-----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, LAQ8lgocZIfd2MBzqHTUb1S5nwmzNf2KFTEln1jnKEy+lfyxZIyQUMND/QzhLPqn ntXS1PlR/0k+7vEKoEsukg== 0000906602-97-000119.txt : 19970815 0000906602-97-000119.hdr.sgml : 19970815 ACCESSION NUMBER: 0000906602-97-000119 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97663696 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, 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 August 11, 1997 was 7,012,718.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands, except share data) June 30, 1997 December 31, 1996 (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 511 $ 1,279 Accounts receivable less allowance of $891 at June 30, 1997 and $673 at December 31, 1996 11,735 9,262 Inventories 13,056 14,920 Prepaid expenses and other 1,506 1,274 --------- -------- Total current assets 26,808 26,735 Plant and equipment: Equipment 13,600 14,094 Leasehold improvements 4,400 3,980 Office furniture and fixtures 1,251 1,248 --------- -------- 19,251 19,322 Less allowances for depreciation and amortization 15,016 15,147 --------- -------- 4,235 4,175 Other assets 210 211 --------- -------- Total Assets $ 31,253 $ 31,121 ========= ======== (thousands, except share data) June 30, 1997 December 31, 1996 (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,331 $ 2,470 Notes payable to bank 98 Salaries and wages 1,394 1,940 Taxes other than income taxes 488 682 Income taxes 209 207 Customer deposits 1,332 2,323 Other 1,654 1,697 --------- -------- Total current liabilities 7,408 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, 6,988,218 shares at June 30, 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 34,437 34,297 Retained-earnings deficit (8,200) (10,159) Foreign currency translation adjustments (317) (292) Unearned ESOP compensation (66) (132) --------- -------- 25,994 23,853 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 --------- -------- Total stockholders' equity 23,348 21,207 --------- -------- Total Liabilities and Stockholders' Equity $ 31,253 $ 31,121 ========= ======== See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 (thousands, except share data) 1997 1996 1997 1996 Revenues Net sales $10,385 $ 7,747 $19,453 $14,232 Service revenues 3,540 3,401 6,885 7,224 Lease revenues 136 4 153 12 ------ ------ ------ ------ Total revenues 14,061 11,152 26,491 21,468 Costs and Expenses Cost of sales 6,417 5,348 12,087 10,047 Marketing and service expenses 4,206 3,518 8,378 7,045 Research and development expenses 1,089 924 2,098 2,030 General and administrative expenses 967 911 1,874 1,748 Interest expense 2 24 24 39 ------ ------ ------ ------ Total costs and expenses 12,681 10,725 24,461 20,909 ------ ------ ------ ------ Operating income 1,380 427 2,030 559 Other income, net 22 36 47 41 ------ ------ ------ ------ Income before income taxes 1,402 463 2,077 600 Income taxes 61 13 118 30 ------ ------ ------ ------ Net Income $ 1,341 $ 450 $ 1,959 $ 570 ====== ====== ====== ====== Earnings per share .19 .07 .28 .08 ====== ====== ====== ====== Average common and common equivalent shares 6,939,633 6,759,533 6,954,640 6,723,384
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 (thousands) 1997 1996 Operating Activities Net income $ 1,959 $ 570 Adjustments to reconcile net income to net cash used by operating activities: Depreciation 622 612 Amortization 672 469 Provision for losses on accounts receivable 324 150 Provision for inventory obsolescence 350 250 Changes in operating assets and liabilities: Accounts receivable (2,797) 309 Inventories 842 (184) Prepaid expenses and other (232) 74 Accounts payable (139) (675) Accrued salaries and wages (546) 82 Taxes other than income taxes (194) (26) Income taxes 2 17 Deferred revenues, net of costs 85 Customer deposits (991) (2,857) Other (1) 49 ------ ------- Net cash used by operating activities (129) (1,075) Investing Activities Purchases of plant and equipment (682) (297) ------ ------- Net cash used by investing activities (682) (297) Financing Activities Proceeds from issuance of common stock 141 20 Proceeds from borrowings 6,652 8,620 Principal payments on borrowings (6,750) (7,456) ------ ------- Net cash provided by financing activities 43 1,184 Decrease in cash and cash equivalents (768) (188) Cash and Cash Equivalents at Beginning of Year 1,279 281 ------ ------- Cash and Cash Equivalents at End of Period $ 511 $ 93 ====== ======= See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For Quarter Ended June 30, 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 six month period ended June 30, 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:
June 30 December 31 (thousands) 1997 1996 - -------------------------------------------------------------------------------------- Finished goods $ 2,080 $ 1,534 Work-in-process 4,849 6,084 Service parts 4,125 4,276 Materials and component parts 2,002 3,026 ------- ------- $ 13,056 $ 14,920 ======= =======
