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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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, 1997 or
___ Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from___to___
Commission file number 0-15864
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SCAN-GRAPHICS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 95-4091769
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
649 North Lewis Road, Limerick, PA 19468
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code) 610-495-3003
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
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.
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 27, 1998 was $51,848,115.
The number of shares of the registrant's Common Stock issued and outstanding as
of February 27, 1998 was 18,642,019 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of Scan-Graphics, Inc. (the "Company"
or "Scangraphics") for future operations. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such
statements in this Form 10-K should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained herein as a result of certain factors including, but not limited to,
dependence on operating agreements with foreign partners, significant foreign
and U.S.-based customers and suppliers, availability of transmission facilities,
U.S. and foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition and
rapid technological change. These factors should not be considered exhaustive;
the Company undertakes no obligation to release publicly the results of any
future revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
General
Founded in 1972, Scangraphics(R) is a provider of Geographic Information Systems
(GIS) database management software products and is a leader in scanning and
image processing technology, large document scanners, backfile conversion
services, image software and systems, systems integration, and consulting. The
Company has key product development and marketing alliances with Oracle Corp. as
well as other database and application vendors. Its products are marketed
internationally by a variety of systems integrators and distributors, especially
its Tangent Imaging Systems products. With principal locations in suburban
Philadelphia, Pennsylvania and Englewood, Colorado, the Company's strategies are
encompassed in three business units: Tangent Imaging Systems, (TIS), the Sedona
GeoServices(TM), Inc., and the Technology Resource Centers(TM), Inc. (TRC).
Tangent Imaging Systems(TIS) provides large format color and monochrome scanning
and reprographics systems, servicing among others, the Geographic Information
System (GIS), engineering, reprographics, and fine arts markets. A complete line
of monochrome and grayscale large document scanners and imaging software for
multiple applications are manufactured in Doylestown, Pennsylvania. The color
scanners and related software are produced in and distributed from a facility in
Englewood, Colorado.
2
ITEM 1. BUSINESS (Continued)
Sedona GeoServices, Inc. (Sedona) acquired by the Company in July of 1995, is a
developer, integrator, and distributor of sophisticated spatial data management
software. The open-architecture, object-oriented data management tools organize
and manipulate geospatial objects such as maps, images, and database information
within a single, user-intuitive GIS. A GIS might combine such geographical data
as elevation, waterways, roadways, or soils with demographic, socioeconomic,
environmental or other types of data in ways to facilitate analysis and display.
Some of the uses for these systems are map development, urban planning and
management, emergency response, utilities management, mining and natural
resource exploration, transportation planning and risk management, environmental
services, global positioning systems, market research and planning, aerial
photography management, real estate and retail cataloging. In addition, Sedona
provides mapping and data conversion services in support of its software
products.
Technology Resource Centers, Inc. (TRC) was incorporated in February of 1996
with the purpose of providing an integrated approach to clients' needs for
document scanning, conversion services, imaging systems consulting, systems
integration and technical training. The TRC is concentrating on services that
support imaging and document management technologies and the integration of
these applications with other processes in engineering and Geographic
Information Services.
Financial Information (In Thousands)
Total revenues for the years ended December 31, 1997, 1996, and 1995 were
$4,827, $5,060, and $4,987, respectively. The percentages of total revenue for
scanners and related services for years ended 1997, 1996 and 1995 were 94%, 92%,
and 93%, respectively. The percentages of total revenue for software and related
services for years ended 1997, 1996, and 1995 were 5%, 5%, and 5%, respectively.
The percentages of total revenue for license and royalty fees for years ended
1997, 1996, and 1995 were 1%, 3%, and 2%, respectively.
Financial Information Relating to Domestic and International Sales(In Thousands)
1997 1996 1995
---- ---- ----
Sales to unaffiliated customers:
United States $ 2,700 $ 3,760 $ 3,825
Export 2,127 1,300 1,162
Gross Profit
United States $ (429) $ 553 $ 1,048
Export $ 711 494 692
Exports were sold into the following regions: Western and Eastern Europe, Asia,
the Middle East, and South America.
Description of Business and Principal Products
Tangent Imaging Systems Division
Tangent Imaging Systems is a leading provider of high performance monochrome,
grayscale, and color scanners for large documents. Its complete line of
monochrome/grayscale large document scanners is manufactured at a facility in
Doylestown, Pennsylvania.
The monochrome and grayscale scanners are used to scan architectural,
engineering, and construction drawings, manufacturing process charts, technical
publications, graphic art, and site/facility maps up to 44" wide of virtually
unlimited length. These CF (Continuous Feed) Series scanners feature multiple
and selectable resolutions from 100 to 1270 dots per inch.
3
ITEM 1. BUSINESS (Continued)
The Company acquired Tangent Engineering, Inc. of Englewood, Colorado in
December 1995. As a result, the Company gained the ability to produce a full
line of color scanners, including a range of high accuracy drum scanners,
flatbed scanners, and sheetfeed scanners ranging from 24" wide to 70" wide. This
complement of color scanners is enhanced with its closed-loop system software
for calibrating the scanner, plotter, and the user's choice of inks and paper to
give color copies of great fidelity. Marketed under the brand names TScan(TM)
and Reproworks(TM), these products are targeted toward reprographics, fine arts,
archiving, and automated mapping.
The key challenges facing Tangent Imaging Systems as it positions its products
going forward include a fuller exploitation of the high price and high quality
niche markets for color and monochrome scanners, development of a lower cost
line of scanners, higher profit line of products, and a broadening of its
international distribution systems. In addition, the Company will continue to
re-orient the marketing focus of its scanner products from the defense to the
commercial and industrial sectors. Finally, the Windows NT operating systems
Reproworks will continue to be established as the primary operating system and
user interface.
Sedona GeoServices, Inc.
Sedona GeoServices, Inc. is the developer of leading-edge software products that
enable both GIS specialists and business analysts to visualize, query, and
analyze spatial data. Sedona is also the only Master Value Added Reseller
authorized to commercially package and distribute Lockheed Martin geospatial
software products to the commercial marketplace. Sedona's leading edge products
are based upon open architecture, object-oriented database management systems
for processing geospatially oriented information. These products allow data
types such as maps, images, text and relational database information to be
organized and manipulated within a single, user intuitive GIS. Sedona is also
the developer of software and processes to convert analog spatial data to
digital forms.
Sedona has recently introduced a number of new products:
Sedona DMTool SDO(TM) Version 6 is a comprehensive set of integrated computer
software which provides extensive imaging, map processing and database
capabilities to the workstation user. Specifically developed to interface with
Oracle Corp.'s Spatial Data Option (SDO) and Spatial Cartridge, DMTool SDO's
capabilities are organized as independent but integrated Tools within a Tool Box
approach. The toolbox contains a broad spectrum of GIS functions including map
and image source data management, map display, map editing, image display, and
image editing. Specific support for many Defense oriented map and image formats,
including Vector Product Format (VPF), are provided in DMTool SDO(TM). DMTool
SDO(TM) was the subject of a rigorous evaluation in 1997 by National Imagery and
Mapping Agency (NIMA) which reviewed over 120 spatial imagery and analysis
products. DMTool SDO(TM) was one of only nine products selected for insertion
into NIMA/Department of Defense (DOD) programs.
Sedona is in the final stages of development of a new visualization and query
tool code named JBuffet. This product provides the means to visualize spatial
information contained in text databases, superimposed on a wide variety of
mapping and image products ranging from satellite imagery to street maps.
JBuffet allows users to query the database to perform spatial analysis and
ultimately produce maps detailing regions or specifics of particular interest.
JBuffet is a 100% Java-based, open architecture product, based on concepts
developed in DMTool. JBuffet is user friendly and valuable to both the
traditional GIS expert and the emerging GIS user focused on business management
and marketing analysis. The initial release of JBuffet, in the early summer of
1998, will focus on enabling Oracle's Spatial Cartridge and will be welcomed by
a large number of Spatial Cartridge users.
4
ITEM 1. BUSINESS (Continued)
Sedona supports its software with map conversion and GIS database creation and
update capabilities. Sedona provides high resolution scanning from the paper
source map to digital information; and Digital Line Graph (DLG), and Digital
Elevation Model (DEM) file generation including the ability to generate these
files to U.S. Geological Survey (USGS) National Mapping Standards. The DLG and
DEM production capability has been facilitated by Sedona's development of
software and processes that automate the data digitization process to the
greatest degree possible. Sedona's data conversion software and processes have
cut the time and cost for digital data production dramatically, while
significantly increasing product quality.
Sedona's strategies in the near term involve exploiting existing channels of
distribution for its geospatial software products (e.g., customers of major
database providers such as Oracle; creating software product demand through a
direct sales force soliciting federal agencies, database vendors and Fortune 500
companies; establishing world class mapping and data conversion services for
private industry as well as federal, state, and local governments; and
developing new technology for the generation and distribution of market-driven
data requirements.
Technology Resource Centers, Inc.
TRC provides a wide range of imaging and document management services via
computer technologies with a special emphasis on large format documents such as
engineering drawings, construction drawings, and maps. Integration of these
documents with related data is one of the fastest growing market segments in
imaging and document management. The services provided by TRC include document
conversion, consulting, and systems implementation and training.
TRC has started the process of developing sales, project management, and
technical teams. The TRC has partnership alliances with key vendors to maximize
its penetration into the large format document markets related to manufacturing,
engineering, and geographic information systems within the local and federal
governments and the commercial sector. In addition, contracts for training
services have been secured from the Department of Defense and TRC is working
with agencies in two states to develop a jobs oriented training program in
technical areas.
Research & Development (In Thousands)
The Company's engineering groups are engaged in continuing research and
development programs for its software and scanner products. Tangent Imaging
Systems' efforts will be centered on development of lower cost, higher
performance hardware, and porting existing software to the Windows NT
environment. Sedona's product development is focused on application of existing
programming tools to spatial applications.
