0000906602-95-000049.txt : 19950816 0000906602-95-000049.hdr.sgml : 19950816 ACCESSION NUMBER: 0000906602-95-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCAN OPTICS INC CENTRAL INDEX KEY: 0000087086 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 060851857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05265 FILM NUMBER: 95563853 BUSINESS ADDRESS: STREET 1: 22 PRESTIGE PARK CIR CITY: EAST HARTFORD STATE: CT ZIP: 06108 BUSINESS PHONE: 2032896001 MAIL ADDRESS: STREET 1: 22 PRESTIGE PARK CIR CITY: EAST HARTFORD STATE: CT ZIP: 06108 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1995 ( )Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-5265 SCAN-OPTICS, INC. (Exact name of registrant as specified in its charter) Delaware 06-0851857 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 22 Prestige Park Circle, East Hartford, CT 06108 (Address of principal executive offices) Zip Code (203) 289-6001 (Registrant's telephone number, including area code) 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. ( X ) YES ( ) NO The number of shares outstanding of each of the issuer's classes of common stock, as of August 9, 1995. Common Stock, $.02 par value 6,516,898 SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands, except share data)
June 30, 1995 December 31, 1994 ------------- ----------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 187 $ 178 Accounts receivable less allowance of $279 at June 30, 1995 and December 31, 1994 9,630 9,124 Inventories 16,649 14,223 Prepaid expenses and other 1,506 1,083 ---------- ---------- Total current assets 27,972 24,608 Plant and equipment: Equipment 14,250 13,928 Leasehold improvements 2,808 2,808 Office furniture and fixtures 1,161 1,158 ---------- ---------- 18,219 17,894 Less allowances for depreciation and amortization 13,970 13,272 ---------- ---------- 4,249 4,622 Other assets 345 389 ---------- ---------- Total Assets $ 32,566 $ 29,619 ---------- ----------
June 30, 1995 December 31, 1994 ------------- ----------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Notes payable to bank $ 6,452 $ 2,265 Accounts payable 4,632 2,774 Salaries and wages 1,013 1,119 Taxes other than income taxes 454 348 Income taxes 180 175 Customer deposits 227 2,165 Deferred revenues, net of costs 30 Royalties payable 23 814 Other 867 903 ---------- ---------- Total current liabilities 13,848 10,593 Other liabilities 366 295 Stockholders' Equity Preferred stock, par value $.02 per share, authorized 5,000,000 shares; none issued or outstanding Common stock, par value $.02 per share, authorized 15,000,000 shares; issued, 6,928,798 shares at June 30, 1995 and 6,906,080 shares at December 31, 1994 138 138 Common stock Class A Convertible, par value $.02 per share, authorized 3,000,000 shares; none issued or outstanding Capital in excess of par value 34,258 34,202 Retained-earnings deficit (12,718) (12,178) Foreign currency translation adjustments (349) (388) Unearned ESOP compensation (331) (397) ---------- ---------- 20,998 21,377 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 ---------- ---------- Total stockholders' equity 18,352 18,731 ---------- ---------- Total Liabilities and Stockholders' Equity $ 32,566 $ 29,619 ---------- ----------
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (thousands, except share data)
Three Months Ended Six Months Ended June 30 June 30 1995 1994 1995 1994 ------------ ------------ ------------ ------------ Revenues Net sales $ 6,052 $ 7,159 $ 13,940 $ 13,789 Service revenues 3,400 4,343 6,889 8,510 Lease revenues 70 25 180 43 ------------ ------------ ------------ ------------ Total revenues 9,522 11,527 21,009 22,342 Costs and Expenses Cost of sales 4,273 4,549 9,689 8,558 Marketing and service expenses 3,950 3,975 7,590 8,014 Research and development expenses 1,086 1,751 2,586 3,339 General and administrative expenses 763 712 1,503 1,423 Interest expense 122 63 233 132 ------------ ------------ ------------ ------------ Total costs and expenses 10,194 11,050 21,601 21,466 ------------ ------------ ------------ ------------ Operating income (loss) (672) 477 (592) 876 Other income, net 17 17 32 21 ------------ ------------ ------------------------- Income (loss) before income taxes (655) 494 (560) 897 Income taxes (benefit) (8) 15 (20) 30 ------------ ------------ ------------ ------------ Net Income (Loss) $ (647) $ 479 $ (540) $ 867 ------------ ------------ ------------ ------------ Earnings (loss) per share $ (0.10) $ 0.07 $ (0.08) $ 0.13 ------------ ------------ ------------ ------------ Average common and common equivalent shares 6,513,696 6,913,475 6,667,228 6,872,252
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (thousands)
For the Six Months Ended ------------------------ June 30 June 30 1995 1994 ---------- ---------- Operating Activities Net income(loss) $ (540) $ 867 Adjustments to reconcile net income (loss) to net cash used by operating activities Depreciation 698 484 Amortization 330 476 Changes in operating assets and liabilities: Accounts receivable (506) (1,008) Inventories, prepaid expenses and other (3,179) (1,796) Accounts payable 1,858 (941) Accrued expenses (36) (163) Royalties payable (791) 289 Income taxes 5 (22) Deferred revenues, net of costs (30) (828) Customer deposits (1,938) (203) Other 220 179 ---------- ---------- Net cash used by operating activities (3,909) (2,666) Investing Activities Purchases of plant and equipment (325) (1,028) ---------- ---------- Net cash used by investing activities (325) (1,028) Financing Activities Proceeds from issuance of common stock 56 231 Proceeds from borrowings 14,572 13,338 Principal payments on borrowings (10,385) (10,074) ---------- ---------- Net cash provided by financing activities 4,243 3,495 Increase (decrease) in cash and cash equivalents 9 (199) Cash and cash equivalents at beginning of year 178 283 ---------- ---------- Cash and Cash Equivalents at End of Period $ 187 $ 84 ---------- ----------
