<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SCAN-GRAPHICS, INC.
- -----------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other
than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount
on which the filing fee is calculated and state how it was
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
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<PAGE>
SCAN-GRAPHICS, INC.
__________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 24, 1998
To the Shareholders
of Scan-Graphics, Inc.
The Annual Meeting of Shareholders of Scan-Graphics, Inc.
(the "Company") will be held at The Wings Club, 52 Vanderbilt
Avenue, 18th Floor, New York, NY, on June 24, 1998 at 11:00 A.M.
(Local Time), for the following purposes:
1. To elect seven (7) directors to serve for the ensuing
year;
2. To ratify, pursuant to Nasdaq Rule 4310(c)(25)(H), the
issuance and sale of the Company's Class A Preferred Stock,
Series E, par value $1,000 per share, Warrants to Purchase Common
Stock, and the shares of the Company's Common Stock, par value
$.001 per share, issuable upon conversion and exercise thereof,
respectively; and
3. To transact such other business as may properly come
before the meeting.
The Board of Directors has no knowledge of any other
business to be presented or transacted at the meeting.
Only shareholders of record on April 30, 1998 are entitled
to notice of and to vote at the meeting.
By Order of the Board of Directors
MICHAEL A. MULSHINE
Secretary
May __, 1998
YOU ARE CORDIALLY INVITED AND URGED TO ATTEND THE ANNUAL MEETING
IN PERSON. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE
SIGN, DATE AND RETURN YOUR PROXY ON THE ENCLOSED CARD WHETHER OR
NOT YOU EXPECT TO ATTEND IN PERSON. SHAREHOLDERS WHO ATTEND THE
MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON IF THEY
DESIRE.
<PAGE>
SCAN-GRAPHICS, INC.
649 North Lewis Road
Limerick, PA 19468
________________________
PROXY STATEMENT
for
Annual Meeting of Shareholders
To be Held June 24, 1998
________________________
This Proxy Statement, the foregoing notice and the enclosed
form of proxy are being sent to shareholders on or about May __,
1998, in connection with the solicitation of proxies for use by
the Board of Directors of Scan-Graphics, Inc. ("Company"), at the
Annual Meeting of Shareholders of the Company ("Meeting") which
will be held at The Wings Club, 52 Vanderbilt Avenue, 18th Floor,
New York, New York, on, June 24, 1998 at 11:00 A.M. (Local Time),
for the purposes set forth in the foregoing Notice of Annual
Meeting, and at any and all adjournments or postponements
thereof.
Record Date and Outstanding Stock
The record date ("Record Date") for determining those
shareholders entitled to notice of and to vote at the Meeting was
April 30, 1997. At that date, the Company had outstanding
500,000 shares of Class A Preferred Stock, Series A, par value
$2.00 per share ("Series A Preferred Stock"), 1,053 shares of
Class A Preferred Stock, Series D, par value $1,000 per share
("Series D Preferred Stock"), 5,200 shares of Class A Preferred
Stock, Series E, par value $1,000 per share ("Series E Preferred
Stock"), and 19,228,181 shares of Common Stock, par value $0.001
per share ("Common Stock").
Proxies
Solicitation. Solicitation of proxies is being made by
management at the direction of the Company's Board of Directors,
without additional compensation, through the mail, in person or
by telegraph or telephone. The cost will be borne by the Company.
In addition, the Company will request brokers and other
custodians, nominees and fiduciaries to forward proxy soliciting
material to the beneficial owners of shares held of record by
such persons, and the Company will reimburse them for their
reasonable expenses in so doing.
Revocation. The execution of a proxy does not affect the
right to vote in person at the Meeting. A proxy may be revoked by
the person giving it at any time before it has been voted at the
Meeting by submitting a later dated proxy or by giving written
notice to the Secretary of the Company. Unless a proxy is
revoked or there is a direction to abstain on one or more
proposals, it will be voted on each proposal and, if a choice is
made with respect to any matter to be acted upon, in accordance
with such choice. If no choice is specified, the proxy will be
voted as recommended by the Board of Directors.
Signatures in Certain Cases. If a shareholder is a
corporation, the enclosed proxy should be signed in its corporate
name by an authorized officer and his or her title should be
indicated. If stock is registered in the name of two or more
trustees or other persons, the proxy must be signed by a majority
of them. If stock is registered in the name of a decedent, the
proxy should be signed by an executor or administrator, and his
or her title as such should follow the signature.
Quorum and Voting
The presence, in person or by proxy, of shareholders
entitled to cast a majority of the votes which all shareholders
are entitled to cast on each matter to be voted upon at the
Meeting is necessary for a quorum. The favorable vote of a
majority of the votes cast at the Meeting by the Series A
Preferred Stock and the Common Stock, voting as a single class,
is required for approval of all business which will come before
the Meeting, except for the election of directors, who will be
elected by at least a plurality of the votes cast at the
election.
Under the Pennsylvania Business Corporation Law, if a
shareholder (including a nominee, broker or other record owner)
either records the fact of abstention, in person or by proxy, or
fails to vote in person and does not return a duly executed form
of proxy, such action would not be considered a "vote cast," and
would have no effect on the outcome of the vote with respect to
voting matters. If a shareholder returns a duly executed form of
proxy but has made no specifications with respect to voting
matters, the persons named as proxies intend (unless instructed
otherwise by the shareholder) to vote for each of the nominees
for director named in this Proxy Statement, for the proposal to
ratify the issuance of the Series E Preferred Stock, and to use
their discretion in any other matters that may properly come
before the Meeting.
Holders of Series A Preferred Stock and Common Stock of
record at the close of business on the Record Date will be
entitled to one vote per share on all matters properly presented
for shareholder approval at the Meeting. Shareholders do not
have the right to cumulate their votes for the election of
directors.
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth information regarding the
ownership of the Company's voting securities on Record Date,
assuming conversion of Series A Preferred Stock into one share of
Common Stock, and including options and warrants by (i) each
person known by the Company to be the beneficial owner of more
than five percent of any class of its voting securities, (ii)
each director and executive officer, and (iii) all directors and
executive officers as a group.
Percentage of
Amount & Nature of Outstanding
Beneficial Owner(1) Beneficial Ownership(2) Common Stock
- ------------------- ----------------------- --------------
Andrew E. Trolio 2,589,288(3) 13.0%
Laurence L. Osterwise 200,000 *
Michael A. Mulshine 829,727(4) 4.2%
David S. Hirsch 229,567(5) 1.2%
James C. Sargent 115,243 *
R. Barry Borden 51,780 *
Jack A. Pellicci 27,260 *
Bruce D. Downing 16,667 *
Robert J. Griffin 5,000 *
Colin B. Matthews 33,333 *
William K. Williams(6) -0- *
All Directors and
Executive Officers as
a group (11 persons) 4,097,865 19.5%
- -------------------
* Represents one percent or less.
(1) Unless otherwise indicated, the address of all persons
listed is c/o Scan-Graphics, Inc. 649 North Lewis Road, Limerick,
PA 19468.
