SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 MARCH 31, 1998
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
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(Address of principal executive offices) (Zip Code)
610-495-3003
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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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
18,496,909 shares of common stock were outstanding as of March 31, 1998
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- March 31, 1998 (Unaudited)
and December 31, 1997 3 - 4
Consolidated Statements of Operations -- (Unaudited) Three months ended
March 31, 1998 and 1997 5
Consolidated Statements of Cash Flow -- (Unaudited)
Three months ended March 31, 1998 and 1997 6
Notes to Financial Statements -- March 31, 1998 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 12
PART II. OTHER INFORMATION
- ---------------------------
Item 1 through Item 6. 13
SIGNATURE PAGE 14
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2
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share data)
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,485 $1,310
Accounts receivable, less
allowance for doubtful accounts of
$78 and $91 1,060 696
Inventories 1,167 1,690
Prepaid expenses and other current
assets 327 267
------ ------
TOTAL CURRENT ASSETS 4,039 3,963
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,167 1,226
OTHER NON-CURRENT ASSETS 38 28
------ ------
TOTAL ASSETS $5,244 $5,217
====== ======
See accompanying notes to financial statements.
3
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 1,249 $ 1,013
Dividend payable 36 30
Deferred revenue 62 33
Current maturities, capital lease obligations 42 41
Current maturities of long-term debt 103 411
Current maturities, retirement obligation 132 -
------ ------
TOTAL CURRENT LIABILITIES 1,624 1,528
------ ------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 71 98
Capital lease obligation, less current maturities 48 58
Deferred revenue - 19
Long-term portion of retirement obligation 286 -
------ ------
TOTAL LONG-TERM LIABILITIES 405 175
------ ------
STOCKHOLDERS' EQUITY
Class A convertible preferred stock Authorized 1,000,000 shares Series A,
issued and outstanding
500,000 shares, par value $2.00 1,000 1,000
Series D, par value $1,000 Issued and Outstanding, 1,435 shares at March
31, 1998 and 2,990 shares,
at December 31, 1997 1,435 2,990
Series E, Issued and Outstanding 2,085
shares, par value $1,000 2,085 -
Common stock, par value $0.001 Authorized 50,000,000 shares Outstanding
18,496,909 shares at March 31, 1998 and 18,070,319
shares at December 31, 1997 19 18
Additional paid-in capital 23,350 22,155
Deficit (24,254) (21,322)
Notes Receivable, Related Parties (420) (1,327)
------ ------
TOTAL STOCKHOLDERS' EQUITY 3,215 3,514
------ ------
TOTAL LIABILITIES & STOCKHOLDER EQUITY $ 5,244 $ 5,217
======= =======
</TABLE>
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)
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
SALES $ 1,202 $ 933
LICENSE AND ROYALTY FEES 9 25
------------ ------------
Total revenues 1,211 958
COST OF GOODS SOLD 1,543 880
(Including inventory write down
provisions of $737 in 1998)
------------ ------------
GROSS PROFIT(LOSS) (332) 78
------------ ------------
EXPENSES:
Research and development 431 202
Sales and marketing 795 478
General and administrative
(Including severance and relocation
provisions of $179 and retirement
obligation expense of $418 in 1998) 1,199 613
------------ ------------
Total operating expenses 2,425 1,293
------------ ------------
OPERATING (LOSS) BEFORE
OTHER INCOME (EXPENSE) (2,757) (1,215)
------------ ------------
OTHER INCOME 35 53
Other Expense (19) (117)
------------ ------------
Total other income (expense) 16 (64)
------------ ------------
(LOSS) BEFORE INCOME TAXES (2,741) (1,279)
INCOME TAXES -- --
------------ ------------
NET (LOSS) (2,741) (1,279)
PREFERRED DIVIDENDS (192) (55)
------------ ------------
BALANCE, APPLICABLE TO COMMON STOCK $ (2,933) $ (1,334)
============ ============
BASIC NET(LOSS) PER SHARE OF COMMON STOCK $ (.16) $ (.09)
============ ============
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 18,422,874 15,495,257
============ ============
See accompanying notes to financial statements.
