<PAGE>
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 SEPTEMBER 30, 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
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
610-495-3003
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by the check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
19,703,309 shares of common stock were outstanding as of October 31, 1998
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ -----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- September 30, 1998 (Unaudited)
and December 31, 1997 3 - 4
Consolidated Statements of Operations -- (Unaudited)
three months ended September 30, 1998 and 1997 5
Consolidated Statements of Operations -- (Unaudited)
nine months ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flow -- (Unaudited)
nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements -
September 30, 1998 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
- ---------------------------
Item 1 through Item 6. 14-15
SIGNATURE PAGE 16
- --------------
</TABLE>
2
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,903 $1,310
Accounts receivable, less
allowance for doubtful accounts of
$37 in 1998 and $91 in 1997 2,069 696
Inventories 877 1,690
Prepaid expenses and other current
assets 153 267
------ ------
TOTAL CURRENT ASSETS 5,002 3,963
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,094 1,226
OTHER ASSETS 34 28
----- -----
TOTAL ASSETS $6,130 $5,217
====== ======
</TABLE>
See accompanying notes.
3
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,121 $ 1,013
Dividend payable 195 30
Deferred revenue 62 33
Current maturities, capital lease obligations 43 41
Current maturities of long-term debt 86 411
Current maturities, retirement obligation 140 -
------- -------
TOTAL CURRENT LIABILITIES 1,647 1,528
------- -------
Long-term debt, less current maturities 31 98
Capital lease obligation, less current maturities 53 58
Deferred revenue - 19
Long-term portion of retirement obligation 176 -
------- -------
TOTAL LONG-TERM LIABILITIES 260 175
------- -------
TOTAL LIABILITIES $ 1,907 $ 1,703
STOCKHOLDERS' EQUITY
Class A convertible preferred stock
Authorized 1,000,000 shares
Series A, issued and outstanding
Shares 500,000, par value $2.00 1,000 1,000
Series D, par value $1,000
Issued and Outstanding, none
at September 30, 1998 and 2,990
at December 31, 1997 - 2,990
Series E, Issued and Outstanding Shares
4,680 par value $1,000 4,680 -
Common stock, par value $0.001
Authorized 50,000,000 shares
issued and outstanding shares 19,703,309
at September 30, 1998 and 18,070,319
at December 31, 1997 19 18
Additional paid-in capital 25,020 22,155
Deficit (26,416) (21,322)
Notes Receivable, Related Parties (80) (1,327)
------- -------
TOTAL STOCKHOLDERS' EQUITY 4,223 3,514
------- -------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,130 $ 5,217
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Sales $1,728 $1,331
License and Royalty Fees - 6
------ ------
Total revenues 1,728 1,337
COST OF GOODS SOLD 795 1,002
------ ------
GROSS PROFIT 933 335
EXPENSES:
General and administrative 701 902
Sales and marketing 676 889
Research and development 385 580
------ ------
Total operating expenses 1,762 2,371
------ ------
OPERATING (LOSS) BEFORE
OTHER INCOME (EXPENSE) (829) (2,036)
Other Income 40 68
Other Expense (15) (317)
------ ------
Total other income (expense) 25 (249)
------ ------
NET LOSS (804) (2,285)
PREFERRED DIVIDENDS (141) (56)
LOSS APPLICABLE TO COMMON SHARES $ (945) $(2,341)
====== =======
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.05) $ (.15)
====== =======
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 19,759,252 16,298,733
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Sales $ 4,472 $ 3,589
License and Royalty Rees 9 31
------- -------
Total revenues 4,481 3,620
COST OF GOODS SOLD 3,181 2,749
------- -------
GROSS PROFIT 1,300 871
------- -------
EXPENSES:
General and administrative 2,522 2,327
Sales and marketing 2,145 2,014
Research and development 1,213 1,106
------- -------
Total operating expenses 5,880 5,447
------- -------
OPERATING (LOSS) BEFORE
OTHER INCOME (EXPENSE) (4,580) (4,576)
Other Income 107 177
Other Expense (55) (540)
------- -------
Total other income (expense) 52 (363)
------- -------
NET LOSS (4,528) (4,939)
PREFERRED DIVIDENDS (567) (165)
------- -------
LOSS APPLICABLE TO COMMON SHARES $(5,095) $(5,104)
======= =======
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (.27) $ (.32)
======= =======
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 19,011,605 15,843,743
========== ==========
</TABLE>
See accompanying notes.
6
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $(4,528) $(4,939)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 263 282
Increase in inventory reserves 737 -
(Increase)decrease in accounts receivable (1,373) 4
Decrease(increase)in interest receivable 70 (91)
Decrease(increase) in inventories 76 (614)
Increase in retirement obligation 316 -
Decrease(increase) in other assets 38 (66)
Increase in accounts payable
and accrued expenses 211 714
Increase(decrease)in interest payable (100) 119
Increase(decrease)in deferred revenue 10 (187)
------- -------
Total adjustments 248 161
------- -------
Net cash used in operating activities (4,280) (4,778)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (131) (496)
Capitalized trademarks & patents - (11)
------- -------
Net cash used in investing activities (131) (507)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (81) (46)
Payment of preferred stock dividends - (320)
Payment of capital lease obligations, net (3) (52)
Proceeds from issuance of Preferred Stock,
Series E 5,200 -
Proceeds from issuance of notes payable - 5,200
Proceeds from exercise of Common stock
warrants/options 88 1,420
Proceeds from subscription receivables - 347
Payment of Expenses, Stock issuance (200) (108)
Repurchase of subsidiary stock - (12)
------- -------
Net cash provided by financing activities 5,004 6,429
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS $ 593 $1,144
CASH AND CASH EQUIVALENTS,
at beginning of year $ 1,310 $1,081
------- -------
CASH AND CASH EQUIVALENTS,
at end of period $ 1,903 $2,225
======= =======
</TABLE>
See accompanying notes.
7
<PAGE>
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-Graphics', Inc. and subsidiaries (the "Company"). All
significant inter-company transactions and balances have been eliminated.
The consolidated financial statements included herein for the three and nine
months ended September 30, 1998 and 1997 are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring accruals) have been
made which are necessary to present fairly the financial position of the Company
in accordance with generally accepted accounting principles. The results of
operations experienced for the nine month period ended September 30, 1998 are
not necessarily indicative of the results to be experienced for the 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 on Form 10-K and Form 10-Q for the Company's quarters ended
March 31, 1998 and June 30, 1998.