NOTE 3 - Credit Arrangements On May 28, 1997, the Company amended its credit agreement (Agreement) with a bank to extend the maturity date to May 28, 1998. The Agreement has two components, a $2 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 June 30, 1997); and a $2 million line (domestic) which is collateralized by domestic accounts receivable and inventory, and which also bears interest at prime (8 1/2% at June 30, 1997). The weighted average interest rates on borrowings during the first half of 1997 and 1996 were 8.0% and 7.5% respectively. The unused portion of the $2 million domestic line is subject to a commitment fee of 1/2% 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 $4,000,000 as of June 30, 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. NOTE 4 - Income Taxes The Company has approximately $3,600,000, $3,200,000 and $2,600,000 of net operating loss carryforwards for federal, state and foreign income tax purposes, respectively, which are scheduled to expire 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 :
June 30 December 31 (thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------ Deferred tax assets: Net operating losses $ 2,383 $ 3,108 Depreciation 106 106 Inventory valuation 226 101 Accounts receivable reserves 338 231 Revenue recognition 13 Vacation accrual 254 245 Other 329 258 ------- ------- Total deferred tax assets 3,636 4,062 Deferred tax liabilities: Depreciation and other (285) (390) Inventory (136) (156) Sales type lease (54) (73) Revenue recognition (168) Valuation allowance (2,993) (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 and Six Months Ended June 30, 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. The ability for the Company to achieve the following 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. In 1996, Scan-Optics derived 38% of its total revenue from one customer. The Company expects this customer to continue to represent a significant portion 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. The Company believes that success in achieving the initiatives described below will help offset the foreseen reduction in sales for this customer. 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 health care and insurance, government and tax, transportation, and order entry 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 supplied product to 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 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. Net sales in the first six months of 1997 increased $5.2 million compared with the first six months of 1996. Net sales in the second quarter of 1997 increased $2.6 million compared with the second quarter of 1996. Compared to the first six months of 1996, international sales in the first six months of 1997 increased $5.2 million while North American sales remained at consistent levels. International sales in the second quarter increased $2.9 million as compared to the prior year due to an increase in the number of systems sold to the Japanese health agency and an increase in sales to Latin and South America. North American sales for the quarter decreased $.3 million. Service revenues decreased $.3 million in the first six months of 1997 compared with the first six months of 1996. Service revenues in the second quarter of 1997 increased $.1 million from the second quarter of 1996. Engineering development revenue in the first half of 1997 decreased $.3 million from the first half of 1996 due to funding for a specific development project which ended in the first quarter of 1996. Customer service revenue in the first six months of 1997 decreased $.4 million mainly due to the replacement of older product lines with current products that require less maintenance than the earlier product lines. Year-to-date software revenue increased $.4 million due to the increase in sales, specifically to end-user customers. Cost of sales increased $2.0 million from the first half of 1996 and increased $1.1 million from the second quarter of 1996. The year-to-date and second quarter increases are a reflection of the increase in net sales in 1997. Cost of sales as a percentage of net sales was 62% for the first six months of 1997, compared to 71% in the prior year. This percentage for the second quarter of 1997 was also 62%, compared to 69% for the same period in 1996. The decreases are due to a change in the overall sales mix and increases in absorbed manufacturing expenses resulting from production efficiencies. Marketing and service expenses increased $1.3 million in the first half of 1997 and increased $.7 million in the second quarter of 1997 compared with 1996. Sales and marketing expenses increased $1.0 million in the first half of 1997 primarily due to an increase in sales staffing levels and the associated fringe benefits and travel expense. Customer service expenses increased $.2 million in the first half of 1997 due to an increase in outside services expense. Software expenses increased $.1 million in the first half of 1997 mainly