SECURITIES AND EXCHANGE COMMISSION
Washington, DC 02549
FORM 10-K
X Annual report pursuant to section 13 or 15(d) of the
- ---- Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1995 or
- ---- Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition
period from___to___
Commission file number 0-15864
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SCAN-GRAPHICS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 95-4091769
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Abbott Drive, Broomall, PA 19008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code) 610-328-1040
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
Registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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___.
The aggregate market value of the Voting Stock held by non-affiliates of
the registrant computed by reference to the closing price as reported on the
NASDAQ system as of February 29, 1996 was $28,745,769.
The number of shares of the registrant's Common Stock issued and
outstanding as of February 29, 1996 was 10,408,081 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Founded in 1972, and located in suburban Philadelphia, SCAN-GRAPHICS(R),
Inc. is an international provider of GIS database management software products,
large document scanners, backfile conversion services, and imaging technology,
software and systems.
Due to the Company's established areas of expertise and the continued
emergence and growth of imaging and document management technologies,
SCAN-GRAPHICS has taken aggressive steps to reposition itself in the Electronic
Document Management (EDM) market during 1995.
The Company is now divided into the following three divisions:
oThe Scanner Division
oSedona TM GeoServices, Inc.
oTechnology Resource Center, Inc. (TRC)
The Scanner Division is a provider of monochrome, greyscale, and color
large document scanners and imaging subsystems. It is an innovator in the
development of new scanning and raster-to-vector conversion technology. The
color scanners and related subsystem software are manufactured and distributed
by Tangent Engineering, Inc., of Englewood, CO. Tangent was acquired by the
Company during December 1995.
Sedona GeoServices, Inc., was acquired by SCAN-GRAPHICS in July 1995. It
immediately became a wholly owned subsidiary of the Company, and, through this
acquisition, acquired the right to package and commercially distribute Lockheed
Martin geospatial software products, which will be launched during the third to
fourth quarter 1996. Sedona is the only authorized distributor of these products
in the commercial marketplace.
The formation of the Technology Resource Center, Inc. (TRC) was announced
in November 1995. Due to be incorporated and functional in the fourth quarter of
1996, this new subsidiary will provide document conversion services, computer
system services and training services focused on imaging and document management
technologies. A key objective of TRC is to address the existing shortage of
qualified imaging and document management personnel through the training and
certification of many individuals, including, but not limited to unemployed and
under-employed people.
Financial Information (In Thousands)
Total revenues for the years ended December 31, 1995, 1994 and 1993 were
$4,987 $5,067, and $3,839, respectively. The percentages of total revenue for
scanners and related services for years ended 1995, 1994 and 1993 were 93%, 91%,
and 85% respectively. The percentages of total revenue for software and related
services for years ended 1995, 1994 and 1993 were 5%, 2%, and 2% respectively.
The percentages of total revenue for license and royalty fees for years ended
1995, 1994 and 1993 were 2%, 7%, and 13%, respectively.
Financial Information Relating to Domestic and International Sales:
(In Thousands)
1995 1994 1993
---- ---- ----
Sales to unaffiliated customers:
United States $3,825 $4,105 $3,030
Export 1,162 962 809
Gross Profit:
United States $1,048 $2,130 $1,001
Export 692 747 456
Exports were sold into the following regions: Western Europe, Eastern
Europe, Asia and Middle East.
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<PAGE>
ITEM 1. BUSINESS (Continued)
It should be noted that to-date, the Company has financed the start-up of
Sedona GeoServices, Inc. from its Scanner Division's cash flow and partially
from the proceeds of a $1.25 million private placement of the Company's
convertible preferred stock completed in September, 1995.
Description of Business and Principal Products
SCAN-GRAPHICS is a provider of GIS database management software products
and is a pioneer and leader in scanning and image processing technology, large
document scanners, backfile conversion services, and imaging software and
systems. SCAN-GRAPHICS markets its products internationally through systems
integrators and distributors. The Company is divided into the following three
divisions:
oThe Scanner Division
oSedona GeoServices, Inc.
oTechnology Resource Center, Inc. (TRC)
Scanner Division
SCAN-GRAPHICS Scanner Division offers a variety of monochrome and greyscale
imaging software for multiple platforms and applications. Specifically, the
Company offers scanner operating systems software, image viewing, software, and
raster-to-vector conversion, editing, and OCR software.
Tangent Engineering, Inc., a part of the Company's Scanner Division, was
acquired in December 1995, and markets its products under the Tradename of
Tangent Color Systems. Tangent offers three styles of color large document
scanners and associated imaging software which are packaged into complete color
scanning systems and sold under the brand name INTREPID.
Sedona GeoServices, Inc.
Sedona GeoServices, Inc., is the only Master Value Added Reseller
authorized to commercially package and distribute Lockheed Martin geospatial
software products to the commercial marketplace. These leading edge products are
based upon the first open architecture, object-oriented database management
system for processing geospatially oriented information. These products will
allow data types such as maps, images, text and relational database information
to be organized and manipulated within a single, user intuitive Geographic
Information Systems (GIS).
Sedona GeoServices will offer the following commercial off-the-shelf (COTS)
products:
1) Sedona GeoCATALOG TM will enable developers and resellers of geospatial
information products, such as maps, aerial photography, and satellite
imagery to create and distribute soft copy and on-line products catalogs.
2) Sedona GeoVIEW TM will be a full-function, high-speed software subsystem
that will enable a user to browse through, view, clean, annotate,
manipulate and print large, complex digital images.
3) The Sedona VPFKit TM will consist of a set of class libraries which will
permit a software developer easy access to any database which uses the
Vector Product Format(VPF). The Sedona VPFKit will provide a layer between
the "raw" data in the database and the user's highest level (graphical or
non-graphical)interface.
3
<PAGE>
ITEM 1. BUSINESS (Continued)
4) Sedona DMTool TM will consist of an integrated set of sophisticated
computer software organized into a toolbox which will manipulate geospatial
data and transform it into pertinent geographic information. The toolbox
will contain open, object oriented data management tools which will
organize and manipulate world objects, such as maps, images and text
information within a single, user intuitive Geographic Information System
(GIS).
Technology Resource Center, Inc. (TRC)
The TRC will provide a wide range of services in support of computer
technologies that have been proven to improve office work productivity. The
center will be a document conversion and training center. The center will
concentrate on services that support imaging and document management
technologies and the integration of these applications with other office
processes such as accounting, information databases, and project controls.
License and Royalty Fees
The Company benefits from its technology expertise by the licensing of its
patented hardware technology and software.
Research & Development (In Thousands)
The Company's engineering group is engaged in a continuing research and
development program of its software and scanner products. Research and
development expenses were $582, $783, and $770 for the years ended December 31,
1995, 1994, and 1993, respectively.
Patents and Copyrights
The Company is the sole owner of two patents entitled "High Speed, High
Resolution Image Processing System," Patent Number 4,631,598 issued December 23,
1986 and Patent Number 4,972,273, issued November 20, 1990. Patents are
effective for seventeen years from date of issuance.
During fiscal year 1995, 1994 and 1993 the Company capitalized costs
related to the issuance of trademarks on its software products and patent costs
related to the continuance, application and amendment of its High Speed, High
Resolution Image Processing System.
These patents relate to the Company's scanner products. The Company
believes that the technology contained in these patents is very important to
electronic document scanner and/or digital copier products and to the Company's
competitive position. The Company's developed software programs are covered and
registered by copyrights.
Marketing
Each of the Company's three separate and distinct, yet synergistic business
units sells its products and services through independent, yet complimentary
distribution systems.
The Scanner Division sells its monochrome and greyscale scanners and
related software through an expanding network of distributors, value added
resellers, and system integrators. There are over 25 resellers in North America
and 22 others throughout Europe, Asia, South America and the Pacific Rim.
Tangent Engineering, Inc. sells its scanners and software products
internationally through distributors, manufacturers representatives, and direct
sales people.
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<PAGE>
ITEM 1. BUSINESS (Continued)
Sedona GeoServices, Inc. is developing a distribution system which consists
of value added resellers, systems integrators, and strategic partners which will
resell shrink-wrapped and customized commercial off-the-shelf (COTS) products
and/or license technology for use in the products of resellers, integrators, and
partners.
The TRC will sell its services through resellers, manufacturers
representatives, and direct sales people. Marketing programs will focus on
specific industries, such as engineering and manufacturing, where the Company
has established expertise. Subsequently, the TRC expects to sell into other
industries that have a high demand for imaging and document management services.