Note #2 Inventories:
------------
Inventories at September 30, 1998 and December 31, 1997
consist of the following:
September 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
Raw materials $ 470 $ 904
Work-in-process 129 414
Finished products 278 372
------ ------
$ 877 $1,690
====== ======
Note #3 Property and Equipment:
-----------------------
Property and equipment consists of:
September 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
Machinery & Equipment $3,184 $3,139
Equipment under capital lease 449 387
Furniture & Fixtures 174 158
Autos & Trucks 12 12
Leasehold Improvements 116 116
Software 290 282
------ ------
4,225 4,094
Less accumulated
depreciation and amortization 3,131 2,868
------ ------
Net Property and Equipment $1,094 $1,226
====== ======
8
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In Thousands, except share and per share data)
Note #4 Long-Term Debt:
---------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
<S> <C> <C>
7% Convertible debentures payable, originally
maturing between May and June 1999. Balance was
converted into preferred stock during January 1998 $ - $311
Note Payable, payable in monthly installments of
$6, including interest at 8.75% through July 1999.
The note payable is collateralized by equipment. - 107
Other 117 91
---- ----
TOTAL LONG-TERM DEBT 117 509
Less current maturities 86 411
---- ----
Long-term debt $ 31 $ 98
==== ====
</TABLE>
Note #5 Stockholders' Equity
--------------------
During the third quarter of 1998, holders of $250 principal value of
the Series "D" Preferred Stock exercised their right to convert into
common stock and 192,986 shares were issued.
During the third quarter of 1998, holders of $520 principal value of
Series "E" Preferred Stock exercised their right to convert into common
stock and 410,344 shares were issued.
During the third quarter of 1998, 82,750 common stock options with
exercise prices approximating fair value at time of grant (range: $1.16
to $2.06)and 1,500,207 common stock warrants were issued to employees
and non-employees of the Company. Of the warrants, all were related to
the modification of Series "E" Convertible Preferred Shares and had an
exercise price of $4.00 (see further discussion under "Liquidity and
Capital Resources").
During the third quarter of 1998, 17,718 options of those issued were
provided to two directors, Michael A. Mulshine and James C. Sargent in
relation to transactions approved by the Board under which $340 of
Notes Receivable, Related Parties were canceled in return for surrender
of 177,180 shares of common stock. See Part II - Other Information
Exhibit Document (28) for further details.
9
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(In Thousands, except share and per share data)
Note #6 Supplemental Disclosures of Cash Flow Information:
--------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash paid during period for
interest $ 39 $ 27
====== ======
Non-cash financing activities are as follows:
Capitalized lease obligations
Incurred to lease new equipment $ 30 $ 45
====== ======
Declaration of Preferred
Stock Dividend $ 311 $ 165
====== ======
Common Stock Subscriptions
Receivable $ - $ 13
====== ======
Conversion of Series C Preferred
Stock to Common Stock $ - $1,250
====== ======
Conversion of Debentures and
Series D Preferred Stock
to Common Stock $2,990 $ 520
====== ======
Conversion of Series E Preferred
Stock to Common Stock $ 520 $ -
====== ======
Notes Receivable, Related Parties
reduction for surrender of
677,180 shares of Common Stock $1,247 $ -
====== ======
</TABLE>
10
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, except share and per share data)
Results of Operations
- ---------------------
Revenues for the three months ended September 30, 1998 increased to $1,728, a
29% increase compared to the three months ended September 30, 1997 amount of
$1,337. Revenue to two customers accounted for approximately 25% of net revenue
for the three months ended September 30, 1998, compared to revenue to one
customer which accounted for approximately 29% of net revenue for the three
months ended September 30, 1997
Revenues for the nine months ended September 30, 1998 increased to $4,481, a 24%
increase compared to the nine months ended September 30, 1997 amount of $3,620.
Revenue to one customer accounted for approximately 19% of net revenue for the
nine months ended September 30, 1998, and revenue to one customer accounted for
approximately 22% of net revenues for the nine months ended September 30, 1997.
Gross Margin percentages for the three months ended September 30, 1998 and 1997
were 54% and 25% of revenue, respectively. The increase in gross profit is due
to increased volume and lower costs.
Gross Margin percentages for the nine months ended September 30, 1998 and 1997
were 29% and 24% of revenue, respectively. The increase in gross profit is
accounted for principally by higher volumes.
General and Administrative expense for the three months ended September 30, 1998
was 41% of revenue compared to 67% at September 30, 1997. This decrease was due
principally to a higher level of sales as well as lower total dollar
expenditures in this category. General and Administrative expense for the nine
months ended September 30, 1998 was 56% of revenue compared to 64% at September
30, 1997. This decrease was due principally to higher revenues.
Sales and Marketing expense as a percentage of revenue decreased to 39% of sales
for these months ended September 30, 1998 compared to 66% at September 30, 1997.
This decrease was due to lower expenses from redirecting efforts as well as
increased volume. Sales and marketing expenses as a percentage of revenue
decreased to 48% of revenue for the nine months ended September 30, 1998,
compared to 56% at September 30, 1997 due to increased volume.
Research and development expense as a percentage of revenue decreased to 22% of
revenue for the three months ended September 30, 1998 compared to 43% of revenue
for the three months ended September 30, 1997 due to reductions in expenditures
and higher revenue.
For the nine months ended September 30, 1998 and 1997, research and development
expenses as a percentage of revenues decreased to 27% versus 31%, respectively,
reflecting higher volumes.
11
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, except share and per share data)
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, cash and cash equivalents increased to $1,903, a $593
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 September 30, 1998, the cash flows from operating activities resulted in a
net use of cash of $4,280. 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. Inventory reserves of $737 as well as $179 of other expenses for
severance and facilities consolidation were recorded 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 the purchase of common stock were issued at fair market
value.
Increases in receivables of $1,373 were due principally to increases in sales as
well as extended terms required to facilitate sales.
As of September 30, 1998, the cash flows from investing activities resulted in a
net use of cash of $131 primarily due to purchases of equipment.
As of September 30, 1998, the cash flows from financing activities resulted in
net cash provided by financing activities of $5,004. The increase in cash
provided was due to the exercise of common stock options as well as proceeds on
the sale of Series "E" Preferred Stock described below.
During March and April 1998, the Company sold $5.2 million of Series E
Convertible Preferred Stock. The 1,500,200 warrants issued in conjunction with
this placement 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 of $138 allocated to second quarter when the offering was completed.
An additional $26 of value was allocated to the Series E related warrants in the
third quarter in connection with the August 7, 1998 revised agreement as
described below.
