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, 1995
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
8,748,812 shares of common stock were outstanding as of June 30, 1995
<PAGE>
SCAN-GRAPHICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Balance Sheets --
June 30, 1995 and December 31, 1994 3 - 4
Statements of Operations --
Three months ended
June 30, 1995 and 1994 5
Statements of Operations --
Six months ended
June 30, 1995 and 1994 6
Statements of Cash Flow --
Three months ended
June 30, 1995 and 1994 7
Notes to Financial Statements --
June 30, 1995 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 11 - 12
PART II. OTHER INFORMATION
Item 1 through Item 6. 13
SIGNATURE PAGE 14
<PAGE>
SCAN-GRAPHICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,058 $ 34,108
Accounts receivable, less
allowance for doubtful accounts of
$29,604 and $269,912 620,385 669,717
Notes Receivable - -
Sales-type lease receivable 22,389 24,635
Inventories (Note 2) 670,289 664,800
Prepaid expenses and other current
assets 17,552 23,692
--------- ---------
TOTAL CURRENT ASSETS $1,355,673 $1,416,952
--------- ----------
PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization
(Notes 3, and 5) 247,431 330,773
OTHER ASSETS (Note 4):
Product acquisition costs, less
accumulated amortization 59,545 99,545
Software production costs, less
accumulated amortization - -
Software purchased 695,148 695,148
Trademarks and patents, less
accumulated amortization 44,245 52,787
Sales-type lease receivable - 8,772
Prepaid expenses - -
Other 6,050 6,050
--------- ---------
TOTAL OTHER ASSETS $ 804,988 $ 862,302
--------- ----------
TOTAL ASSETS $2,408,092 $2,610,027
--------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 696,872 $ 558,042
Loans Payable - related parties 147,000 172,127
Accrued payroll 108,546 81,487
Accrued commissions 15,030 25,447
Advance billings/unearned revenue 103,322 104,598
Billing is excess of cost and estimated
earning on long-term contract 60,500 60,500
Income taxes payable 13,313 13,313
Current maturities of long
term debt (Note 5) 6,419 10,306
--------- ---------
TOTAL CURRENT LIABILITIES $1,151,002 $1,025,820
--------- ---------
LONG-TERM DEBT, less current
maturities (Note 5) -- 1,798
--------- ---------
LONG TERM LIABILITIES:
Dividend Payable 59,749 199,750
COMMITMENTS AND CONTINGENCIES
(Note 7)
STOCKHOLDERS' EQUITY
Class A convertible preferred
stock Series A par value
$2.00 Authorized 1,000,000 shares
Outstanding 500,000 shares and 500,000
shares respectively, at June 30, 1995
and December 31, 1994 1,000,000 1,000,000
Class A convertible preferred
stock Series C par value
$10.00 Outstanding 2,500 shares and -0-
shares respectively, at June 30, 1995
December 31, 1994 25,000 --
Common stock, par value $0.001 Authorized
50,000,000 shares Outstanding
8,748,812 shares at June 30, 1995
and 8,718,812 shares at December 31, 1994 8,749 8,718
Additional paid-in capital 8,536,269 8,303,237
Deficit (8,372,677) (7,929,296)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,197,310 1,382,659
--------- ---------
$2,408,092 $2,610,027
--------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1995 1994
----------- -----------
<S> <C> <C>
SALES $ 397,972 $ 556,752
LICENSE AND ROYALTY FEES 18,947 99,060
----------- -----------
Total revenues $ 416,919 $ 655,812
COST OF GOODS SOLD (Note 2) 427,479 244,088
GROSS PROFIT (10,559) 411,724
----------- -----------
EXPENSES:
Research and development 65,114 87,224
Sales and marketing 195,604 202,627
General and administrative 152,897 154,171
Total operating expenses 413,615 444,022
----------- -----------
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (424,174) (32,298)
OTHER INCOME 636 1,213
Other Expense 10,277 (21,143)
Total other income (expense) 10,913 (19,930)
NET INCOME(LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY ITEM (413,261) (52,229)
INCOME TAX -- --
NET INCOME BEFORE EXTRAORDINARY ITEM (413,261) (52,229)
Extraordinary Credit - Tax reduction
attributable to utilization of net
operating loss carryover -- --
NET INCOME (413,261) (52,229)
PREFERRED DIVIDENDS (30,000) (30,000)
BALANCE APPLICABLE TO COMMON STOCK (443,261) (82,229)
EARNINGS(LOSS) PER SHARE OF COMMON STOCK:
Primary (.05) (.01)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 8,748,812 8,718,812