Research and development expenses were $1,327, $744, and $582 for the years
ended December 31, 1997, 1996 and 1995, 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.
The Company applied for a patent for its color matching solution technology
during 1997. The patent is pending. The Company has no reason to believe that
this patent will not be awarded.
5
ITEM 1. BUSINESS (Continued)
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 internally developed software
programs are covered by copyrights.
Marketing
Each of the Company's business units sells its products and services through
independent, yet complementary distribution systems, looking to leverage
synergistic opportunities across business unit channels.
Tangent Imaging Systems sells its products through an expanding network of
distributors, value added resellers, system integrators, manufacturers'
representatives, and direct sales personnel. In addition, Tangent Imaging
Systems is actively working to expand its distribution capabilities through
strategic alliances. The Company strongly believes in trademarking its products
and servicemarking its services. The Company has been awarded or is in the
process of applying for a total of 26 trademarks and servicemarks.
Sedona expects to derive significant benefit from various third party
relationships:
* Sedona holds the rights to distribute in the commercial marketplace
Lockheed Martin GIS software and cooperates with the company on both
domestic and international defense and commercial systems-integration
projects that involve the licensed products.
* ESRI accepted Sedona into its Business Partner Program, which is designed
to formalize relationships between ESRI and application developers,
technology resellers, data publishers, systems integrators and consultants.
Sedona's first joint product launch was the SRV+ automatic vectorizing
engine that can be fully integrated within ESRI's ARC/INFO geographic
information product.
* Sedona is in Oracle's Business Alliance Program. The companies are working
together to develop open systems software that spatially enable the
database products of Oracle as well as other vendors. Oracle is supporting
the development and release of Sedona's JBuffet product for Oracle's
existing customer base.
* Sedona is a Principal Member of the Open GIS Consortium, a government,
educational and industry-backed, not-for-profit membership organization
promoting GIS standardization and interoperability. Other key members of
the Consortium include IBM, Intergraph, Lockheed Martin, Microsoft,
Mitsubishi, Oracle and Sun Microsystems, as well as US Geological Survey,
National Imagery and Mapping Agency and US Department of Agriculture.
These strategic relationships are complementary to the distribution system
Sedona is constructing to sell commercial off-the-shelf products and/or licensed
technology.
TRC markets its conversion, software, and consulting to numerous federal, state,
and local government agencies and commercial organizations. Targets of
opportunity are based on TRC's expertise with large format documents such as
engineering drawings and maps. TRC coordinates marketing programs with the
Tangent Imaging Systems and Sedona GeoServices to capitalize on the large niche
markets related to manufacturing, engineering, and geographic information
systems. TRC has also developed marketing and reseller alliances with a number
of document management and conversion software providers as well as conversion
hardware manufacturers.
6
ITEM 1. BUSINESS (Continued)
Major Customers
The Company had a different single customer during the years ended December 31,
1997 and 1996 which accounted for 10% or more of the Company's total sales
revenue. Total revenues for these customers, Sihl GmbH (a subsidiary of the Shil
Group located in Germany) and 3M Company amounted to 22%, and 14% in 1997 and
1996, respectively.
Competition
Tangent Imaging Systems' monochrome and grayscale hardware products compete in a
worldwide market estimated at $100 million. Two competitors, Contex and Vidar,
dominate a significant share of that market. The balance of market share is
divided among the Company and a number of other significant hardware
manufacturers.
Tangent Imaging Systems color products comprise a portion of a rapidly expanding
worldwide market which is primarily shared with four other color scanner
manufacturers. In the areas of large document color imaging and color image
processing software, the Company competes with two providers. In all cases, the
Company's market niche remains large document scanning and digital file
manipulation.
Sedona GeoServices, Inc.'s primary software competitors are businesses with a
focus on specially trained GIS users in one or more industry vertical
applications. These GIS specialists are generally focused on engineering and
planning tasks. Sedona's focus is development of user-friendly, broadly
applicable visualization and analysis tools coupled to both spatial and
non-spatial information technology products. Sedona's tools will be at the
leading edge of integrating spatial analysis in day-to-day business decisions.
There are a number of organizations which offer services similar to those
offered by TRC. However, the focus of TRC on large format documents and the
emphasis on job training programs with conversion services has created a very
strong competitive leverage in a very large market segment that has little
competitive penetration. The trend toward outsourcing of computer services
because of the shortage of technically skilled workers has created a very strong
market for the types of services provided by TRC.
Suppliers
The Company is not dependent on any single supplier for components and
subassemblies in the manufacture of its products.
Manufacturing and GIS Software Development
The Company manufactures its large format scanners, scanner interfaces, and
related software products at its Doylestown, Pennsylvania and Englewood,
Colorado facilities. Sedona GeoServices, Inc. maintains its facilities in
Limerick, Pennsylvania.
Employees
As of December 31, 1997, the Company had 79 full time employees. None of these
employees are represented by a labor union. The Company believes that its
relationships with its employees are satisfactory.
7
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 corporate offices as well as facilities for Sedona
GeoServices, and Technology Resource Centers at 649 North Lewis Road, 2nd Floor,
Limerick, Pennsylvania 19468. The lease for this facility of 11,618 square feet
commenced July 1, 1996 and expires September 30, 1999 with a two year renewal
option. Two addendums to this lease have been made to reflect the consolidation
of certain operations in Limerick, PA and the consequent closing of the former
headquarters in Broomall, PA.
The Tangent Imaging Systems Division administrative offices and certain
manufacturing facilities are located at 825 North Easton Road, Doylestown,
Pennsylvania, 18901 in a 5,500 square foot mixed use facility. The current
sublease for this facility commenced on May 31, 1997, as this Division relocated
from the former Broomall, PA location and expires on May 31, 1998. The remaining
manufacturing facilities are located at 14 Inverness Drive East, Suite A-100,
Englewood, Colorado 80012 in a 7,300 square foot facility. The current lease has
a term of five years beginning in June 1994 and ending May 31, 1999.
The Company maintains five remote sales and operations offices in Virginia,
Connecticut, Florida (2) and Ohio.
Management believes that its facilities are adequate to fulfill its current and
near term needs given the current and projected sales levels.
ITEM 3. LEGAL PROCEEDINGS (In Thousands)
On August 15, 1996, the Company filed suit in the United States Federal Court
for the Eastern District of Pennsylvania for patent infringement against two
competitors who produce electronic image scanning equipment. The Company
believes the defendants are infringing one or more of its patents, and has
requested monetary damages in favor of the Company, as well as injunctive
relief. All defendants are denying any claim of infringement, and are vigorously
defending the claim on the merits. The defendants have also filed a counterclaim
against the Company, requesting that the patents be found invalid and other
relief. The case is presently in the discovery stage, with the trial not
scheduled.
8
ITEM 3. LEGAL PROCEEDINGS (Continued)
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 filed an answer to the complaint on February 26, 1996,
asserting loss of profits from failure by the Plaintiff to forward sales orders
for parts, maintenance and software. During 1997, the arbitrator ruled that the
Company owed the opposing party $229. The Company has paid this amount to the
opposing party and has no more potential liabilities directly associated with
this arbitration. The Company had made a $90 provision for this matter in 1996
and the remaining charge of $139 was made during 1997.
On March 11, 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, for termination of contract, by change of control and for convenience.
This plaintiff asserts this sum represents the excess of market value over the
exercise price of unvested warrants held by the plaintiff which the plaintiff
asserts should have been vested and thereby available for exercise and sale. The
Company has categorically denied the plaintiff claims and will defend its
actions if required. No action has been taken as of this date.
No other actions other than matters involved in the ordinary course of business
are currently known by management and none of these are believed by management
to have potential significance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
Common stock is traded in the NASDAQ SmallCap Market under the symbol "SCNG."
The following Table sets forth the high and low sales prices of the Company's
common stock as reflected on the NASDAQ SmallCap Market for the periods
indicated.
Common Stock High Sales Price Low Sales Price
- ------------ ---------------- ---------------
1996
1st Quarter $ 3 7/8 $ 2 5/8
2nd Quarter 3 7/16 1 15/16
3rd Quarter 3 11/16 1 7/16
4th Quarter 4 1/16 2 3/4
Common Stock High Sales Price Low Sales Price
- ------------ ---------------- ---------------
1997
1st Quarter $ 4 3/4 $ 2 1/2
2nd Quarter 4 1/16 2 1/2
3rd Quarter 5 1/8 2 9/16
4th Quarter 4 31/32 2 1/2
Common Stock High Sales Price Low Sales Price
- ------------ ---------------- ---------------
1998
1st Quarter through
February 27, 1997 $ 2 15/16 $ 2 1/8
As of February 27, 1998 there were approximately 2,300 Shareholders of record.
On February 27, 1998, the last reported sale price of the Company's common stock
as reported on the NASDAQ SmallCap Market was $2 50/64.
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.
By letter dated November 14, 1997, NASDAQ contacted the Company regarding its
continued listing eligibility on The NASDAQ SmallCap Market. After a number of
discussions, correspondence and a meeting with NASDAQ, the Company was notified
by letter dated March 10, 1998 that a NASDAQ panel had concluded that the
Company is currently in compliance with the requirements for continued listing.
10
ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)
The following table sets forth selected financial information regarding the
Company for the year ended December 31, 1997 and for the four previous years.