On August 7, 1998, the Series E investors agreed to new terms under which there
will be no conversions of Series E Preferred from August 1, 1998 through January
31, 1999. Thereafter, up to 25% of the remaining Series E Preferred may be
converted per month on a cumulative basis per holder. Prior to restructure of
the agreement, the investors were allowed, starting in July 1998, to convert up
to 10% of their Series E Preferred to common stock per month and to sell the
common stock into the market. Also, as a part of the restructured agreement, the
Company has agreed to adjust the exercise price of 1,500,200 warrants issued to
the investors (28,850 warrants per $100,000 invested) from $3.00 per share to
$2.25 per share, under the condition that prior to February 1, 1999, these
warrants cannot be exercised if the common stock is below $4.00 per share. In
addition, the Company has agreed to issue up to 1,500,200 new warrants to the
investors (28,850 warrants per $100,000 invested) to purchase stock at an
exercise price of $4.00 per share. These new warrants will not vest (become
exerciseable) until February 1, 1999. An investor will receive 28,850 warrants
for each $100,000, or pro rata portion thereof, of Series E Preferred held on
February 1, 1999.
12
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands, except share and per share data)
Liquidity and Capital Resources (Continued)
- -------------------------------
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.
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.
Year 2000 Compliance
- --------------------
The company has conducted an exhaustive review of the Year 2000 issue with all
key executives participating. This review included all software produced by the
Company for use by its customers as well as the principal internally used
management information systems. As a result of this review, conclusion was
reached that there is no Year 2000 issue of significance regarding either
software produced by the Company or used internally. Nevertheless, management
plans to periodically review and perform compliance tests regarding the Year
2000 issue and will develop a comprehensive plan to address any issues which may
arise.
13
<PAGE>
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. Accordingly, no provision has been provided for in the
accompanying financial statements.
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
Discretionary Proxy Voting Authority/Stockholder Proposals
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities Exchange
Act of 1934. The amendment to Rule 14a-4(c)(1) governs the Company's
use of its discretionary proxy voting authority with respect to a
stockholder proposal which the stockholder has not sought to include in
the Company's proxy statement. The new amendment provides that, if a
proponent of a proposal fails to notify the Company at least 45 days
prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which the
stockholder has not previously sought to include in the Company's proxy
statement by March 31, 1999, the management proxies will be allowed to
use their discretionary authority as outlined above.
14
<PAGE>
PART II - OTHER INFORMATION (Continued)
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
(24) Consents of experts and counsel. - None
(25) Power of attorney. None
(28) Additional exhibits.
Exhibit 11.0 Agreement Between Scangraphics, Inc. and Michael A.
Mulshine re cancellation of notes receivables and related common stock.
Exhibit 12.0 Agreement Between Scangraphics, Inc. and James C. Sargent
re cancellation of note receivable and related common stock.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,
Thereunto duly authorized.
SCAN-GRAPHICS, INC.
DATE: November 16, 1998 /s/ Laurence L. Osterwise
------------------ ------------------------------------
Laurence L. Osterwise
President & Chief Executive Officer
DATE: November 16, 1998 /s William K. Williams
------------------ ------------------------------------
William K. Williams
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
Exhibit 11.0
RELEASE AGREEMENT
RELEASE made as of the ___ day of October, 1998 by Scangraphics, Inc., a
Pennsylvania corporation (COMPANY) and Michael A. Mulshine and Osprey Partners
(hereinafter individually and collectively referred to as RELEASEES).
WHEREAS, during December 1996, RELEASEES signed three promissory notes numbered
PN-103, PN-104 and PN-105 (DEBT) payable to the COMPANY, copies of which are
attached;
WHEREAS, the COMPANY'S Board of Directors has determined that it would be
appropriate, all things considered, to provide RELEASEES with a plan to cancel
the DEBT and accrued interest in return for cancellation of the underlying
shares and issuance of new options and/or warrants at a price of $2.00 in a
number equal to 10% of the shares associated with the aforementioned DEBT;
WHEREAS, COMPANY and RELEASEES, have now completed satisfactory negotiations to
terminate the DEBT for valuable consideration as outlined above, the receipt and
sufficiency of which is hereby acknowledged, and expressly intending to be
legally bound hereby, COMPANY and RELEASEES hereby agree as follows:
1. COMPANY does hereby remise, release and forever discharge RELEASEES from
any and all claims, demands, actions, debts, loans, judgments, obligations,
damages, and liabilities, of any nature whatsoever, known or unknown,
whether now existing or hereafter arising, whether or not heretofore
asserted, including without limitation claims for contribution or
indemnification, which against RELEASEES, or any one or more of them,
COMPANY ever had, now has, or may in the future have, in any way or manner
arising out of, relating to, or based upon, in whole or in part, any facts,
transactions, occurrences, representations, acts, or omissions arising out
of the above referenced DEBT.
2. The RELEASEES knowingly, willingly and voluntarily forever irrevocably and
unconditionally release and discharge the COMPANY, or any of its officers,
directors, shareholders, agents, employees, legal representatives,
predecessors, successors or assigns from any and all claims, charges,
complaints, liabilities, obligations, premises, agreements, remedies,
controversies, damages, costs, expenses (including attorneys' costs and
expenses), right and suits of any nature whatsoever, known or unknown,
accrued or not yet accrued, asserted or unasserted, whether in law or in
equity, made, to be made, or which might have been made in connection with,
arising out of, relating to, or as a consequence of, the creation or
termination of above referenced DEBT. The RELEASEES, by entering into this
Agreement, accept the benefits herein provided in full and complete
satisfaction of any and all claims against the COMPANY. Without limiting
the foregoing in any manner whatsoever, the RELEASEES knowingly, willingly
and voluntarily forever irrevocably and unconditionally release and
discharge the COMPANY from any and all obligations arising under each of
the DEBT herein referenced.
1
<PAGE>
3. THE RELEASEES HEREBY ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT
CONSISTING OF TWO PAGES; THAT THEY HAVE HAD A REASONABLE PERIOD OF TIME
WITHIN WHICH TO CONSIDER THIS AGREEMENT AND FULLY UNDERSTAND, ACKNOWLEGE
AND ACCEPT ALL OF ITS TERMS OF THEIR OWN VOLUNTARY FREE WILL; THAT NO
PROMISES OR REPRESENTATIONS HAVE BEEN MADE OTHER THAN AS EXPRESSLY STATED
IN THIS AGREEMENT; THAT THEY HAVE BEEN ADVISED TO CONSULT WITH COUNSEL
AND/OR OTHER ADVISORS AND HAVE HAD AN ADEQUATE OPPORTUNITY TO DISCUSS THE
DOCUMENT WITH COUNSEL AND/OR OTHER ADVISORS AND HAVE DONE SO OR HAVE
VOLUNTARILY ELECTED NOT DO SO; AND BY EXECUTING THIS AGREEMENT AND
ACCEPTING THE CONSIDERATION OUTLINED HEREIN FROM THE COMPANY, THEY WILL
ABIDE BY THE TERMS, AGREEMENTS, AND PROMISES SET FORTH IN THIS AGREEMENT.