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For Quarter Ended June 30, 1995 NOTE 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. NOTE 2 - Inventories The components of inventories were as follows (thousands):
June 30 December 31 1995 1994 Finished goods $ 3,092 $ 2,533 Work-in-process 4,739 2,506 Service parts 2,082 2,409 Materials and component parts 6,736 6,775 ------- -------- $ 16,649 $ 14,223 ======= ========
NOTE 3 - Credit Arrangements On June 30, 1995 the Company amended its credit agreement (Agreement) with the bank to extend the maturity date to May 31, 1996. The Agreement has two components, a $4 million line (international) guaranteed by a third party bank which is collateralized by international accounts receivable and inventory, and which bears interest at prime (9% at June 30, 1995); and a $4 million line (domestic) which is collateralized by domestic accounts receivable and inventory, and which also bears interest at prime (9% at June 30, 1995). As of July 5, 1995, the company converted $2.5 million of the international line of credit to a 90 day rate of 7.3% (LIBOR of 6.06% plus 1.25%). The weighted average interest rates on borrowings during the first half of 1995 and 1994 were 8.6% and 6.8% respectively. The unused portion of the $4 million domestic line is subject to a commitment fee of 1/4% per annum. Borrowings under the Agreement are subject to various limitations based upon percentages of eligible receivables and inventories of the Company. The available balance on the total line of credit was $1,131,000 as of June 30, 1995. In addition, the Agreement contains covenants which, among other things, require the maintenance of specified working capital, debt to equity ratios, net income levels and tangible net worth levels. At June 30, 1995, the Company defaulted on certain covenants which were subsequently waived by the bank. NOTE 4 - Income Taxes The Company has approximately $7,200,000 and $12,800,000 of net operating loss carryforwards for federal and state income tax purposes, respectively, which are scheduled to expire periodically between 1995 and 2009. For financial reporting purposes a valuation allowance has been recognized to offset the deferred tax assets related to those carryforwards and other temporary differences. Significant components of the Company's deferred tax liabilities and assets were as follows :
June 30 December 31 (thousands) 1995 1994 Deferred tax assets: Net operating losses $3,757 $ 3,541 Depreciation 97 97 Inventory valuation 837 964 Accounts receivable reserves 32 32 Revenue recognition 14 86 Vacation accrual 267 265 Other 252 253 ----- ----- Total deferred tax assets 5,256 5,238 Deferred tax liabilities: Depreciation and other (80) (100) Valuation allowance (5,176) (5,138) ----- ----- Net deferred taxes $ 0 $ 0 =========================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Cash and cash equivalents remained relatively consistent with the December 31, 1994 balance. Total Company borrowings increased $4.2 million from the end of 1994 to $6.5 million at June 30, 1995. The increase in borrowings is due to the timing of sales transactions and related receipts. On June 30, 1995 the Company amended the original loan agreement extending the maturity date of the existing line of credit to May 31, 1996. (See Note 3 To Financial Statements for further details). The available balance on the total line of credit was $3,144,000 as of August 8, 1995. Operating activities used $3.9 million of cash in the first half of 1995. Accounts receivable increased $.5 million during the first half of the year due to an increase in systems in acceptance. Inventories increased $2.4 million in the first half of 1995, $1.3 million of which occurred in the second quarter. Total manufacturing inventories increased $2.3 million since the beginning of the year which consisted of a $1.7 million increase in work in process inventory, and a $.6 million increase in finished goods. The manufacturing production schedule was derived early in 1995, orders that were expected to be received and shipped during the second quarter were delayed which resulted in an increase in manufacturing inventory. The delays that occurred in domestic sales were caused by a conservative marketplace for large capital expenditures and the downsizing of Corporate America which delayed the decision making in upper level management. Engineering inventory increased $.4 million related to the development of the Series 7800 and other projects. Customer service inventories decreased by $.3 million in the first half of the year. During the second quarter, work in process inventory increased $1.0 million and finished goods increased $1.2 million, due to the delay in customer orders expected in the quarter. The stockroom inventory decreased by $.7 million which is reflective of the timing of inventory purchases and the future build cycle. Customer