Major Customers
The Company's revenues for the 1995 fiscal year were derived from a number
of customers. One customer accounted for more than 10% of the Company's net
revenue for this period. (See Note 10 to the Financial Statements)
Competition
The Company's competition must be categorized according to the markets in
which the three divisions operate.
The Scanner Division's monochrome and greyscale hardware products compete
with four other hardware manufacturers. These five companies control
approximately 75% of the worldwide marketplace. The Company's Tangent Color
Systems products compete with primarily other makers of large format color
reprographic products such as Canon and Xerox. In the area of front end image
processing, the Company competes with numerous competitors located throughout
the world. In all cases, the Company's market niche remains large document
scanning and digital file manipulation.
Sedona GeoServices, Inc. competes against two types of organizations, GIS
software developers and GIS-related systems integrators/consultants. Recent
industry surveys show that 10 competitive software developers control over 80%
of the GIS software market.
There are a number of organizations that offer services similar to those
offered by the TRC. These organizations include scanning service providers,
hardware and software product developers, consulting organizations, computer
resellers and VARs, systems integrators, and electronic document management
training and certification companies.
Suppliers
The Company is not dependent on any single supplier for components and
subassemblies in the manufacture of its products.
Manufacturing
The Company manufactures its large format scanners, MK35 Aperture Card
Library Management System, scanner interfaces, scan servers, and software
products at its Broomall, PA and Englewood, CO facilities.
Management believes that the facilities are adequate to fulfill its current
and near term needs given the current and projected level of sales.
Employees
As of December 31, 1995, the Company had fifty-five full-time employees. None
of these employees are represented by a labor union. The Company believes
that its relationships with its employees are satisfactory.
5
<PAGE>
ITEM 1. BUSINESS (Continued)
Dependence Upon Key Personnel
The Company is dependent upon certain key members of its management for the
successful operation and development of its business. The loss of the
services of one or more of its management personnel could materially and
adversely affect the operation of the Company. In addition, in order to
continue its operations, the Company must attract and retain additional
technically qualified personnel with backgrounds in engineering, production
and marketing. There is keen competition for such highly qualified personnel
and consequently there can be no assurance that the Company will be
successful in recruiting or retaining personnel of the requisite caliber or
in the numbers necessary to enable the Company to continue to conduct its
business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal offices and one of its manufacturing
facilities at 700 Abbott Drive, Broomall PA 19008. The current lease was
renewed on September 1, 1994 and continues through August 31, 1997 with an
option to renew for two additional years. An additional manufacturing
facility is located at 14 Inverness Drive East, Suite A-100, Englewood, CO
80112. The current lease has a term of five years beginning on June 1, 1994
and ending on May 31, 1999. Management believes that the facilities
adequately fulfill its office and manufacturing space requirements.
(See Notes 12 and 14 to the Financial Statements)
ITEM 3. LEGAL PROCEEDINGS (In Thousands)
On September 15 1992, SCAN-GRAPHICS, Inc. and Scorpion Technologies, Inc.
reached an initial settlement agreement regarding a jury verdict in favor of
SCAN-GRAPHICS, Inc. in August 1992. The agreement provided that Scorpion
Technologies, Inc. was to pay SCAN-GRAPHICS, Inc. $2,000. As a result of the
settlement, Scorpion paid the Company $1,430 through December 31, 1993, but
defaulted in May 1993 on its obligation. As a result of Scorpion's default, in
November 1993, the Company received the software product source codes and
capitalized such for $695 which represented the remaining balance due from
Scorpion. The value of the software was verified by an independent appraiser and
was valued at $1,243. In March 1994, Scorpion turned over and the Company took
possession of all Scorpion SGS8000 scanner technology which included all
tangible and intangible assets
On November 20, 1995, an action was commenced against the Company seeking
damages in excess of $117, for alleged fraud and breach of contract. On
February 8, 1996, the Company answered the complaint, denying entitlement to
recovery of any monies and counter-claiming for breach of contract and fraud.
(See Note 11 to the Financial Statements)
During 1995, an action was filed against the Company through the
International Arbitration Tribunal in Paris, France, claiming amounts due and
damages for the Company's alleged failure to perform its obligations under a
March 30, 1990 agreement. The Company has filed an answer to the complaint on
February 30, 1996, asserting loss of profits from failure by the Plaintiff to
forward sales orders for parts, maintenance and software. (See Note 11 to the
Financial Statements)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The common stock is traded in the over-the-counter market and is authorized
to be quoted on the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System under the symbol "SCNG".
The following Table sets forth the high and low bid prices of the Company's
common stock as reflected on NASDAQ for the periods indicated. The bid prices
represent quotations in the over-the-counter market between dealers in
securities and do not include retail markups, markdowns, or commissions and
do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock High Bid Low Bid
<S> <C> <C>
1994
1st Quarter $ 29/32 $ 17/32
2nd Quarter 11/16 7/16
3rd Quarter 1/2 5/16
4th Quarter 3/4 5/16
1995
1st Quarter $ 17/32 $ 5/16
2nd Quarter 7/8 5/16
3rd Quarter 3 5/8 3/4
4th Quarter 3 1/32 1 11/16
1996
1st Quarter
through
February 29, 1996 $ 3 3/4 $ 3 1/4
</TABLE>
As of February 29, 1996 there were approximately 2,000 Shareholders of
record. On February 29, 1996, the last reported sale price of the Company's
common stock as reported on the NASDAQ System was $3.53125.
The Company has never declared or paid cash dividends on its common stock and
does not anticipate payment of cash dividends on its common stock in the
foreseeable future. It is the current intent of the Company to continue to
retain any earnings to finance the development and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA (In Thousands)
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 1995 and for the four previous years.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (In Thousands) (Continued)
This information should be read in conjunction with the financial statements
and notes thereto included in Item 8 of this Form 10-K.
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Income Statement 1995 1994 1 1993 1 1992 1 1991 1
---- ---- ---- ---- ----
Data:
<S> <C> <C> <C> <C> <C>
Revenue $ 4,987 $ 5,067 $ 3,839 $ 6,837 $ 6,173
Net Income (Loss)
Before Extraordinary
Item $(1,237) $(1,009) $(1,856) $ 255 $ (599)
Net Income (Loss) $(1,237) $(1,009) (1,856) $ 293 $ (599)
Income (Loss) Per
Share of Common Stock
Before Extraordinary
Item
Primary $ (.14) $ (.10) $ (.21) $ .03 $ (.07)
Fully Diluted $ (.14) $ (.10) $ (.21) $ .03 $ (.07)
AT DECEMBER 31,
Balance 1995 1994 1 1993 1 1992 1 1991 1
---- ----- ---- ---- ----
Sheet Data:
Total Assets $4,084 $4,358 $3,884 $5,483 $6,006
Long-Term
Obligations $ 231 $ 417 $ 12 $ 40 $ 78
Stockholders' Equity $2,105 $1,876 $2,885 $4,561 $4,550
</TABLE>
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1 Restated due to acquisition of Tangent Engineering, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (In Thousands)
At December 31, 1995, cash and cash equivalents decreased to $189, a $37
decrease compared to the December 31, 1994 amount of $226. At December 31,
1994, cash and cash equivalents increased to $226, a $84 increase compared to
the December 31, 1993 amount of $142. The above changes in cash and cash
equivalents are explained as follows in the cash flow from operating,
investing and financing activities.
As of December 31, 1995, the cash flows from operating activities resulted in
a net use of cash of $1,234 compared to the December 31, 1994 and December
31, 1993's use of cash of $138 and $375, respectively. The increase in the
use of cash as of December 31, 1995, as compared to 1994 is primarily due to
higher losses incurred, the increase in inventory and the payment of accrued
bonuses. The decrease in the use of cash as of December 31, 1994 as compared
to 1993 is primarily due to lower losses incurred, the increase in both
accounts payable/accrued expenses and accrued bonuses.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As of December 31, 1995, the cash flows from investing activities resulted in
a net use of cash of $139 compared to the December 31, 1994 and 1993's use of
cash of $29 and $224, respectively. The increase in the use of cash as of
December 31, 1995, is due to no proceeds from the sale of property and
equipment compared to the December 31, 1994, amount of $104. The decrease in
the use of cash as of December 31, 1994, is due to the decrease in the
purchase of property and equipment and the proceeds from the sale of property
and equipment of $104 compared to $3 at December 31, 1993.
