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 SEPTEMBER 30, 1996
Commission File Number 0-15864
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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
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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
registrants was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
13,449,565 shares of common stock were outstanding as of September 30, 1996
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995 3 - 4
Consolidated Statements of Operations --
Three months and nine months ended
September 30, 1996 and 1995 5 - 6
Consolidated Statements of Cash Flow --
Nine months ended September 30, 1996 and 1995 7
Notes to Financial Statements --
September 30, 1996 8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 10 - 11
PART II. OTHER INFORMATION
Item 1 through Item 6. 12
SIGNATURE PAGE 13
2
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,819 $ 189
Accounts receivable, less
allowance for doubtful accounts of
$35 and $46 931 991
Inventories 1,373 1,454
Prepaid expenses and other current
assets 113 66
------ ------
TOTAL CURRENT ASSETS $4,236 $2,700
------ ------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 1,138 757
OTHER ASSETS:
Software purchased 459 556
Other Non-Current Assets 92 71
------ ------
TOTAL OTHER ASSETS $ 551 $ 627
------ ------
TOTAL ASSETS $5,925 $4,084
------ ------
See accompanying notes to financial statements.
3
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 682 $ 959
Loans Payable - related parties -0- 59
Notes Payable - officers -0- 259
Dividend Payable 313 158
Deferred revenue 291 157
Notes Payable -0- --
Current maturities, capital lease obligation 12 87
Current maturities of long term debt 118 69
-------- -------
TOTAL CURRENT LIABILITIES $ 1,416 $ 1,748
-------- -------
LONG-TERM DEBT, less current maturities 123 182
Capital lease obligation, less current maturities 4 43
Deferred Revenue 35 6
-------- -------
TOTAL LONG TERM DEBT $ 162 $ 231
-------- -------
STOCKHOLDERS' EQUITY
Class A preferred stock
Authorized 1,000,000 shares,
Outstanding 500,000 shares (Series A),
par value $2.00 1,000 1,000
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
13,449,565 shares at September 30, 1996
and 10,188,812 shares at December 31, 1995 13 10
Additional paid-in capital 12,752 8,677
Deficit (10,668) (8,832)
-------- -------
TOTAL STOCKHOLDERS' EQUITY 4,347 2,105
-------- -------
TOTAL LIABILITIES & STOCKHOLDER EQUITY $ 5,925 $ 4,084
-------- -------
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
------ ------
<S> <C> <C>
SALES $1,375 $1,477
LICENSE AND ROYALTY FEES 13 31
------ ------
Total revenues $1,388 $1,508
COST OF GOODS SOLD 784 575
------ ------
GROSS PROFIT 604 933
EXPENSES:
Research and development* 232 111
Sales and marketing* 539 365
General and administrative* 301 390
------ ------
Total operating expenses 1,072 865
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (468) 68
OTHER INCOME 19 --
Other Expense* (40) (32)
Total other income (expense) (21) (32)
NET INCOME (LOSS) BEFORE INCOME TAX (489) 36
INCOME TAX -- --
NET INCOME (LOSS) (489) 36
PREFERRED DIVIDENDS (105) (30)
BALANCE APPLICABLE TO COMMON STOCK (594) 6
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.06) (.00)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 10,775,990 9,883,412
</TABLE>
See accompanying notes to financial statements.
*See Management's Discussion
5
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------ ------
<S> <C> <C>
SALES $3,762 $3,892
LICENSE AND ROYALTY FEES 40 84
------ ------
Total revenues $3,802 $3,976
COST OF GOODS SOLD 1,970 1,988
------ ------
GROSS PROFIT 1,832 1,988
EXPENSES:
Research and development* 744 262
Sales and marketing* 1,317 1,136
General and administrative* 1,166 823
------ ------
Total operating expenses 3,227 2,221
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (1,395) (233)
OTHER INCOME 35 71
Other Expense* (329) (62)
Total other income (expense) (294) 9
NET INCOME (LOSS) BEFORE INCOME TAX (1,689) (224)
INCOME TAX -- --
NET INCOME (LOSS) (1,689) (224)
PREFERRED DIVIDENDS (165) (90)
BALANCE APPLICABLE TO COMMON STOCK (1,854) (314)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.17) (.03)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 10,775,990 9,883,412
</TABLE>
See accompanying notes to financial statements.