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
----------- -----------
1995 1994
----------- -----------
SALES $ 937,069 $ 1,533,231
LICENSE AND ROYALTY FEES 52,696 241,061
----------- -----------
Total revenues $ 989,765 $ 1,774,292
COST OF GOODS SOLD (Note 2) 814,898 778,345
GROSS PROFIT 174,867 995,947
----------- -----------
EXPENSES:
Research and development 137,421 158,919
Sales and marketing 379,869 406,519
General and administrative 25,784 326,065
Total operating expenses 543,074 891,503
----------- -----------
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (368,207) 104,444
OTHER INCOME 1,423 2,673
Other Expense (16,596) (36,539)
Total other income (expense) (15,173) (33,866)
NET INCOME(LOSS) BEFORE INCOME TAX
AND EXTRAORDINARY ITEM (383,380) 70,578
INCOME TAX -- 21,173
NET INCOME BEFORE EXTRAORDINARY ITEM (383,380) 49,405
Extraordinary Credit - Tax reduction
attributable to utilization of net
operating loss carryover -- 21,173
NET INCOME (383,380) 70,578
PREFERRED DIVIDENDS (60,000) (60,000)
BALANCE APPLICABLE TO COMMON STOCK (443,380) 10,578
EARNINGS(LOSS) PER SHARE OF COMMON STOCK:
Primary (.05) .00
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 8,748,812 8,718,812
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC.
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income(Loss) (383,380) 70,578
Adjustments to reconcile net income (loss)
to net cash (used) in operating
activities:
Depreciation and amortization 140,371 156,795
Consulting Fees -- --
Decrease in notes receivable -- 25,000
(Increase) decrease in notes and
accounts receivable 54,332 (536,412)
(Increase) decrease in inventories (5,489) 45,269
(Increase) decrease in other current assets 6,140 9,763
(Increase) decrease in other assets -- --
(Increase) decrease in sales-type receivables 11,018 6,452
Increase(decrease) in accounts payable
and accrued expenses 155,472 312,900
Increase(decrease) loan payable related party (25,127) (20,460)
Increase(decrease) in advanced billings (1,276) (87,002)
Increase(decrease) in income tax payables -- --
Total adjustments 335,441 (87,695)
Net cash provided(used) by operating
activities (47,939) (17,117)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,488) (446)
Capitalized trademarks & patents -- (7,210)
Net Cash (used) in investing activities (8,488) (7,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (5,685) (4,922)
Payment of preferred dividends -- --
Payment of expired - common stock issue (6,000) --
Proceeds from issuance of preferred stock 45,000 --
Proceeds from exercise of common stock options 14,062 --
Net cash (used) by financing activities 47,377 (4,922)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (9,050) (29,695)
CASH AND CASH EQUIVALENTS,
at beginning of year 34,108 80,561
CASH AND CASH EQUIVALENTS,
at June 30, 25,058 50,866
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCAN-GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
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, 1995 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, 1995 and December 31, 1994
consists of the following:
June 30, December 31,
1995 1994
---------- ------------
Raw materials $ 231,012 $ 224,795
Work-in-process 209,951 151,609
Finished products 229,326 238,396
---------- ----------
$ 670,289 $ 664,800
---------- ----------
Note #3 Property and Equipment:
Property and equipment consists of:
June 30, December 31,
1995 1994
---------- ------------
Machinery & Equipment $1,646,217 $1,637,730
Furniture & Fixtures 59,470 59,470
Autos & Trucks 12,428 12,428
Leasehold Improvements 56,426 56,426
Software 182,075 182,075
---------- ----------
$1,956,616 $1,948,129
Less accumulated
depreciation and
amortization 1,709,185 1,617,356
--------- ---------
Net Fixed Assets $ 247,431 $ 330,773
--------- ---------
Note #4 Other Assets:
Product Acquisition Costs
Capitalized production
acquisition costs $ 400,000 $ 400,000
Less accumulated
amortization 340,455 300,455
--------- ---------
$ 59,545 $ 99,545
Capitalized Software Costs
June 30, December 31,
1995 1994
---------- ------------
Capitalized Software
production costs $ 455,458 $ 455,458
Less accumulated amortization 455,458 455,458
---------- ----------
$ -0- $ -0-
---------- ----------
Software Purchased $ 695,148 $ 695,148
Less accumulated amortization -- --
---------- ----------
