-----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, N//ntlmnv0zJHexK7lDxTI9YnXr+zYDqWYxGJy7ARsrXMG7JmbgGlW3cmlf8JfDw VUiN0zDA1U8urfFYU6gYYA== 0000906602-98-000163.txt : 19980515 0000906602-98-000163.hdr.sgml : 19980515 ACCESSION NUMBER: 0000906602-98-000163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: SEC FILE NUMBER: 000-05265 FILM NUMBER: 98620966 BUSINESS ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 BUSINESS PHONE: 2032896001 MAIL ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 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, 1998 --------------------- ( )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) 169 Progress Drive, Manchester, CT 06040 - ---------------------------------- -------------------------------------- (Address of principal executive Zip Code offices) (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 11, 1998 was 7,368,349.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands, except share data) March 31, 1998 December 31, 1997 (UNAUDITED) - ------------------------------ -------------- ----------------- Assets Current Assets: Cash and cash equivalents $ 4,947 $ 4,386 Accounts receivable less allowance of $104 at March 31, 1998 and $104 at December 31, 1997 13,802 15,695 Inventories 9,769 12,547 Deferred taxes 820 1,038 Prepaid expenses and other 651 969 ---------------------------------- Total current assets 29,989 34,635 Plant and equipment: Equipment 13,205 13,355 Leasehold improvements 4,563 4,585 Office furniture and fixtures 1,267 1,275 ---------------------------------- 19,035 19,215 Less allowances for depreciation and amortization 15,316 15,355 ---------------------------------- 3,719 3,860 Other assets 212 212 ---------------------------------- Total Assets $ 33,920 $ 38,707 ==================================
(thousands, except share data) March 31, 1998 December 31, 1997 (UNAUDITED) - ------------------------------ -------------- ----------------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 1,293 $ 2,071 Salaries and wages 938 1,984 Taxes other than income taxes 370 744 Income taxes 234 942 Customer deposits 291 2,565 Deferred revenues, net of costs 647 734 Other 878 952 ------------------------------- Total current liabilities 4,651 9,992 Deferred taxes 510 486 Other liabilities 497 496 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, 7,236,789 shares at March 31, 1998 and 7,218,455 shares at December 31, 1997 145 144 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 35,088 35,025 Retained-earnings deficit (3,941) (4,369) Foreign currency translation adjustments (384) (421) -------------------------------- 30,908 30,379 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 -------------------------------- Total stockholders' equity 28,262 27,733 -------------------------------- Total Liabilities and Stockholders' Equity $ 33,920 $ 38,707 ================================ See accompanying notes.
SCAN-OPTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 31 (thousands, except share data) 1998 1997 - -------------------------------------------------------------------------------- Revenues Net sales $ 8,538 $ 9,068 Service revenues 4,256 3,329 Engineering revenues 67 16 Other operating revenues 31 17 --------------------------- Total revenues 12,892 12,430 Costs and Expenses Cost of sales 5,740 5,506 Service expenses 2,725 2,556 Sales and marketing expenses 1,609 1,616 Research and development expenses 1,231 1,173 General and administrative expenses 944 907 Interest expense 22 --------------------------- Total costs and expenses 12,249 11,780 --------------------------- Operating income 643 650 Other income, net 61 25 --------------------------- Income before income taxes 704 675 Income taxes 276 57 --------------------------- Net Income $ 428 $ 618 =========================== Basic earnings per share $ .06 $ .09 =========================== Basic weighted-average shares 6,812,689 6,560,754 Diluted earnings per share $ .06 $ .09 =========================== Diluted weighted-average shares 7,149,461 6,967,757 See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31 (thousands) 1998 1997 - -------------------------------------------------------------------------------- [S] [C] [C] Operating Activities Net income $ 428 $ 618 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 298 300 Amortization 402 337 Provision for losses on accounts receivable 327 Provision for inventory obsolescence 350 Deferred taxes 242 Changes in operating assets and liabilities: Accounts receivable 1,893 118 Inventories 2,376 (113) Prepaid expenses and other 318 (143) Accounts payable (778) (266) Accrued salaries and wages (1,046) (877) Taxes other than income taxes (374) (231) Income taxes (708) (42) Deferred revenues, net of costs (87) Customer deposits (2,274) (885) Other (36) (230) ---------------------------- Net cash provided (used) by operating activities 654 (737) Investing Activities Purchases of plant and equipment (157) (242) ---------------------------- Net cash used by investing activities (157) (242) Financing Activities Proceeds from issuance of common stock 64 142 Proceeds from borrowings 4,369 Principal payments on borrowings (4,467) ---------------------------- Net cash provided by financing activities 64 44 Increase (Decrease) in cash and cash equivalents 561 (935) Cash and Cash Equivalents at Beginning of Year 4,386 1,279 ---------------------------- Cash and Cash Equivalents at End of Period $ 4,947 $ 344 ============================ See accompanying notes. SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For Quarter Ended March 31, 1998 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, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Certain 1997 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) 1998 1997 - ------------------------------------------------------------------ Finished goods $ 1,413 $ 2,586 Work-in-process 2,639 3,823 Service parts 3,524 3,807 Materials and component parts 2,193 2,331 -------- ------- $ 9,769 $ 12,547 ======== =======