As of December 31, 1995, the cash flows from financing activities resulted in
net cash provided by financing activities of $1,336 compared to the December
31, 1994 and 1993's cash provided of $251 and $257, respectively. The
increase in cash provided is primarily due to the proceeds from the issuance
of preferred stock of $1,050 and the proceeds from the exercise of common
stock warrants/options of $444. There was a minimal decrease in the cash
provided at December 31, 1994 as compared to December 31, 1993. In 1994, cash
provided was primarily due to the proceeds from loans payable, officers and
the issuance of long term debt as compared to 1993's proceeds from the
issuance of stock and loans payable officers.
In 1995, the Company acquired the rights to develop and distribute a
geospatial software product and acquired Tangent Engineering, Inc., a
manufacturer of color document scanners. The Company is planning on raising
additional capital through the private placement of its securities and/or the
issuance of convertible notes. The use of these funds will be used for the
further development of the geospatial software and the start-up of the
Company's Technology Resource Center (TRC) which will be a document
conversion and technology training center.
In connection with a $3,100,000 private placement of its securities in March
1996, the Company offered for sale 62 units, each of which consisted of a
$50,000, 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 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. As of
March 30, 1996, the Company has received proceeds amounting to $1,995,000.
The proceeds will be used for working capital purposes and to fund the
requirements of its subsidiary, Sedona GeoServices, Inc.
The Company believes that the proceeds from the private placement and funds
generated from operations will be sufficient to meet the Company's working
capital requirements for 1996.
Results of Operations (In Thousands)
Net Revenue in 1995 decreased to $4,987, a 1.6% decrease in revenue compared
to the 1994 revenue of $5,067. This was a result of an decrease in license
fees. Net revenue in 1994 increased to $5,067, a 32.0% increase in revenue
compared to the 1993 revenue of $3,839. This increase occurred due to
hardware sales.
The acquisitions during 1995 has significantly enhanced the product offering
of the Company. The addition of color document scanners and geospatial
software increase the Company's presence in the imaging market.
The percentage of total revenue for scanners and related services for years
ended 1995, 1994 and 1993 was 93%, 91% and 85%, respectively. The percentage
of total revenue for software and related services for years ended 1995, 1994
and 1993 was 5%, 2% and 2%, respectively. The percentage of total revenue for
license fees for years ended 1995, 1994 and 1993 was 2%, 7% and 13%,
respectively.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The gross margin decrease in 1995 was a result of the increase in
manufacturing costs of its monochrome document scanners due to lack of
working capital. This resulted in the Company paying a premium for its cost
of material and labor. The Company believes that this was a one-time event
and costs of manufacturing will return to its appropriate level. The
Company's gross margin percentages were 35%, 57% and 38% for years ended
1995, 1994 and 1993, respectively. The gross margin increase in 1994 compared
to 1993 was a result of a decrease in sales of third party products which had
a lower gross margin than the Company's manufactured products.
Research and Development Expenses: In the years ended December 31, 1995, 1994
and 1993, the Company had research and development expenses of $582, $783,
and $770, respectively. Research and development expenses as a percentage of
revenue in 1995, 1994 and 1993 were 11.7%, 15.5%, and 20.1%, respectively.
The Company's engineering and software group is engaged in continuous
research and development of its software and scanner products. The decrease
in research and development expenses was due primarily to the reduction in
software engineering expenses as a result of completing the development of
certain products. While continuing its research and development, the Company
due to its limited resources, will focus those resources on products which
can be brought to market in a short time frame.
Sales and Marketing Expenses: Sales and Marketing expenses for years ended
December 31, 1995, 1994 and 1993 totaled $1,388 $1,360, and $1,340,
respectively. Sales and marketing expenses as a percentage of Revenue in
1995, 1994 and 1993 were 27.8%, 26.8% and 34.9%, respectively. The Company is
continuing its efforts to market its products through increasing its
advertising and promotion and developing distributor relationships.
Operating, General and Administrative Expenses: General and Administrative
expenses for the years ended December 31, 1995, 1994 and 1993 totaled $985,
$1,641, and $1,142, respectively. General and Administrative expenses
decreased in 1995 compared to 1994 as a result of a reversal of an Accounts
Receivable Reserve of $229 set-up 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. General and Administrative
as a percentage of revenue in 1995, 1994 and 1993 were 19.8%, 32.4% and
29.7%, respectively.
Other Income/Expense: Litigation Legal Fees for the year ended December 31,
1995, 1994 and 1993 were $-0-, $42, and $39, respectively. These expenses are
a result of the Company pursuing license fees owed to the Company per
contractual obligations, patent infringement and a failed acquisition
attempt.
Interest expense for years ended December 31, 1995, 1994 and 1993 were $44,
$35, and $10, respectively. Interest expense increased in 1995, 1994 and 1993
due to the increase of the Company's Long Term Debt. As a result of the
Company's losses in fiscal years 1995 and 1994 and prior years, the Company
has borrowed money and has incurred varying amounts of interest expense.
Interest Income for years ended December 31, 1995, 1994 and 1993 was $2, $5,
and $5, respectively. During 1995 and prior years interest income was earned
on cash investments and sales type lease receivables.
Other Income for years ended December 31, 1995, 1994 and 1993 was $47, $120,
and $7, respectively. The increase in other income in 1994 was due to the
sale of equipment.
Other Expenses for years ended December 31, 1995, 1994 and 1993 were $27,
$30, and $24, respectively. These expenses in 1995, 1994 and 1993 were
primarily due to late payment charges.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Stock-Based Compensation
In 1996, the Company will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting
for stock-based compensation plans either through recognition or disclosure.
The Company intends to adopt this standard by disclosing the pro forma net
income and earnings per share amounts assuming the fair value method was
adopted on January 1, 1995. The adoption of this standard will not impact the
Company's results of operations, financial position or cash flows.
Recoverability of Intangibles
The Company evaluates the recoverability of all intangibles annually, or more
frequently whenever events and circumstances warrant revised estimates, and
considers whether the intangibles should be completely or partially written
off if the amortization period should be accelerated. In accordance with
Statement of Financial Accounting Standards No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company assesses the recoverability of the intangibles based on
undiscounted estimated future operating cash flows. As of December 31, 1995,
the carrying value of the intangibles has been determined not to be impaired.
Inflation
Although inflation has resulted in an increase in certain operating costs
during the past three years, management believes it has not had a material
effect on the Company's results of operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on F-1.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
11
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Position
- ---- --- ---------
Andrew E. Trolio 66 President, Chief Executive
Officer and Chairman of the Board
Joseph N. Battista 41 Vice President of Finance
Robert Garber 46 Director
Michael A. Mulshine 56 Secretary and Director
Anthony M. Trolio (*) 39 Executive Vice President
Howard L. Morgan 50 Director
James C. Sargent 78 Director
David S. Hirsch 60 Director
All Directors hold office until the next annual meeting of the Shareholders
of the Company and until their successors are elected and qualified.
All officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.
(*) Anthony M. Trolio is the son of Andrew E. Trolio.
The business experience, principal occupation and employment of the directors
and executive officers have been as follows:
Andrew E. Trolio, is Chairman of the Board, President and Chief Executive
Officer of the Company. He founded the Company in 1972. From 1961 to 1971 he
was President, Director and Founder of KDI Adtrol, Inc., a company which
manufactured photo-optical recording and reading devices for motion picture
cameras. He is also credited with several patents as inventor or co-inventor.
Mr. Trolio is a Trustee of Cabrini College and has served as Chairman of the
Finance and Audit Committee of SPIE and is currently a Fellow of the
International Society of Optical Engineers.
Joseph N. Battista, Jr., the Company's Vice President of Finance, has been a
Officer of the Company since October 1990. From 1987 to 1990, he was Vice
President and Chief Financial Officer of Wefa, Inc. (Formerly Chase
Econometrics and Wharton Econometrics), an economic consulting, economic data
provider and software company. He received a BS degree in Accounting and an
MBA degree from St. Joseph's University (Philadelphia) in 1976 and 1981,
respectively. He is also a Certified Public Accountant in the State of
Pennsylvania and is a member of the AICPA and PICPA.