(2) Unless otherwise indicated, each person possesses sole
voting and investment power with respect to the shares identified
as beneficially owned in the table.
(3) Includes 510,288 shares of Common Stock held by Mr.
Trolio's wife, as to all of such shares Mr. Trolio disclaims
beneficial ownership. Includes 500,000 shares of Series A
Preferred Stock owned by Mr. Trolio, representing all of the
outstanding shares of the Series A Preferred Stock.
(4) Includes warrants to purchase 70,000 shares issued to
Osprey Partners, a company owned by Mr. Mulshine.
(5) Includes 10,940 shares of Common Stock held by Mr.
Hirsch's wife, as to all of such shares Mr. Hirsch disclaims
beneficial ownership. Includes 51,100 shares of Common Stock
held by Mr. Hirsch's children, as to all of such shares Mr.
Hirsch disclaims beneficial ownership.
(6) Mr. Williams was elected Vice President and Chief
Financial Officer of the Company in April 1998.
The foregoing table also includes shares which the following
directors and executive officers have the right to acquire within
sixty days upon the exercise of options and warrants: Mr. Trolio,
329,000 options, 350,000 warrants; Mr. Osterwise, 200,000
warrants; Mr. Mulshine, 42,845 options, 574,583 warrants; Mr.
Hirsch, 65,345 options; Mr. Sargent, 77,845 options; Mr. Borden,
51,780 options; Mr. Pellicci, 27,260 options; Mr. Downing, 16,667
options; Mr. Griffin, 5,000 options; Mr. Matthews, 33,333
options.
<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
At the Meeting, the shareholders will elect seven directors,
each to hold office until the 1999 Annual Meeting of Shareholders
and until a successor has been elected and qualified.
The Board of Directors has nominated for election the seven
persons designated below as the Company's directors. All nominees
have consented to be named and to serve if elected. If a nominee,
at the time of his election, is unable or unwilling to serve, and
as a result another nominee is designated, the persons named in
the enclosed proxy or their substitute will have discretionary
authority to vote or to refrain from voting for the other nominee
in accordance with their judgment. Unless contrary instructions
are given, the shares represented by the enclosed proxy will be
voted "FOR" the election of R. Barry Borden, Laurence L.
Osterwise, Michael A. Mulshine, David S. Hirsch, Jack A.
Pellicci, James C. Sargent, and Andrew E. Trolio,
THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR DIRECTOR
Nominees
Name Age Since Position with the Company
- --------------------- --- ----- -------------------------
R. Barry Borden 58 1996 Chairman of the Board and
Director(1)(3)
Laurence L. Osterwise 50 1996 President, Chief
Executive Officer and
Director(3)
Michael A. Mulshine 58 1985 Secretary and Director(2)
David S. Hirsch 62 1992 Director(1)(2)
Jack A. Pellicci 59 1996 Director
James C. Sargent 82 1992 Director(2)
Andrew E. Trolio 68 1972 Director(3)
- -----------------------
(1) Member of the Compensation Committee of the Board of
Directors.
(2) Member of the Audit Committee of the Board of
Directors.
(3) Member of the Executive Committee of the Board of
Directors.
Background
The business experience, principal occupation and employment
of the nominees have been as follows:
R. Barry Borden was elected Chairman of the Board in April
1998, and has been a Director of the Company since June 1996.
Mr. Borden has founded and managed businesses in the computer
hardware and software industry for the past 30 years. Since
August 1997, he has served as President of Nettech Systems, Inc.,
a supplier of software for wireless data communications. Prior
to that he served as Chairman and CEO of Mergent International, a
supplier of software for data security on PC Desktops and
enterprise wide networks. Since 1984, Mr. Borden has been
President of LMA Group Inc., a general management consulting
firm. From 1968 to 1980, Mr. Borden was the founder, President
and CEO of Delta Data Systems, a CRT Terminal manufacturer, and
from 1981 to 1984 he was founder, Chairman and CEO of Franklin
Computer Corp., a manufacturer of microcomputers. In 1989 he
served as President and CEO of Cricket Software, Inc., a supplier
of graphics software. Mr. Borden received a BSEE degree from the
University of Pennsylvania in 1961.
Laurence L. Osterwise was appointed Chief Executive Officer,
President and a Director of the Company in April, 1997. Mr.
Osterwise began his employment with the Company on November 1,
1996, as its Chief Operating Officer and President of Sedona
GeoServices, Inc., a subsidiary. He was most recently President
of the $1.5+ billion Communications Division of General
Instruments Corporation. Prior to joining General Instruments
Corporation, Mr. Osterwise spent 25 years with IBM Corporation,
where he held positions as President of Production Industries,
U.S. Vice President and Corporate Director of Market Driven
Quality, and IBM Rochester General Manager and Director of
Application Business Systems. Under his leadership, IBM Rochester
was awarded the Malcomb Baldridge National Quality Award. Mr.
Osterwise received a BS in Mathematics from Duke University in
1969 and a MS in Computer Sciences from Syracuse University in
1973.
Andrew E. Trolio is a Director of the Company and
Past-Chairman of the Board of Directors. He founded the Company
in 1972. From 1961 to 1971 he was President, Director and Founder
of KDI Adtrol, Inc., a company which manufactured photo-optical
recording and reading devices for motion picture cameras. He is
also credited with several patents as inventor or co-inventor.
Mr. Trolio is a Trustee Emeritus of Cabrini College. Mr. Trolio
has served as Chairman of the Finance and Audit Committee and is
currently a Fellow of the International Society of Optical
Engineers. Mr. Trolio received an Honorary Doctor of Science
degree from Cabrini College in 1997.
Michael A. Mulshine has been a Director and Secretary of the
Company since May 1985 and has been associated with the Company
on a management consulting basis since 1979. He has been the
President of Osprey Partners, a management consulting firm, since
1977. Mr. Mulshine is a Director of Vasco Data Security
International, Inc., an OTC traded company and provider of
internet and computer network hardware and software security
products for financial institutions, industry and government.
Additionally, Mr. Mulshine is a Director of Prediction Systems,
Inc., a software engineering company specializing in the
technology of modeling and simulation, and a Director of Inresco,
Inc., a manufacturer of high-performance circuit protection
devices. Mr. Mulshine received a BSEE degree from the Newark
College of Engineering in 1961.
David S. Hirsch, a Director of the Company since January
1992, retired in 1991 from Schroder & Co., Incorporated and its
predecessor firms where he was a principal during the five years
preceding his retirement. Mr. Hirsch received a BA degree from
Cornell University in 1957 and a MBA degree from Harvard
University in 1959.
Jack A. Pellicci, a Director of the Company since October
1996, is Oracle Corporation's Vice President of Global Public
Sector "Government and Education". Prior to joining Oracle in
1992, Mr. Pellicci retired as a Brigadier General with 30 years
in the U.S. Army, where he was the Commanding General of the
Personnel Information Systems Command. Mr. Pellicci is a member
of the Board of Directors of the Open GIS Consortium (OGC), an
organization of over 70 commercial, governmental, and educational
entities dedicated to open systems approaches to geoprocessing.