5
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands, except share and per share data)
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1998 1997
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (Loss) $(2,741) $(1,279)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 82 91
Increase in inventory write downs 737 --
Fixed asset write down 28 --
(Increase) decrease in notes and
accounts receivable (364) 118
(Increase) decrease in inventories (214) (128)
Increase in retirement obligation 418 --
(Increase) in other current assets (60) (40)
(Increase) in other non-current assets (10) (41)
Increase in accounts payable
and accrued expenses 242 180
Increase(decrease)in deferred revenue 10 (8)
------- -------
Total adjustments 869 172
------- -------
Net cash (used) in operating
Activities (1,872) (1,107)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (51) (130)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (27) (16)
Payment of preferred dividends -- (201)
Payment of capital lease obligations (10) (56)
Proceeds from issuance of Preferred Stock, Series E 2,085 --
Proceeds from exercise of Common stock
warrants/options 50 1,408
Payment of Expenses, Stock Issuance -- (71)
Repurchase of subsidiary stock -- (12)
------- -------
Net cash provided in financing activities 2,098 1,052
------- -------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 175 (185)
CASH AND CASH EQUIVALENTS,
at beginning of year 1,310 1,081
------- -------
CASH AND CASH EQUIVALENTS,
at end of period $ 1,485 $ 896
======= =======
See accompanying notes to financial statements.
6
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In Thousands, except share and per share data)
Note #1
The accompanying consolidated financial statements are unaudited and include
the accounts of Scan-Graphic's, Inc. and subsidiaries (the "Company"). All
significant intercompany transactions and balances have been eliminated.
In the opinion of management all adjustments (consisting of normal recurring
accruals) have been made which are necessary to present fairly its financial
position of the Company as of March 31, 1998 and the results of its operations
for the three month periods ended March 31, 1998 and 1997. The results of
operations experienced for the three month period ended March 31, 1998 are not
necessarily indicative of the results to be experienced for the fiscal year
ended December 31, 1998.
The statement and related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying notes should
therefore be read in conjunction with the Company's December 31, 1997 annual
financial statements.
Note #2 Inventories:
Inventories at March 31, 1998 and December 31, 1997 consist of
the following:
March 31,
1998 December 31,
(Unaudited) 1997
----------- ------------
Raw materials $ 771 $ 904
Work-in-process 126 414
Finished products 270 372
------ ------
$1,167 $1,690
====== ======
Note #3 Property and Equipment:
Property and equipment consists of:
March 31,
1998 December 31,
(Unaudited) 1997
----------- ------------
Equipment under capital lease $ 419 $ 387
Machinery & Equipment 2,828 3,139
Furniture & Fixtures 483 158
Autos & Trucks 12 12
Leasehold Improvements 116 116
Software 288 282
------ ------
4,146 4,094
Less accumulated
depreciation and amortization 2,979 2,868
------ ------
Net Fixed Assets $1,167 $1,226
====== ======
Note #4 Commitments and Contingencies:
The Company will be obligated to pay one to three years of
annual salary to certain officers 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 March 31, 1998 is $548.
7
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In Thousands, except share and per share data)
Note #5 Long-Term Debt:
Long-term debt consists of the following:
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<CAPTION>
March 31,
1998 December 31,
(Unaudited) 1997
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<S> <C> <C>
7% Convertible debentures payable, originally maturing between
May and June 1999. Balance was converted into preferred
stock during January 1998 (See Note 6) $ - $311
Note Payable, payable in monthly installments of $6, including
interest at 8.75% through July 1999. The note payable
collateralized
by equipment. 91 107
Other 83 91
---- ---
TOTAL LONG-TERM DEBT 174 509
Less current maturities 103 411
---- ----
Long-term debt $ 71 $ 98
==== ====
</TABLE>
Note #6 Stockholders' Equity
During the first quarter 1998, one shareholder exercised
common stock options resulting in 50,000 shares of common
stock being issued for $50.
