-----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, N6dG5g81wuppcXuN+jF8Zmk44hrnwoCLQuGHq5M/IOVMFor0avrMiD94PviIgBve ZEltP5wFL1wFzFRryGoXTw== 0000950159-01-500089.txt : 20010516 0000950159-01-500089.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950159-01-500089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1635332 BUSINESS ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 BUSINESS PHONE: 8606457878 MAIL ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 10-Q 1 scanopt3-01q.txt 10-Q 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, 2001 ( ) 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 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 9, 2001 was 7,439,732. SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(thousands, except share data) March 31, 2001 December 31, 2000 - ---------------------------------------------------------------------------------------------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents 1,128 36 Accounts receivable less allowance of $2,424 at March 31, 2001 and $2,926 at December 31, 2000 7,131 8,664 Unbilled receivables - contracts in progress less allowance of $0 at March 31, 2001 and $2,689 at December 31, 2000 531 1,064 Refundable income taxes 85 124 Inventories 8,869 8,898 Deferred costs, net of revenues 160 171 Prepaid expenses and other 409 798 -------------------------- Total current assets 18,313 19,755 Plant and equipment: Equipment 13,596 13,574 Leasehold improvements 5,183 5,183 Office furniture and fixtures 1,352 1,362 -------------------------- 20,131 20,119 Less allowances for depreciation and amortization 18,265 18,126 -------------------------- 1,866 1,993 Software license, net 1,254 1,463 Goodwill, net 10,630 10,975 Other assets 250 250 -------------------------- Total Assets 32,313 34,436 ========================== 2 (thousands, except share data) March 31, 2001 December 31, 2000 - ---------------------------------------------------------------------------------------------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable 4,973 6,066 Notes payable to bank 18,287 18,000 Salaries and wages 815 854 Taxes other than income taxes 455 393 Income taxes 70 121 Customer deposits 1,161 1,212 Other 2,730 2,942 -------------------------- Total current liabilities 28,491 29,588 Other liabilities 541 541 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, 7,439,732 shares at March 31, 2001 and December 31, 2000 149 149 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 35,654 35,654 Retained earnings (deficit) (28,849) (28,185) Foreign currency translation adjustments (1,027) (665) -------------------------- 5,927 6,953 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 -------------------------- Total stockholders' equity 3,281 4,307 -------------------------- Total Liabilities and Stockholders' Equity 32,313 34,436 ==========================
See accompanying notes. 3 SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31 (thousands, except share data) 2001 2000 - ----------------------------------------------------------------------------------------------------- Revenues Hardware and software $ 6,164 $ 5,313 Professional services 1,443 2,801 Access services 3,301 2,988 ------------------------------------------------- Total revenues 10,908 11,102 Costs of Revenue Hardware and software 4,399 3,506 Professional services 1,196 2,941 Access services 2,741 2,739 ------------------------------------------------- Total costs of revenue 8,336 9,186 Gross Margin 2,572 1,916 Operating Expenses Sales and marketing 982 1,574 Research and development 745 1,112 General and administrative 985 1,142 Interest 512 394 ------------------------------------------------- Total operating expenses 3,224 4,222 ------------------------------------------------- Operating loss (652) (2,306) Other income, net 10 44 ------------------------------------------------- Loss before income taxes (642) (2,262) Income tax expense 22 13 ------------------------------------------------- Net Loss $ (664) $ (2,275) ================================================= Basic loss per share $ (0.09) $ (0.32) ================================================= Basic weighted-average shares 7,026,232 7,016,672 Diluted loss per share $ (0.09) $ (0.32) ================================================= Diluted weighted-average shares 7,026,232 7,016,672 Certain 2000 amounts have been reclassified to conform to the current year presentation.