OFFERED: ACCEPTED:
By: /s/ Laurence L. Osterwise By: /s/ Michael A. Mulshine
------------------------- ------------------------
Date: 10/28/98 Date: 10/24/98
----------------------- ---------------------
2
<PAGE>
Note No.: PN-103
PROMISSORY NOTE
$246,078.00 Dated: December 2, 1996
FOR VALUE RECEIVED, Osprey Partners, (herein after referred to as "Maker"),
promises to pay to the order of Scangraphics. Inc., (hereinafter referred to as
"Payee" or "Company"), the principal amount of Two Hundred Forty Six Thousand
and Seventy Eight Dollars ($246,078.00) in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts, at the principal office of the Company,
together with interest on the unpaid principal balance. Interest on this
Promissory Note ("Note") will be calculated at the rate of 8.25% per annum.
This Note was issued to the Payee as payment for the exercise of certain Commnon
Stock Purchase Warrants and/or Options (the "Wts/Options"). The 117,180 shares
of Common Stock that were issued upon exercise of the Wts/Options are to be held
in "Escrow" by the Payee's law firm, Dilworth Paxson Kalish & Kaufmann, the
"Escrow Agent", and such shares shall not be released to the Maker until or
unless the following conditions have been satisfied:
Vesting Schedule: These Escrowed shares may not be released for trade or
transfer until the earlier of January 1, 2000 or in increments according to the
schedule below, provided that the pro-rata portion of the principal amount of
this Note relating to the vested share increments, and all related interest due
thereupon, has been paid to the Payee:
SHARES (*) RESTRICTIONS - IF - COMPANY ANNUAL - OR - STOCK (**)
VESTING LAPSE ON REVENUES EXCEED PRICE
- ------- -------- --------------- -----
39,060 Jan. 1, 1998 $8.0 M for 1997 $4.00/Sh
39,060 Jan. l, 1999 $10.0 M for 1998 or $5.00/Sh
$18.0 M Cumulative
for 1997 & 1998
39,060 Jan. 1, 2000 N/A N/A
Note:
(*) Total of 117,180 shares from the exercise of Warrants No. 3 and No. 4.
(**) Trades at or over this price for any 30 day period during prior 12
months.
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Maker. These shares will not be forfeited due to
involuntary termination of Maker or in the event the Maker is terminated due to
inability to provide services to the Payee for reasons of health. In the event
of death of the Maker all restrictions will lapse, and the then vested shares
will accrue to the estate and/or heirs of the Maker. In the event of "change of
control" of the Company, all restrictions will lapse.
Payment of Note and Release of Shares from Escrow: The Maker shall pay the
pro-rata portion of the principal amount of the Note relating to the vested
share increments, and all related interest due thereupon, to the Company within
six months of the vesting of shares as per the Vesting Schedule above. Thus, in
3
<PAGE>
the event all shares vest as per the Vesting Schedule, the Note and related
interest are due in three equal installments of principal of $82,026.00 with
accrued interest, on the following dates:
July 1, 1998
July 1, 1999
July 1, 2000
In addition, in the event the conditions of vesting provided for in the Vesting
Schedule are not met in any given year, but the vesting conditions are
subsequently met in the following year, the shares from the prior year will then
become vested. Further, any and all shares that may not have vested prior to
January 1, 2000, shall become vested as of this date as provided for in the
Vesting Schedule.
Upon receipt of such payments, the Company will then direct the Escrow Agent to
immediately release the vested shares to the Maker, free of any restrictive
legend.
Vesting: Grossly exceeding the "Company Annual Revenue" or "Stock Price" targets
as of any of the annual target measurement dates, as detailed in the above
Vesting Schedule, will not cause an acceleration of the vesting of these shares.
The market price of the Company's shares shall not be a cause for default of
payment of this Note by the Maker.
All payments shall be made to Payee at address below or at such other place as
the Payee may from time to time designate. Any payments on account of principal
and interest shall be applied first to interest as aforesaid and the remainder
thereof shall be applied to principal.
Maker shall have the privilege of paying the principal in whole or in part at
any time, and such payments may be made without penalty or premium; provided,
however, that each payment shall be accompanied by any accrued interest then
due.
Presentment for payment or acceptance, and notice of dishonor of payment or
acceptance, notice of protest and notice of any renewal, extension, modification
or change of time, manner, place or terms of payment, are hereby waived by Maker
or any endorsers, sureties and guarantors hereof.
Any failure or delay of Payee to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any other time or times. The waiver by Payee of a breach or default of any
provisions of this Note shall not operate or be construed as a waiver of any
subsequent breach or default thereof. Maker agrees to reimburse Payee for all
costs and expenses, including reasonable attorneys' fees, incurred by Payee to
enforce the provisions hereof and collect Maker's obligations hereunder.
This Note shall be construed according to, and shall be governed by the laws of
the Commonwealth of Pennsylvania. The provisions of this Note shall be deemed
severable, so that if any provisions hereof is declared invalid under the laws
of any state where it is in effect, or of the United States, all other
provisions of this Note shall continue in full force and effect.
This Note shall be binding upon the successors and assigns of the Maker, and
shall inure to the benefit of and be enforceable by the heirs, personal
representatives, successors and assigns of Payee or any other Payee thereof.
4
<PAGE>
Notices: Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, telegraphed or sent by
certified, registered, or express mail, postage prepaid, and shall be deemed
given when so delivered personally, telegraphed or, if mailed, five days after
the date of deposit in the United States mails, as follows:
(i) if to the Maker, to: Osprey Partners
2517 Route 35, Suite D-201
Manasquan, NJ 08736
(ii) if to the Holder, to: Scangraphics, Inc.
700 Abbott Drive
Broomall, PA 19008
Governing Law: This Note shall be governed in accordance with the internal laws
of the Commonwealth of Pennsylvania, without giving effect to conflict of laws
principles.
Successors and Assigns: All the covenants, stipulations, promises and agreements
in this Note contained by or on behalf of the Maker shall bind its successors
and assigns, whether or not so expressed.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed in its name and
to be dated as of the date first above written.