He is the Vice Chairman of the High Performance Computing and
Communications Consortium (HPCCC). In addition, Mr. Pellicci
serves on the Armed Forces Communications and Electronics
Association (AFCEA) International Technical Committee, and is a
Corporate Fellow for the National Governors Association. He also
serves on the Board of Advisors for the Club of Rome. He is a
graduate of the U.S. Military Academy at West Point with a
Bachelor of Engineering degree, and received a Master of
Mechanical Engineering degree from Georgia Institute of
Technology.
James C. Sargent, a Director of the Company since January
1992, is Counsel to the law firm of Opton, Handler, Gottleib,
Fieler & Katz, and is counsel to Abel Noser Corporation, a member
of the New York Stock Exchange. He was previously a partner and
counsel to Whitman & Ransom. He was Regional Administrator from
1955 to 1956, and Commissioner from 1956 to 1960, of the
Securities and Exchange Commission.
Board and Committee Meetings
The Board of Directors held seven meetings in 1997. During
1997, each incumbent director attended at least 75% of the
aggregate of (1) the total number of meetings of the Board during
the period for which such incumbent was a director, and (2) the
total number of meetings held by all committees on which such
incumbent served.
The Board of Directors has an Executive Committee, a
Compensation Committee, and an Audit Committee. The Executive
Committee meets periodically, between regularly scheduled Board
meetings, for the purpose of reviewing and making recommendations
to the CEO with regard to the Company's ongoing business, and
reports to the Board on its activities at subsequent Board
meetings. This committee met five (5) times in 1997. The
Compensation Committee is responsible for developing and
executing plans for the compensation of the executive officers,
including the CEO of the Company. Additionally, the Compensation
Committee administers the Scan-Graphics, Inc. 1992 Long-Term
Incentive Plan, as amended (the "1992 Plan"), including the
determination, subject to the Plan's provisions, of the
individuals eligible to receive awards, the individuals to whom
awards should be granted, the nature of the awards to be granted,
the number of awards to be granted, and the exercise price,
vesting schedule and term and all other conditions and terms of
the awards to be granted. This committee met three (3) times
during 1997. The Audit Committee meets with the Company's
independent certified public accountants to review the scope and
results of auditing procedures and the Company's accounting
procedures and controls. This committee met one (1) time during
1997.
Compensation of Directors
On the first business day of January 1998 and on the first
business day of January in each succeeding year, each
non-employee director of the Company will receive a grant of an
option to purchase shares of Common Stock at the then-current
Fair Market Value as determined in accordance with the 1992 Plan,
as follows: an option to purchase 15,000 shares of Common Stock
for service to the Board during the preceding year, plus an
option to purchase 2,500 shares of Common Stock for serving as
the Chairman of the Board or on a Committee of the Board during
the preceding year. However, if a director shall become eligible
for an option grant after the first regularly scheduled meeting
of the Board during any calendar year, the Compensation Committee
shall determine the size of such option grant by multiplying
15,000 shares (and/or 2,500 shares) by a fraction which is
determined by dividing the number of regularly scheduled Board
meetings remaining in the calendar year by six. The non-employee
directors were issued the following option grants in January 1998
for service to the Board in 1997: Messrs. Mulshine, Pellicci and
Sargent, 15,000 shares; Mr. Borden, 20,000 shares; Mr. Hirsch,
17,500 shares.
In addition, under the terms of the 1992 Plan, any new
director who is elected to the Board will be granted an option to
purchase 25,000 shares of Common Stock at the then-current Fair
Market Value as determined in accordance with the 1992 Plan. The
shares underlying these options will vest at the rate of 5,000
shares per year for five years, commencing on the first
anniversary date of his election to the Board and on each
subsequent anniversary thereafter.
Further, commencing in 1998, on or before January 31 in each
year, each non-employee director will receive an annual retainer
of $5,000 as cash compensation for his services as a director for
the preceding year. Also, each non-employee director will
receive $500 for attendance at each Board and committee meeting,
with multiple meetings held on the same day to count as one.
These amounts shall be subject to annual review and possible
adjustment at the discretion of the Board.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Compensation
The following table sets forth certain summary information
concerning compensation for services in all capacities awarded
to, earned by or paid to, the Company's Chief Executive Officer
and the other most highly compensated officers of the Company,
whose aggregate cash and cash equivalent compensation exceeded
$100,000 (the "Named Officers"), with respect to the last three
fiscal years.
<PAGE>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compen- ------------ All(1,2)
sation Option/War- Other
Name and -------------- rant Awards Compen-
Principal Position Year Salary Bonus (shares) sation
- ------------------ ---- ------ ----- ------------ -------
Andrew E. Trolio 1997 $152,000 - 50,000 $24,329
Past-Chairman of 1996 $188,500 - 74,000 $32,040
the Board 1995 $115,284 - 55,000 $ 8,445
Laurence Osterwise 1997 $121,154 - 250,000 -
Chief Executive 1996 $ 28,385 - 300,000 -
Officer & President
William C. Hubbard 1997 $114,231 - 50,000 -
Executive Vice 1996 $ 70,000 $25,157 65,000 -
President 1995 $ 40,923 - 144,000 -
Colin B. Matthews 1997 $119,385 - 200,000 -
Vice President of
the Company and
President of
Sedona GeoServices,
Inc.
- ----------------------------
(1) In 1997, no executive officer other than Mr. Trolio
received perquisites or other personal benefits, securities or
property which exceeded the lesser of $50,000 or 10% of such
executive officer's salary and bonus.
(2) The amounts disclosed in this column represent premiums
paid by the Company for an insurance annuity. As of December 31,
1997 this insurance policy had a cash surrender value of $45,085
to Mr. Trolio.
Certain Employment Agreements
On November 1, 1996, the Company entered into an Employment
Agreement with Laurence L. Osterwise, its Chief Executive Officer
and President (the "CEO Agreement"). The CEO Agreement has a
term of three years and two months and continues thereafter on a
year-to-year basis. Compensation during this period will be
$180,000 through December 31, 1997, $225,000 through December 31,
1998, and $250,000 through December 31, 1999, as base annual
salary plus additional compensation as directed by the Board of
Directors. In the event the Company is acquired during the term
of the CEO Agreement or any renewal term thereof, and the
acquirer chooses to terminate Mr. Osterwise, or fails to renew
the CEO Agreement for at least one year, the Company is obligated
to pay Mr. Osterwise a severance payment equal to one year's
annual salary, plus an amount equal to the accrued deferred
compensation, plus bonuses and commissions earned and unpaid, if
any. In addition, upon termination of employment by the Company,
Mr. Osterwise shall be deemed to have vested in any stock
options, and in such event, Mr. Osterwise may exercise his right
to purchase any such vested options at any time within one year
of termination. If such termination had occurred on December 31,
1997, the Company would have been obligated to pay Mr. Osterwise
$225,000. The termination remuneration described above is not
payable in the event of termination for cause. Effective
September 1, 1997, Mr. Osterwise agreed to forego the cash
portion of his compensation for one year. As a result of this
action, and with the approval of the Board of Directors, Mr.