*See Management's Discussion
6
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands except share and per share data)
NINE MONTHS NINE MONTHS
1996 1995
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,689) $ (224)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 243 368
(Increase) decrease in notes and
accounts receivable 60 (388)
(Increase) decrease in inventories (56) 27
(Increase) decrease in other current assets (47) (16)
(Increase) decrease in other assets (23) (7)
Increase (decrease) in accrued bonuses -- (400)
Increase (decrease) in accounts payable
and accrued expenses (277) (293)
Increase (decrease) in deferred revenue 163 (39)
Total adjustments 63 (748)
Net cash provided (used) by operating
activities (1,626) (972)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (371) (105)
Capitalized trademarks & patents (4) --
Net Cash (used) in investing activities (375) (105)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (10) (8)
Payment of notes payable - officers (259) --
Payment of loans payable - officers (59) (82)
Payment of capital lease obligations (114) (184)
Proceeds from notes payable - officers -- 190
Proceeds from long term debt -- 84
Proceeds from issuance of notes payable 3,100 --
Proceeds from exercise of common stock
warrants/options 1,334 224
Proceeds from issuance of preferred stock -- 1,049
Payment of expenses, stock, issuance (361) (79)
Net cash provided (used) by financing activities 3,631 1,194
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 1,630 117
CASH AND CASH EQUIVALENTS,
at beginning of year 189 226
CASH AND CASH EQUIVALENTS,
at September 30 1,819 343
See accompanying notes to financial statements.
7
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 September 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 September 30, 1996 and December 31, 1995
consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials $ 539 $ 625
Work-in-process 505 353
Finished products 329 476
------ ------
$1,373 $1,454
------ ------
Note #3 Property and Equipment:
Property and equipment consists of:
September 30, December 31,
1996 1995
------------- ------------
Equipment under capital lease $ 269 $ 269
Machinery & Equipment 2,682 2,267
Furniture & Fixtures 151 97
Autos & Trucks 46 46
Leasehold Improvements 80 76
Software 231 198
------ ------
$3,459 $2,953
Less accumulated
depreciation and amortization 2,321 2,196
------ ------
Net Fixed Assets $1,138 $ 757
------ ------
Note #4 Other Assets:
Software Purchased $ 703 $ 695
Less accumulated amortization 243 139
------ ------
$ 459 $ 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 September 30, 1996 is $460.
Note #6 Long-Term Debt:
Long-term debt consists of the following:
September 30, December 31,
1996 1995
------------- ------------
Note Payable, payable in monthly
installments including interest
at 8.75% through July 1999. This
note payable is non-recourse to
the Company, is based upon the
credit standing of a customer of
the Company and is further
collateralized by the equipment. $ 183 $ 225
Other -- 26
------ ------
Total $ 183 $ 251
Less current maturities 60 69
------ ------
Long-term debt 123 182
</TABLE>
8
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(In Thousands except share and per share data)
Note #7 Stockholders' Equity
During the third quarter 1996, one officer, employees, and others
exercised common stock options and warrants resulting in 245,360 shares
of common stock issued.
During the third quarter 1996, the $2,600 balance of convertible notes
issued in connection with a $3,100 private placement in March 1996 was
converted into 1,929,973 common shares. Six former note holders also
exercised "A" warrants associated with the private placement, resulting
in 506,068 additional common shares issued.
During the third quarter 1996, 115,000 common stock options and 106,000
common stock warrants were issued to officers and employees of the
Company.
Note #8 Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash paid during year for
interest $ 131 $ 30
------ ------
Declaration of preferred
stock cash dividend $ 165 $ 90
------ ------
Issuance of preferred stock in
lieu of dividends payable $ -0- $ 200
Preferred Subscriptions Receivable $3,100 $ -0-
Conversion of Notes Payable to
Common Stock $ 500 $ -0-
</TABLE>
During the third quarter, the Company transferred inventory with a cost
of $136 to equipment in fixed assets.
9
<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 September 30, 1996, cash and cash equivalents increased to $1,819, a $1,630
increase compared to the December 31, 1995 amount of $189. The above change in
cash and cash equivalents is explained as follows in the cash flow from
operating, investing and financing activities.
As of September 30, 1996, the cash flows from operating activities resulted in a
net use of cash of $1,626. This use of cash was primarily due to the Company's
added significant increases in expenditures for software research and
development and general and administrative expenses relating to the Company's
Sedona GeoServices, Inc. and Tangent Engineering, Inc. subsidiaries.
As of September 30, 1996, the cash flows from investing activities resulted in a
net use of cash of $375. The use of cash was due mainly to purchases of
computers and equipment for its newly formed Sedona GeoServices subsidiary.
As of September 30, 1996, the cash flows from financing activities resulted in
net cash provided by financing activities of $3,631. 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 were 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. All notes were
converted into common stock as of September 30, 1996.