due to increases in staffing levels. As indicated by these increases, the Company's continued focus on revenue growth has required an investment in our marketing and service organizations. Research and development expenses in 1997 increased $.1 million from the first half of 1996 and increased $.2 million in the second quarter. The increase in the first half of 1997 is mainly due to increases in salary and incentive compensation expenses. General and administrative expenses increased $.1 million in the first half of 1997 primarily due to an increase in incentive compensation expense and increases in legal fees and investor relations expenses. Expenses remained consistent for the second quarter of 1997 compared with the second quarter of 1996. Liquidity and Capital Resources Cash and cash equivalents at June 30, 1997 decreased $.8 million from December 31, 1996, for the reasons discussed below. As of June 30, 1997, the Company had no borrowings outstanding against its $4 million line of credit. On May 28, 1997, the Company amended its credit agreement with a bank to extend the maturity date to May 28, 1998. (See Note 3 for further details.) Operating activities used $.1 million of cash in the first half of 1997. Non-cash expenses recorded during the first six months of 1997 were $2.0 million vs. $1.5 million for the same period in 1996. These expenses relate to depreciation of fixed assets (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 increased $2.5 million during the first half of the year due to increases in sales volume, primarily in the month of June. Inventories decreased $1.9 million in the first half of 1997. Total manufacturing inventories decreased $1.7 million from the beginning of the year mainly due to a $1.0 million decrease in the stockroom inventory, which reflects the Company's focus on reducing inventory levels and improving just- in-time purchases. During the first half of the year, work-in-process inventory decreased $1.2 million and finished goods inventory increased $.5 million due to the completion of several system orders. Customer service inventories decreased by $.2 million in the first half of the year mainly due to the amortization of parts inventory. Prepaid expenses increased $.2 million primarily due to increases in prepaid costs related to current engineering development projects, annual report costs and a municipal bid bond. Net plant and equipment increased $.1 million during the first half of 1997 mainly due to $.4 million of capitalized leasehold improvements related to the consolidation and renovation of the corporate offices in Manchester, Connecticut. Other additions of $.3 million include the capitalization of improvements to the customer demonstration facility as well as additions of engineering and test equipment. These increases were partially offset by $.6 million of depreciation expense recorded during the first half of the year. Accounts payable decreased $.1 million from December 31, 1996, due to the timing of payments. Accrued salaries and wages decreased $.5 million reflecting the disbursement of the 1996 incentive compensation of $.8 million, offset by the current year's accrual of $.3 million. Taxes other than income taxes decreased $.2 million due to the remittance of sales tax incurred on prior period sales. Customer deposits decreased $1.0 million resulting from certain large international contracts accepted and recognized in revenue during the first half of 1997 that included substantial deposits.
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 1997 1996 1997 1996 --------- --------- --------- --------- PRIMARY AND FULLY DILUTED Average common shares outstandi 6,576,347 6,529,545 6,568,551 6,527,692 Net effect of dilutive stock options and warrants - based on the treasury stock method using average market price during the quarter 363,286 229,988 386,089 195,692 --------- --------- --------- --------- Total 6,939,633 6,759,533 6,954,640 6,723,384 ========= ========= ========= ========= Net Income $ 1,341 $ 450 $ 1,959 $ 570 ========= ========= ========= ========= Earnings Per Share $ .19 $ .07 $ .28 $ .08 ========= ========= ========= =========
SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 (B) - REPORTS ON FORM 8-K For the Six Months Ended June 30, 1997 No reports on Form 8-K were filed during the first six 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 August 14, 1997 /ss/ James C. Mavel Chairman, President, Chief Executive Officer and Director Date August 14, 1997 /ss/ Michael J. Villano Chief Financial Officer and Vice President EX-27 2 ART. 5 FDS FOR SCAN-OPTICS
5
EXHIBIT 27. SCAN-OPTICS, INC. FINANCIAL DATA SCHEDULE 6-MOS DEC-31-1997 JUN-30-1997 511,000 0 11,735,000 891,000 13,056,000 26,808,000 19,251,000 15,016,000 31,253,000 7,408,000 0 140,000 0 0 23,208,000 31,253,000 19,453,000 26,491,000 12,087,000 24,461,000 0 0 24,000 2,077,000 118,000 1,959,000 0 0 0 1,959,000 .28 .28
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