Osterwise was granted warrants to purchase up to 250,000 shares
of the Company's Common Stock, at an exercise price 25% over the
closing bid of the stock on the date of approval, or $3.75 per
share. These warrants shall vest as of September 1, 1998.
Option/Warrant Grants
The following table sets forth certain information
concerning options/warrants granted to the Named Officers, and
additional information concerning such grants of stock
options/warrants during fiscal year 1997. No stock appreciation
rights have been granted by the Company.
Number Potential Real-
of Sec- Percentage lized Value at
urities of Total Annual Rates of
Under- Options/ Stock Price
lying Warrants Appreciation
Options/ Granted to for Options/
Warrants Employees Exercise Expir- Warrant Term
Granted in Fiscal Price ation -----------------
Name (shares) Year 1997 ($/Sh) Date 5%($) 10%($)
- --------- -------- --------- ------- ------ -----------------
Trolio 50,000 6.15% $3.125 4/22/07 101,171 263,204
Osterwise 250,000 30.75% $3.75 8/25/07 335,074 1,088,861
Hubbard 50,000 7.38% $3.25 3/31/02 46,890 101,724
Matthews 200,000 25.00% $3.00 4/01/02 173,746 376,372
Option Exercises and Fiscal Year-End Values
The following table sets forth certain information as of
December 31, 1997, regarding the number and year end value of
unexercised stock options held by each of the Named Officers. No
stock appreciation rights have been granted by the Company.
Number of
Securities Under-
lying Unexercised
Options/Warrants
Shares at December 31, 1997(#)
Acquired on Value -------------------------
Name Exercise(#) Realized($) Exercisable/Unexercisable
- --------- ----------- ----------- -------------------------
Trolio -0- -0- 429,000 -0-
Osterwise -0- -0- 200,000 350,000
Hubbard -0- -0- 110,000 -0-
Matthews -0- -0- -0- 200,000
(tabled continued)
Value of
Unexercised
In-the-Money
Options/Warrants
at December 31, 1997($)(1)
-------------------------
Name Exercisable/Unexercisable
- --------- -------------------------
Trolio $577,812 -0-
Osterwise -0- -0-
Hubbard $ 15,000 -0-
Matthews -0- -0-
- -----------------------
(1) Based on the closing price of the Common Stock as
reported on the Nasdaq SmallCap Market on that date ($2.50), net
of the option exercise price.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Company's Board of
Directors (the "Compensation Committee") is responsible for
recommending compensation policies with respect to the Company's
executive officers, and for making decisions about awards under
the Company's stock-based compensation plans. Each member of the
Compensation Committee is a "non-employee director" within the
meaning of Rule 16b-3 under the Securities Act of 1934, as
amended (the "Act"), and an "outside director" within the meaning
of Section 162(m) of the Internal Revenue Code. This report
addresses the Company's compensation policies for 1997 as they
affected the Chief Executive Officer and the Company's other
executive officers, including the Named Officers.
Compensation Policies
The Compensation Committee's executive compensation policies
are designed to provide competitive compensation opportunities,
reward executives consistent with the Company's performance,
recognize individual performance and responsibility, underscore
the importance of shareholder value creation, and assist the
Company in attracting and retaining qualified executives. The
principal elements of compensation employed by the Compensation
Committee to meet these objectives are base salaries, annual cash
incentives, and long-term stock-based incentives.
All compensation decisions are determined following a review
of many factors that the Compensation Committee believes are
relevant, including external competitive data, the Company's
achievements over the past year, the individual's contributions
to the Company's success, any significant changes in role or
responsibility, and the internal equity of compensation
relationships.
In general, the Compensation Committee intends that the
overall total compensation opportunities provided to the
executive officers should reflect competitive compensation for
executives with corresponding responsibilities in comparable
firms providing similar products and services. To the extent
determined to be appropriate, the Compensation Committee also
considers general economic conditions, the Company's financial
performance, and the individual's performance in establishing the
compensation opportunities for the executive officers. Total
compensation opportunities for the executive officers are
adjusted over time as necessary to meet this objective. Actual
compensation earned by the executive officers reflects both their
contributions to the Company's actual shareholder value creation
and the Company's actual financial performance.
The competitiveness of the Company's total compensation
program - including base salaries, annual cash incentives, and
long-term stock-based incentives - is regularly assessed with the
assistance of the Compensation Committee's outside compensation
consultant. Data for external comparisons may be drawn from a
number of sources, including the publicly available disclosures
of selected comparable firms with similar products and national
compensation surveys of information technology firms of similar
size.
To present a reasonable comparison of the Company's
performance versus its peers, the Board of Directors has
determined that it would employ two indexes in the Comparative
Stock Performance section of this Proxy Statement; (i) the
NASDAQ-US Index, and (ii) the NASDAQ Computer & Data Processing
Index, since there is no one index that exactly matches the
Company's business. As the Company progresses with its business
development plans, many of the firms in these indexes will be
employed in the peer group to be used by the Compensation
Committee to assess the external competitiveness of compensation
levels.
While the targeted total compensation levels for the
executive officers are intended to be competitive, compensation
paid in any particular year may be more or less than the average,
depending upon the Company's actual performance.
Base Salary
Base salaries for all executive officers, including the
Chief Executive Officer, are reviewed by the Compensation
Committee on an annual basis. In determining appropriate base
salaries, the Compensation Committee considers external
competitiveness, the roles and responsibilities of the
individual, the internal equity of compensation relationships,
and the contributions of the individual to the Company's success.
Annual Cash Incentive Opportunities
The Compensation Committee believes that executives should
be rewarded for their contributions to the success and
profitability of the Company and, as such, approves the annual
cash incentive awards. Incentive awards are linked to the
achievement of revenue and net income goals by the Company and/or
specific business units, and the achievement by the executives of
certain assigned objectives. The individual objectives set for
executive officers of the Company are generally objective in
nature and include such goals as revenue, profit and budget
objectives, and increased business unit productivity. The
Compensation Committee believes that these arrangements tie the
executive's performance closely to key measures of success of the
Company or the executive's business unit. All executive
officers, including the Chief Executive Officer, are eligible to
participate in this program. There were no annual cash incentive
award payments made by the Company in 1997.
Long-Term Stock-Based Incentives
The Compensation Committee also believes that it is
essential to link executive and shareholder interests. As such,
from time to time the Compensation Committee grants stock options
to executive officers and other employees under the 1992 Plan.
In determining actual awards, the Compensation Committee
considers the externally competitive market, the contributions of
the individual to the success of the Company, and the need to
retain the individual over time. All executive officers,
including the Chief Executive Officer, are eligible to
participate in this program.