ATTEST: MAKER:
/s/ Carol J. Mulshine By: /s/ Michael A. Mulshine
- ------------------------- ------------------------------
Michael A. Mulshine, Principal
Osprey Partners
5
<PAGE>
The following LEGEND shall be affixed to the appropriate Stock Certificate
representing the shares of Common Stock covered by this Note:
- ------------------------------------------------------------------------------
LEGEND:
These shares shall be held in Escrow by the Company's Escrow Agent and not be
released for trade or transfer until the earlier of January 1, 2000 or in
increments according to the Vesting Schedule that is detailed in Promissory Note
No. PN-103 (the "Note"), provided the principal amount of this Note relating to
the vested share increments, and all related interest due thereupon, has been
paid to Scangraphics, Inc. (the "Payee").
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Shareholder. These shares will not be forfeited due
to involuntary termination of the Shareholder or in the event the Shareholder is
terminated due to inability to provide services to the Payee for reasons of
health. In the event of death of the Shareholder all restrictions will lapse,
and the then vested shares will accrue to the estate and/or heirs of the
Shareholder. In the event of "change of control" of Scangraphics, Inc., all
restrictions will lapse.
6
<PAGE>
Note No. PN-104
PROMISSORY NOTE
$40,200.00 Dated: December 30, 1996
FOR VALUE RECEIVED, Michael A. Mulshine, (herein after referred to as "Maker"),
promises to pay to the order of Scangraphics, Inc., (hereinafter referred to as
"Payee" or "Company"), the principal amount of Forty Thousand Two Hundred
Dollars ($40,200.00) in such coin or currency of the United States of America as
at the time of payment shall be legal tender for the payment of public and
private debts, at the principal office of the Company, together with interest on
the unpaid principal balance. Interest on this Promissory Note ("Note") will be
calculated at the rate of 8.25% per annum.
This Note was issued to the Payee as payment for the exercise of certain Common
Stock Purchase Warrants and/or Options (the "Wts/Options"). The 30,000 shares of
Common Stock that were issued upon exercise of the Wts/Options are to be held in
"Escrow" by the Payee's law firm, Dilworth Paxson Kalish & Kaufmann, the
"Escrow Agent", and such shares shall not be released to the Maker until or
unless the following conditions have been satisfied:
Vesting Schedule: These Escrowed shares may not be released for trade or
transfer until the earlier of January 1, 2000 or in increments according to the
schedule below, provided that the pro-rata portion of the principal amount of
this Note relating to the vested share increments, and all related interest due
thereupon, has been paid to the Payee:
SHARES (*) RESTRICTIONS - IF- COMPANY ANNUAL - OR - STOCK (**)
VESTING LAPSE ON REVENUES EXCEED PRICE
- -------- -------- --------------- -----
10,000 Jan. 1, 1998 $8.0 M for 1997 $4.00/Sh
10,000 Jan. 1, 1999 $10.0 M for 1998 or $5.00/Sh
$18.0 M Cumulative
for 1997 & 1998
10,000 Jan. 1, 2000 N/A N/A
Note:
(*) Total of 30,OO0 shares from the exercise of Option S0043.
(**) Trades at or over this price for any 30 day period during prior 12
months.
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Maker. These shares will not be forfeited due to
involuntary tennination of Maker or in the event the Maker is terminated due to
inability to provide services to the Payee for reasons of health. In the event
of death of the Maker all restrictions will lapse, and the then vested shares
will accrue to the estate and/or heirs of the Maker. In the event of "change of
control" of the Company, all restrictions will lapse.
Payment of Note and Release of Shares from Escrow: The Maker shall pay the
pro-rata portion of the principal amount of the Note relating to the vested
share increments, and all related interest due thereupon, to the Company within
six months of the vesting of shares as per the Vesting Schedule above. Thus, in
7
<PAGE>
the event all shares vest as per the Vesting Schedule, the Note and related
interest are due in three equal installments of principal of $13,400.00 with
accrued interest, on the following dates:
July 1, 1998
July 1, 1999
July 1, 2000
In addition, in the event the conditions of vesting provided for in the Vesting
Schedule are not met in any given year, but the vesting conditions are
subsequently met in the following year, the shares from the prior year will then
become vested. Further, any and all shares that may not have vested prior to
January 1, 2000, shall become vested as of this date as provided for in the
Vesting Schedule,
Upon receipt of such payments, the Company will then direct the Escrow Agent to
immediately release the vested shares to the Maker, free of any restrictive
legend.
Vesting: Grossly exceeding the "Company Annual Revenue" or "Stock Price" targets
as of any of the annual target measurement dates, as detailed in the above
Vesting Schedule will not cause an acceleration of the vesting of these shares.
The market price of the Company's shares shall not be a cause for default of
payment of this Note by the Maker.
All payments shall be made to Payee at address below or at such other place as
the Payee may from time to time designate. Any payments on account of principal
and interest shall be applied first to interest as aforesaid and the remainder
thereof shall be applied to principal.
Maker shall have the privilege of paying the principal in whole or in part at
any time, and such payments may be made without penalty or premium; provided,
however, that each payment shall be accompanied by any accrued interest then
due.
Presentment for payment or acceptance, and notice of dishonor of payment or
acceptance, notice of protest and notice of any renewal, extension, modification
or change of time, manner, place or terms of payment, are hereby waived by Maker
or any endorsers, sureties and guarantors hereof.
Any failure or delay of Payee to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any other time or times. The waiver by Payee of a breach or default of any
provisions of this Note shall not operate or be construed as a waiver of any
subsequent breach or default thereof. Maker agrees to reimburse Payee for all
costs and expenses, including reasonable attorneys' fees, incurred by Payee to
enforce the provisions hereof and collect Maker's obligations hereunder.
This Note shall be construed according to, and shall be governed by the laws of
the Commonwealth of Pennsylvania. The provisions of this Note shall be deemed
severable, so that if any provisions hereof is declared invalid under the laws
of any state where it is in effect, or of the United States, all other
provisions of this Note shall continue in full force and effect.
This Note shall be binding upon the successors and assigns of the Maker, and
shall inure to the benefit of and be enforceable by the heirs, personal
representatives, successors and assigns of Payee or any other Payee thereof.
8
<PAGE>
Notices: Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, telegraphed or sent by
certified, registered, or express mail, postage prepaid, and shall be deemed
given when so delivered personally, telegraphed or, if mailed, five days after
the date of deposit in the United States mails, as follows:
(i) if to the Maker, to: Michael A. Mulshine
868 Riverview Drive
Brielle, NJ 08730
(ii) if to the Holder, to: Scangraphics, Inc.