$ 695,148 $ 695,148
<PAGE>
SCAN-GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
Note #4 Other Assets: (Continued)
Manufacturing Start-Up Costs
June 30, December 31,
1995 1994
---------- ------------
Capitalized manufacturing
start-up costs $ 386,891 $ 386,891
Less accumulated amortization 386,891 386,891
---------- ----------
$ -- $ --
---------- ----------
June 30, December 31,
1995 1994
---------- ----------
Trademarks and Patents $ 85,420 $ 85,420
less accumulated
amortization 41,175 32,633
---------- ----------
$ 44,245 $ 52,787
Note #5 Long Term Debt
Long-Term debt consists of the following:
June 30, December 31,
1995 1994
---------- ------------
Notes payable, collateralized
by equipment payable in monthly
installments of $617.52
including interest at 9.3%
through March 1996 $ 4,621 $ 8,236
Note payable, collateralized
by equipment, payable in
monthly installments of
$368 including interest at
9.00% through November 1995. 1,798 3,868
---------- ----------
Total 6,419 12,104
Less Current Maturities 6,419 10,306
---------- ----------
Long-Term debt $ -0- $ 1,798
---------- ----------
Note #6 Stockholders' Equity
On January 3, 1995, four (4) outside Directors of the Company
were each issued 25,000 common stock purchase options per the
1992 Long-Term Incentive Plan. These options are exercisable
through December 31, 1999 at a price of $.46875 per share, the
fair market value on the date of the grant.
On February 15, 1995, the Board of Directors approved the
issuance of 125,000 common stock warrants on December 27, 1994
to the Chief executive officer of the Company in consideration
for the credit facility consisting of personal loans of
$250,000 that the Chief executive officer has made available
to the Company. The warrants can be exercisable through
December 31, 1999 at $.375 per share. On January 13, 1995, the
Board of Directors approved the issuance of 124,000 common
stock warrants to an outside consultant to perform marketing
services as required by the Company. The warrants can be
exercisable through January 12, 2000 at $.4375 per share.
In May 1995, three outside Directors of the Company exercised
common stock options of 10,000 shares each.
<PAGE>
SCAN-GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
Note #6 Stockholders' Equity (Continued)
In June 1995, the Company issued a private placement of
Convertible Preferred Stock of $250,000 (25,000 shares, $10,00
par value). The Company intends to raise up to $1,000,000
total.
Note #7 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, 1995 is $390,000.
Note #8 Supplemental Disclosures of Cash Flow Information
June 30, June 30,
1995 1994
---------- ----------
Cash paid during year for
interest $ 1,606 $ 787
---------- ----------
Declaration of preferred
stock cash dividend $ 60,000 $ 60,000
---------- ----------
Issuance of Preferred Stock
in lieu of Dividends Due $ 200,000 $ --
---------- ----------
Preferred Subscription
Receivable $ 5,000 $ --
---------- ----------
<PAGE>
SCAN-GRAPHICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
As of June 30, 1995, the Company's working capital of $204,671 decreased
compared to $391,132 at December 31, 1994. The decrease in working capital of
$186,461 was primarily due to the increase in accounts payables. The Company's
working capital at June 30, 1995 of $204,671 decreased by 77.1% compared to the
June 30, 1994 amount of $1,042,105. This was due primarily to the decrease in
cash and accounts receivable (see Results of Operations) and the increase in
accounts payable. The Company's current ratio of 1.18 to 1 at June 30, 1995
decreased compared to the ratio of 2.03 to 1 at June 30, 1994. The Company had
no bank borrowings outstanding at June 30, 1995.
The Company has continually met its working capital requirements primarily
through private placements of its securities and personal loans from the Chief
Executive Officer of the Company. The Company's continued existence is dependent
upon its ability to resolve liquidity problems, principally by obtaining
additional equity capital, increasing sales and generating net income.
The Company is currently raising capital through a private placement of the
Company's Convertible Preferred Stock. The total number of shares to be issued
will be 100,000 and the amount of financing secured will be $1,000,000.