Section 162(m) of the Internal Revenue Code generally
disallows a tax deduction to public companies for compensation
over $1,000,000 paid to its Named Officers. Qualifying
performance-based compensation will not be subject to the
deduction limit if certain requirements are met. Although no
Named Officer received compensation exceeding this limit in 1997,
the Company has limited the number of shares of Common Stock
subject to options which may be granted to Company employees in a
manner that complies with the performance-based requirements of
Section 162(m). While the Compensation Committee does not
currently intend to qualify its annual incentive awards as a
performance-based plan, it will continue to monitor the impact of
Section 162(m) on the Company.
Respectfully submitted,
R. Barry Borden, Chairman
David S. Hirsch
Compensation Committee Interlocks and Insider Participation
The current members of the Company's Compensation Committee
are Messrs. R. Barry Borden and David S. Hirsch. No executive
officer of the Company has served as a director or member of the
Compensation Committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served as
a director of or member of the Compensation Committee of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had leased its former principal office and
manufacturing facility through August 31, 1997, from Lin-Lea
Corporation, a company which is owned by Andrew E. Trolio. Rent
expense charged to operations was $64,000 for the portion of 1997
in which the Company operated out of that facility.
In January 1997, the Board of Directors approved a
Consulting Agreement with Osprey Partners, a company which is
owned by Michael A. Mulshine. Under the agreement, Osprey was
paid a $5,000 monthly retainer during 1997 for shareholder and
investor relations activities and for management consulting
services. In January 1998, Osprey's agreement with the Company
was adjusted, such that in lieu of cash compensation for 1998,
Osprey was issued warrants to purchase up to 70,000 shares of
Common Stock, with such warrants to vest at the rate of 5,833.33
shares on the first of each month for the twelve months starting
January 1, 1998, and such warrants to be exercisable for up to
ten years at 25% above the closing bid ($3.36) on the effective
date of the agreement. In addition to the above-referenced
monthly retainer fee, the Company incurred commissions and
management consulting expenses in the amount of $180,708 for the
year ended December 31, 1997, to Osprey Partners. Management
believes that the levels of compensation for the services
provided by Osprey were at least as favorable as would be
available to the Company from a third party source.
Effective March 21, 1998, Andrew E. Trolio entered into a
Retirement Settlement Agreement with the Company ("Settlement
Agreement"). The Settlement Agreement was reviewed and ratified
by the Board of Directors. Under the Settlement Agreement, Mr.
Trolio agreed to step down as Chairman of the Company's Board of
Directors, effective upon the election of a new Chairman. As a
condition thereof, Mr. Trolio is expected to remain as a Director
of the Company for a minimum of three years. In addition, Mr.
Trolio agreed to surrender 500,000 shares of Common Stock that he
purchased at the end of 1996 from the Company, and certain
promissory notes relating to such purchase have been canceled.
In consideration of the preceding, Mr. Trolio was issued warrants
to purchase up to 250,000 shares of the Company's common stock,
exercisable for ten years at the exercise price of $2.546875,
which was the average of the bid and asked prices at the closing
on March 20, 1998.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder
return on the Common Stock of the Company for the period from
December 31, 1992 through December 31, 1997 with the cumulative
total return on (i) the "NASDAQ-US Index", and (ii) the NASDAQ
"Computer & Data Processing Index". The comparisons assume the
investment of $100 on December 31, 1992 in the Common Stock and
in each of the indices and, in each case, assumes reinvestment of
all dividends. The Company has not paid any dividends on its
Common Stock and does not intend to do so in the foreseeable
future. The performance graph is not necessarily indicative of
future performance.
- -----------------------------------------------------------------
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- -----------------------------------------------------------------
Scangraphics, Inc.
100.00 40.28 20.83 118.06 162.50 111.11
- -----------------------------------------------------------------
NASDAQ-US Index
100.00 114.79 112.21 158.69 195.18 239.58
- -----------------------------------------------------------------
Computer & Data Proc. Index
100.00 105.83 128.53 195.74 241.54 269.77
- -----------------------------------------------------------------
<PAGE>
PROPOSAL II
RATIFICATION OF ISSUANCE AND SALE OF SHARES OF
CLASS A PREFERRED STOCK, SERIES E, AND
WARRANTS TO PURCHASE COMMON STOCK
On April 7, 1998, the Company completed the sale by private
placement of 52 units ("Units"), each Unit consisting of 100
shares of Class A Preferred Stock, Series E (the "Series E
Preferred Stock") and a warrant ("Warrant") to purchase 28,850
shares of Common Stock for a purchase price of $100,000 per Unit.
The gross proceeds of the offering were $5,200,000. The Series E
Preferred Stock is convertible, in whole or in part, into a
number of shares of Common Stock equal to $1,000 per share
converted divided by the Conversion Price, as defined below. The
Warrants are currently exercisable at $3.00 per share and expire
on March 15, 2002. The Company used the proceeds to fund general
working capital requirements.
The Certificate of Designation for the Series E Preferred
Stock and form of Warrant are annexed as Exhibit A hereto. The
following is a summary of their terms and conditions. Reference
is made to the full texts thereof for a complete description of
the terms and conditions of the Series E Preferred Stock and the
Warrants. Capitalized terms used herein and not defined hereby
have the meanings ascribed to them in the Certificate of
Designation and/or the Warrant.
Shareholder Approval
Pursuant to the terms of the Series E Preferred Stock and
Warrants, the Company covenanted to call a meeting of its
shareholders before July 15, 1998 to solicit shareholder approval
of the issuance of shares of Common Stock upon conversion of the
Series E Preferred Stock and exercise of Warrants in excess of
19.9% of the outstanding Common Stock in accordance with new
rules promulgated by the National Association of Securities
Dealers, Inc. and the Nasdaq Small Cap Market ("Rule
4310(c)(25)(H)"). Rule 4310(c)(25)(H) became effective on or
about February 25, 1998. Until such approval is obtained, the
maximum number of shares of Common Stock which can be issued on
conversion of the Series E Preferred Stock and exercise of the
Warrants is 19.9% of the outstanding Common Stock issuable on a
first converted-first exercised basis.
Rule 4310(c)(25)(H) requires shareholder approval for the
issuance of shares of Common Stock in a transaction or series of
transactions involving (i) the sale or issuance by the issuer of
common stock (or securities convertible into or exercisable for
common stock) at a price less than the greater of book or market
value which together with sales by officers, directors or
substantial shareholders of the corporation equals 20% or more of
the outstanding common stock or 20% or more of the voting power
outstanding before issuance; or (ii) the sale or issuance by the
issuer of common stock (or securities convertible into or
exercisable for common stock) equal to 20% or more of the common
stock or 20% or more of the voting power obtained before the
issuance for less than the greater of book or market value of the
stock.
In the event shareholders do not approve the issuance of
Common Stock as described above, the Company will be required,
pursuant to the terms of the Series E Preferred Stock, to redeem
such portion of the shares of Common Stock issuable upon
conversion which exceeds the 19.9% limitation at a redemption
price per share equal to $1150 plus accrued dividends. In such
case, the redemption price will be payable within five business
days after demand for redemption is made and shall accrue
interest payable on demand at 11% per annum.