700 Abbott Drive
Broomall, PA 19008
Governing Law: This Note shall be governed in accordance with the internal laws
of the Commonwealth of Pennsylvania, without giving effect to conflict of laws
principles.
Successors and Assigns: All the covenants, stipulations, promises and agreements
in this Note contained by or on behalf of the Maker shall bind its successors
and assigns, whether or not so expressed.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed in its name and
to be dated as of the date first above written.
ATTEST: MAKER:
/s/ Carol J. Mulshine /s/ Michael A. Mulshine
---------------------- ------------------------
Michael A. Mulshine
9
<PAGE>
The following LEGEND shall be affixed to the appropriate Stock Certificate
representing the shares of Common Stock covered by this Note:
- -------------------------------------------------------------------------------
LEGEND:
These shares shall be held in Escrow by the Company's Escrow Agent and not be
released for trade or transfer until the earlier of January 1, 2000 or in
increments according to the Vesting Schedule that is detailed in Promissory Note
No. PN-104 (the "Note"), provided the principal amount of this Note relating to
the vested share increments, and all related interest due thereupon, has been
paid to Scangraphics, Inc. (the "Payee").
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Shareholder. These shares will not be forfeited due
to involuntary termination of the Shareholder or in the event the Shareholder is
terminated due to inability to provide services to the Payee for reasons of
health. In the event of death of the Shareholder all restrictions will lapse,
and the then vested shares will accrue to the estate and/or heirs of the
Shareholder. In the event of "change of control" of Scangraphics, Inc., all
restrictions will lapse.
10
<PAGE>
Note No. PN-105
PROMISSORY NOTE
$17,500.00 Dated: December 30, 1996
FOR VALUE RECEIVED, Osprey Brothers, (herein after referred to as "Maker"),
promises to pay to the order of Scangraphics, Inc., (hereinafter referred to as
"Payee" or "Company"), the principal amount of Seventeen Thousand Five Hundred
Dollars ($17,500.00) in such coin or currency of the United States of America as
at the time of payment shall be legal tender for the payment of public and
private debts, at the principal office of the Company, together with interest on
the unpaid principal balance. Interest on this Promissory Note ("Note") will be
calculated at the rate of 8.25 per annum.
This Note was issued to the Payee as payment for the exercise of certain Common
Stock Purchase Warrants and/or Options (the "Wts/Options"). The 10,000 shares of
Common Stock that were issued upon exercise of the Wts/Options are to be held in
"Escrow" by the Payee's law firm, Dilworth Paxson Kalish & Kaufmann, the "Escrow
Agent", and such shares shall not be released to the Maker until or unless the
following conditions have been satisfied:
Vesting Schedule: These Escrowed shares may not be released for trade or
transfer until the earlier of January 1, 2000 or in increments according to the
schedule below, provided that the pro-rata portion of the principal amount of
this Note relating to the vested share increments, and a related interest due
thereupon, has been paid to the Payee:
SHARES (*) RESTRICTIONS - IF - COMPANY ANNUAL - OR - STOCK (**)
VESTING LAPSE ON REVENUES EXCEED PRICE
- ------- -------- --------------- -----
3,333 Jan. 1, 1998 $8.0 M for 1997 $4.00/Sh
3,333 Jan. 1, 1999 $10.0 M for 1998 or $5.00/Sh
$18.0 M Cumulative
for 1997 & 1998
3,334 Jan. 1, 2000 N/A N/A
Note:
(*) Total of 10,000 shares from the exercise of Warrant WC0049.
(**) Trades at or over this price for any 30 day period during prior 12
months.
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Maker. These shares will not be forfeited due to
involuntary termination of Maker or in the event the Maker is terminated due to
inability to provide services to the Payee for reasons of health. In the event
of death of the Maker all restrictions will lapse, and the then vested shares
will accrue to the estate and/or heirs of the Maker. In the event of "change of
control" of the Company, all restrictions will lapse.
Payment of Note and Release of Shares from Escrow: The Maker shall pay the
pro-rata portion of the principal amount of the Note relating to the vested
share increments, and all related interest due thereupon, to the Company within
six months of the vesting of shares as per the Vesting Schedule above. Thus, in
11
<PAGE>
the event all shares vest as per the Vesting Schedule, the Note and related
interest are due in three equal installments of principal of $5,833.33 with
accrued interest, on the following dates:
July 1, 1998
July 1, 1999
July 1, 2000
In addition, in the event the conditions of vesting provided for in the Vesting
Schedule are not met in any given year, but the vesting conditions are
subsequently met in the following year, the shares from the prior year will then
become vested. Further, any and all shares that may not have vested prior to
January 1, 2000, shall become vested as of this date as provided for in the
Vesting Schedule.
Upon receipt of such payments, the Company will then direct the Escrow Agent to
immediately release the vested shares to the Maker, free of any restrictive
legend.
Vesting: Grossly exceeding the "Company Annual Revenue" or "Stock Price" targets
as of any of the annual target measurement dates, as detailed in the above
Vesting Schedule, will not cause an acceleration of the vesting of these shares.
The market price of the Company's shares shall not be a cause for default of
payment of this Note by the Maker.
All payments shall be made to Payee at address below or at such other place as
the Payee may from time to time designate. Any payments on account of principal
and interest shall be applied first to interest as aforesaid and the remainder
thereof shall be applied to principal.
Maker shall have the privilege of paying the principal in whole or in part at
any time, and such payments may be made without penalty or premium; provided,
however, that each payment shall be accompanied by any accrued interest then
due.
Presentment for payment or acceptance, and notice of dishonor of payment or
acceptance, notice of protest and notice of any renewal, extension, modification
or change of time, manner, place or terms of payment, are hereby waived by Maker
or any endorsers, sureties and guarantors hereof.
Any failure or delay of Payee to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any other time or times. The waiver by Payee of a breach or default of any
provisions of this Note shall not operate or be construed as a waiver of any
subsequent breach or default thereof. Maker agrees to reimburse Payee for all
costs and expenses, including reasonable attorneys' fees, incurred by Payee to
enforce the provisions hereof and collect Maker's obligations hereunder.
This Note shall be construed according to, and shall be governed by the laws of
the Commonwealth of Pennsylvania. The provisions of this Note shall be deemed
severable, so that if any provisions hereof is declared invalid under the laws
of any state where it is in effect, or of the United States, all other
provisions of this Note shall continue in full force and effect.
