SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 of Incorporation) (IRS Employer Identification No.)
700 ABBOTT DRIVE, BROOMALL, PENNSYLVANIA 19008-4373
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(Address of principal executive offices) (Zip Code)
610-328-1040
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Registrant's telephone number, including area code
Indicate by the check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
15,692,387 shares of common stock were outstanding as of March 31, 1997
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
- - ----------------------------- ----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets --
March 31, 1997 and December 31, 1996 3 - 4
Consolidated Statements of Operations --
Three months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flow --
Three months ended March 31, 1997 and 1996 6
Notes to Financial Statements --
March 31, 1997 7 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 10
PART II. OTHER INFORMATION
- - ---------------------------
Item 1 through Item 6. 11
SIGNATURE PAGE 12
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2
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
MARCH 31, DECEMBER 31,
1997 1996
-------- ------------
ASSETS
- - ------
CURRENT ASSETS:
- - ---------------
Cash and cash equivalents $ 896 $ 1,081
Accounts receivable, less
allowance for doubtful accounts of
$196 and $189 727 844
Inventories 1,301 1,173
Prepaid expenses and other current
assets 131 91
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TOTAL CURRENT ASSETS $ 3,055 $ 3,189
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PROPERTY AND EQUIPMENT, less accumulated
depreciation and amortization 903 865
OTHER ASSETS:
Other Non-Current Assets 79 38
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TOTAL OTHER ASSETS $ 79 $ 38
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TOTAL ASSETS $ 4,037 $ 4,092
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See accompanying notes to financial statements.
3
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
- - --------------------
<S> <C> <C>
Accounts payable and accrued expenses $ 796 $ 617
Dividend payable 222 368
Deferred revenue 229 237
Current maturities, capital lease obligation 54 102
Current maturities of long term debt 63 62
-------- --------
TOTAL CURRENT LIABILITIES $ 1,364 $ 1,386
-------- --------
LONG-TERM DEBT, less current maturities 90 107
Capital lease obligation, less current maturities 35 43
-------- --------
TOTAL LONG TERM DEBT $ 125 $ 150
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STOCKHOLDERS' EQUITY
Class A preferred stock
Authorized 1,000,000 shares,
Outstanding 500,000 shares (Series A),
par value $2.00 1,000 1,000
Outstanding 125,000 shares
(Series C), par value $10.00 1,250 1,250
Common stock, par value $0.001
Authorized 50,000,000 shares
Outstanding 15,692,387 shares at
March 31, 1997 and 14,780,766
shares at December 31, 1996 16 15
Additional paid-in capital 16,351 15,295
Deficit (14,656) (13,323)
Notes Receivable, Related Parties (1,413) (1,681)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 2,548 2,556
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TOTAL LIABILITIES & STOCKHOLDER EQUITY $ 4,037 $ 4,092
-------- --------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
SALES $ 933 $ 1,227
LICENSE AND ROYALTY FEES 25 10
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Total revenues $ 958 $ 1,237
COST OF GOODS SOLD 880 653
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GROSS PROFIT 78 584
EXPENSES:
Research and development 202 242
Sales and marketing 478 367
General and administrative 613 514
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Total operating expenses 1,293 1,123
NET OPERATING INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (1,215) (539)
OTHER INCOME 53 -
Other Expense (117) (21)
Total other income (expense) (64) (21)
NET INCOME (LOSS) BEFORE INCOME TAX (1,279) (560)
INCOME TAX - -
NET INCOME (LOSS) (1,279) (560)
PREFERRED DIVIDENDS (55) (30)
BALANCE APPLICABLE TO COMMON STOCK (1,334) (590)
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Primary (.09) (.06)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Primary 15,495,257 10,331,750
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
1997 1996
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ (1,279) $ (560)
Adjustments to reconcile net income (loss)
to net cash (used) in operating activities:
Depreciation and amortization 91 177
(Increase) decrease in notes and
accounts receivable 118 (14)
(Increase) decrease in inventories (128) (42)
(Increase) decrease in other current assets (40) (35)
(Increase) decrease in other assets (41) 8
Increase (decrease) in accounts payable
and accrued expenses 180 63
Increase (decrease) in deferred revenue (8) 222
Total adjustments 172 379
Net cash provided (used) by operating
activities (1,107) (181)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (130) (76)
Capitalized trademarks & patents - (10)
Net Cash (used) in investing activities (130) (86)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (16) -
Payment of preferred dividends (201) -
Payment of loans payable - officers - (6)
Payment of capital lease obligations (56) -
Proceeds from issuance of notes payable - 1,995
Proceeds from exercise of common stock
warrants/options 1,408 252
Payment of Expenses, Stock Issuance (71) -
Repurchase of subsidiary stock (12) -
Net cash provided (used) by financing activities 1,052 2,241
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (185) 1,974
CASH AND CASH EQUIVALENTS,
at beginning of year 1,081 189
CASH AND CASH EQUIVALENTS,
at March 31 896 2,163
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(In Thousands except share and per share data)
Note #1
In the opinion of management all adjustments are of a normal recurring nature
and have been made to present fairly its financial position at March 31, 1997
and the results of operations for the periods indicated. The operating results
for the periods are not necessarily indicative of results to be expected.