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. As of September 30,
506,068 of the "A" warrants associated with the private placement have been
exercised, increasing cash flow by $702. 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 related
warrants 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 September 30, 1996 decreased to $1,388, a
8.0% decrease compared to the three months ended September 30, 1995, amount of
$1,508. Revenue in excess of 10% of revenue from one customer accounted for
approximately 20.0% of net revenue for the three months ended September 30,
1996, compared to revenue in excess of 10% of revenue from each of two customers
which accounted for approximately 28.2% of net revenue for the three months
ended September 30, 1995.
Net Revenue for the nine months ended September 30, 1996 decreased to $3,802, a
4.4% decrease compared to nine months ended September 30, 1995 amount of $3,976.
Revenue in excess of 10% of revenue from one customer accounted for
approximately 14.9% of net revenue for the nine months ended September 30, 1996,
compared to revenue in excess of 10% of revenue from one customer which
accounted for approximately 11.3% of net revenue for the nine months ended
September 30, 1995.
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)
Gross Margin percentages for the three months ended September 30, 1996 and 1995
were 43.5% and 61.9% of revenue, respectively. Costs of sales for the three
months ended September 30, 1996 increased due to inventory written down for a
discontinued product line.
Gross Margin percentages for the nine months ended September 30, 1996 and 1995
were 48.2% and 50.0% of revenue, respectively.
Research and development expense as a percentage of revenue increased to 16.7%
of revenue for the three months ended September 30, 1996 compared to 7.4% of
revenue at September 30, 1995. Research and development expenses as a percentage
of revenue increased to 19.6% of revenue for the nine months ended September 30,
1996 compared to 6.9% of revenue at September 30, 1995. These increases over the
respective periods are attributable to the continued staffing and research
efforts of the Company's newly formed Sedona GeoServices subsidiary. The Company
is investing 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 nine months
ended September 30, 1996, compared to September 30, 1995 by $482.
Sales and marketing expense as a percentage of revenue increased to 38.8% of
revenue for the three months ended September 30, 1996 compared to 24.2% at
September 30, 1995. This increase is due to intensified marketing efforts in
establishing the product lines of all subsidiaries in both the government and
commercial sectors. Sales and marketing expense as a percentage of revenue
increased to 34.6% of revenue for the nine months ended September 30, 1996
compared to 28.6% at September 30, 1995. On an actual expense comparison, sales
and marketing expenses increased for the nine months ended September 30, 1996
compared to September 30, 1995 by $181.
General and administrative expense for the third quarter 1996 was 21.7% of
revenue compared to 25.9% at September 30, 1995. General and administrative
expense for the nine months ended September 30, 1996 was 30.7% of revenue
compared to 20.7% at September 30, 1995. The increase over the respective year
to date periods is attributable in the most part to the development of the
Company's newly formed Sedona GeoServices subsidiary offset by a reversal of an
accounts receivable reserve of $238 in March 1995 which was subsequently
collected. On an actual expense comparison, general and administrative expenses
increased for the nine months ended September 30, 1996 compared to September 30,
1995 by $343.
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.
11
<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.
None
(24) Consents of experts and counsel.
None
(25) Power of attorney.
None
(28) Additional exhibits.
None
12
<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 13, 1996 /s/ Andrew E. Trolio
----------------- -------------------------------
Andrew E. Trolio
President
DATE: November 13, 1996 /s/ Denis P. Kelly
----------------- -------------------------------
Denis P. Kelly
Director, Corporate Finance
(Chief Accounting Officer)
13
<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> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,819
<SECURITIES> 0
<RECEIVABLES> 931
<ALLOWANCES> 0
<INVENTORY> 1,373
<CURRENT-ASSETS> 4,236
<PP&E> 3,459
<DEPRECIATION> 2,321
<TOTAL-ASSETS> 5,925
<CURRENT-LIABILITIES> 1,416
<BONDS> 0
0
2,250
<COMMON> 13
<OTHER-SE> 2,084
<TOTAL-LIABILITY-AND-EQUITY> 5,925
<SALES> 1,375
<TOTAL-REVENUES> 1,388
<CGS> 784
<TOTAL-COSTS> 1,072
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (489)
<INCOME-TAX> 0
<INCOME-CONTINUING> (489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,819
<SECURITIES> 0
<RECEIVABLES> 931
<ALLOWANCES> 0
<INVENTORY> 1,373
<CURRENT-ASSETS> 4,236
<PP&E> 3,459
<DEPRECIATION> 2,321
<TOTAL-ASSETS> 5,925
<CURRENT-LIABILITIES> 1,416
<BONDS> 0
0
2,250
<COMMON> 13
<OTHER-SE> 2,084
<TOTAL-LIABILITY-AND-EQUITY> 5,925
<SALES> 3,762
<TOTAL-REVENUES> 3,802
<CGS> 1,970
<TOTAL-COSTS> 3,227
<OTHER-EXPENSES> 294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,689)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,689)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,689)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