service inventories decreased $.2 million during the second quarter. Prepaid expenses and other assets increased $.4 million due to increases in deferred costs relating to systems in acceptance. Accounts payable increased $1.9 million from December 31, 1994 due to the increased inventory purchases which were necessary to support the second and third quarter build schedule. Customer deposits decreased $1.9 million reflective of certain large international contracts recognized in revenue during the first half of 1995 which included substantial deposits. Royalties payable decreased $.8 million due to the payment of royalties in January on sales recognized in the third and fourth quarter of 1994. Results of Operations for the Three Months and Six Months Ended June 30, 1995 vs. 1994 Net sales increased $.2 million from the first six months of 1994 and decreased $1.1 million from the second quarter of 1994 to 1995. Compared to the first six months last year, international sales increased $2.7 million but were offset by a decrease in North American sales of $2.5 million. International sales, as a percentage of total sales, have increased due to the first and second quarter sales of several enhanced Series 9000's to a Japanese health agency for health claim processing. Domestic sales in the first half of 1995 were disappointing, however, the Company expects that domestic sales will rebound in the second half of 1995 to more consistent levels. Service revenues decreased $1.6 million from the first six months of 1994 to 1995 and $.9 million from the second quarter of 1994 to 1995. Software revenue decreased $.6 million which was directly related to the decline in domestic sales. R&D revenue decreased $.4 million due to the completion of a significant development project which began in the third quarter of 1993. Customer service revenue decreased $.6 million mostly due to the continued replacement of older ReliaReader equipment with the Company's Series 9000 system which is less expensive to maintain. Cost of sales increased $1.1 million over the first six months of 1995 vs. 1994 and decreased $.3 million from the second quarter of 1994. The year to date increase is a reflection of a decrease in the gross margin percentage. The actual gross margin percentage decreased to 30% in the first half of 1995 from 38% for the same period in 1994. The gross margin percentages realized for the second quarter of 1995 and 1994 were consistent with the year to date percentages. The decline in the gross margin was mainly due to the sales discounts recorded under the terms of a research and development agreement, which accounted for $1.0 million in the first half of 1995 compared to $.3 million in 1994. One of the two agreements relating to discounts and royalties was completed at the end of the second quarter of 1995. The gross margin percentage without the required discounts and royalties would be 38% for the first half of 1995 vs. 40% for 1994. Marketing and service expenses decreased $.4 million from the first half of 1994 and remained consistent with the second quarter of 1994. Customer service expenses decreased $.3 million due to staffing decreases, a reduction in travel expenses and a decrease in depreciation expense related to customer service inventory. Sales expenses decreased $.3 million due to reduction in salaries, commissions and travel expenses. Marketing expenses and software expenses each increased $.1 million due to increases in salary expenses. Research and development expenses decreased $.8 million from the first half of 1994 and decreased $.7 million compared to the second quarter of 1994 mainly due to a decrease in outside consulting services which were utilized in 1994 for development projects related to the system for health claim processing in Japan. SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 (A) - EXHIBIT COMPUTATION OF EARNINGS PER SHARE (thousands except share data)
Three Months Ended Six Months Ended June 30 June 30 1995 1994 1995 1994 ------------ ------------ ------------ ------------ PRIMARY AND FULLY DILUTED Average common shares outstanding 6,513,696 5,604,732 6,505,404 5,577,585 Average Class A common shares outstanding 854,464 854,464 Net effect of dilutive stock options and warrants - based on the treasury stock method using average market price during the quarter 454,279 161,825 440,203 ------------ ------------ ------------ ------------ Total 6,513,696 6,913,475 6,667,229 6,872,252 ------------ ------------ ------------ ------------ Net Income (Loss) $ (647) $ 479 $ (540) $ 867 ------------ ------------ ------------ ------------ Earnings (Loss) Per Share $ (0.10) $ 0.07 $ (0.08) $ 0.13 ------------ ------------ ------------ ------------
[CAPTION] SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 (B) - REPORTS ON FORM 8-K For the Three Months Ended June 30, 1995 No reports on Form 8-K were filed during the First Six Months of 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned thereunto duly authorized. SCAN-OPTICS, INC. (Registrant) Date August 9, 1995 /ss/ Richard I. Tanaka Chairman, Chief Executive Officer and President Date August 9, 1995 /ss/ Michael J. Villano Vice President and Chief Financial Officer EX-27 2 ART. 5 FDS FOR SCAN-OPTICS
5 1000 6-MOS DEC-31-1995 JUN-30-1995 187 0 9,630 279 16,649 27,972 18,219 13,970 32,566 13,848 0 138 0 0 18,214 32,566 13,940 21,009 9,689 21,601 0 0 0 (560) (20) (540) 0 0 0 (540) (.08) (.08)