During the first quarter of 1998, the remaining $311 of 7% Convertible
Notes issued in April 1997 were converted to a new Series "D" of 7%
Convertible Preferred Stock.
During the first quarter of 1998, holders of $1,554 principal
value of the Series "D" Preferred Stock exercised their right
to convert into common stock and 876,588 shares were issued.
See discussion below under "Liquidity and Capital Resources"
for a description of a new Series "E" Preferred Stock issue.
During the first quarter 1998, 30,000 common stock options and
320,000 common stock warrants were issued to employees of the
Company. Of the warrants, 250,000 were issued to Andrew E.
Trolio pursuant to a Retirement Agreement, dated April 16,
1998, which had an effective date of March 21, 1998. In addition,
$907 in Notes Receivable, Related Parties were cancelled as part
of this Agreement in return for surrender of 500,000 shares of
common stock.
8
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In Thousands, except share and per share data)
Note #7 Supplemental Disclosures of Cash Flow Information:
March 31,
1998 December 31,
(Unaudited) 1997
----------- ------------
Cash paid during year for interest $ 7 $ 8
====== ===
Non-cash financing activities
are as follows:
Declaration of preferred
stock dividend $ 100 $55
====== ===
Preferred Subscriptions Receivable $ -- $50
====== ===
Conversion of 7% debentures
to Preferred Stock $ 311 --
====== ===
Conversion of Series D Preferred Stock
to Common Stock $1,554 --
====== ===
Expenses incurred related to issuance
of Class A Convertible Preferred
Stock, Series E $ 92 --
====== ===
Notes Receivable, Related Parties reduction
for surrender of 500,000 shares of
Common Stock $ 907 --
====== ===
9
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
(In Thousands, except share and per share data)
Liquidity and Capital Resources
At March 31, 1998, cash and cash equivalents increased to $1,485, a $175
increase compared to the December 31, 1997 amount of $1,310. The above change in
cash and cash equivalents are explained as follows in the cash flow from
operating, investing and financing activities.
As of March 31, 1998, the cash flows from operating activities resulted in a net
use of cash of $1,872. This use of cash was primarily due to the Company's
development costs in all Divisions as well as operating losses sustained by the
Tangent Imaging Systems Division. In May, 1998 management decided to refocus
operations on those which showed the best current performance and future
prospects. Additionally, inventory reserves of $737 as well as $179 of other
expenses for severance and facilities consolidation were taken as part of this
refocusing, as of the March 31, 1998 reporting date. Also as of March 31, 1998,
management recorded $418 in costs related to a retirement agreement with the
Company's founder and former chairman. Under this agreement, among other things,
cash payments aggregating approximately $485 will be made through the year 2000
and 250,000 warrants for purchase of common stock were issued at fair market
value.
Inventory write downs stemmed from two decisions which were made as at March 31,
1998. First, based on Tangent Imaging Systems successes in the commercial color
reprographics and scanning marketplace coupled with the changing market
requirements, the continuing technological difficulties and the results of the
newspaper field trials in the monochrome marketplace, the Company has decided to
focus its resources in the faster growth, higher margin color markets, thereby
decreasing its resources devoted to monochrome development, manufacturing and
distribution. Second, the early feedback on Sedona GeoServices' software
products coupled with the disappointing evolution of the mapping conversion
market has led the Company to reduce its resources focused on mapping
conversion. With these two decisions, management believes it now is appropriate
to record inventory reserves for the impacted areas.
Increases in receivables ($364) were due principally to delays in collections.
Accounts payable and accrued expenses increased $242 due principally to $151 in
reserves for severance and relocation expenses taken in connection with the
Company's refocusing efforts discussed above, as of March 31, 1998.
As of March 31, 1998, the cash flows from investing activities resulted in a net
use of cash of $51. The use of cash was due primarily to purchases of equipment.
As of March 31, 1998, the cash flows from financing activities resulted in net
cash provided by financing activities of $2,098. The increase in cash provided
was due to the exercise of common stock options as well as proceeds from the
sale of Series "E" Preferred Stock described below.