Robert A. Garber, has served as Vice President and Chief Financial Officer of
Tangent Engineering, Inc., since August of 1993. He now serves as Tangent's
Chief Operating Officer. Mr. Garber has specialized in the domestic and
international corporate finance, assets based lending investment banking,
where he held various senior management positions, including positions with
Chase Manhattan Bank, United States Leasing Corporation and Litton
Industries. Mr. Garber was one of the founders of ICON Group, Inc., a New
York based investment banking and securities organization. Robert A. Garber,
is a graduate of New York's Bernard Baruch College, having earned as BS in
Business Administration and Finance.
Michael A. Mulshine, has been a Director and Secretary of the Company since
May 1985 and has been associated with the Company on a management consulting
basis since 1979. He has been the President of Osprey Partners, a management
consulting firm, since 1977. He is also Chairman of Dynex Sport Optics, Inc.,
an exclusive licensee of the Wilson Sporting Goods Company, and a director of
Vasco Corp., an OTC traded company.
12
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Anthony M. Trolio, the Company's Executive Vice President has been with the
Company since 1978. He is responsible for direction and planning related to
software and hardware engineering. He received a BS degree from Villanova
University in 1978.
Howard L. Morgan, Ph.D. has been a Director of the Company since September
1989. He is President of the ARCA Group, Inc., a consulting and investment
management firm. Dr. Morgan was Professor of Decision Sciences at the Wharton
School of the University of Pennsylvania from 1972 to 1986 and has headed
Renaissance Technologies Corporation's venture capital activities since 1986.
He serves on the board of directors of a number of emerging technology
companies including Franklin Computer Corporation, Quarterdeck Office
Systems, Integrated Circuit Systems, Inc., Cylink Corporation and Kentek
Information Systems.
James C. Sargent, a Director of the Company since January 1992, is of Counsel
to the law firm of Whitman & Ransom. He has been a partner at Whitman &
Ransom for the past five years. He was Regional Administrator from 1955 to
1956, and Commissioner from 1956 to 1960, of the New York Regional Office of
the Securities and Exchange Commission.
David S. Hirsch, a Director of the Company since January 1992, retired in
1991 from Wertheim Schroder & Co. Incorporated and its predecessor firms
where he was a principal for over the last five years. Mr. Hirsch is also a
director of Postal Buddy Corporation, Myers, Holdings & F.W. Myers and
Reprise Capital Corp. He received an AB degree from Cornell University in
1957 and an MBA degree from Harvard University in 1959.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the information under the caption "Compensation of Executive Officers and
Directors" in the Company's definitive proxy statement for the 1996 annual
meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's proxy statement for the 1996 annual
meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related
Transactions" in the Company's proxy statement for the 1996 annual meeting of
Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedules" on F-1.
(b) Reports on Form 8-K
None filed in the last quarter of the period covered by this
report.
(c) Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated in
parenthesis.
13
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
3.1 Articles of incorporation (2) (Exhibit 3.1).
3.2 Bylaws (2) (Exhibit 3.2).
*3.3 Amendment to Articles of Incorporation
4.1 Specimen copy of stock certificate for shares
of Common Stock of the Registrant. (5)
4.2 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series
A (1) (Exhibit 4.2).
4.3 Specimen copy of stock certificate for shares of
Class B Preferred Stock (1) (Exhibit 4.3).
4.4 Restricted Common Stock Registration Rights
(1) (Exhibit 4.1).
4.5 Form of Common Stock Warrant (1) (Exhibit 4.4).
4.6 Form of Redeemable Common Stock Purchase Warrant
and Subscription Agreement (1) (Exhibit 4.5).
4.7 Letter agreement between Cameron Associates, Inc.
and SCAN-GRAPHICS, Inc. (1) (Exhibit 4.6).
*4.8 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series C.
**10.1 Employment Contract - Andrew E. Trolio (1)
(Exhibit 10.1).
**10.2 Employment Contract - Anthony M. Trolio (1)
(Exhibit 10.4).
**10.3 Employment Contract - Joseph N. Battista (1)
(Exhibit 10.5).
**10.4 Form of Common Stock Option (1) (Exhibit 10.6).
**10.5 SCAN-GRAPHICS, Inc. 1992 Long Term Incentive Plan
(3) (Exhibit 2.1 - Annex E).
10.6 Facility Lease, 700 Abbott Drive, Broomall, PA (6)
10.7 Form of Selling Shareholder Agreement (4)
(Exhibit 10.2).
10.8 Agreement between SCAN-GRAPHICS, Inc. and
Howard L. Morgan and the ARCA Group, Inc. (5)
(Exhibit 10.9)
10.9 Agreement between SCAN-GRAPHICS, Inc. and
Michael A. Mulshine and Osprey Partners. (6)
*24.1 Consent of BDO Seidman with respect to the
registration statement on Form S-3 (33-47127).
25.1 Power of attorney (included on the signature page
to this Form 10-K).
14
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
* Filed herewith.
** Executive Compensation Plans and Arrangements.
(1) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, as amended by Amendment
No. 1 on Form 8 dated June 12, 1992 and Amendment No. 2 on
Form 8 dated July 27, 1992.
(2) Filed as an Exhibit to the Company's Current report on Form
8-K dated June 15, 1992.
(3) Filed as an Exhibit to the Registration Statement on Form 8-K,
filed under the Securities Exchange Act of 1934, dated June 19,
1992.
(4) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 33-47127)
filed on July 2, 1992.
(5) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, as amended by Amendment No.
1 on Form 8 dated April 21, 1993.
(6) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal ended December 31, 1994.
15
<PAGE>
SIGNATURES
ursuant to the requirements of Sections 13 or 15(d) of the Securities
xchange Act of 1934, the registrant has duly caused this report to the
e signed on its behalf by the undersigned, thereunto duly authorized.
SCAN-GRAPHICS, INC.
March 29, 1996 /s/ ANDREW E. TROLIO
DATE -----------------------------
ANDREW E. TROLIO
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant, in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Andrew E.
Trolio, Chairman of the Board of Directors, President and Chief
Executive Officer, his true and lawful attorney-in-fact, in his name,
place and stead, to execute and cause to be filed with the Securities
and Exchange Commission, any or all amendments to this report.
Signatures
BY: /S/ ANDREW TROLIO Date March 29, 1996
- --------------------------------------------
Andrew E. Trolio
Chairman of the Board of Directors,
President and Chief Executive Officer
BY: /S/ JOSEPH N. BATTISTA Date March 29, 1996
- --------------------------------------------
Joseph N. Battista
Vice President Finance
(Principal Financial and Accounting Officer)
BY: /S/ MICHAEL A. MULSHINE Date March 29, 1996
- --------------------------------------------
Michael A. Mulshine
Director and Secretary
BY: /S/ HOWARD L. MORGAN Date March 29, 1996
- --------------------------------------------
Howard L. Morgan
Director
BY: /S/ DAVID S. HIRSCH Date March 29, 1996
- --------------------------------------------
David S. Hirsch
Director
BY: /S/ JAMES C. SARGENT Date March 29, 1996
- --------------------------------------------
James C. Sargent
Director
BY: /S/ ROBERT GARBER Date March 29, 1996
- --------------------------------------------
Robert Garber
Director
16
<PAGE>
Scan-Graphics, Inc.
and Subsidiaries
-------------------------------------------
Report on Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Contents
- --------------------------------------------------------------------------------
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated financial statements
Balance sheets as of December 31, 1995 and 1994 F-3
Statements of operations for each of the three years
in the period ended December 31, 1995 F-4 - F-5
Statements of stockholders' equity for each of the
three years in the period ended December 31, 1995 F-6
Statements of cash flows for each of the three years in the
period ended December 31, 1995 F-7 - F-8
Summary of significant accounting policies F-9 - F-11
Notes to consolidated financial statements F-12 - F-18
Financial statement schedule
Schedule II - Valuation and qualifying accounts and
reserves for each of the three years in the
period ended December 31, 1995 F-29 - F-30
</TABLE>
- --------------------------------------------------------------------
All other schedules have been omitted because they are inapplicable,
not required, or the required information is included elsewhere in
the financial statements and notes thereto.