4 SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31 (thousands) 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- Operating Activities Net loss $ (664) $ (2,275) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 168 218 Amortization of customer service inventory and software license 639 425 Amortization of goodwill 345 506 Changes in operating assets and liabilities: Accounts receivable 2,066 851 Refundable income taxes 39 975 Recoverable income taxes 740 Inventories (401) (1,614) Prepaid expenses and other 389 (15) Accounts payable (1,093) 219 Accrued salaries and wages (39) (230) Taxes other than income taxes 62 (511) Income taxes (51) 61 Deferred costs, net of revenues 11 (23) Customer deposits (51) (144) Other (574) (42) ---------------------------------------------------------- Net cash provided (used) by operating activities 846 (859) Investing Activities Proceeds from the sale of plant and equipment 215 Purchases of plant and equipment (41) (82) ---------------------------------------------------------- Net cash provided (used) by investing activities (41) 133 Financing Activities Proceeds from issuance of common stock 87 Proceeds from borrowings 3,385 8,653 Principal payments on borrowings (3,098) (8,005) ---------------------------------------------------------- Net cash provided by financing activities 287 735 Increase in cash and cash equivalents 1,092 9 Cash and Cash Equivalents at Beginning of Year 36 38 ---------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 1,128 $ 47 ==========================================================
See accompanying notes. 5 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 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, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. Certain 2000 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) 2001 2000 - -------------------------------------------------------------------------- Finished goods $ 199 $ 196 Work-in-process 1,110 846 Service parts 4,382 4,552 Materials and component parts 3,178 3,304 ------------------------------ $ 8,869 $ 8,898 ============================== NOTE 3 - Credit Arrangements On May 10, 1999, the Company amended its credit agreement (the "Agreement") with a bank to extend the maturity date to May 10, 2002 and to reduce the line from $13 million to $10 million. The unused portion of the line is subject to a commitment fee of 3/8% per annum. The available balance on the line of credit was $.2 million and $.5 million at March 31, 2001 and December 31, 2000, respectively. The weighted average interest rate on borrowings during the first three months of 2001 and 2000 was 11.4% and 8.9%, respectively. Additionally, on May 10, 1999, a five-year term loan in the amount of $10 million was established to better match the cash expenditures for acquisitions with the cash flow that results from the acquired businesses. The outstanding balance on the term loan at March 31, 2001 and December 31, 2000 was $8.5 million, all of which is classified as a current liability on the 6 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 consolidated balance sheet due to the waiver of defaults which expires on July 1, 2001 as noted below. Both the line of credit and the term loan bore interest at prime plus 5% through January 30, 2001. This rate was reduced to prime plus 2% in accordance with the amendment as described below. Fleet National Bank sold the Agreement to Patriarch Partners, LLC on January 4, 2001. The Agreement contains covenants which, among other things, require the maintenance of specified working capital, debt to equity ratios, net income levels, tangible net worth levels and backlog levels. The Company entered into an amendment and waiver agreement with Patriarch Partners, LLC on January 31, 2001 which waived defaults on the revolver and term loans through July 1, 2001. The amendment also reduced the interest rate to prime plus 2% effective January 30, 2001. The Company is in compliance with all covenants in effect under the amendment and waiver agreement relating to the line of credit and term loan as of March 31, 2001. The Company is in the process of negotiating a total debt restructuring to meet its short-term and long-term capital needs. These matters raise substantial doubt about the Company's ability to continue as a going concern. If negotiations on the revision of the Agreement with Patriarch Partners LLC are not complete by the end of the second quarter, the Company will continue to negotiate with other bank and finance companies, as well as review other business and financing options. The carrying value of the notes payable to the bank approximates its fair value and is secured by all of the Company's assets. NOTE 4 - Income Taxes At March 31, 2001, the Company has U.S. federal and state operating loss carryforwards of approximately $18,000,000 and $19,700,000, respectively. The U.S. federal and state net operating loss carryforwards expire through 2020. At March 31, 2001, the Company has approximately $480,000, $2,700,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively, which begin to expire in 2008. At March 31, 2000, the Company had U.S. federal and state operating loss carryforwards of approximately $9,700,000 and $12,300,000, respectively. At March 31, 2000, the Company had approximately $450,000, $3,100,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively. For financial reporting purposes, a valuation allowance has been recorded for the first quarter of 2001 and 2000 to fully offset deferred tax assets relating to U.S. federal, state, and foreign net operating loss carryforwards and other temporary differences. 7 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 Significant components of the Company's deferred tax liabilities and assets were as follows:
March 31 December 31 (thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Net operating losses $ 8,499 $ 8,556 Alternative minimum tax credit carryforward 168 168 Depreciation 92 92 Charitable contribution carryforward 53 53 Inventory valuation 558 553 Inventory 180 180 Accounts receivable reserves 888 2,057 Goodwill 570 206 Vacation accrual 243 216 Other 155 156 --------------------------------------- Total gross deferred tax assets 11,406 12,237 Deferred tax liabilities: Revenue recognition - milestone and retainer contracts (4) Depreciation and other (437) (449) --------------------------------------- Total gross deferred tax liabilities (441) (449) Valuation allowance (10,965) (11,788) --------------------------------------- Net deferred tax asset $ - $ - =======================================
8 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 NOTE 5 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share:
March 31 March 31 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Numerator: Net loss $ (664) $ (2,275) ===================================== Denominator for basic and diluted earnings (loss) per share (weighted-average shares) 7,026,232 7,016,672 ===================================== Basic earnings (loss) per share $ (.09) $ (.32) ===================================== Diluted earnings (loss) per share $ (.09) $ (.32) =====================================
9 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 NOTE 6 - Comprehensive Income The components of comprehensive income, net of related tax, for the three-months ended March 31, 2001 and 2000 are as follows:
March 31 March 31 (thousands) 2001 2000 - --------------------------------------------------------------------------------------- Net loss $ (664) $ (2,275) Foreign currency translation adjustments (374) (28) --------------------------------------- Comprehensive loss $ (1,038) $ (2,303) =======================================
The components of accumulated comprehensive loss, net of related tax, at March 31, 2001 and December 31, 2000 are as follows:
March 31 December 31 (thousands) 2001 2000 - --------------------------------------------------------------------------------------- Foreign currency translation adjustments $ (998) $ (624) --------------------------------------- Accumulated comprehensive loss $ (998) $ (624) =======================================
10 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2001 Note 7 - Segment Information The Company views its business in three distinct revenue categories: Product and solution sales, Access services, and Contract manufacturing services. Revenues are used by management as a guide to determine the effectiveness of the individual segment. The Company manages its operating expenses through a traditional functional perspective and accordingly does not report operating expenses on a segment basis.
Three Months Ended March 31 (thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Revenues Solutions and products $ 7,107 $ 7,544 Access services 3,301 2,988 Contract manufacturing services 500 570 --------------------------------------- Total revenues 10,908 11,102 Cost of solutions and products 5,595 6,447 Service expenses 2,741 2,739 --------------------------------------- Gross margin 2,572 1,916 Operating expenses, net 3,214 4,178 --------------------------------------- Loss before income taxes $ (642) $ (2,262) ======================================= Total expenditures for additions to long-lived assets $ 41 $ 48
Note 8 - Recent Developments The Company has reached a full and final agreement with the Kentucky Finance and Administration Cabinet regarding the contract with the Department of Revenue. The settlement received from this customer was $.1 million in excess of the unreserved accounts receivable balance, which was included as a reduction in general and administrative expenses in the first quarter of 2001. Kentucky has removed and rescinded the notice of default that was issued in 2000. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Outlook The forward-looking statements contained in this Outlook and elsewhere in this document are based on current expectations. Scan-Optics, Inc. (the "Company") and its future operations are subject to a number of risks, including those discussed below. The following list is not intended to be an exhaustive list of all the risks to which the Company's business is subject, but only to highlight certain substantial risks faced by the Company. The Company will need to negotiate an extension from its existing lender or locate alternative sources of financing in order to continue to operate its business as currently conducted and implement its business plan. The Company's ability to ship its products and fulfill contracts on a timely basis may be limited by a lack of liquidity. The Company's business could be adversely affected by downturns in the domestic and international economy. The Company's international sales and operations are subject to various international business risks. The Company's revenues depend in part on contracts with various state or federal governmental agencies, and could be adversely affected by patterns in government spending. The Company faces