Note #2 Inventories:
------------
Inventories at March 31, 1997 and December 31, 1996
consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Raw materials $ 643 $ 523
Work-in-process 299 263
Finished products 359 388
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$1,301 $1,174
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Note #3 Property and Equipment:
-----------------------
Property and equipment consists of:
March 31, December 31,
1997 1996
--------- ------------
Equipment under capital lease $ 390 $ 415
Machinery & Equipment 2,628 2,492
Furniture & Fixtures 126 110
Autos & Trucks 12 12
Leasehold Improvements 99 94
Software 254 253
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$3,509 $3,376
Less accumulated
depreciation and amortization 2,605 2,512
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Net Fixed Assets $ 904 $ 864
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Note #4 Commitments and Contingencies:
------------------------------
The Company will be obligated to pay one to two years of
annual salary to certain officers of the Company if the
Company is acquired or merged and the acquirer chooses to
terminate their services. In this event, the aggregate
potential severance pay at March 31, 1997 is $880.
7
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(In Thousands except share and per share data)
Note #5 Long-Term Debt:
---------------
Long-term debt consists of the following:
March 31, December 31,
1997 1996
--------- ------------
Note Payable, payable in monthly
installments including interest
at 8.75% through July 1999. This
note payable is non-recourse to
the Company, is based upon the
credit standing of a customer of
the Company and is further
collateralized by the
equipment. $ 153 $ 169
Less current maturities 63 62
------ ------
Long-term debt $ 90 $ 107
As of March 31, 1997, long-term debt matures as follows:
1997 $46
1998 $68
1999 $39
Note #6 Stockholders' Equity
--------------------
During the first quarter 1997, one director, one officer,
employees, and one consultant exercised common stock options
and warrants resulting in 169,457 shares of common stock
issued.
During the first quarter 1997, the remaining holders of "A"
warrants issued in connection with a $3,100 private placement
in March 1996 exercised and 637,809 common shares were issued.
During the first quarter 1997, 5,000 common stock options and
18,000 common stock warrants were issued to employees of the
Company.
Note #7 Supplemental Disclosures of Cash Flow Information:
--------------------------------------------------
March 31, March 31,
1997 1996
--------- ---------
Cash paid during year for
interest $ 8 $ 13
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Non-cash financing activities
are as follows:
Declaration of preferred
stock cash dividend $ 55 $ 30
------ ------
Preferred Subscriptions Receivable $ 50 $ -0-
------ ------
8
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Liquidity and Capital Resources (In Thousands except share and per share data)
At March 31, 1997, cash and cash equivalents decreased to $896, a $185 decrease
compared to the December 31, 1996 amount of $1,081. The above change in cash and
cash equivalents are explained as follows in the cash flow from operating,
investing and financing activities.
As of March 31, 1997, the cash flows from operating activities resulted in a net
use of cash of $1,107. This use of cash was primarily due to the Company's
significant additions of executive management in Corporate, Sedona GeoServices
and the Scanner Division. Also, all three business units continue to add
technical and sales personnel in order to increment and/or initiate revenue.
As of March 31, 1997, the cash flows from investing activities resulted in a net
use of cash of $130. The use of cash was due primarily to purchases of equipment
and fixtures at Sedona's new Limerick, PA facility.
As of March 31, 1997, the cash flows from financing activities resulted in net
cash provided by financing activities of $1,052. The increase in cash provided
was due to the exercise of common stock options and warrants by directors,
officers, employees and investors involved in the March 1996 convertible
debenture private placement.