F-1
<PAGE>
Report of Independent Certified Public Accountants
Scan-Graphics, Inc.
and Subsidiaries
Broomall, Pennsylvania
We have audited the accompanying consolidated balance sheets of Scan-Graphics,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. We have also
audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit. We did not audit the financial statements of
Tangent Engineering, Inc., a wholly-owned subsidiary, which statements reflect
total assets of $1,657,000 and $1,748,000 as of December 31, 1995 and 1994, and
total revenues of $3,023,000, $2,631,000 and $1,632,000 for the years ended
1995, 1994 and 1993, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Tangent Engineering, Inc., is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Scan-Graphics, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
March 8, 1996, except for Note 18,
as to which the date is March 30, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 189 $ 226
Accounts and notes receivable, less allowance
for doubtful accounts of $46 and $275 991 1,078
Inventories 1,454 1,150
Prepaid expenses and other current assets 66 76
- -------------------------------------------------------------------------------------------------------------------
Total current assets 2,700 2,530
- -------------------------------------------------------------------------------------------------------------------
Property and equipment,
less accumulated depreciation and amortization 757 889
- -------------------------------------------------------------------------------------------------------------------
Other assets
Product acquisition costs, less accumulated amortization - 100
Software purchased, less accumulated amortization 556 695
Other non-current assets 71 144
- -------------------------------------------------------------------------------------------------------------------
Total other assets 627 939
- -------------------------------------------------------------------------------------------------------------------
$ 4,084 $ 4,358
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Accounts payable and accrued expenses $ 959 $ 853
Accrued bonuses - 400
Loans payable, related parties 59 172
Notes payable, officers 259 78
Dividend payable 158 200
Deferred revenue 157 219
Current maturities, capital lease obligation 87 81
Current maturities of long-term debt 69 62
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,748 2,065
- -------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 182 226
Capital lease obligation, less current maturities 43 130
Deferred revenue 6 61
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Class B preferred stock, par value $0.01
Authorized 2,000,000 shares
No outstanding shares - -
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 -
Common stock, par value $0.001
Authorized 50,000,000 shares
Outstanding 10,188,812 shares in 1995 and
9,718,812 shares in 1994 10 10
Additional paid-in capital 8,677 8,303
Deficit (8,832) (7,437)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,105 1,876
- -------------------------------------------------------------------------------------------------------------------
$ 4,084 $ 4,358
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-3
<PAGE>
- --------------------------------------------------------------------------------
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Sales $ 4,866 $ 4,734 $ 3,335
License and royalty fees 121 333 504
- -------------------------------------------------------------------------------------------------------------------
Total revenues 4,987 5,067 3,839
Cost of goods sold (including rent expense to a
related party of $48 in each year) 3,247 2,190 2,382
- -------------------------------------------------------------------------------------------------------------------
Gross profit 1,740 2,877 1,457
- -------------------------------------------------------------------------------------------------------------------
Expenses
Research and development 582 783 770
Sales and marketing (including rent expense to a
related party of $29 in each year) 1,388 1,360 1,340
General and administrative (including related
party amounts of $26, $19 and $61, respectively) 985 1,641 1,142
- -------------------------------------------------------------------------------------------------------------------
Total expenses 2,955 3,784 3,252
- -------------------------------------------------------------------------------------------------------------------
(Loss) before other (expense) income (1,215) (907) (1,795)
- -------------------------------------------------------------------------------------------------------------------
Other (expense) income
Litigation legal fees - (42) (39)
Interest expense (including related party
amounts of $10, $3 and $2, respectively) (44) (35) (10)
Other expenses (27) (30) (24)
Interest income 2 5 5
Other Income 47 120 7
- -------------------------------------------------------------------------------------------------------------------
Total other (expense) income (22) 18 (61)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
- --------------------------------------------------------------------------------
Scan-Graphics, Inc.
Consolidated Statements of Operations (continued)
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before income taxes $ (1,237) $ (889) $ (1,856)
Income taxes - - -
- -------------------------------------------------------------------------------------------------------------------
Net loss (1,237) (889) (1,856)
Preferred dividends (158) (120) (120)
- -------------------------------------------------------------------------------------------------------------------
Balance, applicable to common stock $ (1,395) $ (1,009) $ (1,976)
- -------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (.14) $ (.10) $ (.21)
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 9,872,327 9,718,812 9,218,477
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Class A
Class B Preferred
Preferred Stock Stock Stock
Stock Amount Series A Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992,
as originally reported 233 $ 2 500,000 $ 1,000
Adjustment to reflect acquisition - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992,
as restated 233 2 500,000 1,000
Conversion of preferred stock to common stock (226) (2) - -
Issuance of common stock - - - -
Preferred stock dividends declared and payable - - - -
Net loss, year ended December 31, 1993 - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 7 - 500,000 1,000
Conversion of preferred stock to common stock (7) - - -
Issuance of common stock - - - -
Preferred stock dividends declared and payable - - - -
Net loss, year ended December 31, 1994 - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 - - 500,000 1,000
Issuance of preferred stock Class A,
Series C - - - -
Exercise of common stock options - - - -
Exercise of common stock warrants - - - -
Expenses incurred related to issuance of
preferred stock and common stock - - - -
Preferred stock dividends, declared
and payable - - - -
Net loss, year ended December 31, 1995 - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 - $ - 500,000 $ 1,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Class A
Preferred Additional
Stock Stock Common Stock Paid-In
Series C Amount Shares Amount Capital (Deficit)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- $ - 8,116,482 $ 8 $ 8,004 $ (4,888)
- - 1,000,000 1 (1) 436
- -------------------------------------------------------------------------------------------------------------------
- - 9,116,482 9 8,003 (4,452)
- - 2,260 - - -
- - 600,000 1 300 -
- - - - - (120)
- - - - - (1,856)
- -------------------------------------------------------------------------------------------------------------------
- - 9,718,742 10 8,303 (6,428)
- - 70 - - -
- - - - - (120)
- - - - - (889)
- -------------------------------------------------------------------------------------------------------------------
- - 9,718,812 10 8,303 (7,437)
125,000 1,250 - - - -
- - 185,000 - 296 -
- - 285,000 - 157 -
- - - - (79) -
- - - - - (158)
- - - - - (1,237)
- -------------------------------------------------------------------------------------------------------------------
125,000 $ 1,250 10,188,812 $ 10 $ 8,677 $ (8,832)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-6
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,237) $ (889) $ (1,856)
Adjustments to reconcile net loss to net
cash (used) in operating activities
Depreciation and amortization 679 479 403
Provision for losses on accounts receivable 12 43 237
(Gain) loss on sale of assets 1 (90) 6
Write-off of sales lease receivable - - 56
Consulting fees - 10 16
Decrease (increase) in
Accounts and notes receivable 74 (303) 567
Inventories (391) (218) (40)
Prepaid expenses and other current assets 10 - 121
Other non-current assets 27 5 41
Increase (decrease) in
Accounts payable and accrued expenses 111 335 (196)
Accrued bonuses (400) 400 137
Deferred revenue (120) 90 133
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) in operating activities (1,234) (138) (375)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (129) (120) (193)
Capitalized trademark and patent costs (10) (13) (34)
Proceeds from sale of property and equipment - 104 3
- -------------------------------------------------------------------------------------------------------------------
Net cash (used) in investing activities (139) (29) (224)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Payment of preferred dividends $ - $ - $ (78)
Payment of loans payable, officer (108) (28) (60)
Proceeds from notes payable, officers 387 - -
Payment of notes payable, officers (207) (58) -
Payment of long-term debt (70) (34) (17)
Payment of capital lease obligation (81) (58) -
Proceeds from issuance of stock - - 300
Proceeds from loans payable, officers - 148 112
Payment of expenses, stock issuance (79) - -
Proceeds from issuance of preferred stock 1,050 - -
Proceeds from exercise of common
stock warrants/options 444 - -
Proceeds from issuance of long-term debt - 281 -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,336 251 257
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (37) 84 (342)
Cash and cash equivalents, at beginning of year 226 142 484
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of year $ 189 $ 226 $ 142
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting
policies and notes to consolidated financial statements.
F-8
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Description of Scan-Graphics, Inc. designs, manufactures and markets a comprehensive line
Business of automated imaging products and related software.
Principles of The Company's consolidated financial statements include the accounts of its
Consolidation wholly-owned subsidiaries, Tangent Engineering, Inc. and Sedona, Inc. All
significant intercompany accounts and transactions have been eliminated.
Inventories Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property and Property and equipment are stated at cost. Depreciation and amortization are
Equipment, computed on the straight-line method for financial reporting and income tax
Depreciation and purposes over the estimated useful lives of the respective assets.
Amortization
Revenue Revenue from product sales is recognized at the time the equipment is shipped.
Recognition Revenue from non-contract maintenance services is recorded as performed.
Deferred revenue from maintenance contracts is recognized over the service
period of the contract. Revenue from royalty and licensing agreements is
recorded when earned.