Dividends
The holders of the Series E Preferred Stock shall be
entitled to receive dividends payable quarterly on the first day
of each calendar quarter commencing July 1, 1998, or on earlier
conversion or redemption, at the annual rate of $70 per share.
The dividend rate increases to $180 per annum in the event that
the Company does not register the shares of Common Stock issuable
upon conversion of the Series E Preferred Stock for resale by the
close of business 90 days following completion of the offering.
In the event such resale registration has not been effected by
180 following completion of the offering, the annual dividend
rate increase to $240. At the option of the Company, these
dividends may be deferred, accrued and paid on the earlier of
conversion or redemption of the Series E Preferred Stock.
The dividends are payable, at the option of the Company,
either in cash or in shares of Common Stock at a price equal to
the average of the closing bid prices for the Common Stock on the
Nasdaq SmallCap Market on the last five trading days prior to the
date of payment, provided, however, that the shares issued in
payment of the dividends are eligible for public resale.
Conversion
Subject to the restrictions discussed below, any holder of
the Series E Preferred Stock has the right at any time to
convert, in whole or in part, shares of the Series E Preferred
Stock into a number of shares of Common Stock equal to $1,000 per
share converted divided by the Conversion Price. The Conversion
Price means the lesser of (i) $3.00 or (ii) 85% of the average of
the closing bid price of a share of Common Stock during the five
trading days prior to such conversion.
The Series E Preferred Stock shall automatically convert on
March 15, 2000 into shares of Common Stock at the Conversion
Price, provided that the Common Stock is admitted for quotation
on the Nasdaq SmallCap Market at all times from and after January
1, 1999, and only if the shares of Common Stock issuable upon
such conversion may be resold publicly pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, or Rule 144 promulgated thereunder. In the event such
mandatory conversion is not available as aforesaid, in addition
to any other remedy, the holder may require the Company to redeem
the Series E Preferred Stock at a redemption price equal to
$1,000 per share plus accrued dividends. The redemption price
shall accrue interest payable on demand at the rate of 15% per
annum.
Based on the market price for the Common Stock on the date
hereof of $______ per share, the Series E Preferred Stock would
be convertible into _______ shares of Common Stock. The
conversion of the Series E Preferred Stock, however, is limited
by its terms to not more than 10% of the initial principal amount
in any calendar month (with the unconverted portion of each
month's installment being carried forward to subsequent months).
In addition, the Series E Preferred Stock is not convertible into
shares of Common Stock until and unless a registration statement
covering the resale of the Common Stock issuable upon such
conversion shall have been declared effective by the Securities
and Exchange Commission.
The monthly restriction on conversion will not apply,
however, so long as the closing bid price of the Common Stock is
$3.50 or more. In addition, the Series E Preferred Stock is not
convertible to the extent that the holder thereof would, as a
result of the conversion (and after giving effect to any shares
or warrants or other securities of the Company owned by the
holder) beneficially own more than 4.99% of the then-outstanding
shares of Common Stock.
Moreover, in the event that the holder of shares of Series E
Preferred Stock proposes to convert all or any portion thereof at
a conversion price of less than $2.00, the Company, at its
option, will be entitled to redeem all or any portion of the
Series E Preferred Stock proposed to be converted. Such option
is exercisable by paying to the holder, within three business
days after the date of such proposed conversion, 115% of the
amount of the principal proposed to be converted, together with
accrued and unpaid dividends.
The Company has reserved for issuance pursuant to the terms
of the Series E Preferred Stock and Warrants 3,466,667 and
1,500,200 shares of Common Stock, respectively. The Board
unanimously approved the issuance of the Series E Preferred Stock
and Warrants and recommends that the shareholders ratify the
issuance thereof.
THE BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
ISSUANCE OF THE SERIES E PREFERRED STOCK AND WARRANTS.
COST OF SOLICITATION OF PROXIES
The Company will bear the cost of soliciting proxies for the
Meeting, including the cost of preparing, assembling and mailing
proxy materials, the handling and tabulation of proxies received
and charges of brokerage houses and other institutions, nominees
and fiduciaries in forwarding such materials to beneficial
owners. In addition to the mailing of the proxy material, such
solicitation may be made in person or by telephone or facsimile
by directors, officers or regular employees of the Company
without any special remuneration, or by a professional proxy
solicitation organization engaged by the Company.
OTHER MATTERS
Management is not aware of any other matters to be presented
for action at the Meeting or any adjournment thereof. If any
other matters come before the Meeting, however, it is intended
that shares represented by proxy will be voted in accordance with
the judgment of the persons voting them.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the
provisions of the rules of the Securities and Exchange Commission
and applicable laws of the Commonwealth of Pennsylvania, wishes
to submit a proposal for inclusion in the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders, must
deliver such proposal, in writing, to the attention of the
Secretary of the Company at the Company's principal executive
offices at 649 N. Lewis Road, Limerick, PA 19468, not later than
January 15, 1999.
ANNUAL REPORT TO SHAREHOLDERS
A copy of the Company's 1997 Annual Report to Shareholders,
which includes the Company's Annual Report on Form 10-K
(including the financial statements and schedules thereto), is
being transmitted herewith, but does not form a part of the proxy
solicitation materials.
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON
SOLICITED BY THIS PROXY STATEMENT, ON THE WRITTEN REQUEST OF ANY
SUCH PERSON, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
(INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO) AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR ITS MOST
RECENT FISCAL YEAR. SUCH WRITTEN REQUESTS SHOULD BE DIRECTED TO
MICHAEL A. MULSHINE, SECRETARY, AT 649 N. LEWIS ROAD, LIMERICK,
PA 19468.
<PAGE>
Exhibit A
Certificate of Designation
There is hereby created a series of the Preferred Stock of this
corporation to consist of 5,200 of the shares of Series E
Preferred Stock, $1000 par value per share, which this
corporation now has authority to issue.
The distinctive designation of the series shall be "Series E
Convertible Preferred Stock" (the "Preferred Stock" or the
"Series E Preferred Stock"). The number of shares of Series E
Convertible Preferred Stock shall be 5,200.
For purposes of this Certificate of Designation and the Company's
Certificate of Incorporation, (i) any series of Preferred Stock
of the Company entitled to dividends and liquidation preference
on a parity with the Series E Preferred Stock shall be referred
to as "Parity Preferred Stock," (ii) any series of Preferred
Stock ranking senior to the Series E and Parity Preferred Stock
with respect to dividends and liquidation preference shall be
referred to as "Senior Stock," and (iii) the Common Stock and any
series of Preferred Stock ranking junior to the Series E and
Parity Preferred Stock with respect to dividends and liquidation
preference shall be referred to as "Junior Stock." As of the date
of this Certificate of Designation there is not outstanding any
Parity Preferred Stock.