This Note shall be binding upon the successors and assigns of the Maker, and
shall inure to the benefit of and be enforceable by the heirs, personal
representatives, successors and assigns of Payee or any other Payee thereof.
12
<PAGE>
Notices: Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, telegraphed or sent by
certified, registered, or express mail, postage prepaid, and shall be deemed
given when so delivered personally, telegraphed or, if mailed, five days after
the date of deposit in the United States mails, as follows:
(i) if to the Maker, to: Osprey Partners
2517 Route 35, Suite D-201
Manasquan, NJ 08736
(ii) if to the Holder, to: Scangraphics, Inc.
700 Abbott Drive
Broomall, PA 19008
Governing Law: This Note shall be governed in accordance with the internal laws
of the Commonwealth of Pennsylvania, without giving effect to conflict of laws
principles.
Successors and Assigns: All the covenants, stipulations, promises and agreements
in this Note contained by or on behalf of the Maker shall bind its successors
and assigns, whether or not so expressed.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed in its name and
to be dated as of the date first above written.
ATTEST: MAKER:
/s/ Carol A. Mulshine By: /s/ Michael A. Mulshine
---------------------- ------------------------------
Michael A. Mulshine, Principal
Osprey Partners
13
<PAGE>
The following LEGEND shall be affixed to the appropriate Stock Certificate
representing the shares of Common Stock covered by this Note:
- -------------------------------------------------------------------------------
LEGEND:
These shares shall be held in Escrow by the Company's Escrow Agent and not be
released for trade or transfer until the earlier of January 1, 2000 or in
increments according to the Vesting Schedule that is detailed in Promissory Note
No. PN-105 (the "Note"), provided the principal amount of this Note relating to
the vested share increments, and all related interest due thereupon, has been
paid to Scangraphics, Inc. (the "Payee").
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Shareholder. These shares will not be forfeited due
to involuntary termination of the Shareholder or in the event the Shareholder is
terminated due to inability to provide services to the Payee for reasons of
health. In the event of death of the Shareholder all restrictions will lapse,
and the then vested shares will accrue to the estate and/or heirs of the
Shareholder. In the event of "change of control" of Scangraphics, Inc., all
restrictions will lapse.
14
<PAGE>
Exhibit 12.0
RELEASE AGREEMENT
RELEASE made as of the ___ day of October, 1998 by Scangraphics, Inc., a
Pennsylvania corporation (COMPANY) and James C. Sargent (hereinafter
individually and collectively referred to as RELEASEE).
WHEREAS, during December 1996, RELEASEE signed one promissory note numbered
PN-108 (DEBT) payable to the COMPANY, copy of which is attached;
WHEREAS, the COMPANY'S Board of Directors has determined that it would be
appropriate, all things considered, to provide RELEASEE with a plan to cancel
the DEBT and accrued interest in return for cancellation of the underlying
shares and issuance of new options and/or warrants at an exercise price of $2.00
in a number equal to 10% of the shares associated with the aforementioned DEBT;
WHEREAS, COMPANY and RELEASEE, have now completed satisfactory negotiations to
terminate the DEBT for valuable consideration as outlined above, the receipt and
sufficiency of which is hereby acknowledged, and expressly intending to be
legally bound hereby, COMPANY and RELEASEE hereby agree as follows:
1. COMPANY does hereby remise, release and forever discharge RELEASEE from any
and all claims, demands, actions, debts, loans, judgments, obligations,
damages, and liabilities, of any nature whatsoever, known or unknown,
whether now existing or hereafter arising, whether or not heretofore
asserted, including without limitation claims for contribution or
indemnification, which against RELEASEE, COMPANY ever had, now has, or may
in the future have, in any way or manner arising out of, relating to, or
based upon, in whole or in part, any facts, transactions, occurrences,
representations, acts, or omissions arising out of the above referenced
DEBT.
2. The RELEASEE knowingly, willingly and voluntarily forever irrevocably and
unconditionally releases and discharges the COMPANY, or any of its
officers, directors, shareholders, agents, employees, legal
representatives, predecessors, successors or assigns from any and all
claims, charges, complaints, liabilities, obligations, premises,
agreements, remedies, controversies, damages, costs, expenses (including
attorneys' costs and expenses), right and suits of any nature whatsoever,
known or unknown, accrued or not yet accrued, asserted or unasserted,
whether in law or in equity, made, to be made, or which might have been
made in connection with, arising out of, relating to, or as a consequence
of, the creation or termination of above referenced DEBT. The RELEASEE, by
entering into this Agreement, accepts the benefits herein provided in full
and complete satisfaction of any and all claims against the COMPANY.
Without limiting the foregoing in any manner whatsoever, the RELEASEE
knowingly, willingly and voluntarily forever irrevocably and
unconditionally releases and discharges the COMPANY from any and all
obligations arising under the DEBT herein referenced.
1
<PAGE>
3. THE RELEASEE HEREBY ACKNOWLEDGES THAT HE HAS READ THIS AGREEMENT CONSISTING
OF TWO PAGES; THAT HE HAS HAD A REASONABLE PERIOD OF TIME WITHIN WHICH TO
CONSIDER THIS AGREEMENT AND FULLY UNDERSTANDS, ACKNOWLEGES AND ACCEPTS ALL
OF ITS TERMS OF HIS OWN VOLUNTARY FREE WILL; THAT NO PROMISES OR
REPRESENTATIONS HAVE BEEN MADE OTHER THAN AS EXPRESSLY STATED IN THIS
AGREEMENT; THAT HE HAS BEEN ADVISED TO CONSULT WITH COUNSEL AND/OR OTHER
ADVISORS AND HAS HAD AN ADEQUATE OPPORTUNITY TO DISCUSS THE DOCUMENT WITH
COUNSEL AND/OR OTHER ADVISORS AND HAS DONE SO OR HAS VOLUNTARILY ELECTED
NOT DO SO; AND BY EXECUTING THIS AGREEMENT AND ACCEPTING THE CONSIDERATION
OUTLINED HEREIN FROM THE COMPANY, HE WILL ABIDE BY THE TERMS, AGREEMENTS,
AND PROMISES SET FORTH IN THIS AGREEMENT.
OFFERED: ACCEPTED:
By: /s/ Laurence L. Osterwise By: /s/ James Sargent
------------------------- ------------------------
Date: 10/27/98 Date: 10/22/98
------------------------ -----------------------
<PAGE>
Note No: PN-108
PROMISSORY NOTE
$ 36,250.00 Dated: December 30, 1996
FOR VALUE RECEIVED, James C. Sargent, (herein after referred to as "Maker"),
promises to pay to the order of Scangraphics, Inc., (hereinafter referred to as
"Payee" or "Company"), the principal amount of Thirty Six Thousand Two Hundred
Fifty Do11ars ($36,250.00) in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, at the principal office of the Company, together with
interest on the unpaid principal balance. Interest on this Promissory Note
("Note") will be calculated at the rate of 8.25% per annum.