NOTE 3 - Credit Arrangements The Company has a line of credit agreement (the "Agreement") with a bank which expires on May 28, 1998. The Agreement has two components, a $2 million line (international) guaranteed by the Export-Import Bank of the United States, which is collateralized by international accounts receivable and inventory, and which bears interest at prime (8 1/4 % at March 31, 1998); and a $2 million line (domestic) which is collateralized by domestic accounts receivable and inventory, and which also bears interest at prime (8 1/4 % at March 31, 1998). There were no borrowings during the first quarter of 1998, and during the first quarter of 1997, the weighted average interest rate on borrowings was 8.7%. 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. 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. The available balance on the total line of credit was $4 million as of March 31, 1998. The Company expects to receive a commitment letter from the bank extending the maturity date of the outstanding line of credit to May 27, 1999, based on the same limitations and covenants in the current Agreement. The commitment letter is subject to the extension of the guarantee by the third party bank on the international line. The Company expects that the guarantee will be extended. NOTE 4 - Income Taxes At March 31, 1998, the Company has approximately $3,900,000 of net operating loss carryforwards for foreign income tax purposes which are scheduled to expire periodically between 1998 and 2005. At March 31, 1997, the Company had 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. The net operating loss carryforwards for federal and state purposes were utilized during 1997. For financial reporting purposes, a valuation allowance has been recorded for the first quarter of 1998 to offset a significant portion of the deferred tax assets related to the foreign net operating loss carryforwards and other temporary differences. In 1997, the valuation allowance was recorded to offset all of the deferred tax assets related to the carryforwards and other temporary differences. Significant components of the Company's deferred tax liabilities and assets were as follows :
March 31 December 31 (THOUSANDS) 1998 1997 - -------------------------------------------------------------------------- Deferred tax assets: Net operating losses $ 1,520 $ 1,479 Depreciation 92 92 Inventory valuation 290 275 Deferred revenue 103 130 Accounts receivable reserves 38 36 Revenue recognition 261 347 Vacation accrual 232 193 Other 150 287 -------- ------- Total deferred tax assets 2,686 2,839 Deferred tax liabilities: Depreciation and other (516) (486) Inventory (74) (80) -------- ------- Total deferred tax liabilities (590) (566) Valuation allowance (1,786) (1,721) -------- ------- Net deferred taxes $ 310 $ 552 ======== =======
NOTE 5 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
March 31 March 31 1998 1997 - ------------------------------------------------------------------------ Numerator: Net income $ 428 $ 618 ========= ========= Denominator: Denominator for basic earnings per share (weighted-average shares) 6,812,689 6,560,754 Effect of dilutive securities: Employee stock options 336,772 407,003 Denominator for diluted earnings per share (adjusted weighted-average --------- --------- shares and assumed conversions) 7,149,461 6,967,757 ========= ========= Basic earnings per share $ .06 $ .09 ========= ========= Diluted earnings per share $ .06 $ .09 ========= ========= NOTE 6 - Year 2000 Compliance The Company has addressed the Year 2000 compliance issues with its products. All current standard operating systems are in the process of modification to ensure Year 2000 compliance. Application software will be changed at the request of the individual customer on a chargeable basis. Customers of non- current products will be notified that the Company does not plan to modify the operating systems to achieve Year 2000 compliance. The Company is in the early stages of implementing a fully compliant Enterprise Resource Planning system as a replacement for the current manufacturing and financial reporting system. This implementation is scheduled to be completed by the second quarter of 1999 and will eliminate the potential information technology internal risks associated with the Year 2000 compliance. A team of individuals is analyzing other potential areas of risk associated with Year 2000 compliance. The costs and effects of these areas are unknown by the Company at this time but are not expected to be material. NOTE 7 - Comprehensive Income As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement 130, REPORTING COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires the Company's foreign currency translation adjustments, which were reported separately in shareholders' equity prior to adoption, to be included in other comprehensive income. The components of comprehensive income, net of related tax, for the three- months ended March 31, 1998 and 1997 are as follows:
March 31 March 31 (THOUSANDS) 1998 1997 - ----------------------------------------------------------------------- Net income $ 428 $ 618 Foreign currency translation adjustments 22 (51) -------- -------- Comprehensive income $ 450 $ 567 ======== ========
The components of accumulated comprehensive income, net of related tax, at March 31, 1998 and December 31, 1997 are as follows:
March 31 December 31 (THOUSANDS) 1998 1997 - ------------------------------------------------------------------------- Foreign currency translation adjustments $ (382) $ (404) -------- -------- Accumulated comprehensive income $ (382) $ (404) ======== ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 VS. 1997 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 Scan-Optics, (the "Company") to achieve the following expectations could be impacted by increased competition or a slowdown in growth within the scanning and imaging market, alternate forms of processing, inability to consummate accretive acquisitions and changes in the economic climates of foreign markets as well as that of the United States. The foregoing factors should not be construed as exhaustive. In 1997, the Company derived 39% of its total revenue from one customer, Toyo Officemation, Inc., one of the Company's distributors in Japan. Health claims processing systems represented 90% of this revenue. The Company completed its order of ten high-volume scanning systems for this customer in the first quarter of 1998. This order brings the total health claims processing systems ordered on this contract to ninety-five. The Company's original expectation was for one hundred and fifty systems to be delivered over the contract life. The efficiencies created by the application of the Company's technology will reduce the overall requirements for this contract. This customer is currently evaluating its system requirements going forward. The Company believes that with the continued pressures on the Yen and the objective to reduce the cost of medical fee processing in Japan, the customer is faced with a challenge to continue to improve its efficiency. The Company expects to receive the results from this internal study in the second half of 1998. The Company believes that success in achieving the initiatives described below will help offset a foreseen significant reduction in sales from this customer for the balance of 1998 as compared to 1997. The inability of the Company to meet these initiatives may have a materially adverse effect on earnings. Five major initiatives currently underway are expected to help compensate for this anticipated decline in revenues. The first initiative is in the healthcare industry, combining the Company's ImageEMC++ system with its 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 healthcare/insurance, government/tax, transportation, and order entry markets. The Company expects to continue to emphasize its "Solutions at 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 at 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, Latin America and other Pacific Rim countries. The fourth initiative relates to leveraging the Company's core competencies in an effort to add revenues and profits. The Company believes that its hardware service, manufacturing and custom engineering organizations have potential to sell their individual expertise, experience and cost effectiveness to other entities. During the first quarter of 1998, the Company achieved favorable results from this initiative by executing its first contract manufacturing relationship under an agreement to manufacture secured access systems for RAPOR, and through an agreement with Docutronix, Inc., that leverages the services of the Company's field service personnel. The last initiative is growth through an accretive acquisition(s). In the fourth quarter of 1997, the Company engaged the services of an investment banking firm to assist in a corporate growth strategy that is focused on the consolidation occurring in the imaging and data capture market. The imaging industry is made up of many smaller companies and management believes achieving greater critical mass will increase the likelihood of growth in the adoption of this technology. With that in mind, the Company is pursuing acquisitions that will utilize its core competencies and will provide immediately accretive earnings. It is the Company's policy not to discuss or comment on negotiations regarding such transactions until a definitive agreement is signed or after circumstances indicate a high degree of probability that a transaction will be consummated, unless the law otherwise requires. Total revenues increased $.5 million or 4% from the first quarter of 1997 to the first quarter of 1998. Net sales decreased $.5 million or 6% in the first quarter of 1998 compared with the first quarter of 1997. International sales increased $.4 million or 7% due to an increase in the number of systems sold to the Japanese health agency. North American sales decreased $.9 million or 34% for the same period due to delay of a contract