In July 1995, the Company signed an agreement to acquire a company which has the
Master Distribution Agreement for the Lockheed Martin geospatial software
products. This software is an open architecture, object oriented data management
system. The Company believes that the private placement of preferred stock and
the acquisition will generate a positive cash flow and a net income for the next
twelve months.
Results of Operation
Net Revenue for the three months ended June 30, 1995 decreased to $446,919, a
36.4% decrease compared to the three months ended June 30, 1994, amount of
$655,812. The decrease in revenue was primarily due to parts shortages which
delayed significant shipments from its 2nd quarter backlog into the 3rd quarter
1995. Net Revenue for the six months ended June 30, 1995, was $989,765, a 44.2%
decrease compared to the six months ended June 30, 1994, amount of $1,774.992.
Revenue in excess of 10% of revenue to two customers accounted for approximately
25.1% of net revenue for the six months ended June 30, 1995, compared to revenue
in excess of 10% of revenue to each of two customers which accounted for
approximately 30% of net revenue for the six months ended June 30, 1994.
Gross Margin percentages for the six months ended June 30, 1995 and 1994 were
22% and 56% of revenue, respectively. Gross Margin percentages for the three
months ended June 30, 1995 and 1994 were (2%) and 68%, respectively. The
decrease was due the special incentives on initial scanner orders to
distributors and resellers and amortization of capitalized product cost in which
sales of these products has not as yet materialized to offset the majority of
these costs.
<PAGE>
SCAN-GRAPHICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research and development expense as a percentage of revenue increased to 13.90%
of revenue for the six months ended June 30, 1995 compared to 9.0% of revenue
for the six months ended June 30, 1994. Research and development expense as a
percentage of revenue increased to 15.6% for the three months ended June 30,
1995, compared to 13.3% of revenue for the three months ended June 30, 1994. 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 decreased for the six
months ended June 30, 1995, compared to June 30, 1994 by $21,498.
Sales and Marketing expense as a percentage of revenue increased to 38.4%
of sales for the six months ended June 30, 1995 compared to 22.9% at June 30,
1994. Sales and Marketing expense as a percentage of revenues increased to 46.9%
for the three months ended June 30, 1995, compared to 30.9% at June 30, 1994. On
an actual expense comparison, sales and marketing expenses decreased by $26,650
for the six months ended June 30, 1995 compared to June 30, 1994.
General and Administrative expense as a percentage of revenue decreased to 2.6%
of sales for the six months ended June 30, 1995 compared to 2.6% at June 30,
1994. General and Administrative expense as a percentage of revenue increased to
36.7% of sales for the three months ended June 30, 1995 compared to 23.5% at
June 30, 1994. On an actual expense comparison, general and administrative
expenses decreased at June 30, 1995 compared to June 30, 1994 by $300,281. This
decrease was a result of a reversal of an Accounts Receivable Reserve of
$238,862, setup in 1994 and 1993 for a potentially uncollectible account. An
agreement with the customer was reached for the full amount in March 1995 to pay
the receivable.
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) 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.
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 1995:
For Withheld
--------- --------
Andrew E. Trolio 8,428,553 49,210
David S. Hirsch 8,431,553 46,210
Howard L. Morgan 8,432,553 45,210
Michael A. Mulshine 8,428,553 49,210
James C. Sargent 8,430,053 47,710
(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 15, 1995 /s/ Andrew E. Trolio
- --------------------------------- -----------------------------------
President
DATE: August 15, 1995 /s/ Joseph N. Battista
- --------------------------------- -----------------------------------
Vice President Finance and
Operations
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 25,058
<SECURITIES> 0
<RECEIVABLES> 642,774
<ALLOWANCES> 0
<INVENTORY> 670,298
<CURRENT-ASSETS> 1,355,673
<PP&E> 1,956,616
<DEPRECIATION> 1,709,185
<TOTAL-ASSETS> 2,408,092
<CURRENT-LIABILITIES> 1,151,002
<BONDS> 0
0
1,025,000
<COMMON> 8,749
<OTHER-SE> 163,592
<TOTAL-LIABILITY-AND-EQUITY> 2,408,092
<SALES> 937,069
<TOTAL-REVENUES> 989,765
<CGS> 814,898
<TOTAL-COSTS> 543,074
<OTHER-EXPENSES> 15,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (383,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (383,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (383,380)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
