SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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.)
700 ABBOTT DRIVE, BROOMALL, PENNSYLVANIA 19008-4373
(Address of principal executive offices) (Zip Code)
610-328-1040
Registrant's telephone number, including area code
Indicate by the check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
10,745,346 shares of common stock were outstanding as of June 30, 1996
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- - ----------------------------- ----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
June 30, 1996 and December 31, 1995 3 - 4
Consolidated Statements of Operations --
Three months and six months ended
June 30, 1996 and 1995 5 - 6
Consolidated Statements of Cash Flow --
Three months ended
June 30, 1996 and 1995 7
Notes to Financial Statements --
June 30, 1996 8
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9 - 10
PART II. OTHER INFORMATION
Item 1 through Item 6. 11
SIGNATURE PAGE 12
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
JUNE 30, DECEMBER 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,864 $ 189
Accounts receivable, less
allowance for doubtful accounts of
$46 and $46 896 991
Inventories 1,620 1,454
Prepaid expenses and other current
assets 390 66
------ ------
TOTAL CURRENT ASSETS $4,770 $2,700
------ ------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 721 757
OTHER ASSETS:
Software purchased 487 556
Other Non-Current Assets 54 71
------ ------
TOTAL OTHER ASSETS $ 541 $ 627
------ ------
TOTAL ASSETS $6,032 $4,084
------ ------
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 744 $ 959
Loans Payable - related parties -0- 59
Notes Payable - officers -0- 259
Dividend Payable 218 158
Deferred revenue 373 157
Notes Payable 2,600 -
Current maturities, capital lease obligation 87 87
Current maturities of long term debt 55 69
------- -------
TOTAL CURRENT LIABILITIES $ 4,077 $ 1,748
------- -------
LONG-TERM DEBT, less current maturities 182 182
Capital lease obligation, less current maturities 43 43
Deferred Revenue 0 6
------- -------
TOTAL LONG TERM DEBT $ 225 $ 231
------- -------
STOCKHOLDERS' EQUITY
Class A convertible preferred stock authorized
1,000,000 shares, stock
outstanding 500,000 shares
(Series A), par value $2.00 1,000 1,000
stock outstanding 125,000 shares
(Series C), par value $10.00 1,250 1,250
Common stock, par value $0.001 Authorized
50,000,000 shares Outstanding
10,745,346 shares at June 30, 1996 and
10,188,812 shares at December 31, 1995 11 10
Additional paid-in capital 9,464 8,677
Deficit (9,995) (8,832)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 1,730 2,105
------- -------
$ 6,032 $ 4,084
------- -------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
SALES $ 1,160 $ 1,621
LICENSE AND ROYALTY FEES 17 19
------------ ------------
Total revenues $ 1,177 $ 1,640
COST OF GOODS SOLD 533 760
GROSS PROFIT 644 880
------------ ------------
EXPENSES:
Research and development* 270 150
Sales and marketing 412 449
General and administrative* 351 260
Total operating expenses 1,033 859
------------ ------------
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (389) 21
OTHER INCOME 15 1
Other Expense* (266) (1)
Total other income (expense) (251) --
NET INCOME (LOSS) BEFORE INCOME TAX (640) 21
INCOME TAX -- --
NET INCOME (LOSS) (640) 21
PREFERRED DIVIDENDS (30) (30)
BALANCE APPLICABLE TO COMMON STOCK (670) (9)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.06) (.00)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 10,745,346 9,748,812
</TABLE>
See accompanying notes to financial statements.
*See Management's Discussion
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
SALES $ 2,388 $ 2,484
LICENSE AND ROYALTY FEES 27 53
------------ ------------
Total revenues $ 2,415 $ 2,537
COST OF GOODS SOLD 1,186 1,419
GROSS PROFIT 1,229 1,118
------------ ------------
EXPENSES:
Research and development* 513 311
Sales and marketing 778 773
General and administrative* 865 267
Total operating expenses 2,156 1,351
------------ ------------
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (927) (232)
OTHER INCOME 16 5
Other Expense* (289) (33)
Total other income (expense) (273) (28)
NET INCOME (LOSS) BEFORE INCOME TAX (1,200) (260)
INCOME TAX -- --
NET INCOME (LOSS) (1,200) (260)
PREFERRED DIVIDENDS (60) (30)
BALANCE APPLICABLE TO COMMON STOCK (1,260) (290)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.12) (.03)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 10,745,346 9,748,812
See accompanying notes to financial statements.