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 1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ------- -------
Data:
Revenue $ 4,827 $ 5,060 $ 4,987 $ 5,067 $ 3,839
(Loss)before
Extraordinary item (7,517) (4,271) (1,237) (889) (1,856)
Extraordinary item (300) -- -- -- --
Net (Loss) (7,817) (4,271) (1,237) (889) (1,856)
Preferred Dividends (182) (220) (158) (120) (120)
Balance, applicable
to Common Stock (7,999) (4,491) (1,395) (1,009) (1,976)
Basic(Loss) Per
Share applicable to
Common Stock
Before Extraordinary
Item $ (.47) $ (.39) $ (.14) $ (.10) $ (.21)
Extraordinary Item $ (.02) -- -- -- --
Basic Net(Loss) Per
Common Share(2) $ (.49) $ (.39) $ (.14) $ (.10) $ (.21)
AT DECEMBER 31,
---------------
Balance Sheet Data: 1997 1996 1995 1994(1) 1993(1)
---- ---- ---- ------- -------
Total Assets $5,217 $4,092 $4,084 $4,358 $3,884
Working Capital 2,435 1,804 952 465 880
Long-Term
Obligations 156 150 231 417 12
Stockholders' Equity 3,514 2,556 2,105 1,876 2,885
(1) Restated due to acquisition of Tangent Engineering, Inc.
(2) Company adopted SFAS 128 in 1997 and applied it to all prior periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (In Thousands Except Per Share and Share Data)
At December 31, 1997, cash and cash equivalents increased to $1,310, a $229
increase compared to the December 31, 1996 amount of $1,081. The above changes
in cash and cash equivalents are explained as follows in the discussion of cash
flows from operating, investing and financing activities.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources(Continued)
For the year ended December 31, 1997, the cash flows from operating activities
resulted in a net use of cash of $7,333 compared to the year ended December 31,
1996 amount of $2,621. The increase of $4,712 was primarily due to funding of
development costs in all Divisions of the Company as well as operating losses
sustained by the Tangent Imaging Systems Division. An increase in inventories
($644) was due principally to a build up of stock in anticipation of 1998
orders.
For the year ended December 31, 1997 the cash flows from investing activities
resulted in a net use of cash of $591 compared to the year ended December 31,
1996 amount of $329. The increase in the use of cash of $262 as of December 31,
1997, compared to December 31, 1996 is due to the purchase of property and
equipment for ongoing operations and development activities and the lack of $228
in proceeds from the sale of Tangent demo scanners realized in 1996.
For the year ended December 31, 1997, cash flows from financing activities
provided $8,153 compared to the fiscal December 31, 1996 amount of $3,842. The
increase in cash in 1997 is due principally to the proceeds of an April 1997
private placement of $5,200, in addition to increased funds from exercise of
options and warrants of $3,162. The increase in cash in 1996 was due to the
proceeds of a March 1996 private placement of $3,100 less expenses of $300, in
addition to increased funds from warrant/option exercise activity ($1,641).
In connection with a $5,200 private placement of its securities in April 1997,
the Company offered for sale 52 units, each of which consisted of a $100, 7%
convertible note due May or June 1999, and one warrant to purchase 17,308 shares
of common stock of the Company at an exercise price of $4.00 per share for a
period of four (4) years. The notes and any accrued interest are convertible
within two (2) years at a price per share equal to the lesser of $7.00 or the
applicable percentage of the average closing sales price (90%, minus 1% for each
full $.20 by which the conversion price for such conversion is greater than
$4.00) of the Company's common stock during the last five trading days prior to
conversion. If the conversion price is less than $4.00, a 10% discount to the
closing price for the 5 days prior to conversion is required.
In conjunction with this financing, the Company has entered into a consulting
agreement with a New York investment capital firm, and has issued 2,100,000
warrants on the same terms as the individual investors participating in the
$5,200 private placement.
During the remainder of 1997, substantially all the April 1997 convertible notes
outstanding were converted to a new Series "D" of Preferred Stock with similar
terms and conditions.
Promissory notes ofthe certain officers and directors of the Company in the
amountof $1,327 reflects the balance of amounts provided in exchange for
exercise of warrants and options and have maturity dates through January 2003.
During March 1998, the Company entered into a $5.2 million private placement
purchase agreement. The Company expects to sell 52 units of convertible
debentures. Each unit consists of $100, 7% convertible note due in two years and
a warrant to purchase 28,850 shares of common stock. The notes and any accrued
interest are convertible within 90 days at a price per share equal to the lesser
of $3 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources(Continued)
If the conversion price is $2 a share or less, the Company may elect to redeem
all or part of the debenture and accrued interest at the par value of principal,
plus the conversion discount. Conversions are restricted to 10% per month on a
cumulative monthly basis. As of March 27, 1998, the Company has received $2.1
million of these proceeds.
The Company believes that the proceeds from this private placement and funds
generated from operations will be sufficient to meet the Company's working
capital requirements for 1998.
Results of Operations (In Thousands)
Net Revenue for the year ended December 31, 1997 decreased to $4,827, a 4.6%
decline when compared to the year ended December 31, 1996 amount of $5,060.
The percentage of total revenue for scanners and related services for years
ended December 31, 1997, 1996 and 1995 were 94%, 92%, and 93%, respectively. The
percentages of total revenue for software and related services for years ended
December 31, 1997, 1996 and 1995 were 5%, 5%, and 5%, respectively. The
percentage of total revenue for license fees for years ended December 31, 1997,
1996 and 1995 was 1%, 3%, and 2%, respectively.
The gross profit margin decreased to $282 for the year ended December 31, 1997
from $1,047 for the year ended December 31, 1996, a drop of 73%. This resulted
from a combination of lower sales volume in the Tangent Division and higher
costs principally in the Company's Sedona Division.
The gross profit margin decrease of $693 between the years ended December 31,
1996 and 1995 was a result of inventory write-offs for two discontinued product
lines ($400) and the full amortization of software rights received in a
litigation settlement ($417). The Company's gross profit margin percentages were
6%, 21%, and 35% for the years ended December 31, 1997, 1996, and 1995,
respectively.
Research and Development Expenses: In the years ended December 31, 1997, 1996
and 1995, the Company had research and development expenses of $1,327, $744, and
$582, respectively. Research and development expenses as a percentage of revenue
for 1997, 1996 and 1995 were 27.5%, 14.7%, and 11.7%, respectively. The 1997
increase from the 1996 amounts of research and development was principally the
result of increased expenses in the Sedona software products area and Tangent
Imaging Systems Division. The 1996 increase from 1995 levels in research and
development was the result of increased personnel engaged in the design of
Sedona GeoServices geospatial software products.
Sales and Marketing Expenses: Sales and Marketing expenses for years ended
December 31, 1997, 1996 and 1995 totaled $2,773, $1,665, and $1,388,
respectively. Sales and marketing expenses as a percentage of Revenue in 1997,
1996 and 1995 were 57.4%, 32.9%, and 27.8%, respectively. Increases are
principally the result of the hiring of sales management and personnel and
related costs for Sedona.
Operating, General and Administrative Expenses: General and Administrative
expenses for the years ended December 31, 1997, 1996 and 1995 totaled $3,375,
$2,263, and $985, respectively. The increase in year ended December 31, 1997
expenses compared to the year ended December 31, 1996 resulted principally from
the addition of executive level personnel in Corporate and Tangent Imaging
Systems Divisions.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
The general and administrative cost increases in the years ended December 31,
1996 from 1995 levels resulted from the addition of key executive management
personnel in each subsidiary and in Corporate capacities. In addition, Sedona
($575) and TRC ($150) staffed or initiated their operations during 1996 and the
Company incurred $283 of non-cash consulting expense for warrants issued for
non-employee services. General and Administrative expenses as percentages of
revenue for the years ended December 31, 1997, 1996 and 1995 were 69.9%, 44.7%,
and 19.8%,respectively.
Interest expense for years ended December 31, 1997, 1996 and 1995 was $326, $432
and $44, respectively. The Company incurred $100 of non-cash interest expense
for the issuance of warrants to note holders of the $5,200 private placement in
April of 1997. Interest expense of $193 was incurred on the $5,200 in private
placement debentures prior to their conversion at the year ended December 31,
1997 into a new series of preferred stock.
The company has conducted an exhaustive review of the Year 2000 issue with all
key executives participating. This review included all software produced by the
Company for use by its customers as well as the principal internally used
management information system. As a result of this review, conclusion was
reached that there is no Year 2000 issue of significance regarding either
software produced by the Company or used internally. Nevertheless, management
plans to periodically review the Year 2000 issue and will develop a
comprehensive plan to address any issues which may arise.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"), effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent rights
and privileges of various securities outstanding (stock, options, warrants,
preferred stock and debt) including dividend and liquidation preferences, call
prices and dates, conversion or exercise prices and redemption requirements. The
Company has adopted the standard for all periods presented.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for public
enterprises reporting of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Recent Accounting Pronouncements (Continued)
Statement of Financial Accounting Standards No.132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"), revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminate certain existing disclosure requirements.
SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of all three statements is not
expected to impact financial statements or disclosures.
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.
15
PART III
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 68 Chairman of the Board
Laurence L. Osterwise 50 CEO, President and Director
William C. Hubbard 42 Executive Vice President
Michael A. Mulshine 58 Secretary and Director
R. Barry Borden 58 Director
David S. Hirsch 62 Director
Jack Pellicci 59 Director
James C. Sargent 82 Director
Bruce D. Downing 57 Vice President
Robert J. Griffin 51 Vice President
Colin B. Matthews 43 Vice President
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.
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 and a Director 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
Emeritus of Cabrini College. Mr. Trolio has served as Chairman of the Finance
and Audit Committee and is currently a Fellow of the International Society of
Optical Engineers. Mr. Trolio received an Honorary Doctor of Science degree from
Cabrini College in 1997.
Laurence L. Osterwise was appointed Chief Executive Officer, President and a
Director of the Company by action of the Board of Directors on April 23, 1997.
Mr. Osterwise began his employment with the Company on November 1, 1996, as its
Chief Operating Officer and President of Sedona GeoServices, Inc., a subsidiary.
He was most recently President of the $1.5+ billion Communications Division of
General Instruments Corporation. Prior to joining General Instruments
Corporation, Mr. Osterwise spent 25 years with IBM Corporation, where he held
positions as President of Production Industries, U.S. Vice President and
Corporate Director of Market Driven Quality, and IBM Rochester General Manager
and Director of Application Business Systems. Under his leadership, IBM
Rochester was awarded the Malcomb Baldridge National Quality Award. Mr.