Research and Costs incurred in the research and development of the Company's products are
Development expensed as incurred.
Costs
Software Software purchased is stated at cost. Amortization is computed by using the
Purchased greater of the ratio of actual current revenue recognized over the total
estimated revenue, or the straight-line method over the estimated useful lives
of the products, not to exceed five years.
Product The Company incurred expenses relating to an acquisition of a new product line.
Acquisition These costs have been capitalized and are being amortized by using the greater
Costs of the ratio of actual current revenue recognized over the total estimated
revenue or the straight-line method over the estimated useful life of the
product line, not to exceed five years.
Loss Per Loss per common share is computed by dividing net loss, adjusted for preferred
Share dividend requirements, by the weighted average number of common shares
outstanding. Common stock equivalents are not included in the loss per share
computation because they are antidilutive.
</TABLE>
F-9
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Stock-Based In 1996, the Company will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company intends to adopt this standard by disclosing the pro forma net income
and earnings per share amounts assuming the fair value method was adopted on
January 1, 1995. The adoption of this standard will not impact the Company's
results of operations, financial position or cash flows.
Recoverability The Company evaluates the recoverability of all intangibles annually, or more
of Intangibles frequently whenever events and circumstances warrant revised estimates, and
considers whether the intangibles should be completely or partially written off
or if the amortization period should be accelerated. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company assesses the recoverability of the intangibles based on undiscounted
estimated future operating cash flows. As of December 31, 1995, the carrying
value of the intangibles has been determined not to be impaired.
Use of Estimates The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration Financial instruments which potentially subject the Company to credit risk
of Credit Risk consist of cash equivalents and accounts receivable.
The Company's policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being creditworthy. At December 31, 1995, the Company had bank
deposits which exceeded federally insured limits by approximately $183.
Concentration of credit risk, with respect to accounts receivable, is limited
due to the Company's credit evaluation process. The Company does not require
collateral from its customers. Although the Company has a diversified client
base, its customers consist primarily of distributors, governmental agencies and
large corporate entities. As of December 31, 1995 and 1994, the Company's
receivables related to the above were approximately $708 and $601, respectively.
</TABLE>
F-10
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Fair Value The carrying amounts reported in the balance sheets for cash, accounts and notes
of Financial receivable, accounts payable, accrued liabilities and short-term debt
Instruments approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term debt
approximates fair value because the underlying instruments are at variable rates
which are repriced frequently. The remaining long-term debt is based on quoted
market prices or where quoted market prices are not available on the present
value of cash flows discounted at estimated borrowing rates for similar debt
instruments.
Income Taxes The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, this standard requires the Company to
compute deferred tax amounts using the enacted corporate income tax rates for
the years in which the taxes will be paid or refunds received. The adoption of
this standard had no material effect on net income in 1993.
Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Reclassifications Certain amounts in the 1994 and 1993 financial statements have been reclassified
to conform with the 1995 presentation.
</TABLE>
F-11
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1. Acquisitions On December 29, 1995, 1,000,000 common shares of Scan-Graphics, Inc. were issued
in exchange for all the outstanding common shares of Tangent Engineering, Inc.
(Tangent), primarily a manufacturer of document imaging color scanners. The
acquisition has been accounted for as a pooling of interests, and accordingly,
the accompanying financial information has been restated to include the accounts
of Tangent for all periods presented. Net sales and net earnings of the separate
companies for the period preceding the acquisition were:
</TABLE>
Years ended December 31, 1995 1994 1993
---------------------------------------------------------------------
Net Sales
Scan-Graphics, Inc. $ 1,964 $ 2,436 $ 2,207
Tangent 3,023 2,631 1,632
---------------------------------------------------------------------
Combined $ 4,987 $ 5,067 $ 3,839
---------------------------------------------------------------------
Net Income (Loss)
Scan-Graphics, Inc. $ (1,360) $ (917) $ (1,884)
Tangent 123 28 28
---------------------------------------------------------------------
Combined $ 1,237 $ (889) $ (1,856)
---------------------------------------------------------------------
Net Income (Loss) Per Common Share
Scan-Graphics, Inc. $ (.15) $ (.11) $ (.22)
Tangent .01 .01 .01
---------------------------------------------------------------------
Combined $ (.14) $ (.10) $ (.21)
---------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
On July 28, 1995, the Company acquired all of the outstanding common stock of
Sedona GeoServices, Inc. of Pennsylvania ("Sedona") in exchange for warrants to
purchase up to 1,210,000 shares of the Company's common stock at an exercise
price of $1.00 per share. Sedona has the exclusive rights to certain "Geographic
Information System" software, which, although requiring additional development,
is expected to reach technological feasibility in 1997. Warrants to purchase
160,000 shares vested immediately, and the balance will vest as cumulative
revenues from future sales of the software reach levels specified in the
acquisition agreement. Warrants which do not vest within five years from the
date of acquisition will be cancelled. On July 28, 1995, the market price for
the Company's common stock was $1.78, but the fair value of the warrants was
considered to be insignificant.
</TABLE>
F-12
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
2. Inventories Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 625 $ 458
Work-in-process 353 279
Finished goods 476 413
--------------------------------------------------------------------------------
$ 1,454 $ 1,150
--------------------------------------------------------------------------------
3. Property Major classes of property and equipment consist of the following:
and
Equipment
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Equipment under capital lease $ 269 $ 269
Machinery and equipment 2,267 2,071
Furniture and fixtures 97 97
Automobiles and trucks 46 13
Leasehold improvements 76 76
Software 198 182
--------------------------------------------------------------------------------
2,953 2,708
Less accumulated depreciation
and amortization 2,196 1,819
--------------------------------------------------------------------------------
$ 757 $ 889
--------------------------------------------------------------------------------
Depreciation and amortization expense was $457 in 1995, $317 in 1994, and $252
in 1993.
</TABLE>
4. Other Assets Product Acquisition Costs
<TABLE>
<CAPTION>
December 31, 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Capitalized product acquisition costs $ 400 $ 400
Less accumulated amortization 400 300
--------------------------------------------------------------------------------
$ - $ 100
--------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
In 1991, the Company purchased for $400 the rights and title
to a product line which is now being manufactured by
Scan-Graphics, Inc. Amortization expense was $100, $100 and
$80 for the years ended December 31, 1995, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
Software Purchased
December 31, 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Capitalized software purchased $ 695 $ 695
Less accumulated amortization 139 -
--------------------------------------------------------------------------------
$ 556 $ 695
--------------------------------------------------------------------------------
</TABLE>
In 1993, the Company received software product source codes
and capitalized $695 (see Note 11). Amortization expense was
$139 for the year ended December 31, 1995, when the product
was released for general sale to customer. The Company had
no amortization expense for the years ended December 31,
1994 and 1993.
5. Loans Payable, The Company has a line of credit agreement, expiring on May
Officer and 31, 1996, with the chief executive officer and a related
Related party owned by the chief executive officer. The terms are to
Company lend up to $150 in the form of loans and deferred rent
payments. The interest rate is a bank's prime rate, plus 1%
or the interest charged to the chief executive officer to
secure borrowings (8.50% bank's prime rate at December 31,
1995). As of December 31, 1995, the Company had loans
payable of $55 and interest payable of $4. As of December
31, 1994, the Company had loans payable of $132, interest
payable of $5 and other accrued expenses of $5. On December
30, 1994, the chief financial officer advanced to the
Company $30. This advance was repaid in January 1995.
6. Notes Payable, Notes payable to officers accrue interest at 5% per annum,
Officers are due on demand and are without collateral. At December
31, 1995 and 1994, the balance was $259 and $78,
respectively, and interest paid on the notes during the
years ended December 31, 1995 and 1994 totalled $13 and $4,
respectively.
F-14
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
7. Long-Term Long-term debt consists of the following:
Debt
<TABLE>
<CAPTION>
December 31, 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
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 collateral-
ized by the equipment. $ 225 $ 276
Other 26 12
---------------------------------------------------------------------------------
251 288
Less current maturities 69 62
---------------------------------------------------------------------------------
Long-term debt $ 182 $ 226
---------------------------------------------------------------------------------
</TABLE>
As of December 31, 1995, long-term debt matures as follows:
1996 $ 69
1997 74
1998 69
1999 39
8. Capital Lease At December 3, 1995 and 1994, equipment with a net book
Obligation value of $112 and $219, respectively, (net of accumulated
amortization of $157 and $50, respectively) has been leased
under capital leases.
