-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rwn1m9zTB+5whSdv3yrLDDu1Txg42JcxrdH7WZ6Pogy6AfYP0fsWZ2R47eg+lHZX 8wHyRah098gvYWZNqit8UQ== 0000906602-97-000092.txt : 19970520 0000906602-97-000092.hdr.sgml : 19970520 ACCESSION NUMBER: 0000906602-97-000092 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97608151 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 March 31, 1997 ( )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 incorporation or organization) Identification Number 169 Progress Drive, Manchester, CT 06040 (Address of principal executive offices) Zip Code (860) 645-7878 (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 of common stock, $.02 par value, outstanding as of May 12, 1997 was 6,988,218. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(thousands, except share data) March 31, 1997 December 31, 1996 - ---------------------------------------------------------------------------------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 344 $ 1,279 Accounts receivable less allowance of $908 at March 31, 1997 and $673 at December 31, 1996 8,817 9,262 Inventories 14,346 14,920 Prepaid expenses and other 1,417 1,274 --------- ---------- Total current assets 24,924 26,735 Plant and equipment: Equipment 13,407 14,094 Leasehold improvements 4,153 3,980 Office furniture and fixtures 1,251 1,248 --------- ---------- 18,811 19,322 Less allowances for depreciation and amortization 14,694 15,147 --------- ---------- 4,117 4,175 Other assets 210 211 --------- ---------- Total Assets $ 29,251 $ 31,121 ========= ==========
(thousands, except share data) March 31, 1997 December 31, 1996 - ---------------------------------------------------------------------------------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,204 $ 2,470 Notes payable to bank 98 Salaries and wages 1,063 1,940 Taxes other than income taxes 451 682 Income taxes 165 207 Customer deposits 1,438 2,323 Other 1,489 1,697 --------- ---------- Total current liabilities 6,810 9,417 Other liabilities 497 497 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, 6,991,018 shares at March 31, 1997 and 6,945,701 shares at December 31, 1996 140 139 Common stock Class A Convertible, par value $.02 per share, authorized 3,000,000 shares; available for issuance 2,145,536 shares; none issued or outstanding Capital in excess of par value 34,438 34,297 Retained-earnings deficit (9,541) (10,159) Foreign currency translation adjustments (348) (292) Unearned ESOP compensation (99) (132) --------- ---------- 24,590 23,853 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 --------- ---------- Total stockholders' equity 21,944 21,207 --------- ---------- Total Liabilities and Stockholders' Equity $ 29,251 $ 31,121 ========= ==========
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31 (thousands, except share data) 1997 1996 - ---------------------------------------------------------------------------------------- Revenues Net sales $ 9,068 $ 6,487 Service revenues 3,345 3,823 Lease revenues 17 8 --------- --------- Total revenues 12,430 10,318 Costs and Expenses Cost of sales 5,670 4,701 Marketing and service expenses 4,172 3,527 Research and development expenses 1,009 1,106 General and administrative expenses 907 837 Interest expense 22 15 --------- --------- Total costs and expenses 11,780 10,186 --------- --------- Operating income 650 132 Other income, net 25 5 --------- --------- Income before income taxes 675 137 Income taxes 57 17 --------- --------- Net Income $ 618 $ 120 ========= ========= Earnings per share $ .09 $ .02 ========= ========= Average common and common equivalent shares 6,969,646 6,687,234
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31 (thousands) 1997 1996 - ---------------------------------------------------------------------------------------- Operating Activities Net income $ 618 $ 120 Adjustments to reconcile net income to net cash used by operating activities: Depreciation 300 306 Amortization 337 267 Provision for losses on accounts receivable 327 Provision for inventory obsolescence 350 Changes in operating assets and liabilities: Accounts receivable 118 899 Inventories (113) (473) Prepaid expenses and other (143) (134) Accounts payable (266) (479) Accrued salaries and wages (877) 179 Taxes other than income taxes (231) 17 Income taxes (42) 9 Customer deposits (885) (1,182) Other (230) 39 --------- --------- Net cash used by operating activities (737) (432) Investing Activities Purchases of plant and equipment (242) (355) --------- --------- Net cash used by investing activities (242) (355) Financing Activities Proceeds from issuance of common stock 142 12 Proceeds from borrowings 4,369 3,255 Principal payments on borrowings (4,467) (1,748) --------- --------- Net cash provided by financing activities 44 1,519 Increase (decrease) in cash and cash equivalents (935) 732 Cash and Cash Equivalents at Beginning of Year 1,279 281 --------- --------- Cash and Cash Equivalents at End of Period $ 344 $ 1,013 ========= =========
See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For Quarter Ended March 31, 1997 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 three month period ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. Certain 1996 amounts have been reclassified to conform to current year presentation. NOTE 2 - Inventories The components of inventories were as follows:
March 31 December 31 (thousands) 1997 1996 Finished goods $ 2,737 $ 1,534 Work-in-process 4,666 6,084 Service parts 4,206 4,276 Materials and component parts 2,737 3,026 ------- ------- $ 14,346 $ 14,920 ======= =======