In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, after setting
apart or paying in full the preferential amounts due to holders
of Senior Stock, the holders of Series E Preferred Stock
and Parity Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets
or surplus funds of the Company to the holders of Junior Stock or
Common Stock by reason of their ownership thereof, an amount
equal to their full liquidation preference, which in the case of
shares of Series E Preferred Stock shall be $1,000 per share,
plus accrued and unpaid dividends (the "Redemption Value"). If,
upon such liquidation, dissolution or winding-up of the Company,
the assets of the Company available for distribution to the
holders of its stock be insufficient to permit the distribution
in full of the amounts receivable as aforesaid by the holders of
Preferred Stock and Parity Preferred Stock, then all such assets
of the Company shall be distributed ratably among the holders of
Preferred Stock and Parity Preferred Stock in proportion to the
amounts which each would have been entitled to receive if such
assets were sufficient to permit distribution in full as
aforesaid. Neither the consolidation nor merger of the Company
nor the sale, lease or transfer by the Company of all or any part
of its assets shall be deemed to be a liquidation, dissolution or
winding-up of the Company for the purposes of this paragraph.
Certain Definitions and References.
The Preferred is being issued under Private Placement Purchase
Agreements between the Company and the holders of the Preferred
(each, a "Subscription Agreement").
The terms "Registration Statement" and "Completion Date" shall
have the meanings 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.
Dividends
The holders of the Preferred Stock shall be entitled to receive a
dividend, payable quarterly on the first day of each calendar
quarter commencing July 1, 1998 or on earlier conversion or
redemption of the Preferred Stock, which accrues from the date of
issuance at the annual rate of $70 per share, provided that the
annual rate shall be $180 during any First Delay Period and the
annual rate shall be $240 during any Extended Delay Period. At
the option of the Company, these dividends may be deferred,
accrued and paid on the earlier of conversion or required
redemption of the Preferred Stock.
The reference to the "First Delay Period" shall apply only if the
Effective Date has not occurred by the close of business 90 days
following the Completion Date and means the period which begins
the next day and ends on the earlier of 180 days following the
Completion Date or the Effective Date.
The reference to the "Extended Delay Period" shall apply only if
the Effective Date has not occurred by 180 days following the
Completion Date and means the period which begins the next day
and ends on the Effective Date.
The dividends shall be payable at the option of the Company
either in cash or in shares of Common Stock which on the
date of the dividend payment are convertible into shares of
Common Stock which have a value equal to the dividend,
provided that dividends may be paid in Common Stock only if the
public sale thereof is then permitted under a then effective
registration statement. The value of each share of Common Stock
for the purposes of any dividend payment shall be equal to the
average of the closing bid prices therefor on the NASDAQ Small
Cap Market on the last five trading days prior to the date of the
payment.
Nothing in this Certificate shall limit any other remedies which
may be available to the Holder by reason of any delay in the
filing or the effectiveness of the Registration Statement.
Conversion
The holder shall have the right at any time, subject to the
restrictions noted below, in its sole discretion, to convert the
Preferred Stock, in whole or in part, into a number of shares
(the "Conversion Shares") of the Company's common stock
(the "Common Stock") equal to $1,000 per share converted divided
by the Conversion Price. The Conversion Price means the lesser of
(1) $3 or (2) 85% of the average of the closing bid price of a
share of Common Stock of the Company during the five trading days
prior to such conversion.
In the event that the holder elects to exercise its conversion
rights hereunder, it shall give to the Company written notice
(by fax or overnight courier service or personal delivery) of
such election and shall surrender its Preferred Stock to the
Company for cancellation. Conversion shall be effective upon the
giving of such notice provided that the certificate for the
converted Preferred is received by the Company within three days
thereafter. The Company shall, within three business days after
receipt by the Company of notice of conversion and the Preferred
being converted, deliver irrevocable instructions to its transfer
agent (with a copy to Holder) to DWAC the shares of Common Stock
issuable on such conversion.
The Preferred Stock shall on March 15, 2000 automatically convert
into Common Stock at the then Conversion Price, provided that
such conversion shall occur on such date only if the Company's
listing on the NASDAQ Small Cap or National Market has then been
in effect at all times from and after January 1, 1999, and only
if the Common Stock issuable upon conversion of the Preferred
Stock may then be resold publicly pursuant to an effective
registration statement under the Securities Act of 1933 or under
Rule 144 thereunder. If by reason of the proviso in the preceding
sentence the Preferred shall not convert automatically on March
15, 2000, the Holder may, in addition to such Holder's other
remedies, by written notice to the Company, require the Company
forthwith to redeem the Preferred at a redemption price equal to
$1,000 per share plus accrued dividends. The redemption price
shall accrue interest payable on demand at the rate of 15% per
annum.
The Company shall reserve for issuance on conversion and exercise
of the Preferred and the Warrant (as defined in the
Subscription Agreement) the number shares of Common Stock which
would be issuable under the Preferred if converted at a
Conversion Price of $1.50. The Company shall use its diligent
efforts promptly to list on NASDAQ all shares of Common Stock
which are issued upon conversion of this Preferred.
Conversion of the Preferred Note is subject to the following
restrictions:
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 this restriction shall not apply so long as the
closing bid price of a share of Common Stock is $3.50 or more on
NASDAQ (or such other securities exchange where the common stock
may then be listed);
The Preferred shall be convertible at any time only to the extent
that Holder would not as a result of such exercise (and after
giving effect to any shares or warrants or other securities owned
by Holder) 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.
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 Preferred 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 Preferred, 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 Preferred
(assuming the Preferred were then convertible). In any such
case, appropriate provision shall be made with 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.
In the event that the Holder proposes to convert all or any
portion of the Preferred at a conversion price of less than
$2.00, the Company shall at its option be entitled to redeem all
or any portion of the Preferred 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,
115% of the amount of principal proposed to be converted,
together with accrued and unpaid dividends.
The Company covenants to call a special meeting of shareholders
which will be held on or before July 15, 1998 and at which the
Company's shareholders will be asked to approve the issuance of
shares on conversion of the Preferred and Warrants issued to the
Purchasers (on such terms as defined in the Subscription
Agreement). The Board of Directors of the Company will recommend
that the shareholders of the Company vote in favor of such
approval. Until such approval is obtained, the maximum number of
shares which will be issued on conversion of the Preferred and
exercise of the Warrants is 19.9%, issuable on a first
converted-first exercised basis. Should such approval not be
obtained by July 15, 1998, then until such approval is obtained,
the Company shall on demand by Holder made at any time or times,
redeem any portion of the Preferred designated for redemption
(the "Redeemed Portion") at a redemption price per share
equal to $1150 plus accrued dividends. The redemption price shall
be payable within five business days after demand for redemption
is made and shall accrue interest payable on demand at 11% per
annum.
Purchase for Investment.
The Holder, by acceptance of shares of Preferred, acknowledges
that the Preferred (and the Common Stock into which the Preferred
is convertible) has not been registered under the Act, covenants
and agrees with the Company that such Holder is taking and
holding the Preferred (and the Common Stock into which the
Preferred is convertible) for investment purposes and not with a
view to, or for sale in connection with, a distribution thereof
and that the Preferred (and the Common Stock into which the
Preferred 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 Preferred (and the Common Stock into
which the Preferred is convertible) and is able to bear the
economic risk of such investment.