Osterwise received a BS in Mathematics from Duke University in 1969 and a MS in
Computer Sciences from Syracuse University in 1973.
16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
William C. Hubbard has been an Executive Vice President of the Company since
March 1996. He initially joined the Company as a consultant in 1995, and later
that year he assumed the position of Vice President of Sales and Marketing. From
1991 to 1994, he was Vice President of Marketing for R & B, Inc., a manufacturer
and distributor of replacement parts for automobiles, watercraft and trucks.
Prior to joining R & B, Inc., Mr. Hubbard spent 6 years with Giles & Ransome,
Inc., the last 3 years in the capacity of Corporate Marketing Manager. From 1979
to 1984, he completed a variety of field sales/dealer development and internal
staff assignments for Caterpiller, Inc. He received a BA in Economics and
Business from Rockford College in 1978. Mr. Hubbard has announced his
resignation from the Company effective March 31, 1998.
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. In addition, he is a Director of Vasco Data
Security International, Inc., an OTC traded company and provider of internet and
computer network hardware and software security products for financial
institutions, industry and government. Mr. Mulshine received a BSEE degree from
the Newark College of Engineering in 1961.
R. Barry Borden, a Director of the Company since June 1996, has founded and
managed businesses in the computer hardware and software industry for the past
30 years. Since August 1997, he has served as President of Nettech Systems,
Inc., a supplier of software for wireless data communications. Prior to that he
has served as Chairman and CEO of Mergent International, a supplier of software
for data security on PC Desktops and enterprise wide networks. Since 1984, Mr.
Borden has been President of LMA Group Inc., a general management consulting
firm. From 1968 to 1980, Mr. Borden was the founder, President and CEO of Delta
Data Systems, a CRT Terminal manufacturer, and from 1981 to 1984 he was founder,
Chairman and CEO of Franklin Computer Corp., a manufacturer of microcomputers.
In 1989 he served as President and CEO of Cricket Software, Inc., a supplier of
graphics software. Mr. Borden received a BSEE degree from the University of
Pennsylvania in 1961.
David S. Hirsch, a Director of the Company since January 1992, retired in 1991
from Schroder & Co., Incorporated and its predecessor firms where he was a
principal during the five years preceding his retirement. Mr. Hirsch received a
BA degree from Cornell University in 1957 and a MBA degree from Harvard
University in 1959.
Jack Pellicci, a Director of the Company since October 1996, is Oracle
Corporation's Vice President of Global Public Sector "Government and Education".
Prior to joining Oracle in 1992, Mr. Pellicci retired as a Brigadier General
with 30 years in the U.S. Army, where he was the Commanding General of the
Personnel Information Systems Command. Mr. Pellicci is a member of the Board of
Directors of the Open GIS Consortium (OGC), an organization of over 70
commercial, governmental, and educational entities dedicated to open systems
approaches to geoprocessing. He is the Vice Chairman of the High Performance
Computing and Communications Consortium (HPCCC). In addition, Mr. Pellicci
serves on the Armed Forces Communications and Electronics Association (AFCEA)
International Technical Committee, and is a Corporate Fellow for the National
Governors Association. He also serves on the Board of Advisors for the Club of
Rome. He is a graduate of the U.S. Military Academy at West Point with a
Bachelor of Engineering degree, and received a Master of Mechanical Engineering
degree from Georgia Institute of Technology.
17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
James C. Sargent, a Director of the Company since January 1992, is Counsel to
the law firm of Opton, Handler, Gottleib, Fieler & Katz, and is counsel to Abel
Noser Corporation, a member of the New York Stock Exchange. He was previously a
partner and counsel to Whitman & Ransom. He was Regional Administrator from 1955
to 1956, and Commissioner from 1956 to 1960, of the Securities and Exchange
Commission.
Bruce Downing has been the President of the Technology Resource Centers, Inc.
since July 1996 and was appointed Company Vice President in March 1998. Mr.
Downing has more than 30 years experience in computer systems management and
business development. His computer industry experience includes positions as a
marketing manager and systems consultant for Systems and Computer Technology
Corporation, Director of Industry Marketing for Commodore Computers covering
education and government markets and as a founding officer and Senior Vice
President of Intelligent Electronics. Prior to joining the Company, Mr. Downing
was involved in the startup of software and systems consulting companies. Mr.
Downing received a BA degree from Grinnel College in 1962 and a MA and PhD
degree from the University of Colorado in 1966.
Robert J. Griffin was appointed a Company Vice President in March 1998. He
joined the Company as Senior Vice President of Sales and Distribution in the
Company's Tangent Imaging Systems Division in September 1997 and in January 1998
Mr. Griffin was appointed President of that unit. Prior to joining the Company,
Mr. Griffin directed a broad array of marketing and sales initiatives with
International Business Machines Corporation including: market and brand
management, customer satisfaction, business partner recruitment and support,
sales training and field sales management. Most recently, Mr. Griffin served as
Director, Worldwide Competitive Marketing and Sales for IBM, a position directly
responsible to the CEO and senior executive team.
Colin B. Matthews has been President of Sedona GeoServices, Inc., since April
1997 and was appointed Company Vice President in March 1998. Prior to his
joining the Company, Mr. Matthews was President, COO and a Director of Denbridge
Capital Corporation, a Toronto Stock Exchange listed venture capital/ merchant
bank to high technology and junior resource companies. Mr. Matthews became a
part of the Denbridge organization in 1994 when a company he co-founded in 1992,
RMSL Traffic Systems, Ltd., was acquired by the Denbridge organization in a $50
million transaction. Mr. Matthews received a BSC degree in Electronic
Engineering in 1975 from Robert Gordons University in Aberdeen, Scotland.
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 1998 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 1998 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 1998 annual meeting of Shareholders.
18
PART IV
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.
3.1 Articles of incorporation (2) (Exhibit 3.1).
3.2 Bylaws (2) (Exhibit 3.2).
3.3 Amendment to Articles of Incorporation. (7)
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).
4.8 Specimen copy of stock certificate for shares
of Class A Convertible Preferred Stock Series C. (7)
*4.9 Specimen copy of stock certificate for shares of Class A
Convertible Preferred Stock Series D.
*4.10 Designation of rights and preferences with respect to shares of
Class A Convertible Preferred Stock Series D.
**10.1 Employment Contract - Andrew E. Trolio (1) (Exhibit 10.1).
*,**10.1.1 Addendum to Employment Agreement - Andrew E. Trolio
Exhibit (10.1.1).
**10.2 Employment Contract - Anthony M. Trolio (1)(Exhibit 10.4).
**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)
(Exhibit 10.6).
19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
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) (Exhibit 10.9
10.9.1 Agreement between SCAN-GRAPHICS, Inc. and
Michael A. Mulshine and Osprey Partners. (8)(Exhibit 10.9.1)
10.9.2 Agreement between SCAN-GRAPHICS, Inc. and
Michael A. Mulshine and Osprey Partners. (8)(Exhibit 10.9.2)
10.9.3 Finders Fee Agreement between SCAN-GRAPHICS, Inc. and
Osprey Partners and C&F Global Enterprises. (8)(Exhibit 10.9.3)
10.10 Facility Lease, 649 N. Lewis Rd., Limerick, PA.(8)
(Exhibit 10.10)
10.10.1 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA. (8)
(Exhibit 10.10.1)
*10.10.2 Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA.
(Exhibit 10.10.2)
**10.11 Employment Contract - Laurence L. Osterwise (8) (Exhibit 10.11)
**10.12 Employment Contract - Richard L. Rex (8) (Exhibit 10.12)
**10.13 Employment Contract - Bruce Downing (8) (Exhibit 10.13)
*,**10.13.1 Employment Contract - Bruce Downing (Exhibit 10.13.1)
**10.14 Employment Contract - William Hubbard (8) (Exhibit 10.14)
10.15 License Agreement between The Ohio State University Research
Foundation and Sedona GeoServices, Inc.(8)(Exhibit 10.15)
*,**10.16 Employment Contract - Colin M. Matthews (Exhibit 10.16)
*,**10.17 Employment Contract - Robert J. Griffin (Exhibit 10.17)
*10.18 Facility Lease - 825 N. Easton Road, Doylestown, Pennsylvania
(Exhibit 10.18)
25.1 Power of attorney (included on the signature page to this
Form 10-K).
* Filed herewith.