NOTE 3 - Credit Arrangements The Company has a line of credit agreement (Agreement) with a bank which expires on May 29, 1997. The Agreement has two components, a $3 million line (international) guaranteed by a third party bank which is collateralized by international accounts receivable and inventory, and which bears interest at prime (8 1/2% at March 31, 1997); and a $3 million line (domestic) which is collateralized by domestic accounts receivable and inventory, and which bears interest at prime plus 1/2% (9% at March 31, 1997). The weighted average interest rates on borrowings during the first quarters of 1997 and 1996 were 8.7% and 8.1% respectively. The unused portion of the $3 million domestic line is subject to a commitment fee of 3/4% 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 $5,852,789 as of March 31, 1997. 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. On March 12, 1997, the Company received a commitment letter from the bank extending the maturity date of the outstanding line of credit to May 28, 1998. The line of credit was reduced at the Company's request from $6 million to $4 million ($2 million each for international and domestic lines), which is reflective of the Company's current cash availability and projected cash flow requirements for the next twelve months. The commitment letter is subject to the extension of the guarantee by the third party bank on the $2 million international line. The Company expects that the guarantee will be extended. NOTE 4 - Income Taxes The Company has approximately $5,000,000, $4,100,000 and $2,600,000 of net operating loss carryforwards for federal, state and foreign income tax purposes, respectively, which are scheduled to expire periodically between 1997 and 2010. 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 :
March 31 December 31 (thousands) 1997 1996 - ------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating losses $ 2,880 $ 3,108 Depreciation 106 106 Inventory valuation 231 101 Accounts receivable reserves 344 231 Revenue recognition 13 Vacation accrual 224 245 Other 340 258 ------- ------- Total deferred tax assets 4,125 4,062 Deferred tax liabilities: Depreciation and other (337) (390) Inventory (146) (156) Sales type lease (63) (73) Revenue recognition (4) Valuation allowance (3,575) (3,443) ------- ------- Net deferred taxes $ 0 $ 0 ======= =======
NOTE 5 - Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The Statement establishes standards for computing and presenting earnings per share ("EPS"). The Statement requires the presentation of basic and diluted EPS. Basic EPS excludes common stock equivalents, such as stock options, and is computed by dividing earnings by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if common stock equivalents, such as stock options, were exercised. The Company will adopt this Statement in the fourth quarter of 1997 and expects that there will not be a material dilution to the Company's earnings per share as a result of the adoption based on the current number of outstanding common stock equivalents. If the number of common stock equivalents were to increase, the diluted EPS could be significantly impacted. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the Three Months Ended March 31, 1997 vs. 1996 Outlook The forward-looking statements contained in this Outlook and elsewhere in this document are based on current expectations. As such, actual results may differ materially. In 1996, Scan-Optics derived 38% of its total revenue from one customer. The Company expects this customer to continue to represent over 30% of its total revenue in each of the next two fiscal years. It is expected that by 1999, the majority of the program will be complete. Additional orders with this customer are anticipated, but at a greatly reduced sales level. Four major initiatives currently underway are expected to compensate for this anticipated decline in revenues. The first initiative is in the health care industry, combining our ImageEMC system with our high performance image capture transports, to process HCFA Medicare claim forms as well as other types of medical claim forms. The Company has focused on and has experienced success with this vertical line of business and believes it provides an opportunity for growth. The second initiative consists of the Company's development of target market data capture applications that, combined with its other high speed transports and archival systems, will provide cost effective solutions. The current focus is on the transportation, order entry, tax, health care and exam scoring markets. The Company expects to continue to emphasize its "Solutions that Work" focus on these targeted markets for the foreseeable future. As other market opportunities emerge, the Company will evaluate the potential of using its products and services to provide "Solutions that Work" in these new markets. The third initiative is further expansion into the international marketplace. The Company has successfully penetrated the Japanese market and has experienced strong sales activity through relationships with highly qualified and productive distributors. Over the next two years, the Company will focus on developing comparably strong relationships in Europe, South America and other Pacific Rim countries. The fourth initiative relates to the expansion of some of the Company's core competencies in an effort to add revenues and profits. The Company believes that the hardware service, manufacturing and custom engineering organizations have potential to leverage their individual expertise, experience and cost effectiveness to other entities. The Company believes that success in achieving these initiatives will help offset the foreseen reduction in sales for the customer described above. The ability for the Company to achieve the above expectations could be impacted by increased competition or a slowdown in the growth within the scanning and imaging market, alternate forms of processing and changes in the economic climates of foreign markets as well as that of the United States. Net sales increased $2.6 million in the first quarter of 1997 compared with the first quarter of 