Future minimum annual lease payments are as follows:
Year ending December 31,
------------------------------------------
1996 $ 93
1997 49
------------------------------------------
Total minimum lease payments 142
Less amount representing interest (12)
------------------------------------------
130
Less current maturities (87)
------------------------------------------
$ 43
------------------------------------------
F-15
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
9. Stockholders' Class B Preferred Stock
Equity
Each share of the Company's Class B preferred stock is
convertible at the holder's option into ten shares of common
stock. The holders of Class B preferred stock are entitled
to share in any dividends declared by the Board of Directors
on a pro-rata basis, without preference, with the holders of
common stock. Dividends are not cumulative. In liquidation,
the only preference is for the par value of the preferred
shares.
Class A Preferred Stock
Series A and C
Class A preferred stock is issuable in various series and is
convertible in accordance to the issued series. The Board of
Directors has the authority to fix by resolution all other
rights.
The Class A Series A preferred shares pay quarterly
dividends at the rate of twelve percent (12%) per annum,
have cumulative rights and have a liquidation preference for
the par value of the preferred shares. Each holder has the
same right to vote each share on all corporate matters as
the holder of one share of common stock.
The Class A Series C preferred shares pay quarterly
dividends at the rate of eight percent (8%) per annum, have
cumulative rights and have a liquidation preference for the
par value of the preferred shares. Each share is convertible
at the election of the holder after twenty-four months from
date of issue into shares of common stock at a 50% discount
from "Market Price" (closing bid price for the day) average
for the twenty trading days preceding notice of conversion,
but not less than $.50 per share or more than $2.50 per
share of common stock. The Company has the right to force
conversion to common stock upon thirty days written notice
after thirty-six months from date of issue. Each share of
Class A, Series C represents twenty (20) shares of common
stock in voting power in matters brought before the
shareholders.
F-16
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
Common Stock
On December 29, 1995, the Company issued 1,000,000 shares for
all the shares outstanding of Tangent Engineering, Inc. in a
pooling of interests business combination (see Note 1).
In November 1993, the Company issued 600,000 shares at $.50 a
share, or a value of $300 in a private placement under
Regulation S (overseas issuances).
Dividends Declared
During 1995, the Board of Directors declared preferred
dividends on the Company's Class A Series A and Series C
preferred stock payable on a quarterly basis as due.
Dividends for 1995 totalled $158 of which none were paid as
of December 31, 1995.
During 1994, the Board of Directors declared preferred
dividends on the Company's Class A preferred stock payable on
a quarterly basis as due. Dividends for 1994 totalled $120 of
which all were paid during 1995.
On February 12, 1993, the Board of Directors declared
preferred dividends on the Company's Class A Preferred Stock
payable on a quarterly basis as due. Dividends for 1993
totalled $120 of which $40 was paid during 1993 and $80 was
paid during 1995.
Options and Warrants
Long-Term Incentive Plan
On June 12, 1992, at the Company's Annual Meeting, the
stockholders of the Company approved a Long-Term Incentive
Plan for the issuance of options for the purchase of up to
1,000,000 restricted common stock shares in the aggregate, or
such other number of shares as are subsequently approved by
the Company's stockholders.
The Long-Term Incentive Plan provides for the granting of
both incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, and
non-qualified stock options which do not so qualify. Unless
the Plan is terminated earlier by the Board of Directors, the
Plan will terminate in March 2002. As of December 31, 1995,
the Company has 291,112 of options still permitted to be
granted under the Plan.
F-17
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
Options outstanding under the Long-Term Incentive Plan have
been granted to officers, directors and employees to purchase
common stock at prices ranging from $.46875 to $2.50 per
share and expiring between December 31, 1996 and September
25, 2000. All options were granted at market prices. A
summary of the option transactions follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share Aggregate
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at
December 31, 1992 340,000 $1.8125 $ 616
Cancelled or expired (350,000) $1.34 (583)
to
$1.8125
Granted 183,888 $1.03 341
to
$2.25
----------------------------------------------------------------------------------------
Outstanding at
December 31, 1993 173,888 $.78125 374
to
$2.25
Cancelled or expired (20,000) $1.03125 (21)
Granted 320,000 $.50 236
to
$.78125
----------------------------------------------------------------------------------------
Outstanding at
December 31, 1994 473,888 $.50 589
to
$2.25
</TABLE>
F-18
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share Aggregate
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cancelled or expired (130,000) $.50 $ (169)
to
$2.00
Granted 490,000 $.46875 577
to
$2.50
Exercised (125,000) $.46875 (139)
to
$1.8125
----------------------------------------------------------------------------------------
Outstanding at
December 31, 1995 708,888 $.46875 $ 858
to
$2.50
----------------------------------------------------------------------------------------
</TABLE>
Nonqualified Stock Option Plan
As indicated in the previous pages, a Long-Term Incentive
Plan was approved on June 12, 1992. Prior to the inception of
the Plan, there were options to purchase 450,000 common
shares outstanding. Options under the Nonqualified Stock
Option Plan have been granted to officers of the Company to
purchase common stock at prices ranging from $.78125 to $1.34
and expire on December 31, 1996.
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share Aggregate
----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
December 31, 1992,
1993 and 1994 450,000 $.78125 $ 586
to
$1.34
----------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share Aggregate
----------------------------------------------------------------------------------------
<S> <C> <C>
Exercised (60,000) $1.34 $ (18)
----------------------------------------------------------------------------------------
Outstanding at
December 31, 1995 390,000 $.78125 $ 568
to
$1.34
----------------------------------------------------------------------------------------
</TABLE>
Warrants outstanding have been granted to officers,
directors, stockholders and others to purchase common stock
at prices ranging from $.375 to $3.00 per share and expiring
between December 3, 1996 and December 31, 2000. All warrants
were granted at market prices. A summary of the warrant
transactions follows:
<TABLE>
<CAPTION>
Exercise Price
Shares Per Share Aggregate
----------------------------------------------------------------------------------------
<S> <C> <C>
Warrants outstanding at
December 31, 1992 1,270,279 $.50 $ 2,055
to
$2.10
Warrants granted 307,333 $.50 300
to
$1.00
Warrants expired (51,720) $1.5625 (94)
to
$1.90625
----------------------------------------------------------------------------------------
Warrants outstanding at
December 31, 1993 (1,525,892) $.50 2,261
to
$2.10
</TABLE>
F-20
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
Exercise Price
Shares Per Share Aggregate
- --------------------------------------------------------------------------------
Warrants granted 125,000 $.375 $ 47
- --------------------------------------------------------------------------------
Warrants outstanding at
December 31, 1994 1,650,892 $.375 2,308
to
$2.10
Warrants granted 2,546,500 $.4375 4,289
to
$3.00
Warrants exercised (285,000) $.4375 (297)
to
$2.10
- -------------------------------------------------------------------------------
Warrants outstanding at
December 31, 1995 3,912,392 $.375 6,300
to
$3.00
- --------------------------------------------------------------------------------
The Company is obligated to purchase 605,000 options and
1,090,000 warrants from three (3) officers and five (5)
employees of the Company in the event of change of control
of the Company or termination of employment at a cash
purchase price equal to the amount of the aggregate fair
market value of the shares, less the aggregate
option/warrant price of such shares. As of December 31,
1995, the market value exceeded the aggregate option/warrant
price by approximately $514.
10. Revenues During the years ended December 31, 1995, 1994, and 1993,
from Major customers which accounted for 10% or more of the Company's
Customers total sales revenue was one in 1995 at 14.6%, none in 1994
and one in 1993 at 10.4%.
F-21
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
A summary of domestic and export sales and gross profits for the years ended
December 31, 1995 and 1994 are as follows:
1995
- --------------------------------------------------------------------------------
Total Domestic Export
- --------------------------------------------------------------------------------
Revenues $ 4,987 $ 3,825 $ 1,162
Cost of sales 3,247 2,777 470
- --------------------------------------------------------------------------------
Gross profit $ 1,740 $ 1,048 $ 692
- --------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------
Total Domestic Export
- --------------------------------------------------------------------------------
Revenues $ 5,067 $ 4,105 $ 962
Cost of sales 2,190 1,975 215
- --------------------------------------------------------------------------------
Gross profit $ 2,877 $ 2,130 $ 747
- --------------------------------------------------------------------------------
Exports were sold into western and eastern Europe, Asia and
middle east regions.
