary, as set forth above,
an incentive bonus plan is provided in the event certain goals or levels of
achievement are reached, as reflected herein:
BONUS:
Short Term: Based on Sedona GeoServices results (weighted at 80%) and
Scangraphics results (the remaining 20%), your short term bonus will be targeted
at 40% of your base salary. To receive bonus, you must be employed on 2/28 of
the following year. For 1997, NEBT must be greater than $0. After 1997, a
formula will be determined that will include NEBT per plan. Payouts range from
0% to 80% as follows: at (less than) 80% of revenue plan = 0%; 80% of plan =
15%; 100% of plan = 40%; 125% of plan = 60%; 150% of plan = 80% of base salary
... graduated between.
Long Term Incentive: Again based on results of Sedona GeoServices and
Scangraphics, the LTI is targeted at 25% of base salary and will be paid, if
earned, 50% in each year, 2000 and 2001. Based on performance to plan, this will
range between 0% and 37.5%.
3) EQUITY - OPTIONS
20O,000 Options to Purchase Common Shares for a period of 5 years at an exercise
price of $3.00 (based on the bid price on 4/2/97), the date of beginning
employment, with vesting as follows:
33,333 shares on each anniversary beginning on 4/1/98
33,333 shares on achieving each of the following revenue targets
within Sedona GeoServices ($ 1.5M, $5.0M, 10.0M, 15.0M)
4) Travel and Relocation
An allowance not to exceed $2000 per month will be provided to defer reasonable
and actual expenses for travel to and from work locations (i.e. Limerick,
Reston, etc.)
An allowance not to exceed $10,000 will be provided to defer reasonable and
actual relocation expenses when you relocate to the Limerick area or other
agreed upon location.
5) SEPARATION: It is agreed that the inability of the Employee to perform in the
areas listed below is reason for separation under Section 5c of the Employment
Agreement.
1
<PAGE>
o Operations
o Financial community
o Attracting new corporate strategic partners
o Controlling costs
o Maximizing profits
In the event of separation under Section 5c, 5d or 5e the Company will provide a
separation package as follows:
a) salary for 9 months, if separation occurs within the first two years
of employment and 6 months thereafter,
b) benefits for 1 year or until employee obtains full-time employment
with benefits,
c) prorata bonus per Section 2 above,
d) any accrued Long Term Incentive under Section 4 above.
6) BENEFITS: As a "Full Time" Employee, Employee will be compensated bi-weekly,
and the Employee will be included in the Company's general employee benefit
programs. In place of Scangraphics Medical/Dental coverage, an allowance, not to
exceed $560 per month, will be provided to defer costs of your COBRA expenses.
Employee: For the Company:
/s/ Colin B. Matthews /s/ L.L. Osterwise
- ------------------------- -----------------------
Colin B. Matthews Laurence L. Osterwise
Chief Operating Officer
Date: April 01, 1997 Date: 4/1/97
-------------- -----------------
2
<PAGE>
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