** Executive Compensation Plans and Arrangements.
20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(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, 1993
(6) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
21
Scan-Graphics, Inc. and Subsidiaries
Contents
Report of Independent Certified Public Accountants F-2
Consolidated financial statements
Balance sheets as of December 31, 1997 and 1996 F-3 - F-4
Statements of operations for each of the three years
in the period ended December 31, 1997 F-5 - F-6
Statements of stockholders' equity for each of the three
years in the period ended December 31, 1997 F-7 - F-8
Statements of cash flows for each of the three years in the
period ended December 31, 1997 F-9 - F-10
Summary of significant accounting policies F-11 - F-15
Notes to consolidated financial statements F-16 - F-38
Financial statements schedule
Schedule II - Valuation and qualifying accounts and
reserves for each of the three years in the period
ended December 31, 1997 F-39
- ------------------------------------------------------------------
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
Limerick, Pennsylvania
We have audited the accompanying consolidated balance sheets of Scan-Graphics,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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 audits. We did not audit the 1995 financial statements of
Tangent Engineering, Inc., a wholly owned subsidiary, which statements reflect
total assets of $1,657,000 as of December 31, 1995, and total revenues of
$3,023,000 for the year then ended. 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 reports 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, 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
Philadelphia, Pennsylvania
March 13, 1998, except for
Note #14, which is dated March 27, 1998
F-2
Scan-Graphics, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash $ 1,310 $ 1,081
Accounts and notes receivable,
less allowance for doubtful accounts of $91 and $189 696 844
Inventories 1,690 1,174
Prepaid expenses and other current assets 267 91
- --------------------------------------------------------------------------------------------------------------------
Total current assets 3,963 3,190
- --------------------------------------------------------------------------------------------------------------------
Property and equipment,
less accumulated depreciation and amortization 1,226 864
- --------------------------------------------------------------------------------------------------------------------
Other assets 28 38
- --------------------------------------------------------------------------------------------------------------------
$ 5,217 $ 4,092
====================================================================================================================
F-3
Scan-Graphics, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 1,013 $ 617
Dividend payable 30 368
Deferred revenue 33 237
Current maturities, capital lease obligations 41 102
Current maturities of long-term debt 411 62
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,528 1,386
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 98 107
Capital lease obligations, less current maturities 58 43
Deferred revenue 19 --
Stockholders' equity
Class B preferred stock, par value $0.01
Authorized 2,000,000 shares
No issued shares -- --
Class A convertible preferred stock
Authorized 1,000,000 shares
Series A - Issued and outstanding 500,000 shares,
par value $2.00 1,000 1,000
Series C - No issued and outstanding shares for 1997 and
125,000 for 1996, par value $10.00 -- 1,250
Series D - Issued and outstanding 2,990 shares for 1997,
par value $1,000 2,990 --
Common stock, par value $0.001
Authorized 50,000,000 shares
Issued and outstanding 18,070,319 and 14,780,766 shares 18 15
Additional paid-in capital 22,155 15,295
Deficit (21,322) (13,323)
Notes receivable, related parties (1,327) (1,681)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,514 2,556
- --------------------------------------------------------------------------------------------------------------------
$ 5,217 $ 4,092
====================================================================================================================
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Revenues
Sales $ 4,791 $ 4,935 $ 4,866
License and royalty fees 36 125 121
- --------------------------------------------------------------------------------------------------------------------
Total revenues 4,827 5,060 4,987
Cost of goods sold (including rent expense
to a related party of $30 in 1997 and
$48 in 1996 and 1995) 4,545 4,013 3,247
- --------------------------------------------------------------------------------------------------------------------
Gross profit ` 282 1,047 1,740
- --------------------------------------------------------------------------------------------------------------------
Expenses
Research and development 1,327 744 582
Sales and marketing (including rent expense
to a related party of $4 in 1997 and $29 in
1996 and 1995) 2,773 1,665 1,388
General and administrative (including
related party amounts of $30, $19 and $26,
respectively) 3,375 2,263 985
- --------------------------------------------------------------------------------------------------------------------
Total expenses 7,475 4,672 2,955
- --------------------------------------------------------------------------------------------------------------------
(Loss) before other (expense) income (7,193) (3,625) (1,215)
- --------------------------------------------------------------------------------------------------------------------
Other (expense) income
Litigation legal fees (187) (179) --
Interest expense (including related party
amounts of $-0-, $23 and $10, respectively)
(326) (432) (44)
Other expenses (29) (86) (27)
Interest income 218 51 2
Other income -- -- 47
- --------------------------------------------------------------------------------------------------------------------
Total other (expense) (324) (646) (22)
- --------------------------------------------------------------------------------------------------------------------
F-5
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Data)
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
(Loss) before income taxes $ (7,517) $ (4,271) $ (1,237)
Income taxes -- -- --
- ------------------------------------------------------------------------------------------------------------
(Loss) before extraordinary item (7,517) (4,271) (1,237)
Extraordinary item
(Loss) on early extinguishment of debt
(net of tax of $-0-) (300) -- --
- ------------------------------------------------------------------------------------------------------------
Net (loss) (7,817) (4,271) (1,237)
Preferred dividends (182) (220) (158)
- ------------------------------------------------------------------------------------------------------------
Balance, applicable to common stock $ (7,999) $ (4,491) $ (1,395)
============================================================================================================
Per share data
Basic
(Loss) applicable to common shares
before extraordinary item $ (.47) (.39) (.14)
Extraordinary item (.02) -- --
- ------------------------------------------------------------------------------------------------------------
Basic net (loss) per common share $ (.49) $ (.39) $ (.14)
============================================================================================================
Basic weighted average number
of common shares outstanding 16,288,296 11,490,332 9,872,327
============================================================================================================
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-6
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Class B Preferred Class A Preferred Class A Preferred
Stock Stock Series A Stock Series C
------------------- ------------------ --------------------
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 -- $ -- 500,000 $ 1,000 -- $ --
Issuance of preferred stock
Class A, Series C -- -- -- -- 125,000 1,250
Exercise of common stock options -- -- -- -- -- --
Exercise of common stock warrants -- -- -- -- -- --
Expenses incurred related to issuance of
preferred stock and common stock -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 500,000 1,000 125,000 1,250
Issuance of stock warrants - convertible debt -- -- -- -- -- --
Stock warrants/options issued for
consulting services -- -- -- -- -- --
Exercise of common stock
options/warrants - stock subscription -- -- -- -- -- --
Conversion of debt into common stock -- -- -- -- -- --
Exercise of common stock options -- -- -- -- -- --
Exercise of common stock warrants -- -- -- -- -- --
Expenses incurred related to issuance
of convertible debt -- -- -- -- -- --
Expenses incurred related to
issuance of common stock -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss, year ended December 31, 1996 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 500,000 1,000 125,000 1,250
Stock warrants/options issued for consulting services -- -- -- -- -- --
Conversion of debt into common stock -- -- -- -- -- --
Conversion of debt into preferred stock -- -- -- -- -- --
Conversion of preferred stock into common stock -- -- -- -- (125,000) (1,250)
Exercise of common stock options -- -- -- -- -- --
Exercise of common stock warrants -- -- -- -- -- --
Expenses incurred related to conversion
of convertible debt -- -- -- -- -- --
Expenses incurred related to issuance of
common stock -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Repayment of notes receivable -- -- -- -- -- --
Issuance of stock warrants - convertible debt -- -- -- -- -- --
Net loss, year ended December 31, 1997 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- $ -- 500,000 $ 1,000 -- $ --
=================================================================================================================================
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-7
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Class A Preferred Notes
Stock Series D Common Stock Additional Receivable,
------------------- -------------------- Paid-In Related
Shares Amount Shares Amount Capital Deficit Party
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 -- $ -- 9,718,812 $ 10 $ 8,303 $ (7,437) $ --
Issuance of preferred stock
Class A, Series C -- -- -- -- -- -- --
Exercise of common stock options -- -- 185,000 -- 296 -- --
Exercise of common stock warrants -- -- 285,000 -- 157 -- --
Expenses incurred related to issuance of
preferred stock and common stock -- -- -- -- (79) -- --
Preferred stock dividends -- -- -- -- -- (158) --
Net loss, year ended December 31, 1995 -- -- -- -- -- (1,237) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- -- 10,188,812 10 8,677 (8,832) --
Issuance of stock warrants - convertible debt -- -- -- -- 270 -- --
Stock warrants/options issued for
consulting services -- -- -- -- 283 -- --
Exercise of common stock
options/warrants - stock subscription -- -- 1,099,300 1 1,680 -- (1,681)
Conversion of debt into common stock -- -- 2,259,056 2 3,105 -- --
Exercise of common stock options -- -- 264,222 1 330 -- --
Exercise of common stock warrants -- -- 969,376 1 1,309 -- --
Expenses incurred related to issuance
of convertible debt -- -- -- -- (300) -- --
Expenses incurred related to
issuance of common stock -- -- -- -- (59) -- --
Preferred stock dividends -- -- -- -- -- (220) --
Net loss, year ended December 31, 1996 -- -- -- -- -- (4,271) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 14,780,766 15 15,295 (13,323) (1,681)
Stock warrants/options issued for consulting services -- -- -- -- 124 -- --
Conversion of debt into common stock -- -- 683,020 1 1,954 -- --
Conversion of debt into preferred stock 2,990 2,990 -- -- -- -- --
Conversion of preferred stock into common stock -- -- 949,352 1 1,451 -- --
Exercise of common stock options -- -- 182,917 -- 295 -- --
Exercise of common stock warrants -- -- 1,474,264 1 2,864 -- --
Expenses incurred related to conversion
of convertible debt -- -- -- -- (45) -- --
Expenses incurred related to issuance of
common stock -- -- -- -- (183) -- --
Preferred stock dividends -- -- -- -- -- (182) --
Repayment of notes receivable -- -- -- -- -- -- 354
Issuance of stock warrants - convertible debt -- -- -- -- 400 -- --
Net loss, year ended December 31, 1997 -- -- -- -- -- (7,817) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,990 $2,990 18,070,319 $ 18 $ 22,155 $ (21,322) $(1,327)
====================================================================================================================================
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-8
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (7,817) $ (4,271) $ (1,237)
Adjustments to reconcile net loss to net cash
(used in) operating activities
Depreciation and amortization 384 344 679
Write-off of purchased software -- 556 --
Consulting expense 124 283 --
Interest expense and write-off of deferred debt costs 454 270 --
Provision for losses on accounts receivable (98) 143 12
(Gain) loss on sale and disposition of assets -- 23 1
Decrease in deferred income taxes -- 34 --
Decrease (increase) in
Accounts receivable 246 3 74
Inventories (644) 280 (391)
Prepaid expenses and other current assets (176) (55) 10
Other noncurrent assets (17) 30 27
Increase (decrease) in
Accounts payable and accrued expenses 396 (335) 111
Accrued bonuses -- -- (400)
Deferred revenue (185) 74 (120)
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (7,333) (2,621) (1,234)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (591) (553) (129)
Capitalized trademark and patent costs -- (4) (10)
Proceeds from sale of property and equipment -- 228 --
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (591) (329) (139)
- --------------------------------------------------------------------------------------------------------------------
F-9
Scan-Graphics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities
Proceeds from issuance of convertible debt and warrants $ 5,200 $ 3,100 $ --
Payment of preferred stock dividends (289) (10) --
Repayments of notes receivable, related parties 324 -- --
Payment against loans payable, officer -- (59) (108)
Proceeds from notes payable, officers -- 25 387
Payment of notes payable, officers -- (284) (207)
Payment of long-term debt (66) (82) (70)
Payment of capital lease obligation (46) (130) (81)
Payment of expenses, stock issuance (183) (59) (79)
Payment of expenses, convertible debt (45) (300) --
Proceeds from issuance of preferred stock -- -- 1,050
Proceeds from exercise of common stock warrants/options 3,162 1,641 444
Proceeds from issuance of long-term debt 96 -- --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,153 3,842 1,336
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 229 892 (37)
Cash and cash equivalents, beginning of year 1,081 189 226
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,310 $ 1,081 $ 189
====================================================================================================================
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-10
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 of
Business 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., Sedona, Inc. and
Technology Resource Center, 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 over the estimated useful lives of the
Depreciation and respective assets.