10
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
(In Thousands, except share andper share data)
Liquidity and Capital Resources (Continued)
During March 1998, the Company entered into a $5.2 million private placement
purchase agreement. Under the Agreement, the company completed, in April 1998,
the sale of 52 units of convertible preferred stock. Each unit consists of 100
shares of Series E Convertible Preferred Stock, and a warrant to purchase 28,850
shares of common stock of the Company. The Preferred Stock and any accrued
interest are convertible within 90 days at a price per share equal to the lesser
of $3.00 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion. The warrants had an estimated, based on an
appraisal, fair value of $230, $92 of which was deemed to have been allocated to
the first quarter with the remainder allocated to the second quarter when the
offering was completed.
If the conversion price is $2 a share or less, the Company may elect to redeem
all or part of the Preferred Stock and accrued dividends at the par value of
principal, plus the conversion discount. Conversions are restricted to 10% per
month on a cumulative monthly basis. As of March 31, 1998, $2,085 had been
raised through these subscriptions. On April 7, 1998, subscriptions for this
offering were completed and the Company had received the remaining proceeds for
a total $5,200.
The Company believes that proceeds from the private placement of convertible
preferred stock noted above and funds generated from operations will be
sufficient to meet the Company's working capital requirements for 1998.
Results of Operations
Net Revenue for the three months ended March 31, 1998 increased to $1,211, a 26%
increase compared to the three months ended March 31, 1997, amount of $958.
Revenue in excess of 10% of revenue to one customer accounted for approximately
46% of net revenue for the three months ended March 31, 1998 involved two
customers, compared to revenue in excess of 10% of revenue to one customer which
accounted for approximately 44% of net revenue for the three months ended March
31, 1997 from three customers which had each crossed the 10% threshold.
Gross Margin percentages at March 31, 1998 and 1997 were (27.4%) and 8.1% of
revenue, respectively. The decrease in gross profit (loss) is accounted for by
the inventory reserves noted above. Excluding the reserves, gross margin would
have been 33.4% for the quarter ended March 31, 1998, an increase due to
increased volume and lower costs.
Research and development expense as a percentage of revenue increased to 35.6%
of revenue at March 31, 1998 compared to 21.1% of revenue at March 31, 1997. The
Company continues to invest its resources in the development of geospatial and
imaging software and state-of-the-art, cost competitive scanners.
Sales and Marketing expense as a percentage of revenue increased to 65.6% of
sales at March 31, 1998 compared to 49.9% at March 31, 1997. This increase was
due to increased headcount principally in Sedona GeoServices and Tangent Imaging
Systems Divisions.
11
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SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, except share and per share data)
Results of Operations (Continued)
General and Administrative expense for the first quarter of 1998 was 99.0% of
revenue compared to 64.0% at March 31, 1997. This increase was due principally
to the reserves for the retirement agreement noted above ($418) and severance
and relocation reserves ($179). Excluding these items, general and
administrative expenses would have been $602, or 49.7% of sales, a decrease
attributable to the higher level of sales in 1998.
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.
12
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On March 11, 1998, an action was commenced in the
Court of Common Pleas of Montgomery County, PA,
against the Company by a former employee, seeking
damages of $361 for termination of contract, by change
of control and for convenience. This plaintiff
asserts this sum represents the excess of market
value over the exercise price of unvested warrants
held by the plaintiff which the plaintiff asserts
should have been vested and thereby available for
exercise and sale. The Company has categorically
denied the plaintiff's claims and will defend its
actions if required.
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 - None
Exhibit Document
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession. - None
*(4) Instruments defining the rights of security holders.