which the Company expects to receive in the second quarter of 1998. Service revenues increased $.9 million compared to the same period in 1997. Hardware maintenance and support revenue decreased $.2 million mainly due to the replacement of older product lines with current products which require less maintenance than the earlier product lines. Professional services revenue increased $1.1 million or 235% reflecting the Company's growth in the solutions marketplace. Cost of sales increased $.2 million from the first quarter of 1997. Cost of sales as a percentage of net sales was 67% for the first quarter of 1998, compared to 61% in the prior year. These increases are due to a change in the overall sales mix. Service expenses increased $.2 million in the first quarter of 1998 compared with the respective period of 1997. Professional service expenses increased $.2 million mainly due to increases in headcount and travel related expenses. This increase indicates the Company's continued focus on growth in the solutions marketplace. Research and development expenses increased $.1 million from the first quarter of 1997 to the first quarter of 1998 mainly due to consulting expenses required to augment staff levels for short term projects near completion. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at March 31, 1998 increased $.6 million from December 31, 1997. As of March 31, 1998, the Company had no borrowings outstanding against its $4 million line of credit. The Company expects to receive a commitment letter from the bank extending the maturity date of the bank line of credit to May 27, 1999. The line of credit of $4 million ($2 million each for the international and domestic lines) is reflective of the Company's current cash availability and projected cash flow requirements for the next twelve months. Management believes that the line of credit provides the Company with sufficient financial resources to meet its working capital requirements. (See Note 3 for further details.) Operating activities provided $.7 million of cash in the first three months of 1998. Non-cash expenses recorded during the quarter were $.9 million vs. $1.3 million for the same period in 1997. 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, provisions for inventory obsolescence and deferred taxes. Net accounts receivable decreased $1.9 million during the first quarter of the year due to collections on 1997 sales. Total inventories decreased $2.8 million in the first quarter of 1998. Total manufacturing inventories decreased $2.5 million from the beginning of the year due to reductions in raw materials of $.1 million, reductions in work-in- process inventory of $1.2 million as well as decreases in finished goods inventory of $1.2 million due to the completion and delivery of several system orders in the first quarter of 1998 and the Company's focus on reducing inventory levels. Customer service inventories decreased by $.3 million in the first quarter mainly due to the amortization of parts inventory. Deferred taxes decreased $.2 million during the first quarter due to the tax timing differences generated from first quarter activity. (See Note 4 for further details.) Prepaid expenses and other decreased by $.3 million during the first three months of the year mainly due to the amortization of prepaid engineering costs. Net plant and equipment decreased $.1 million during the first quarter of 1998 mainly due to $.3 million of depreciation expense recorded during the first three months of the year. The depreciation expense was offset by additions of $.2 million for the capitalization of leasehold improvements related to the renovation of facilities in Manchester, Connecticut, and for upgrades of internal network computers. Accounts payable decreased $.8 million from December 31, 1997 due to improvements in the just-in-time inventory procurement process. Accrued salaries and wages decreased $1 million during the first quarter of 1998 reflecting the disbursement of the 1997 incentive compensation of $.9 million. Taxes other than income taxes decreased $.4 million due to the remittance of sales tax incurred on fourth quarter 1997 sales. Income taxes decreased $.7 million due to the payment of 1997 estimated income tax liability. Customer deposits decreased $2.3 million from December 31, 1997, mainly due to the acceptance of the Japanese health claims processing systems, recognized in revenue during the first quarter of 1998, which had included substantial deposits. SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 (B) - REPORTS ON FORM 8-K For the Three Months Ended March 31, 1998 No reports on Form 8-K were filed during the first three months of 1998. 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 14, 1998 /s/ James C. Mavel James C. Mavel Chairman, Chief Executive Officer, President and Director Date MAY 14, 1998 /s/ Michael J. Villano Michael J. Villano Chief Financial Officer, Vice President and Treasurer EX-27 2 ART. 5 FDS FOR SCAN-OPTICS CORPORATION
5 EXHIBIT 27. SCAN-OPTICS, INC. FINANCIAL DATA SCHEDULE 3-MOS DEC-31-1998 MAR-31-1998 4,947,000 0 13,802,000 104,000 9,769,000 29,989,000 19,035,000 15,316,000 33,920,000 4,651,000 0 145,000 0 0 28,117,000 33,920,000 8,538,000 12,892,000 5,740,000 12,249,000 (61,000) 0 0 704,000 276,000 428,000 0 0 0 428,000 .06 .06
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