Amortization
Revenue Revenue from product sales is recognized at the time of shipment. Revenue from
Recognition noncontract 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 Costs expensed as incurred. Software production costs (once product is considered
and Software feasible and a working model or detail design is completed) are capitalized and
Production Costs amortized by using the 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.
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.
F-11
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
Net Loss Per The Company adopted the provisions of Statement of Financial
Common Share Accounting Standards No. 128 ("SFAS 128") "Earnings Per
Share" in 1997. SFAS 128 provides for the calculation of
"basic" and "diluted" net loss per share for all periods
presented. Basic net loss per share includes no dilution and
is calculated by dividing net loss by the weighted average
number of common shares outstanding for the period. Diluted
net loss per share has not been presented as it would have
an antidilutive effect on loss per share. The adoption of
SFAS #128 had no impact on the prior years.
Long-Lived The Company evaluates the recoverability of all intangibles
Assets and other long-lived assets annually, or more frequently
whenever events and circumstances warrant revised estimates,
and considers whether the assets 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
assets based on undiscounted estimated future operating cash
flows.
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 revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
Concentration Financial instruments which potentially subject the Company
of Credit Risk to credit risk consist of cash equivalents and accounts
receivable.
F-12
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
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. Concentration of credit risk, with respect to
accounts receivable, is reduced due to the Company's credit
evaluation process. The Company does not require collateral
from its customers with the exception of certain foreign
customers which prepayments or letters of credit are
required. Although the Company has a diversified client
base, its customers consist primarily of distributors,
governmental agencies and large corporate entities.
Fair Value of The carrying amounts reported in the balance sheets for
Financial cash, accounts and notes receivable, accounts payable and
Instruments short-term debt 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 accounts for income taxes under the liability
method. Deferred tax liabilities are recognized for taxable
temporary differences and deferred tax assets are recognized
for deductible temporary differences, tax losses and credit
carryforwards. A valuation allowance is established to
reduce deferred tax assets if some, or all, of such deferred
tax assets are not likely to be realized.
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.
F-13
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
Recent Accounting Statement of Financial Accounting Standards No. 129,
Pronouncements "Disclosure of Information about Capital Structure" ("SFAS
129"), effective for periods ending after December 15, 1997,
establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of
the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock and
debt) including dividend and liquidation preferences, call
prices and dates, conversion or exercise prices and
redemption requirements. The Company has adopted the
standard for all periods presented.
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), establishes
standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except
those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS 130 requires that
all items required to be recognized under current accounting
standards as components of comprehensive income be reported
in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of a Business Enterprise" ("SFAS
131"), establishes standards for public enterprises
reporting of information about operating segments in annual
financial statements and requires reporting of selected
information about operating segments in interim financial
statements issued to the public. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about
which separate financial information is available and that
is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance.
F-14
Scan-Graphics, Inc. and Subsidiaries
Summary of Significant Accounting Policies
(In Thousands, Except Share and Per Share Amounts)
Statement of Financial Accounting Standards No.132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"), revises employers'
disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of
those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in
the benefit obligations and fair values of plan assets that
will facilitate financial analysis and eliminate certain
existing disclosure requirements.
SFAS 130, SFAS 131 and SFAS 132 are effective for financial
statements for periods beginning after December 15, 1997 and
require comparative information for earlier years to be
restated. Adoption of all three statements is not expected
to impact financial statements or disclosures.
F-15
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
1. Business On December 29, 1995, 1,000,000 common shares of
Combinations 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 was accounted for as a
pooling of interests. Accordingly, Tangent's operating
results are included in the financial statements for all
periods presented.
On July 28, 1995, the Company acquired all of the
outstanding common stock of Sedona GeoServices, Inc. of
Pennsylvania ("Sedona") and the rights to their software 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 1998. 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. As of
December 31, 1997, those levels had not been attained.
Warrants which do not vest within five years from the date
of acquisition will be canceled.
2. Inventories Inventories are summarized as follows:
December 31, 1997 1996
----------------------------------------------------------
Raw materials $ 904 $ 523
Work-in-process 414 263
Finished goods 372 388
----------------------------------------------------------
$ 1,690 $ 1,174
==========================================================
F-16
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
3. Property and Major classes of property and equipment consist of the
Equipment following:
December 31, 1997 1996
--------------------------------------------------------
Equipment under capital lease $ 387 $ 415
Machinery and equipment 3,139 2,492
Furniture and fixtures 158 110
Automobiles and trucks 12 12
Leasehold improvements 116 94
Software 282 253
--------------------------------------------------------
4,094 3,376
Less accumulated depreciation
and amortization 2,868 2,512
--------------------------------------------------------
$ 1,226 $ 864
========================================================
Depreciation and amortization expense was $357 in 1997, $344
in 1996 and $457 in 1995.
4. Other Assets Software purchased is summarized as follows:
December 31, 1997 1996
--------------------------------------------------------
Capitalized software purchased $ 695 $ 695
Less accumulated amortization 695 695
--------------------------------------------------------
$ -- $ --
========================================================
In 1996, the carrying amount of the Company's software
purchased was determined to be impaired based on an analysis
of the products undiscounted estimated future operating cash
flows. Therefore, the remaining amount of $556 was written
off and recorded in cost of goods sold.
F-17
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
5. Long-Term Debt
Long-term debt consists of the following:
December 31, 1997 1996
------------------------------------------------------------------------
7% convertible debentures payable, originally
maturing between May and June 1999. Balance
was converted into common stock subsequent to
December 31, 1997 (see Note 6).
$ 311 $ --
Note payable, payable in monthly installments
of $6, including interest at 8.75% through
July 1999. The note payable is collateralized
by equipment. 107 169
Other 91 --
------------------------------------------------------------------------
509 169
Less current maturities 411 62
------------------------------------------------------------------------
Long-term debt $ 98 $ 107
========================================================================
As of December 31, 1997, long-term debt matures as follows:
1998 $ 411
1999 62
2000 36
------------------------------------------------------------------------
$ 509
========================================================================
F-18
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
6. 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, C and D
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 at
the par value of the preferred shares. Each share is
convertible at the election of the holder into one share of
common stock at any time. 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 the "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 the date of issue. Each
share of Class A Series C represents twenty (20) shares of
F-19
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
common stock in voting power in matters brought before the
shareholders. During the second and third quarters of 1997,
all outstanding shares of Class A Series C preferred stock
and their related dividends payable were converted to common
stock.
The Class A Series D preferred shares pay quarterly
dividends at the rate of seven percent (7%) per annum, of
the par value of the preferred shares. Each share and any
accrued interest is convertible at the election of the
holder of the issue into shares of common stock at a price
per share equal to the lesser of $7.00 per share or the
average closing bid for the five days preceding conversion,
or if the conversion price is less than $4.00 per share, at
a 10% discount to the average closing bid price for the five
days prior to conversion. If the conversion price is greater
than $4.00, but less than $7.00, the discount is increased
by 1% for each $.20 increase in the conversion price.
Conversions are limited to 10% per month on a cumulative
basis. The Company has the right to force conversion if the
conversion price is equal to or less than $3.00 per share.
The holders shall not have any rights to vote on elections
of directors or on other corporate matters.
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 connection with a $3,100 private placement purchase
agreement in March 1996, the Company sold 62 units of
convertible debentures. Each unit consisted of a $50, 8%
convertible note due March 28, 1997, 19,355 "A" warrants and
19,355 "B" warrants. The notes and any accrued interest were
convertible within one 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 which was determined,
based on an appraisal, to reflect estimated fair value of
the common stock at the date of the transaction.
F-20
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
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.
The warrants had an estimated, based on an appraisal, fair
value of $270. This amount was reflected as a debt discount.
Upon the conversion of the notes to stock (see below), this
amount was charged to interest expense within the 1996
statement of operations.During 1997 and 1996, 618,454 and
542,841, respectively, of the total 1,200,010 "A" warrants
were exercised. During 1997 and 1996, 437,558 and -0-,
respectively, of the total 1,200,010 "B" warrants were
exercised.
During the second and third quarters of 1996, all of the
debentures, plus $7 in accrued interest, were converted into
2,259,056 shares of common stock.
During December 1996, 260,000 stock options and 839,300
stock warrants were exercised for $366 and $1,315,
respectively, by certain officers and directors of the
Company in exchange for promissory notes and promissory
demand notes. The notes bear an interest rate of 8.25%. The
promissory notes, together with accrued interest, have
maturity dates ranging from July 1998 through January 2003.
The loans are secured by 737,180 shares of the Company's
common stock. The Company intends to collect all amounts
under these notes. Promissory demand notes totaling $354
were paid during the first quarter 1997.