The Company covenants and agrees that all shares of Common Stock
which may be issued upon conversion of this Preferred will, upon
issuance, be duly and validly issued, fully paid and
non-assessable and no personal liability will attach to the
holder thereof.
Certain Events of Mandatory Redemption.
An "event of redemption" with respect to this Preferred shall
exist if any of the following shall occur, if:
The Company shall breach or fail to comply with any provision of
this Preferred and such breach or failure shall continue for 15
days after written notice by any Holder of any Preferred to the
Company;
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;
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;
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.
If an event of redemption shall occur, the Holder may, in
addition to such Holder's other remedies, by written notice
to the Company, require the Company forthwith to redeem the
Preferred at a redemption price equal to $1,000 per share
plus accrued dividends. The redemption price shall accrue
interest payable on demand at the rate of 11% per annum.
Without the consent of a majority in interest of the holders of
the Preferred, the Company shall not create any class of
equity security which is senior to or on parity with the
Preferred in liquidation rights, other than in connection with
the sale of shares to existing stockholders of the Company; or to
an entity whose relationship with the Company creates
intangible value for the Company; or to fund merger and/or
acquisition related activity.
All share, redemption and similar amounts are subject to
appropriate adjustment in the event of stock splits, stock
dividends, recapitalization and similar events.
Miscellaneous.
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 its headquarters office, or to such other
address as the Company shall furnish to the Holder in accordance
with this Section.
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.
The Holder shall be entitled to recover its reasonable legal and
other costs of collecting on this Preferred and such costs
shall accrue interest payable on demand at the rate of 7% per
annum.
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.
<PAGE>
FORM OF WARRANT
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:
_______________________________
THIS CERTIFIES THAT the Holder is entitled to purchase from
SCANGRAPHICS, INC., a Pennsylvania corporation (hereinafter
called the "Company"), at $3.00 per share the number of shares of
the Company's common stock ("Common Stock") set forth above.
All rights granted under this Warrant shall expire on March 15,
2002, subject to earlier termination as set forth in Section 3.
Early Expiration.
The following terms shall have the following definitions:
Effective Date means the date of the effectiveness of the
registration statement (the "Registration Statement") referred
to in a Private Placement Purchase Agreement dated as of the date
of this Warrant.
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.
If any 30-day Price is not less than $6 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.
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 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).
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, then as of
the last day of the test Period, this Warrant shall expire in
full.
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" (after
giving effect to all other securities owned by Holder) of 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.
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.
The Company covenants to call a special meeting of shareholders
which will be held on or before July 15, 1998 and at which the
Company's shareholders will be asked to approve the issuance of
shares on conversion of the Preferred and Warrants issued to the
Purchasers (each such terms as defined in the Subscription
Agreement). The Board of Directors of the Company will recommend
that the shareholders of the Company vote in favor of such
approval. Until such approval is obtained, the maximum number of
shares which will be issued on conversion of the Preferred and
exercise of the Warrants is 19.9%, issuable on a first converted,
first exercised basis. Should such approval not be obtained by
July 15, 1998, then until such approval is obtained, the Company
shall on demand by Holder made at any time or times, redeem any
portion of the Preferred designated for redemption (the "Redeemed
Portion") at a redemption price per share equal to the pre-tax
profit Holder would have earned had Holder, at the close of
business on the date of its demand for redemption, exercised the
Redeemed Portion and simultaneously sold the shares received on
such exercise at the closing NASDAQ sales price on such date. The
redemption price shall be payable within five business days after
demand for redemption is made, and shall accrue interest payable
on demand at 11% per annum.
The holder of this warrant is entitled to certain registration
rights under the Subscription Agreement.
Should the "Underlying Shares" not be registered within one year
from the Completion date, the Holder shall have the right to
request and the Company shall be obligated to fulfill a
"cashless" exercise of Warrants submitted for exercise based on
the Closing Bid price on the date of exercise.
Any permitted assignment of this Warrant shall be effected by the
Holder by (i) executing a standard form of assignment, (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.
The term "Holder" should be deemed to include any permitted
record transferee of this Warrant.
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 at all
times will have authorized and reserved a sufficient number of
shares of Common Stock for issuance upon exercise of this Warrant
and all other Warrants.
This Warrant shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company.
If 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 and in the exercise price 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 eliminated and the price per share of the
remaining shares subject to this Warrant adjusted accordingly.
The rights represented by this Warrant may be exercised at any
time within the period above specified by (i) surrender of this
Warrant (with a standard purchase form 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.
The certificates for the Common Stock so purchased shall be
DWAC'd 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.
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 party
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:__________________________
Title:________________________
<PAGE>
Scan-Graphics, Inc.
Proxy for Annual Meeting of Shareholders June 24, 1998.
The undersigned hereby appoints R. BARRY BORDEN and MICHAEL
A. MULSHINE, or either of them acting in the absence of the
other, with full power of substitution, the proxy or proxies of
the undersigned to attend the annual meeting of shareholders of
Scangraphics, Inc., to be held on June 24, 1998, and at any
adjournments thereof, to vote the shares of stock that the signer
would be entitled to vote if personally present as indicated
below and on the reverse side hereof and on any other matters
brought before the meeting, all as set forth in the Proxy
Statement of Scangraphics dated May __, 1998, receipt of which is
hereby acknowledged.
Please date, sign and return promptly.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SCAN-GRAPHICS, INC.
1. ELECTION OF DIRECTORS: Nominees: R. Barry Borden, David
S. Hirsch, Michael A. Mulshine, Laurence L. Osterwise, Jack A.
Pellicci, James C. Sargent, and Andrew E. Trolio.
FOR ALL NOMINEES.
WITHHOLD AUTHORITY FOR ALL NOMINEES.
WITHHOLD AUTHORITY FOR THE FOLLOWING NOMINEE(S) AND VOTE FOR ALL
OTHER NOMINEES.
- -----------------------------------------------------------------
- -----------------------------------------------------------------
The Board of Directors recommends that you vote FOR all nominees.
2. To ratify, pursuant to Nasdaq Rule 4310 (c)(25)(H), the
issuance and sale of the Company's Class A Preferred Stock,
Series E, par value $1,000 per share, Warrants to Purchase Common
Stock, and the shares of the Company's Common Stock, par value
$.001 per share, issuable upon conversion and exercise thereof,
respectively.
FOR AGAINST ABSTAIN
You signature(s) on this form of proxy should be exactly as
your name and/or names appear on this proxy. If the stock is held
jointly, each holder should sign. If signing is by an attorney,
executor, administrator, trustee or guardian, please give full
title.
Dated: _________________________ 1998
-------------------------------
Signature
-------------------------------
Signature
The shares represented by this proxy will be voted as
directed by the shareholder. If no direction is given when the
fully executed proxy is returned, such shares will be voted in
accordance with the recommendations of the Board of Directors FOR
all nominees and FOR proposal 2.