*See Management's Discussion
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands except share and per share data)
SIX MONTHS SIX MONTHS
1996 1995
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income(Loss) $(1,200) $ (260)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 290 259
(Increase) decrease in notes and
accounts receivable 95 (54)
(Increase) decrease in inventories (166) (15)
(Increase) decrease in other current assets (324) (12)
(Increase) decrease in other assets 17 25
Increase (decrease) in accrued bonuses -- (400)
Increase (decrease) in accounts payable
and accrued expenses (215) 228
Increase(decrease)in deferred revenue 216 50
Total adjustments (87) 91
Net cash provided (used) by operating
activities (1,287) (169)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (95) (15)
Capitalized trademarks & patents (14) --
Net Cash (used) in investing activities (109) (15)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt -- --
Payment of notes payable - officers (259) (60)
Proceeds from notes payable - officers -- 332
Proceeds from loans payable - officers -- (15)
Payment of loans payable - officers (59) (40)
Payment of capital lease obligations -- (51)
Proceeds from issuance of notes payable 3,100 --
Proceeds from exercise of common stock
warrants/options 289 --
Net cash provided (used) by financing activities 3,071 196
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 1,675 12
CASH AND CASH EQUIVALENTS,
at beginning of year 189 226
CASH AND CASH EQUIVALENTS,
at June 30 1,864 238
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
(In Thousands except share and per share data)
Note #1
In the opinion of management all adjustments are of a normal recurring nature
and have been made to present fairly its financial position at June 30, 1996 and
the results of operations for the periods indicated. The operating results of
operations for the periods are not necessarily indicative of results to be
expected.
Note #2 Inventories:
Inventories at June 30, 1996 and December 31, 1995 consists of
the following:
June 30, December 31,
1996 1995
---- ----
Raw materials $ 491 $ 625
Work-in-process 680 353
Finished products 449 476
------ ------
$1,620 $1,454
------ ------
Note #3 Property and Equipment:
Property and equipment consists of:
June 30, December 31,
1996 1995
---- ----
Equipment under capital lease $ 269 $ 269
Machinery & Equipment 2,224 2,267
Furniture & Fixtures 103 97
Autos & Trucks 46 46
Leasehold Improvements 76 76
Software 217 198
------ ------
$2,935 $2,953
Less accumulated
depreciation and amortization 2,214 2,196
----- -----
Net Fixed Assets $ 721 $ 757
------ -----
Note #4 Other Assets:
Software Purchased $ 695 $ 695
Less accumulated amortization 208 139
----- ------
$ 487 $ 556
Note #5 Commitments and Contingencies
The Company will be obligated to pay one to two 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 June 30, 1996 is $390.
Note #6 Supplemental Disclosures of Cash Flow Information
June 30, June 30,
1996 1995
---- ----
Cash paid during year for
interest $ 31 $ 2
---- ----
Declaration of preferred
stock cash dividend $ 60 $ 60
---- ----
Issuance of preferred stock in
lieu of dividends payable $-0- $200
Preferred Subscriptions Receivable $-0- $ 5
Conversion of Notes Payble to
Common Stock $500 $-0-
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (In Thousands except share and per share data)
At June 30, 1996, cash and cash equivalents increased to $1,864, a $1,675
increase compared to the December 31, 1995 amount of $189. The above change in
cash and cash equivalents are explained as follows in the cash flow from
operating, investing and financing activities.
As of June 30, 1996, the cash flows from operating activities resulted in a net
use of cash of $1,287. This use of cash was primarily due to the Company's added
significant increases in expenditures for research and development and general
and administrative expenses relating to the Company's Sedona GeoServices, Inc.
and Tangent Engineering, Inc. divisions.
As of June 30, 1996, the cash flows from investing activities resulted in a net
use of cash of $109. The use of cash was due mainly to purchases of equipment
for its newly formed Sedona GeoServices Division.
As of June 30, 1996, the cash flows from financing activities resulted in net
cash provided by financing activities of $3,071. The increase in cash provided
was due to the exercise of common stock options and warrants and a private
placement of securities.
In connection with a $3,100 private placement of its securities in March 1996,
the Company offered for sale 62 units, each of which consisted of a $50, 8%
convertible note due March 28, 1997, 19,355 "A" warrants and 19,355 "B"
warrants. The notes and any accrued interest are convertible within one (1) year
at a price per share equal to the lesser of $3.00 or 65% of the average closing
bid price for the five days preceding conversion.
The warrants are exercisable immediately and expire in March 1999. The "A"
warrants are exercisable at $3.00 per share or, if less, the lowest price per
share at which any conversion shall have occurred under any of the convertible
notes. The "B" warrants are exercisable at $4.00 per share. The proceeds will be
used for working capital purposes and for the most part to fund the requirements
of its subsidiary, Sedona GeoServices, Inc.
The Company believes that proceeds from the private placement and funds
generated form operations will be sufficient to meet the Company's working
capital requirements for 1996.
Results of Operation (In Thousands except share and per share data)
Net Revenue for the three months ended June 30, 1996 decreased to $1,177 a 28.4%
decrease compared to the three months ended June 30, 1995, amount of $1,640.
Revenue in excess of 10% of revenue to one customer accounted for approximately
21.9% of net revenue for the three months ended June 30, 1996, compared to
revenue in excess of 10% of revenue to one customer which accounted for
approximately 16.1% of net revenue for the three months ended June 30, 1995.