F-21
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Convertible Debentures
In connection with a $5,200 private placement purchase
agreement completed during June 1997, the Company sold 52
units of convertible debentures. Each unit consisted of
$100, 7% convertible note due between May and June 1999 and
a warrant to purchase 17,308 shares of common stock. The
notes and any accrued interest were convertible within 90
days at a price per share equal to the lesser of $7.00 per
share or the average closing bid price for the five days
preceding conversion, or if the conversion price was less
than $4.00 per share, at a 10% discount to the average
closing bid price for the five days prior to conversion. If
the conversion was greater than $4.00, but less than $7.00,
the discount was increased by 1% for every $.20 increase in
the conversion price. Debenture conversions are limited to
$520 in any month.
The warrants were exercisable immediately at $4.00 per share
and expire June 1, 2001. The warrants had an estimated fair
value, based on an appraisal of $400. This amount is
reflected as a debt discount. Upon the conversion of the
notes to stock (see below), $100 of this amount was charged
to interest expense within the 1997 statement of operations
while the remaining $300 was reflected as extraordinary loss
on early extinguishment of debt (see Note 13). From August
through December 1997, note holders converted $1,900 or 19
units of convertible debentures, plus accrued interest
thereon, into 683,150 shares of common stock. During
December 1997, note holders converted $2,990 or 29.9 units
of convertible debentures, plus accrued interest thereon,
into $2,990 shares of Class A Series D preferred stock.
Additionally, during January 1998, note holders converted
the remaining $310.5 or 3.1 units of convertible debentures,
plus accrued interest thereon, into 139,114 shares of common
stock.
F-22
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
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 shares related to the
unexercised or undistributed portion of any terminated,
expired or forfeited award will also be made available for
distribution in connection with future grants under the
Plan. During 1997, the Plan was amended to increase the
number of options available for future grants to 3,000,000.
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
nonqualified 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.
F-23
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 $.47 to $4.00 per share and expiring between March 8, 1998 and August 25,
2007. All options were granted at market prices. Transactions under this Plan
were as follows:
Exercise Weighted
Price Range Average
Shares Per Share Price
------------------------------------------------------------------------------
Outstanding at
December 31, 1994 473,888 $ .50 $ 1.24
to
2.25
Canceled or expired (130,000) .50 1.30
to
2.00
Granted 490,000 .47 1.18
to
2.50
Exercised (125,000) .47 1.11
to
1.81
------------------------------------------------------------------------------
Outstanding at
December 31, 1995 708,888 .47 1.21
to
2.50
Granted 782,643 2.00 2.89
to
3.50
Exercised (127,222) .47 1.04
to
2.50
------------------------------------------------------------------------------
F-24
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Exercise Weighted
Price Range Average
Shares Per Share Price
-----------------------------------------------------------------------------
Outstanding at
December 31, 1996 1,364,309 $ .47 $ 2.20
to
3.50
Canceled or expired (112,750) .50 2.30
to
3.03
Granted 573,717 2.00 3.09
to
4.00
Exercised (182,917) .78 1.62
to
2.50
-----------------------------------------------------------------------------
Outstanding at
December 31, 1997 1,642,359 .47 2.57
to
4.00
=============================================================================
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 $1.34 to $1.81. Transactions under the Plan were as
follows:
Exercise Weighted
Price Average
Range
Shares Per Share Price
-----------------------------------------------------------------------------
Outstanding at
December 31, 1995 390,000 $ 1.34 $ 1.46
to
1.81
Exercised (390,000) 1.34 1.46
to
1.81
-----------------------------------------------------------------------------
Outstanding at
December 31, 1996 and 1997 -- -- --
=============================================================================
F-25
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Exercise Weighted
Option Price Range Average
Shares Per Share Price
-------------------------------------------------------------------------------
Exercisable at year-end - qualified stock options
1995 708,888 $.47 to $2.50 $ 1.21
1996 984,309 $.47 to $3.00 $ 2.03
1997 912,360 $.47 to $4.00 $ 2.30
Available for future grant
1995 166,112
1996 (616,531)
1997 915,502
===============================================================================
As of December 31, 1996, the Company over issued stock options under their 1992
plan. During 1997, the Company amended its Long-Term Incentive Plan and
increased the number of options available for future grants by 2,000,000 to a
total of 3,000,000.
The following table summarizes information about stock options outstanding at
December 31, 1997:
Ranges Total
---------------------------- ----------
$ .47 $ 2.00 $ 3.00 $ .47
to to to to
Range of exercise prices 1.00 2.50 4.00 4.00
Outstanding Options
Number outstanding at 314,999 160,000 1,167,360 1,642,359
December 31, 1997
Weighted average remaining 1.8 3.1 6.3 5.8
contractual life (years)
Weighted average $ .87 $ 2.22 $ 3.08 $ 2.57
exercise price
F-26
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Ranges Total
---------------------------- ----------
Exercisable Options
Number outstanding at 295,000 85,000 532,360 912,360
December 31, 1997
Weighted average $ .86 $ 2.00 $ 3.14 $ 2.30
exercise price
Warrants
Warrants outstanding have been granted to officers, directors, stockholders and
others to purchase common stock at prices ranging from $.38 to $5.29 per share
and expiring between January 18, 1998 and August 25, 2007. All warrants were
granted with exercise prices equal to the fair market value of the underlying
stock. Transactions under the plan were as follows:
Exercise Weighted
Price Range Average
Shares Per Share Price
-------------------------------------------------------------------------------
Warrants outstanding at
December 31, 1994 1,650,892 $ .38 $ 1.40
to
2.10
Warrants granted 2,546,500 .44 1.68
to
3.00
Warrants exercised (285,000) .44 1.01
to
2.10
-------------------------------------------------------------------------------
F-27
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Exercise Weighted
Price Range Average
Shares Per Share Price
- -------------------------------------------------------------------------------
Warrants outstanding at
December 31, 1995 3,912,392 $ .38 $ 1.61
to
3.00
Canceled or expired (510,000) 1.00 2.57
to
3.00
Granted 3,396,010 1.31 2.68
to
4.00
Exercised (1,808,676) .50 1.45
to
2.10
- -------------------------------------------------------------------------------
Outstanding at
December 31, 1996 4,989,726 .38 2.30
to
4.00
Canceled or expired (793,598) .50 3.13
to
4.00
Granted 3,626,473 1.00 3.94
to
5.29
Exercised (1,474,264) .50 1.94
to
4.00
- -------------------------------------------------------------------------------
Outstanding at
December 31, 1997 6,348,337 .38 3.22
to
5.29
===============================================================================
F-28
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Exercise Weighted
Warrant Price Range Average
Shares Per Share Price
-------------------------------------------------------------------------------
Exercisable at year-end
1995 1,961,088 $.38 to $3.00 $ 1.73
1996 3,236,294 $.38 to $4.00 $ 2.58
1997 4,698,731 $.38 to $4.00 $ 3.56
During 1995, the Company issued 2,546,500 stock warrants. 1,210,000 stock
warrants were issued in connection with the Sedona acquisition (see Note 1). The
remaining warrants of 1,336,500 were issued in lieu of compensation for various
employment contracts. The warrants were issued at fair market value and vest
over time.
During 1996, the Company issued 3,396,010 stock warrants. 2,400,020 warrants
were issued in connection with the convertible debt (see Note 6 - common stock).
Of the remaining warrants of 995,990, 374,999 were issued to nonemployees for
certain consulting contracts and 620,991 were issued to employees in lieu of
compensation. The 1996 statement of operations reflects a charge of $283 for
nonemployee stock warrants and options.
During 1997, the Company issued 3,626,473 stock warrants. 3,000,016 warrants
were issued in connection with the 1997 convertible debt financing (see Note 6 -
common stock and convertible debentures). Of the 626,457 warrants, 311,457 were
issued to nonemployees in lieu of compensation, while the remaining 315,000 were
issued to employees.Included among the 311,457 warrants issued to nonemployees
are 300,000 warrantswhich were not valued as their vesting is contingent upon
completion of certain services. The 1997 statement of operations reflects a
charge of $124 for nonemployee stock warrants and options.
F-29
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
The following table summarizes information about stock warrants outstanding at
December 31, 1997:
Ranges Total
----------------------------- ------------
$ .38 1.31 $ 2.63 $ .38
to to to to
Range of exercise prices 1.00 2.38 5.29 5.29
Outstanding Warrants
Number outstanding at 1,140,086 254,021 4,954,230 6,348,337
December 31, 1997
Weighted average remaining 2.3 2.3 3.4 3.3
contractual life (years)
Weighted average $ .93 $ 1.66 $ 3.80 $ 3.22
exercise price
Exercisable Warrants
Number outstanding at 243,500 173,021 4,282,210 4,698,731
December 31, 1997
Weighted average $ .67 $ 1.50 $ 3.81 $ 3.56
exercise price
The Company is obligated to purchase 294,000 options and 516,362 warrants from
two (2) officers and seven (7) employees of the Company in the event of change
of control of the Company or termination of employment for breach of contract or
convenience 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, 1997, the market value exceeded the aggregate
option/warrant price by approximately $1.3 million.
During 1995, the FASB issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation", which has recognition
provisions that establish a fair value based method of accounting for
stock-based employee compensation plans and established fair value as the
measurement basis for transactions in which an entity acquires goods or services
F-30
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
from nonemployees in exchange for equity instruments. SFAS 123 also has certain
disclosure provisions. Adoption of the recognition provisions of SFAS 123 with
regard to these transactions with nonemployees was required for all such
transactions entered into after December 15, 1995. The Company adopted these
provisions as required. The recognition provision with regard to the fair value
based method of accounting for stock-based employee compensation plans is
optional. Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") uses what is referred to as an intrinsic value
based method of accounting. The Company has decided to continue to apply APB 25,
for its stock-based employee compensation arrangements. Accordingly, no
compensation cost has been recognized. The Company estimates the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1997,
1996 and 1995, respectively: no dividends paid for all years; expected
volatility of 35%; risk-free interest rates range from 5.25% to 7.81%; and
expected lives range from .77 to 10.00 years.