competition from many sources, and its products may be replaced with products relying on alternative technologies. The Company's business could be adversely affected by technological changes. The foregoing factors should not be construed as exhaustive. The Company experienced a net loss of $.7 million in the first quarter of 2001 as compared with a loss of $2.3 million in the first quarter of 2000. The first quarter of 2001 represents a $3.5 million improvement over the net loss, net of one time charges, from the fourth quarter of 2000. The Company was substantially complete, as of December 31, 2000, with the professional services projects that were negatively impacting the services margin. In the first quarter of 2001 the professional services organization experienced the first quarter of profitability since the second quarter of 1999. This improvement shows good progress on the transition to becoming a Solutions company. Because of the existence of significant non-cash expenses, such as depreciation of fixed assets and amortization of intangible assets and customer service inventory, the Company believes that EBITDA (earning before interest, taxes, depreciation and amortization) contributes to a better understanding of the Company's ability to satisfy its obligations and to utilize cash for other purposes. EBITDA should not be considered in isolation from or as a substitute for operating income, cash flow from operating activities, and other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles. The operating income before interest, taxes, depreciation and amortization (EBITDA) was $1 million in the first quarter of 2001, as compared to an EBITDA loss of $.7 million in the first quarter of 2000 and an EBITDA loss of $2.3 million, net of one time charges, for the fourth quarter of 2000. 12 The Company has three major initiatives currently underway to improve revenue growth and profitability. They are to emphasize the "Business of Solutions" focus in targeted markets, to decrease market risk through expansion in the international marketplace, and to capitalize on existing core competencies of the Company. A fourth initiative that is currently on hold is to add long term value through the acquisition of key strategic products or enterprises. The inability of the Company to carry out these initiatives may have a materially adverse effect on revenue growth and earnings. The first initiative is to provide cost effective solutions through the Company's development of target market data capture applications combined with its high speed transports and archival systems. The Company has refined its target market approach and has chosen to focus primarily on the government and insurance markets, while continuing to address the transportation, financial and order entry markets. The Company expects to continue to emphasize its "Business of Solutions" 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 in these new markets. The Company's revenue in the solutions initiative decreased $.5 million or 6% in the first quarter of 2001 as compared to 2000. The government market increased $2 million or 80% while the health insurance market declined $1.2 million or 82% on a first quarter 2000 to 2001 comparison. The other target markets were consistent with the prior year. The second initiative is further expansion into the international marketplace. The Company has successfully supplied product to the Japanese market and has experienced strong sales activity in the past through relationships with highly qualified and productive distributors. The Company will continue to focus on developing strong relationships in Europe, Latin America and other Pacific Rim countries. The Company experienced a revenue increase of $2.5 million or 382% in Europe from the first quarter of 2000 to 2001. The Pacific Rim declined in the same timeframe by $1.7 million or 89%. The economic environment in Latin America has been an impediment to growth where the Company experienced only a slight increase in revenue. The Company plans on the continuation of this expansion effort in the future. The third initiative relates to leveraging the Company's core competencies in an effort to offset fixed expense and add revenues and profits. The Company has demonstrated that Access Services and Contract Manufacturing Services have potential to sell their individual expertise, experience and cost effectiveness to other entities. During the first quarter of 2001 compared to 2000, Access Services revenue increased by $.3 million or 10%, contract manufacturing revenue decreased by $.1 million or 12%. 13 The Company has put on hold its initiative of long term growth through accretive acquisitions of key strategic products or enterprises. No acquisitions are currently being considered due to management's focus on the operations of the business and the liquidity position of the Company. Results of Operations for the Three Months Ended March 31, 2001 vs. 2000 - ------------------------------------------------------------------------ Total revenues decreased $.2 million or 2% from the first quarter of 2000 to the first quarter of 2001. Hardware and software revenues increased $.9 million or 16% in the first quarter of 2001 compared with the first quarter of 2000. North American sales increased $.1 million or 2%. International sales increased $.8 million or 29% mainly due to a large integrated solution sale to the British government which was partially offset by a decline in revenue in the Pacific