Documents related to Class A Convertible Preferred Stock,
Series E. (Exhibit 4.0)
*(10) Material Contracts
Retirement Settlement Agreement - Andrew E. Trolio
(Exhibit 10.0)
(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) Previously unfiled documents. - None
(20) Report(s) furnished to security holders. - None
(23) Published report regarding matters submitted to
vote of security holders. - None
(24) Consents of experts and counsel. - None
(25) Power of attorney. None
(28) Additional exhibits. - None
(*) Filed herewith
13
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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: May 15, 1998 /S/ Laurence L. Osterwise
---------------------- --------------------------
Laurence L. Osterwise
President & Chief Executive Officer
DATE: May 15,1998 /S/ William K. Williams
---------------------- --------------------------
William K. Williams
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,485
<SECURITIES> 0
<RECEIVABLES> 1,138
<ALLOWANCES> (78)
<INVENTORY> 1,167
<CURRENT-ASSETS> 4,039
<PP&E> 4,146
<DEPRECIATION> (2,979)
<TOTAL-ASSETS> 5,244
<CURRENT-LIABILITIES> 1,624
<BONDS> 0
0
4,520
<COMMON> 19
<OTHER-SE> (1,324)
<TOTAL-LIABILITY-AND-EQUITY> 5,244
<SALES> 1,202
<TOTAL-REVENUES> 1,211
<CGS> 1,543
<TOTAL-COSTS> 1,543
<OTHER-EXPENSES> 2,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (2,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,933)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 4.0
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.
1. 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.
2. 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.
3. 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.
4. Certain Definitions and References.
(a) The Preferred is being issued under Private Placement Purchase
Agreements between the Company and the holders of the
Preferred (each, a "Subscription Agreement").
(b) 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.
5. Dividends
(a) 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.
1
<PAGE>
(i) 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.
(ii) 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.
(b) 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 . 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.
(c) 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.
6. Conversion
(a) 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.
(b) 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.
(c) 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.
(d) 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
2
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shall use its diligent efforts promptly to list on NASDAQ all
shares of Common Stock which are issued upon conversion of
this Preferred.
(e) Conversion of the Preferred is subject to the following
restrictions:
(i) If the Effective Date shall have occurred on or
before the 90th day after the Completion Date, no
more than 10% of the initial principal amount of this
Note shall be convertible in any calendar month (with
the unconverted portion of each month's installment
being carried forward to later months); provided that
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.
(f) 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.
(g) 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.
(h) 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.
3
<PAGE>
7. 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.
8. 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.
9. Certain Events of Mandatory Redemption.
(a) An "event of redemption" with respect to this Preferred shall exist
if any of the following shall occur, if:
(i) 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;
(ii) A receiver, liquidator or trustee of the Company or
of a substantial part of its properties shall be
appointed by court order and such order shall remain
in effect for more than 15 days; or the Company shall
be adjudicated bankrupt or insolvent; or a
substantial part of the property of the Company shall
be sequestered by court order and such order shall
remain in effect for more than 15 days; or a petition
to reorganize the Company under any bankruptcy,
reorganization or insolvency law shall be filed
against the Company and shall not be dismissed within
45 days after such filing;
(iii) The Company shall file a petition in voluntary
bankruptcy or request reorganization under any
provision of any bankruptcy, reorganization or
insolvency law, or shall consent to the filing of any
petition against it under any such law;
(iv) The Company shall make an assignment for the benefit
of its creditors, or admit in writing its inability
to pay its debts generally as they become due, or
consent to the appointment of a receiver, trustee or
liquidator of the Company, or of all or any
substantial part of its properties.
(b) 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.
10. 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.
4
<PAGE>
11. All share, redemption and similar amounts are subject to appropriate
adjustment in the event of stock splits, stock dividends, recapitalization and
similar events.
5
<PAGE>
12. Miscellaneous.
(a) All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by
telegram, by facsimile, recognized overnight mail carrier, telex or
other standard form of telecommunications, or by registered or
certified mail, postage prepaid, return receipt requested, addressed as
follows: (a) if to the Holder, to such address as such Holder shall
furnish to the Company in accordance with this Section, or (b) if to
the Company, to its headquarters office, or to such other address as
the Company shall furnish to the Holder in accordance with this
Section.