Utilizing the above assumptions, the weighted average fair market value of
employee issued stock options and warrants for each of the three years ended
December 31, 1997 are as follows:
1997 1996 1995
-------------------------------------------------------------------------------
Stock options $ 1.48 $ 1.67 $ .49
Warrants 1.31 .86 .48
===============================================================================
F-31
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
Had compensation cost for the Company's employee stock options and warrants been
determined based on the fair value at the grant date for such awards consistent
with the method of SFAS 123, the Company's net loss and basic loss applicable to
a common share would have been increased to the pro forma amounts indicated
below:
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Net (loss)
As reported $ (7,817) $ (4,271) $ (1,237)
Pro forma $ (8,959) $ (5,121) $ (1,711)
Basic (loss) applicable to
common share
As reported $ (.49) $ (.39) $ (.14)
Pro forma $ (.55) $ (.46) $ (.19)
===============================================================================
7. Revenues from The Company had a customer during the year ended December
Major Customers 31, 1997 which accounted for more than 10% of the Company's
total sales revenue. Additionally, the Company had a
customer for each of the years ended December 31, 1996 and
1995, which accounted for more than 10% of the Company's
total sales revenue. Total revenues for these customers
amounted to 22%, 14% and 15% in 1997, 1996 and 1995,
respectively.
A summary of domestic and export sales and gross profits for
the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997
- -------------------------------------------------------------------------------
Total Domestic Export
- -------------------------------------------------------------------------------
Revenues $ 4,827 $ 2,700 $ 2,127
Cost of sales 4,545 3,129 1,416
- -------------------------------------------------------------------------------
Gross profit $ 282 $ (4,29) $ 711
===============================================================================
F-32
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
1996
-------------------------------------------------------------------------------
Total Domestic Export
-------------------------------------------------------------------------------
Revenues $ 5,060 $ 3,760 $ 1,300
Cost of sales 4,013 3,207 806
-------------------------------------------------------------------------------
Gross profit $ 1,047 $ 553 $ 494
===============================================================================
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
===============================================================================
Exports were sold into Western and Eastern Europe, Asia, the
Middle East and South America regions.
8. Litigation On August 15, 1996, the Company filed suit for patent
Matters infringement against two competitors. The defendants filed a
counterclaim against the Company, requesting that the
patents be found invalid. The Company plans to vigorously
litigate the matter. The case is presently in the discovery
stage, with the trial not scheduled. 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 filed an answer to the complaint on
February 26, 1996, asserting loss of profits from failure by
the plaintiff to forward sales orders for parts, maintenance
F-33
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
and software. On September 24, 1997, the arbitrator ruled
against the Company and ordered them to pay $229. The amount
was paid in October 1997 and $139 is reflected in the
statement of operations for the period ended December 31,
1997, as the Company has accrued $90 during the year ended
December 31, 1996.
During 1998, an Action was filed against the Company by a
former employee for $360. The basis of the claim is his
expired employment agreement and stock warrants issued to
him as an employee. The Company plans to vigorously defend
itself and may seek a counterclaim. No provision has been
made in the accompanying financial statements related to
this uncertainty.
9. Related Party The Company had leased its principal office and one of its
Transactions manufacturing facilities from a corporation which is owned
by the former chief executive officer of the Company. This
operating lease, terminated on August 31, 1997. Rent expense
charged to operations was $64 for the year ended December
31, 1997 and $96 for each of the years ended December 31,
1996 and 1995.
The Company incurred consulting and commission fees, and
out-of-pocket expenses of $60, $259 and $73 for the years
ended December 31, 1997, 1996 and 1995, respectively, to a
company whose president is 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.
F-34
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
The Company issued stock options and warrants to purchase
54,300 shares of the Company's common stock to directors of
the Company for services rendered during 1997. The options
and warrants were issued with exercise prices ranging
between $3.69 and $3.98 per share, expiring through December
31, 2006. None of these options or warrants were issued at
exercise prices below the Company's market value. As of
December 31, 1997, none of these options or warrants were
exercised.
The Company issued stock warrants to purchase 170,000 shares
of the Company's common stock to directors of the Company
for services rendered during 1996. The warrants were issued
with an exercise price of $3.00 per share, expiring through
April 30, 2001 with immediately vesting upon issuance. Of
the 170,000 warrants, 20,000 were issued at an exercise
price below the Company's market value. As of December 31,
1997, none of these warrants were exercised.
10. Profit Sharing A subsidiary of the Company has a qualified profit
Plan sharing/401(k) plan (the Plan ) available to all eligible
employees. 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.
The total amount charged to operations under the plan was
$72, $35 and $83 for the years ended December 31, 1997, 1996
and 1995, respectively.
F-35
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
11. 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 commitments for future salaries at December
31, 1997 is $778, for 1998 and $625 for 1999.
In addition, the Company will be obligated to pay one to two
years of annual salary to certain officers and employees 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, 1997 was $1,013.
The Company is obligated under a royalty agreement to make
future minimum payments as of December 31, 1997 as follows:
Year ended December 31,
- -------------------------------------------------------------------------------
1998 $ 220
1999 220
2000 220
2001 220
2002 110
- -------------------------------------------------------------------------------
$ 990
===============================================================================
F-36
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
12. Income Taxes At December 31, 1997, 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
----------------------------------------------------------------------------
Net operating loss carryforwards $ 19,500 1999-2017
Investment tax credit carryforwards 25 1998-2000
Research credit carryforwards 230 2000-2010
Approximately $8.1 million of deferred tax assets arising
primarily from net operating loss and tax credit carryovers
have been offset by a $8.1 million valuation allowance.
13. Extraordinary In 1997, the Company recognized a $300 extraordinary loss as
Item-Loss a result of the early redemption of the 7% convertible
Related to debentures. The extraordinary loss consisted of a partial
Early write-off of the debt discount which was recorded upon
Retirement of issuance of the debentures. There was no tax benefit
Debt recognized for the extraordinary item because it increased
the Company losses.
14. Subsequent During March 1998, the Company entered into a $5.2 million
Events private placement purchase agreement. The Company expects to
sell 52 units of convertible debentures. Each unit consists
of $100, 7% convertible note due in two years and a warrant
to purchase 28,850 shares of common stock. The notes and any
accrued interest are convertible within 90 days at a price
per share equal to the lesser of $3 per share or at a 15%
discount to the average closing bid price for the five days
preceding conversion. If the conversion price is $2 a share
or less, the Company may elect to redeem all or part of the
debenture and accrued interest at the par value of
principal, plus the conversion discount. Conversions are
restricted to 10% per month on a cumulative monthly basis.
As of March 27, 1998, the Company has received $2.1 million
of these proceeds.
F-37
Scan-Graphics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Amounts)
15. Supplemental
Disclosures
of Cash Flow
Information
Year ended December 31, 1997 1996 1995
-------------------------------------------------------------------------------
Cash paid during the year for interest $ 223 $ 166 $ 45
Cash paid during the year for
income taxes -- -- 10
Noncash investing and financing
activities are as follows:
Conversion of debentures into
common stock 1,954 3,107 --
Issuance of common stock in
exchange for notes
receivable, related party -- 1,681 --
Declaration of preferred stock
cash dividend 182 210 158
Capitalized lease obligations
incurred to lease new
equipment -- 146 --
Common Stock issued
in lieu of payment of
preferred dividends 201 -- 200
Transfer of inventory to
equipment in fixed assets 128 -- 137
Transfer of equipment in fixed
assets to inventory upon
termination of lease -- -- 50
Purchase of a vehicle through
a note payable -- -- 33
Conversion of debentures
into preferred stock 2,990 -- --
Dividends payable offset against
notes receivable - related
party 30 -- --
Conversion of preferred stock
Series C into common stock 1,250 -- --
F-38
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
of Period Expenses Accounts - Describe of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Allowance for doubtful accounts $ 189 $ 1 $ -- $ 99(A) $ 91
Year ended December 31, 1996
Allowance for doubtful accounts $ 46 $ 155 $ -- $ 12(A) $ 189
Year ended December 31, 1995
Allowance for doubtful accounts $ 275 $ 12 $ -- $ 241(A) $ 46
(A) Accounts receivable written-off.
F-39
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to the be signed on its
behalf by the undersigned, thereunto duly authorized.
SCAN-GRAPHICS, INC.
March 30, 1998 /S/ Laurence L. Osterwise
- --------------- -------------------------------------
DATE LAURENCE L. OSTERWISE
CHIEF EXECUTIVE OFFICER AND PRESIDENT
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 whose signature appears below constitutes and appoints Laurence L.
Osterwise and Michael A. Mulshine and each of them, as his lawful
attorney-in-fact and agent, each with full power of substitution and
resubstitution for him and in his name, place and stead in any and all
capacities to execute in the name of each such person who is then an officer or
director of the registrant any and all amendments (including post-effective
amendments) to this report and to file the same with all exhibits thereto and
other documents in connection therewith with the Securities Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing required or necessary to be done in and
about the premises as fully as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signatures
----------
BY /S/ Andrew E. Trolio Date March 30, 1998
-------------------------- --------------
Andrew E. Trolio Chairman of the Board
of Directors
BY /S/ Laurence L. Osterwise Date March 30, 1998
-------------------------- --------------
Chief Executive Officer,
President, and Acting
Principal Financial &
Accounting Officer
BY /S/ Michael A. Mulshine Date March 30, 1998
-------------------------- --------------
Michael A. Mulshine Director and Secretary
BY /S/ R. Barry Borden Date March 30, 1998
-------------------------- --------------
R. Barry Borden Director
BY /S/ David S. Hirsch Date March 30, 1998
-------------------------- --------------
David S. Hirsch Director
BY /S/ Jack Pellicci Date March 30, 1998
-------------------------- --------------
Jack Pellicci Director
BY /S/ James C. Sargent Date March 30, 1998
-------------------------- --------------
James C. Sargent Director