Rim. Professional services revenues decreased $1.4 million or 48% in the first quarter of 2001 compared with the first quarter of 2000, mainly due to the completion of various contracts that were behind schedule during 2000 along with a reduced level of current projects which allowed the Company to achieve expected profitability targets for the quarter. Access services revenues increased $.3 million from the first quarter of 2000, mainly due to increases in contracted maintenance on proprietary Scan-Optics products. Cost of hardware and software increased $.9 million from the first quarter of 2000. Cost of hardware and software sales as a percentage of revenue was 71% for the first quarter of 2001, compared to 66% in the prior year. This increase is due to sales mix. The Company installed a large integrated solution for the British government in the first quarter of 2001, which was mainly comprised of third party hardware and software components that yielded a lower margin than traditional Company hardware and software. Cost of professional services decreased $1.7 million in the first quarter of 2001 mainly due to the reduction in contractors required as compared to the first quarter of 2000, as well as an overall reduction in work effort required to deliver professional services customer requirements in the first quarter of 2001. Cost of Access services in the first quarter of 2001 remained consistent with the first quarter of 2000. 14 Sales and marketing expenses decreased $.6 million from the first quarter of 2000 mainly due to a $.4 million decrease in salaries and benefits and a $.2 million decrease in travel and related expenses. Research and development expenses decreased $.4 million from the first quarter of 2000 mainly due to a decrease of $.1 million in salaries and benefits, $.2 million in consulting expenses and $.1 million in travel and facility cost reductions. General and administrative expenses decreased $.2 million from the first quarter of 2000 mainly due to the recovery of reserved accounts receivable. Interest expense increased $.1 million from the first quarter of 2000 due to the change in the interest rate. Both the line of credit and term loan carried an interest rate of prime through March 24, 2000 when the rate increased to prime plus 5%. As of January 30, 2001 the interest rate was reduced to prime plus 2%. The weighted average interest rate for the first quarter of 2001 was 11.4% compared to 8.9% in 2000. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents at March 31, 2001 increased $1.1 million from December 31, 2000 levels. Total borrowings increased to $18.3 million at March 31, 2001 from $18 million at the end of 2000. The available balance on the line of credit was $.2 million at March 31, 2001. As of March 31, 2001, the Company is in compliance with all of the financial covenants related to its bank debt and is currently negotiating with its bank to restructure the borrowing arrangements and agree to new terms and conditions. The current bank waiver expires on July 1, 2001, accordingly, all bank debt has been classified as a current liability on the consolidated balance sheet. (See Note 3 for further details.) Operating activities provided $.8 million of cash in the first three months of 2001. Non-cash expenses recorded during the quarter were $1.2 million vs. $1.1 million for the same period in 2000. These expenses relate to depreciation of fixed assets (discussed in net plant and equipment below), amortization of customer service spare parts inventory and amortization of goodwill. Net accounts receivable and unbilled receivables decreased $2.1 million from December 31, 2000 due to collection of outstanding receivables that were related to various contracts that were behind schedule in 2000, along with the collection within the quarter 15 of the British government solution sale that would have typically been in accounts receivable at the end of the quarter. Total inventories at March 31, 2001 remained consistent with inventory levels at December 31, 2001. Total manufacturing inventories increased $.1 million from the beginning of the year mainly due to an increase in work in process inventory. Customer service inventories decreased $.1 million due to amortization of inventory. Net plant and equipment decreased $.1 million from December 31, 2000 mainly due to depreciation expense reported during the quarter. Software license decreased by $.2 million from December 31, 2000 due to the amortization of the source code licensing agreement. Goodwill decreased by $.3 million from December 31, 2000 due to amortization recorded for the quarter. Accounts payable decreased $1.1 million from December 31, 2000 due to the timing of payments. Other current liabilities decreased by $.2 million from December 31, 2000 due to a decrease in accrued interest expense and payments applied to accrued expenses. 16 SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6(B) - REPORTS ON FORM 8-K For the Three Months Ended March 31, 2001 No reports on Form 8-K were filed during the first three months of 2001. 18 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 15, 2001 /ss/ ------------------------- -------------------------------------------- James C. Mavel Chairman, Chief Executive Officer, President and Director Date May 15, 2001 /ss/ ------------------------- -------------------------------------------- Michael J. Villano Chief Financial Officer, Vice President and Treasurer 18 -----END PRIVACY-ENHANCED MESSAGE-----