1996. International sales increased $2.3 million and North American sales increased $.3 million. International sales, as a percentage of total sales, increased due to a total of eight enhanced Series 9000's sold to a Japanese health agency for health claim processing in the first quarter of 1997 compared to four in the same period of 1996. Service revenues decreased $.5 million mainly due to a decrease in engineering revenue of $.4 million due to funding for a specific development project which ended in the first quarter of 1996. Customer service revenue decreased $.1 million mainly due to the cancellation of three service maintenance contracts in Canada, which was partially offset by annual contract increases. Cost of sales increased $1.0 million from the first quarter of 1996 which was a reflection of the increase in net sales. Cost of sales as a percentage of net sales was 63%, compared to 72% in the prior year. This decrease was mainly due to a change in the overall sales mix. Marketing and service expenses increased $.6 million from the first quarter of 1996 to 1997. Sales and marketing expenses increased $.5 million primarily due to an increase in sales staffing levels and an increase in the accounts receivable reserve. Software service expenses increased $.1 million mainly due to increases in staffing levels. Customer service expenses remained consistent with the first quarter of 1996. Research and development expenses decreased $.1 million from the first quarter of 1996 to the first quarter of 1997 mainly due to a decrease in outside consulting fees. General and administrative expenses increased $.1 million primarily due to an increase in the incentive compensation expense and an increase in legal fees. Liquidity and Capital Resources Cash and cash equivalents decreased $.9 million from December 31, 1996, for the reasons discussed below. As of March 31, 1997, the Company had no borrowings outstanding against its $6 million line of credit. The balance decreased from $.1 million at December 31, 1996, due to improvements in cash flow realized from the increased sales volume and decreases in operating expenses from the fourth quarter 1996 run rate. On March 12, 1997, the Company received a commitment letter extending the maturity date of the existing line of credit to May 28, 1998. (See Note 3 for further details.) Operating activities used $.7 million of cash in the first quarter of 1997. Non-cash expenses recorded during the quarter were $1.3 million vs. $.6 million for the same period in 1996. These expenses relate to depreciation of fixed assets, which is discussed in net plant and equipment below, amortization of customer service spare parts inventory, provisions for losses on accounts receivable and provisions for inventory obsolescence. Net accounts receivable decreased $.4 million during the first quarter of the year due to collections made on 1996 sales combined with a provision of $.3 million for a specific customer recorded during the quarter. Inventories decreased $.6 million in the first quarter of 1997. Total manufacturing inventories decreased $.5 million during the quarter mainly due to a $.3 million decrease in the stockroom inventory which reflects the Company's focus on reducing inventory levels. Customer service inventories decreased by $.1 million in the first quarter mainly due to the amortization of parts inventory. Prepaid expenses increased $.1 million primarily due to increases in prepaid inventory related to current engineering development projects. Net plant and equipment decreased $.1 million during the first quarter of 1997 mainly due to $.3 million of depreciation expense recorded during the first three months of the year. This decrease was offset by $.2 million of capitalized leasehold improvements related to the consolidation and renovation of the corporate offices in Manchester, Connecticut. Accounts payable decreased $.3 million from December 31, 1996, due to improvements in the just-in-time inventory procurement process. Accrued salaries and wages decreased $.9 million reflecting the disbursement of the 1996 incentive compensation. Taxes other than income taxes decreased $.2 million due to the remittance of sales tax incurred on fourth quarter 1996 sales. Customer deposits decreased $.9 million reflective of certain large international contracts accepted and recognized in revenue during the first quarter of 1997 which included substantial deposits. Other current liabilities decreased $.2 million due to the payment of legal and accounting fees accrued in 1996. 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 --------------------------------- March 31 1997 1996 --------- ---------- PRIMARY AND FULLY DILUTED Average common shares outstanding 6,560,754 6,525,838 Net effect of dilutive stock options and warrants - based on the treasury stock method using average market price during the quarter 408,892 161,396 --------- ---------- Total 6,969,646 6,687,234 ========= ========== Net Income $ 618 $ 120 ========= ========== Earnings Per Share $ .09 $ .02 ========= ==========
SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 (B) - REPORTS ON FORM 8-K For the Three Months Ended March 31, 1997 No reports on Form 8-K were filed during the first three months of 1997. 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 May 13, 1997 /ss/ James C. Mavel President, Chief Executive Officer and Director Date May 13, 1997 /ss/ Michael J. Villano Chief Financial Officer and Vice President EX-27 2 ART. 5 FDS FOR SCAN-OPTICS CORPORATION
5 EXHIBIT 27. SCAN-OPTICS, INC. FINANCIAL DATA SCHEDULE 3-MOS DEC-31-1997 MAR-31-1997 344,000 0 8,817,000 908,000 14,346,000 24,924,000 18,811,000 14,694,000 29,251,000 6,810,000 0 140,000 0 0 21,944,000 29,251,000 9,068,000 12,430,000 5,670,000 11,780,000 0 0 22,000 675,000 57,000 618,000 0 0 0 618,000 .09 .09
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