Net Revenue for the six months ended June 30, 1996 decreased to $2,415, a 4.8%
decrease compared to six months ended June 30, 1995 amount of $2,537. Revenue in
excess of 10% of revenue to one customer accounted for approximately 10.7% of
net revenue for the six months ended June 30, 1996, compared to revenue in
excess of 10% of revenue to one customer which accounted for approximately
11.82% of net revenue for the six months ended June 30, 1995.
<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)
Gross Margin percentages for the three months ended June 30, 1996 and 1995 were
54.7% and 53.6% of revenue, respectively.
Gross Margin percentages for the six months ended June 30, 1996 and 1995 were
50.9% and 44.1% of revenue, respectively.
Research and development expense as a percentage of revenue increased to 22.9%
of revenue for the three months ended June 30, 1996 compared to 9.1% of revenue
at June 30, 1995. Research and development expenses as a percentage of revenue
increased to 21.2% of revenue for the six months ended June 30, 1996 compared to
12.3% of revenue at June 30, 1995. These increases over the respective periods
are attributable in the most part to start-up of the Company's newly formed
Sedona GeoServices Division. The Company continues to invest its resources in
the development of software imaging products and the continuing development of
new hardware products. On an actual expense comparison research and development
expenses increased for the six months ended June 30, 1996, compared to June 30,
1995 by $203.
Sales and marketing expense as a percentage of revenue increased to 35.0% of
revenue for the three months ended June 30, 1996 compared to 27.4% at June 30,
1995. This increase was due to lower revenue. Sales and marketing expense as a
percentage of revenue increased to 32.2% of revenue for the six months ended
June 30, 1996 compared to 30.5% at June 30, 1995. These increases over the
respective periods are attributable in the most part to start-up of the
Company's newly formed Sedona GeoServices Division. On an actual expense
comparison, sales and marketing expenses increased for the six months ended June
30, 1996 compared to June 30, 1995 by $5.
General and administrative expense for the second quarter 1996 was 29.8% of
revenue compared to 15.9% at June 30, 1995. General and administrative expense
for the six months ended June 30, 1996 was 35.8% of revenue compared to 10.5% at
June 30, 1995. These increases over the respective periods are attributable in
the most part to start-up of the Company's newly formed Sedona GeoServices
Division. The low percentage of revenue at June 30, 1995 was due to a reversal
of an accounts receivable reserve of $238 in March 1995 which was collected.
Inflation
There can be no assurance that the Company's business will not be affected by
inflation in the future, however, management believes the inflation did not have
a material effect on the results of operations or financial condition of the
Company during the period presented herein.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities - None
Item 3 - Default Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of
Security Holders - None
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8K
A) None
B) None
Exhibit Document
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
None
(4) Instruments defining the rights of security holders.
None
(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.
Proposal No. 1
In Election of Directors to terms expiring in 1997:
FOR WITHHELD
Andrew E. Trolio 10,411,474 2,760
David S. Hirsch 10,410,474 3,760
Michael A. Mulshine 9,910,474 503,760
James C. Sargent 10,410,474 3,760
Robert A. Garber 10,411,474 2,760
R. Barry Borden 10,410,474 3,760
(24) Consents of experts and counsel.
None
(25) Power of attorney.
None
(28) Additional exhibits.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,
Thereunto duly authorized.
SCAN-GRAPHICS, INC.
DATE: August 14, 1996 /S/ Andrew E. Trolio
---------------------- ---------------------
Andrew E. Trolio
President
DATE: August 14, 1996 /S/ Joseph N. Battista
---------------------- -----------------------
Joseph N. Battista
Vice President Finance
(Chief Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,864
<SECURITIES> 0
<RECEIVABLES> 896
<ALLOWANCES> 0
<INVENTORY> 1,620
<CURRENT-ASSETS> 4,770
<PP&E> 2,935
<DEPRECIATION> 2,214
<TOTAL-ASSETS> 6,032
<CURRENT-LIABILITIES> 4,077
<BONDS> 0
0
2,250
<COMMON> 11
<OTHER-SE> (531)
<TOTAL-LIABILITY-AND-EQUITY> 6,032
<SALES> 1,160
<TOTAL-REVENUES> 1,177
<CGS> 533
<TOTAL-COSTS> 1,033
<OTHER-EXPENSES> 251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (640)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,864
<SECURITIES> 0
<RECEIVABLES> 896
<ALLOWANCES> 0
<INVENTORY> 1,620
<CURRENT-ASSETS> 4,770
<PP&E> 2,935
<DEPRECIATION> 2,214
<TOTAL-ASSETS> 6,032
<CURRENT-LIABILITIES> 4,077
<BONDS> 0
0
2,250
<COMMON> 11
<OTHER-SE> (531)
<TOTAL-LIABILITY-AND-EQUITY> 6,032
<SALES> 2,388
<TOTAL-REVENUES> 2,415
<CGS> 1,186
<TOTAL-COSTS> 2,156
<OTHER-EXPENSES> 273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,200)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,200)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
