-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ev5i5vg7C/Pb7PaRpr5jDRy0GW+v5UMR0Xx8Ew3sUvlvr1LJtGIY4lvOWP3HSKZf VTNQz1DIA9q0KrF2QlTi/w== 0000950115-96-000555.txt : 19960510 0000950115-96-000555.hdr.sgml : 19960510 ACCESSION NUMBER: 0000950115-96-000555 CONFORMED SUBMISSION TYPE: 10-K405 CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCAN GRAPHICS INC CENTRAL INDEX KEY: 0000764843 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 954091769 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15864 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 700 ABBOTT DR CITY: BROOMALL STATE: PA ZIP: 19008-4373 BUSINESS PHONE: 6103281040 MAIL ADDRESS: STREET 1: 700 ABBOTT DR CITY: BROOMALL STATE: PA ZIP: 19008 FORMER COMPANY: FORMER CONFORMED NAME: CAPTIVE VENTURE CAPITAL INC DATE OF NAME CHANGE: 19870519 10-K405 1 QUARTERLY REPORT 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 ----------------------------------------------- SCAN-GRAPHICS, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 95-4091769 - -------------------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 Abbott Drive, Broomall, PA 19008 - -------------------------------------------- --------------------------------- (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 - -------------------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share - ------------------------------------------------------------------------------- (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. 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. 2 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 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. 4 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 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 6 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.
Common Stock High Bid Low Bid 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
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 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,
Income Statement 1995 1994 1 1993 1 1992 1 1991 1 ---- ---- ---- ---- ---- Data: 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
- --------------------------- 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 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. 9 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 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 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 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 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 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 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 Scan-Graphics, Inc. and Subsidiaries ------------------------------------------- Report on Consolidated Financial Statements Years Ended December 31, 1995, 1994 and 1993 Scan-Graphics, Inc. and Subsidiaries
Contents - -------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------- 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 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
December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
Scan-Graphics, Inc. and Subsidiaries Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data)
December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-3 - -------------------------------------------------------------------------------- Scan-Graphics, Inc. and Subsidiaries Consolidated Statements of Operations (In Thousands, Except Share and Per Share Data)
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------------
F-4 - -------------------------------------------------------------------------------- Scan-Graphics, Inc. Consolidated Statements of Operations (continued) (In Thousands, Except Share and Per Share Data)
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-5
Class A Class B Preferred Preferred Stock Stock Stock Stock Amount Series A Amount - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
Scan-Graphics, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (In Thousands, Except Share Data)
Class A Preferred Additional Stock Stock Common Stock Paid-In Series C Amount Shares Amount Capital (Deficit) - ------------------------------------------------------------------------------------------------------------------- - $ - 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) - -------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-6 Scan-Graphics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) (In Thousands)
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------------
F-7 Scan-Graphics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued) (In Thousands)
Year ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-8 Scan-Graphics, Inc. and Subsidiaries Summary of Significant Accounting Policies (In Thousands, Except Share and Per Share Amounts) - --------------------------------------------------------------------------------
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.
F-9 Scan-Graphics, Inc. and Subsidiaries Summary of Significant Accounting Policies (In Thousands, Except Share and Per Share Amounts) - --------------------------------------------------------------------------------
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.
F-10 Scan-Graphics, Inc. and Subsidiaries Summary of Significant Accounting Policies (In Thousands, Except Share and Per Share Amounts) - --------------------------------------------------------------------------------
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.
F-11 Scan-Graphics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Share and Per Share Amounts) - --------------------------------------------------------------------------------
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:
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) ---------------------------------------------------------------------
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.
F-12 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:
December 31, 1995 1994 -------------------------------------------------------------------------------- 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
December 31, 1995 1994 -------------------------------------------------------------------------------- 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.
4. Other Assets Product Acquisition Costs
December 31, 1995 1994 -------------------------------------------------------------------------------- Capitalized product acquisition costs $ 400 $ 400 Less accumulated amortization 400 300 -------------------------------------------------------------------------------- $ - $ 100 --------------------------------------------------------------------------------
F-13 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.
Software Purchased December 31, 1995 1994 -------------------------------------------------------------------------------- Capitalized software purchased $ 695 $ 695 Less accumulated amortization 139 - -------------------------------------------------------------------------------- $ 556 $ 695 --------------------------------------------------------------------------------
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 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
December 31, 1995 1994 --------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------
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 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 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 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:
Exercise Price Shares Per Share Aggregate ---------------------------------------------------------------------------------------- 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
F-18 Scan-Graphics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Share and Per Share Amounts) - --------------------------------------------------------------------------------
Exercise Price Shares Per Share Aggregate ---------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------
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.
Exercise Price Shares Per Share Aggregate ---------------------------------------------------------------------------------------- Outstanding at December 31, 1992, 1993 and 1994 450,000 $.78125 $ 586 to $1.34 ----------------------------------------------------------------------------------------
F-19 Scan-Graphics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (In Thousands, Except Share and Per Share Amounts)
Exercise Price Shares Per Share Aggregate ---------------------------------------------------------------------------------------- Exercised (60,000) $1.34 $ (18) ---------------------------------------------------------------------------------------- Outstanding at December 31, 1995 390,000 $.78125 $ 568 to $1.34 ----------------------------------------------------------------------------------------
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:
Exercise Price Shares Per Share Aggregate ---------------------------------------------------------------------------------------- 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
F-20 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 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 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 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 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 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 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 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 Scan-Graphics, Inc. and Subsidiaries Consolidated Schedule II - Valuation and Qualifying Accounts and Reserves (In Thousands) - --------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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
(A) Accounts receivable written-off. F-29 Scan-Graphics, Inc. and Subsidiaries Consolidated Schedule II - Valuation and Qualifying Accounts and Reserves (In Thousands) - --------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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
(A) Accounts receivable written-off. F-30 EX-27 2 FDS
5 1,000 U.S. 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 189 0 981 0 1,454 2,700 2,953 2,196 4,084 1,748 0 0 2,250 10 (155) 4,084 4,866 4,987 3,247 2,955 22 0 0 (1,237) 0 (1,237) 0 0 0 (1,237) (0.14) 0
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