(b) 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.
(c) 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.
(d) 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.
6
<PAGE>
Exhibit B
Neither this Warrant nor the shares of Common Stock issuable on exercise of this
Warrant have been registered under the Securities Act of 1933. None of such
securities may be transferred in the absence of registration under such Act or
an opinion of counsel to the effect that such registration is not required.
SCANGRAPHICS, INC.
WARRANT
DATED:
Number of Shares:
Holder:
Address:
- -------------------------------
1. THIS CERTIFIES THAT the Holder is entitled to purchase from SCANGRAPHICS,
INC., a Pennsylvania corporation (hereinafter called the "Company"), at $3.00
per share the number of shares of the Company's common stock ("Common Stock")
set forth above.
2. All rights granted under this Warrant shall expire on March 15, 2002, subject
to earlier termination as set forth in Section 3.
3. Early Expiration.
(a) The following terms shall have the following definitions:
(i) Effective Date means the date of the effectiveness of
the registration statement (the "Registration
Statement") referred to in a Private Placement
Purchase Agreement dated as of the date of this
Warrant.
(ii) The "30-day Price" means the closing bid price (on
NASDAQ or such other securities exchange where the
common stock may then be listed) of the Common Stock
on not less than 30 days in any consecutive 45-day
period (the "Test Period") which begins after the
Effective Date and through which the Registration
Statement continues to be effective.
(b) If any 30-day Price is not less than $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.
(c) 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).
7
<PAGE>
(d) 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.
4. Notwithstanding anything to the contrary contained herein, Holder shall not
have the right to exercise this Warrant so long as and to the extent that at the
time of such exercise, such exercise would cause the Holder then to be the
"beneficial owner" (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.
5. This Warrant and the Common Stock issuable on exercise of this Warrant (the
"Underlying Shares") may be transferred, sold, assigned or hypothecated, only if
registered by the Company under the Securities Act of 1933 (the "Act") or if the
Company has received from counsel to the Company a written opinion to the effect
that registration of the Warrant or the Underlying Shares is not necessary in
connection with such transfer, sale, assignment or hypothecation. The Warrant
and the Underlying Shares shall be appropriately legended to reflect this
restriction and stop transfer instructions shall apply. The Holder shall through
its counsel provide such information as is reasonably necessary in connection
with such opinion.
6. The 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.
7. The holder of this warrant is entitled to certain registration rights under
the Subscription Agreement.
8. 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.
9. The term "Holder" should be deemed to include any permitted record transferee
of this Warrant.
10. 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
8
<PAGE>
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.
11. This Warrant shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
12. 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.
13. 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.
14. 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.
15. 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:________________________
9
Exhibit 10.0
Retirement Settlement Agreement
Effective March 21, 1998, Scangraphics, Inc. (the "Company") and Andrew E.
Trolio (the "Employee") in consideration of Employee's loyalty, dedication and
continued service to the Company for twenty-six years, and the Employee's
willingness to terminate his Employment Agreement according to the terms herein,
hereby agree to the following Terms and Conditions as set forth below:
1) The Company and the Employee agree that the Employment Agreement executed on
January 1, 1991 and the Addendum to Employment Agreement executed October 29,
1997 are terminated. This Agreement contains the entire agreement between the
Employee and the Company and it supersedes any prior agreement or understanding.
No agreement, representation, or understanding of either party which is not
contained in this Agreement is binding on the parties. This Agreement can be
modified only in a writing signed by both parties.
2) Employee will step down as Chairman of the Company's Board of Directors
(effective upon election of a new chairman at the next meeting of the Board.)
The Company will use its best efforts to elect the Employee as a Director of the
Company at least until such time as all items of this agreement have been
satisfied.
It is the intent that the Employee will be re-elected to the Board of
Directors during, at a minimum, the three year period as stated herein and at a
minimum the Chief Executive Officer and Chairman will support such re-election
of Employee to the Board.
The Company will pay ordinary expenses afforded other members of the
Board during his term(s) as a member of the Board.