11. Litigation On September 15, 1992, Scan-Graphics, Inc. and Scorpion
Settlements Technologies, Inc. reached an initial settlement agreement
regarding a jury verdict in favor of Scan-Graphics, Inc. in
August 1992. The agreement provided that Scorpion
Technologies, Inc. was to pay Scan-Graphics, Inc. $2,000. As
a result of the settlement, Scorpion paid the Company $1,430
through December 31, 1993, but defaulted in May 1993 on its
obligation. As a result of Scorpion's default, in November
1993, the Company received the software product source codes
and capitalized such for $695 which represented the
remaining balance due from Scorpion. The value of the
software was verified by an independent appraiser and was
valued at $1,243. In March 1994, Scorpion turned over and
the Company took possession of all Scorpion SGS8000 scanner
technology which included all tangible and intangible
assets.
F-22
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
On November 20, 1995, an action was commenced against the
Company seeking damages in excess of $117, for alleged fraud
and breach of contract. On February 8, 1996, the Company
answered the complaint, denying entitlement to recovery of
any monies and counter-claiming for breach of contract and
fraud. No provision has been made in the accompanying
financial statements related to this uncertainty.
During 1995, an action was filed against the Company through
the International Arbitration Tribunal in Paris, France,
claiming amounts due and damages for the Company's alleged
failure to perform its obligations under a March 30, 1990
agreement. The Company has filed an answer to the complaint
on February 30, 1996, asserting loss of profits from failure
by the Plaintiff to forward sales orders for parts,
maintenance and software. No provision has been made in the
accompanying financial statements related to this
uncertainty.
12. Related Party The Company leases its principal office and one of its
Transactions manufacturing facilities from a corporation which is owned
by the chief executive officer of the Company. This
operating lease, which continues through August 31, 1997
with an option to renew for an additional two years,
provides for the payment of an annual base rental of $96 and
excess real estate taxes. Rent expense charged to operations
was $96 for each of the years ended December 31, 1995, 1994
and 1993.
The Company incurred consulting and commission fees, and
out-of-pocket expenses of $73, $390 and $6 for the years
ended December 31, 1995, 1994 and 1993, respectively, to a
company owned by a director of the Company. Commissions,
plus out-of-pocket expenses, were incurred for investment
banking type services and other agreed-upon duties provided
to the Company.
The Company issued 20,000 shares of common stock at $1.5625
per share to a director of the Company in 1992 for services
to be rendered over a 24 month period ending August 31,
1994. Consulting expense incurred was $10 and $16 in 1994
and 1993, respectively.
F-23
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
13. Profit-Sharing A subsidiary of the Company has a qualified profit
Plan sharing/401(k) plan (the Plan) for those employees who meet
certain eligibility requirements set forth in the Plan.
Employees become eligible to participate in the Plan after
one year of service. The Plan does permit voluntary
contributions by participants. Contributions to the 401(k)
portion of the Plan are matched by the Company equal to 100%
of voluntary contributions by individual participants,
limited to 3% of the individual participant's annual pay.
Annual profit sharing contributions to the Plan are at the
discretion of the Board of Directors. Vested benefits are
distributed upon death, disability or termination of
employment according to the following vested schedule:
Years of Service Percentage
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
The total amount charged to operations under the plan was
$83, $92, and $49 for the years ended December 31, 1995,
1994, and 1993, respectively.
14. Commitments The Company has employment agreements with certain key
and employees which expire at various dates through December
Contingencies 1998. The agreements provide for minimum salary levels, plus
any additional compensation as directed by the Board of
Directors. The commitment for future salaries at December
31, 1995 is $585 for 1996, $525 for 1997 and $285 for 1998.
In addition, 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. The aggregate potential
severance pay at December 31, 1995 was $690.
F-24
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
The Company has entered into a facility lease agreement
other than its principal office and equipment leases through
May 31, 1999. Rent expense for the years ended December 31,
1995, 1994 and 1993 totalled $75, $62 and $36, respectively.
Future minimum lease payments are as follows:
Year Ending December 31,
------------------------------------------------------------
1996 $ 60
1997 58
1998 59
1999 24
------------------------------------------------------------
$ 201
------------------------------------------------------------
15. Leased The Company's leasing operations consist principally of the
Equipment leasing of scanning and copying equipment and maintenance
agreements. The leases are classified as operating leases.
Lease terms range from one to five years. At December 31,
1995 and 1994, machinery and equipment included $301 and
$180 of leased equipment, respectively, and accumulated
depreciation of $57 and $18, respectively.
The following is a schedule of the minimum future rentals on
noncancelable operating leases as of December 31, 1995:
Year ending December 31,
------------------------------------------------------------
1996 $ 179
1997 125
1998 115
1999 40
------------------------------------------------------------
$ 459
------------------------------------------------------------
F-25
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
16. Income Taxes At December 31, 1995, the Company has accumulated, for
federal and state income tax purposes, net operating loss
carryforwards and federal tax credit carryforwards. These
carryforwards are generally available for use by the Company
through the indicated expiration dates.
Approximate Expiration
Description Amount
Dates (In Thousands)
- --------------------------------------------------------------------------------
Net operating loss
carryforwards $ 7,993 1998-2010
Investment tax credit
carryforwards 35 1996-2000
Foreign tax credit
carryforwards 120 2000
Research credit carryforwards 253 2000-2010
Approximately $3.7 million of deferred tax assets arising
primarily from net operating loss and tax credit carryovers
have been offset by a $3.7 million valuation allowance, as
there is little likelihood that the asset will result in
future tax savings.
F-26
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
17. Supplemental Year ended December 31, 1995 1994 1993
Disclosures ------------------------------------------------------------
of Cash Flow Cash paid during the year
Information for interest $ 45 $ 32 $ 8
Cash paid during the year
for income taxes 10 10 7
Noncash investing and
financing activities
are as follows:
Software capitalized
in lieu of payment of
notes receivable 695
Declaration of preferred
stock cash dividend 158 120 80
Capitalized lease obligations
incurred to lease new
equipment 17
Net effect of terminated
lease obligation by the
return of equipment and
cancellation of prepaid
maintenance contracts 17
Preferred stock Series C
issued in lieu of payment
of preferred dividends 200
Transfer of inventory to equip-
ment in fixed assets 137 180
Transfer of equipment in
fixed assets to inventory
upon termination of lease 50
Purchase of a vehicle through
a note payable 33
Exchange of scanning and
copying equipment for
software rights 90
F-27
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
- --------------------------------------------------------------------------------
18. Subsequent In connection with a $3,100,000 private placement of its
Events securities in March 1996, the Company offered for sale 62
units, each of which consisted of a $50,000, 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 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.
As of March 30, 1996, the Company has received proceeds
amounting to $1,995,000. The proceeds will be used for
working capital purposes and to fund the requirements of its
subsidiary, Sedona GeoServices, Inc.
F-28
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Schedule II - Valuation and Qualifying Accounts and Reserves
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other Reductions at End
Description of Period Expenses Accounts - Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts $ 275 $ 12 $ $ 241(A) $ 46
Accumulated amortization of software
production costs 455 455
Accumulated amortization of manufacturing
start-up costs 387 387
Accumulated amortization of product acquisition 300 100 400
Accumulated amortization of trademarks
and patents 33 17 50
Accumulated amortization of software purchased - 139 - - 139
Year ended December 31, 1994
Allowance for doubtful accounts $ 273 $ 43 $ $ 41(A) $ 275
Accumulated amortization of software
production costs 409 46 455
Accumulated amortization of manufacturing
start-up costs 387 - - - 387
Accumulated amortization of product acquisition 201 100 - - 300
Accumulated amortization of trademarks
and patents 17 16 33
</TABLE>
(A) Accounts receivable written-off.
F-29
<PAGE>
Scan-Graphics, Inc. and Subsidiaries
Consolidated Schedule II - Valuation and Qualifying Accounts and Reserves
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other Reductions at End
Description of Period Expenses Accounts - Describe of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Allowance for doubtful accounts $ 53 $ 237 $ - $ 17(A) $ 273
Accumulated amortization of software
production costs 401 8 - - 409
Accumulated amortization of manufacturing
start-up costs 333 54 - - 387
Accumulated amortization of product acquisition 121 80 - - 201
Accumulated amortization of trademarks
and patents 8 9 - - 17
</TABLE>
(A) Accounts receivable written-off.
F-30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
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