In connection with a $5,200 private placement of its securities in April 1997,
the Company offered for sale 52 units, each of which consisted of a $100, 7%
convertible note due April 1999, and one warrant to purchase 17,308 shares of
common stock of the Company at an exercise price of $4 per share for a period of
three (3) years. The notes and any accrued interest are convertible within two
(2) years at a price per share equal to the lesser of $7.00 or the applicable
percentage of the average closing sales price (90%, minus 1% for each full $.20
by which the conversion price for such conversion is greater than $4.00) of the
Company's common stock during the last five trading days prior to conversion. If
the conversion price is less than $4.00, a 10% discount to the closing bid price
for the 5 days prior to conversion is required.
In conjunction with this financing the Company has entered into a consulting
agreement with a New York investment capital firm, and will issue 2,100,000
warrants on the same terms as the individual investors participating in the
$5,200 private placement.
The Company believes that proceeds from the private placement and funds
generated from operations will be sufficient to meet the Company's working
capital requirements for 1997.
Results of Operations (In Thousands except share and per share data)
Net Revenue for the three months ended March 31, 1997 decreased to $958, a 22.6%
decrease compared to the three months ended March 31, 1996, amount of $1,237.
Revenue in excess of 10% of revenue to one customer accounted for approximately
43.8% of net revenue for the three months ended March 31, 1997 (three
customers), compared to revenue in excess of 10% of revenue to one customer
which accounted for approximately 18.2% of net revenue for the three months
ended March 31, 1996.
Gross Margin percentages at March 31, 1997 and 1996 were 8.1% and 47.2% of
revenue, respectively. A delay in the introduction of the new monochrome
scanner line and a delayed 1997 release of Department of Defense funding
involving the Tangent color scanner products in the early part of the first
quarter have resulted in lower revenues.
9
<PAGE>
SCAN-GRAPHICS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In Thousands except share and per share data)
Research and development expense as a percentage of revenue increased to 21.1%
of revenue at March 31, 1997 compared to 19.1% of revenue at March 31, 1996.
While the percentage increase is due to reduced first quarter sales in 1997 as
opposed to 1996, the Company continues to invest its resources in the
development of geospatial and imaging software and state-of-the-art, cost
competitive scanners. In an actual expense comparison, research and development
expenses decreased at March 31, 1997, compared to March 31, 1996 by $40.
Sales and Marketing expense as a percentage of revenue increased to 49.9% of
sales at March 31, 1997 compared to 29.7% at March 31, 1996. This increase was
due to lower revenue and increased headcount at Sedona GeoServices and the new
Reston, VA sales office.
General and Administrative expense for the first quarter 1997 was 64.0% of
revenue compared to 41.6% at March 31, 1996. These increases were anticipated
with the hiring of new exeuctive management in each subsidiary.
Inflation
There can be no assurance that the Company's business will not be affected by
inflation in the future, however, management believes the inflation did not have
a material effect on the results of operations or financial condition of the
Company during the period presented herein.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities - None
Item 3 - Default Upon Senior Securities - None
Item 4 - Submission of Matters to a Vote of
Security Holders - None
Item 5 - Other Information - None
Item 6 - Exhibits and Reports on Form 8K - None
Exhibit Document
----------------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
None
(4) Instruments defining the rights of security holders.
None
(11) Statement re: computation of per share earnings.
Not applicable
(15) Letter re: unaudited financial information.
Not applicable
(18) Letter re: change in accounting principles.
Not applicable
(19) Previously unfiled documents.
None
(20) Report(s) furnished to security holders.
None
(23) Published report regarding matters submitted to
vote of security holders.
None
(24) Consents of experts and counsel.
None
(25) Power of attorney.
None
(28) Additional exhibits.
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,
Thereunto duly authorized.
SCAN-GRAPHICS, INC.
DATE: May 14, 1997 /S/ Laurence L. Osterwise
---------------------- -----------------------------------
Laurence L. Osterwise
President & Chief Executive Officer
DATE: May 14, 1997 /S/ Denis P. Kelly
---------------------- ----------------------------
Denis P. Kelly
Director, Corporate Finance
(Principal Financial and
Accounting Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 896
<SECURITIES> 0
<RECEIVABLES> 923
<ALLOWANCES> (196)
<INVENTORY> 1,301
<CURRENT-ASSETS> 3,055
<PP&E> 3,509
<DEPRECIATION> (2,605)
<TOTAL-ASSETS> 4,037
<CURRENT-LIABILITIES> 1,364
<BONDS> 0
0
2,250
<COMMON> 16
<OTHER-SE> 282
<TOTAL-LIABILITY-AND-EQUITY> 4,037
<SALES> 958
<TOTAL-REVENUES> 958
<CGS> 880
<TOTAL-COSTS> 1,293
<OTHER-EXPENSES> 55
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (1,279)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,279)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