3) The Company will pay Employee a salary of $150,000 per year on a bi-weekly
basis through December 31, 2000.
4) The Company will continue to pay all medical benefits through December 31,
2000 for Employee. The Company will continue to pay
<PAGE>
Employee the current automobile expense allowance through December 31, 1998 and
will pay the current Company paid life insurance through December 31, 1998.
5) The Employee will surrender the 500,000 shares purchased at year end 1996 and
in turn the Company will cancel these shares. In addition the Company will
cancel Notes PN-101 and 102 relating to the purchase of such shares and as such,
relieving the Employee of any liability to the Company in connection with these
Notes as of December 31, 1997.
6) In consideration of Section 5 above, the Company will issue to Employee
250,000 Warrants to purchase the Company's common stock, exercisable for 10
years at the price of $2.546875, which was the average of bid (2 1/2) and ask
prices (2 19/32) at closing on March 20, 1998.
7) The Employee will not be provided with an office or a secretary. As of
4/30/98, the Employee will assume all expenses of Employee's current office,
including but not limited to: rent, phone, fax, utilities and maintenance. The
Company will pay any reasonable outstanding expenses, to April 30,1998, relating
to the rental of the Company office in Broomall which are minimal. [Note, the
Company has been and will continue to be financially responsible for, Lorraine
Carsello, the Employee's current secretary.]
8) Employee covenants and agrees that, for the term of this agreement, he shall
not, directly or indirectly engage in any business activities within the
Continental United States, the same as, or in competition with business
activities carried on by the Company. The term "engage in" shall include,
without being limited to, activities as proprietor, partner, stockholder,
principal, agent, employee or consultant. 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 of more than 5% of any class of
equity securities of a company whose securities are traded on a national
exchange. Additionally, if the Company permanently abandons (to be agreed to by
the Company, in writing) any of its existing businesses and/or products, the
Employee will be free of any restrictions
<PAGE>
relating to engaging, participating, investing in and or owning any such
abandoned business or products. 9) If the office or offices of Chairman of the
Board of Directors or President and Chief Executive Officer shall become vacant
for any reason whatsoever, and if the Company desires for Employee to occupy
such position or positions temporarily until either or both can be located and
hired, Employee will, at his option, and upon request by the Board of Directors,
enter into the office or offices at the pleasure of the Board of Directors.
During such time that Employee is employed as President and Chief Executive
Officer, Employee shall receive compensation equal to that received by the
President and Chief Executive Officer that he replaces. There would be no
additional compensation for assuming the duties of Chairman of the Board. Upon
the Employee no longer being the President and Chief Executive Officer, his
compensation would revert to that provided in this agreement.
10) Releases and or discussions relating to Employee. The Company, its Officers
and Directors, will not, publicly or privately, publish, discuss, state, infer
or communicate in any manner anything which is reasonably anticipated to reflect
negatively on the Employee.
11) In the event of default by the Company of any provisions of this Agreement,
and a failure to cure such default within 15 business days of the Company's
receipt of written notice of such default, the Employee will be entitled to
immediate receipt of the balance of all and any moneys due Employee under this
Agreement, including but not limited to recovering of reasonable legal expenses,
interest and fees, etc., as provided under the laws of the Commonwealth of
Pennsylvania. Additionally, non-compete restrictions will terminate.
12) In the event of incapacitation or death of Employee, salary as noted in
Section 3 and life insurance payments as noted in Section 4 shall inure to the
beneficiaries of the Estate of the Employee.
<PAGE>
AGREED TO:
By: Andrew E. Trolio By: Laurence L. Osterwise.
/s/ Andrew E. Trolio /s/ Laurence L. Osterwise
- -------------------- -------------------------
President & CEO, Scangraphics, Inc.
Date: 4/16/98 Date: 4/13/98
--------------- --------------------
WITNESSED:
By : Victoria R. Franchetti
/s/ Victoria R. Franchetti
- --------------------------
Assistant Secretary, Scangraphics, Inc.
Date: 4/14/98