This Note was issued to the Payee as payment for the exercise of certain Common
Stock Purchase Warrants and/or Options (the "Wts/Options"). The 20,000 shares of
Common Stock that were issued upon exercise of the Wts/Options are to be held in
"Escrow" by the Payee's law firm, Dilworth Paxson Kalish & Kaufmann, the "Escrow
Agent", and such shares shall not be released to the Maker until or unless the
following conditions have been satisfied:
Vesting Schedule: These Escrowed shares may not be released for trade or
transfer until the earlier of January 1, 1998 or in increments according to the
schedule below, provided that the pro-rata portion of the principal amount of
this Note relating to the vested share increments, and all related interest due
thereupon, has been paid to the Payee:
SHARES (*) RESTRICTIONS - IF - COMPANY ANNUAL - OR - STOCK (**)
VESTING LAPSE ON REVENUES EXCEED PRICE
- -------- -------- --------------- -----
20,000 Jan. 1, 1998 N/A N/A
Note:
(*) Total of 20,000 shares from the exercise of Option S0050.
(**) Trades at or over this price for any 30 day period during prior 12
months.
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Maker. These shares will not be forfeited due to
involuntary termination of Maker or in the event the Maker is terminated due to
inability to provide services to the Payee for reasons of health. In the event
of death of the Maker all restrictions will lapse, and the then vested shares
will accrue to the estate and/or heirs of the Maker. In the event of "change of
control" of the Company, all restrictions will lapse.
Payment of Note and Release of Shares from Escrow: The Maker shall pay the
pro-rata portion of the principal amount of the Note relating to the vested
share increments, and all related interest due thereupon, to the Company within
three months of the vesting of shares as per the Vesting Schedule above. Thus,
in the event all shares vest as per the Vesting Schedule, the Note and related
interest are due in one installment of principal of $36,250.00, with accrued
interest, on or before April 1, 1998.
3
<PAGE>
In addition, in the event the conditions of vesting provided for in the Vesting
Schedule are not met in any given year, but the vesting conditions are
subsequently met in the following year, the shares from the prior year will then
become vested, Further, any and all shares that may not have vested prior to
January 1, 1998, shall become vested as of this date as provided for in the
Vesting Schedule.
Upon receipt of such payments, the Company will then direct the Escrow Agent to
immediately release the vested shares to the Maker, free of any restrictive
legend.
Vesting: Grossly exceeding the "Company Annual Revenue" or "Stock Price" targets
as of any of the annual target measurement dates, as detailed in the above
Vesting Schedule, will not cause an acceleration of the vesting of these shares.
The market price of the Company's shares shall not be a cause for default of
payment of this Note by the Maker.
All payments shall be made to Payee at address below or at such other place as
the Payee may from time to time designate. Any payments on account of principal
and interest shall be applied first to interest as aforesaid and the remainder
thereof shall be applied to principal.
Maker shall have the privilege of paying the principal in whole or in part at
any time, and such payments may be made without penalty or premium; provided,
however, that each payment shall be accompanied by any accrued interest then
due.
Presentment for payment or acceptance, and notice of dishonor of payment or
acceptance, notice of protest and notice of any renewal, extension, modification
or change of time, manner, place or terms of payment, are hereby waived by Maker
or any endorsers, sureties and guarantors hereof.
Any failure or delay of Payee to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any other time or times. The waiver by Payee of a breach or default of any
provisions of this Note shall not operate or be construed as a waiver of any
subsequent breach or default thereof. Maker agrees to reimburse Payee for all
costs and expenses, including reasonable attorneys' fees, incurred by Payee to
enforce the provisions hereof and collect Maker's obligations hereunder.
This Note shall be construed according to, and shall be governed by the laws of
the Commonwealth of Pennsylvania. The provisions of this Note shall be deemed
severable, so that if any provisions hereof is declared invalid under the laws
of any state where it is in effect, or of the United States, all other
provisions of this Note shall continue in full force and effect.
This Note shall be binding upon the successors and assigns of the Maker, and
shall inure to the benefit of and be enforceable by the heirs, personal
representatives, successors and assigns of Payee or any other Payee thereof.
Notices: Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, telegraphed or sent by
certified, registered, or express mail, postage prepaid, and shall be deemed
given when so delivered personally, telegraphed or, if mailed, five days after
the date of deposit in the United States mails, as follows:
4
<PAGE>
(i) if to the Maker, to: James C. Sargent
c/o Opton Handler Gottlieb Feiler & Katz
52 Vanderbilt, Suite 1017
New York, NY 10017
(ii) if to the Holder, to: Scangraphics, Inc.
700 Abbott Drive
Broomall, PA 19008
Governing Law: This Note shall be governed in accordance with the internal laws
of the Commonwealth of Pennsylvania, without giving effect to conflict of laws
principles.
Successors and Assigns: All the covenants, stipulations, promises and agreements
in this Note contained by or on behalf of the Maker shall bind its successors
and assigns, whether or not so expressed.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed in its name and
to be dated as of the date first above written.
ATTEST: MAKER:
By:
---------------------- -----------------------
James C. Sargent
5
<PAGE>
The following LEGEND shall be affixed to the appropriate Stock Certificate
representing the shares of Common Stock covered by this Note:
- -------------------------------------------------------------------------------
LEGEND:
These shares shall be held in Escrow by the Company's Escrow Agent and not be
released for trade or transfer until the earlier of January 1, 1998 or in
increments according to the Vesting Schedule that is detailed in Promissory Note
No. PN-108 (the "Note"), provided the principal amount of this Note relating to
the vested share increments, and all related interest due thereupon, has been
paid to Scangraphics, Inc. (the "Payee").
These Escrowed shares will be forfeited in the event of voluntary termination of
services to the Payee by the Shareholder. These shares will not be forfeited due
to involuntary termination of the Shareholder or in the event the Shareholder is
terminated due to inability to provide services to the Payee for reasons of
health. In the event of death of the Shareholder all restrictions will lapse,
and the then vested shares will accrue to the estate and/or heirs of the
Shareholder. In the event of "change of control" of Scangraphics, Inc., all
restrictions will lapse.
6
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<PERIOD-START> JUL-01-1998
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