-----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, FGUaRL34JYq7FqHHMus2FSNHgTGSiZ2NqksrVYYqmgUVujpOvkMouDgBohz5WKxc cManDd5AxxCvu1v4QhT84A== 0000950159-01-500363.txt : 20020410 0000950159-01-500363.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950159-01-500363 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1789798 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 scan10-q.txt SCAN-OPTICS, INC. 9-01 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 September 30, 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 October 31, 2001 was 7,439,732. 1 SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(thousands, except share data) September 30, December 31, 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 1,664 $ 36 Accounts receivable less allowance of $1,943 at September 30, 2001 and $2,926 at December 31, 2000 2,004 8,664 Unbilled receivables - contracts in progress less allowance of $0 at September 30, 2001 and $2,689 at December 31, 2000 1,105 1,064 Refundable income taxes 124 Inventories 9,521 8,898 Deferred costs, net of revenues 160 171 Prepaid expenses and other 243 798 --------------------------------------------------------------- Total current assets 14,697 19,755 Plant and equipment: Equipment 13,637 13,574 Leasehold improvements 5,183 5,183 Office furniture and fixtures 1,359 1,362 --------------------------------------------------------------- 20,179 20,119 Less allowances for depreciation and amortization 18,629 18,126 --------------------------------------------------------------- 1,550 1,993 Software license, net 836 1,463 Goodwill, net 9,582 10,975 Other assets 250 250 --------------------------------------------------------------- Total Assets $ 26,915 $ 34,436 ===============================================================
2
(thousands, except share data) September 30, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,687 $ 6,066 Notes payable to bank 18,387 18,000 Salaries and wages 865 854 Taxes other than income taxes 399 393 Income taxes 4 121 Customer deposits 721 1,212 Other 1,725 2,942 ------------------------------------------------- Total current liabilities 25,788 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 September 30, 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 (31,598) (28,185) Foreign currency translation adjustments (973) (665) ------------------------------------------------- 3,232 6,953 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 ------------------------------------------------- Total stockholders' equity 586 4,307 ------------------------------------------------- Total Liabilities and Stockholders' Equity $ 26,915 $ 34,436 =================================================
See accompanying notes. 3 SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 (thousands, except share data) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Revenues Hardware and Software $ 901 $ 5,251 $ 8,787 $ 15,147 Professional Services 1,579 1,691 4,965 6,269 Access Services 3,106 3,073 9,733 9,625 -------------------------------------- ---------------------------------- Total revenues 5,586 10,015 23,485 31,041 Costs of Revenue Hardware and software 1,121 3,487 7,065 10,548 Professional services 805 1,523 3,105 6,743 Access services 2,621 2,708 8,051 8,459 -------------------------------------- ---------------------------------- Total costs of revenue 4,547 7,718 18,221 25,750 Gross Margin 1,039 2,297 5,264 5,291 Operating Expenses Sales and marketing 935 1,497 2,830 4,662 Research and development 642 761 2,073 2,836 General and administrative 873 1,052 2,403 3,307 Interest 401 726 1,352 1,789 -------------------------------------- ---------------------------------- Total operating expenses 2,851 4,036 8,658 12,594 -------------------------------------- ---------------------------------- Operating loss (1,812) (1,739) (3,394) (7,303) Other income (expense), net 4 (26) 12 38 -------------------------------------- ---------------------------------- Loss before income taxes (1,808) (1,765) (3,382) (7,265) Income tax expense 1 16 31 47 -------------------------------------- ---------------------------------- Net Loss $ (1,809) $ (1,781) $ (3,413) $ (7,312) ====================================== ================================== Basic loss per share $ (.26) $ (.25) $ (.49) $ (1.04) ====================================== ================================== Basic weighted-average shares 7,026,232 7,027,861 7,026,232 7,022,267 Diluted loss per share $ (.26) $ (.25) $ (.49) $ (1.04) ====================================== ================================== Diluted weighted-average shares 7,026,232 7,027,861 7,026,232 7,022,267 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)
Nine Months Ended September 30 (thousands) 2001 2000 - --------------------------------------------------------------------------------------------------------------- Operating Activities Net loss $ (3,413) $ (7,312) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 522 670 Amortization of customer service inventory and software license 1,897 1,746 Amortization of goodwill 993 975 Provision for losses on accounts receivable 100 Changes in operating assets and liabilities: Accounts receivable 6,619 4,688 Refundable income taxes 124 1,012 Recoverable income taxes 0 740 Inventories (1,893) (1,279) Prepaid expenses and other 555 (239) Accounts payable (2,379) (136) Accrued salaries and wages 11 (262) Taxes other than income taxes 6 (726) Income taxes (117) 87 Deferred costs, net of revenues 11 (210) Customer deposits (491) 60 Other (1,525) (135) ----------------------------------------------------- Net cash provided (used) by operating activities 920 (221) Investing Activities Acquisition related settlement - See Note 8 400 Proceeds from the sale of plant and equipment 215 Purchases of plant and equipment (79) (128) ------------------------------------------------------ Net cash provided by investing activities 321 87 Financing Activities Proceeds from issuance of common stock 87 Proceeds from borrowings 3,485 19,684 Principal payments on borrowings (3,098) (19,602) ------------------------------------------------------ Net cash provided by financing activities 387 169 Increase in cash and cash equivalents 1,628 35 Cash and Cash Equivalents at Beginning of Year 36 38 ----------------------------------------------------- Cash and Cash Equivalents at End of Period $ 1,664 $ 73 =====================================================
See accompanying notes. 5 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 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 nine month period ended September 30, 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: September 30, December 31, (thousands) 2001 2000 - ------------------------------------------------------------------------ Finished goods $ 199 $ 196 Work-in-process 953 846 Service parts 4,254 4,552 Materials and component parts 4,115 3,304 ------------------------------ $ 9,521 $ 8,898 ============================== NOTE 3 - Credit Arrangements On June 29, 2001, the Company announced that it had reached an agreement with Patriarch Partners, LLC ("Patriarch") on terms and conditions to complete its debt restructuring. Under the proposed amendment from Patriarch, the maturity date of the Second Amended and Restated Loan Agreement, dated May 10, 1999 will extend to January 1, 2004. The current $8.5 million term loan will be restructured into a senior term loan of $6.5 million, which will remain at prime plus 2%; and a subordinated term loan of $2 million at a fixed rate of 10%. Monthly principal payments of $5,000 are required as part of the senior term loan. The revolving line of credit will remain at $10 million at an interest rate of prime plus 2%. This amendment will include warrants to purchase Scan-Optics common stock in an amount equal to 12.5% of the common equity on a fully diluted basis with 6 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 reciprocal put and call rights. The warrants will be purchased at a price of $.01 per share. The closing is scheduled to take place on or before December 31, 2001. The outstanding balance on the term loan at September 30, 2001 and December 31, 2000 was $8.5 million, all of which is classified as a current liability on the consolidated balance sheet due to the waiver of defaults which expires on December 31, 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. 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 $.1 million and $.5 million at September 30, 2001 and December 31, 2000, respectively. The weighted average interest rate on borrowings during the first nine months of 2001 and 2000 was 9.9% and 11.6%, respectively. Fleet National Bank sold the Agreement to Patriarch 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 on January 31, 2001 which waived defaults on the revolver and term loans through July 1, 2001. This amendment and waiver agreement was extended most recently on October 31, 2001 for a period of sixty days to allow adequate time to document and execute the debt restructuring noted above. 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 September 30, 2001. 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 September 30, 2001, the Company has U.S. federal and state net operating loss carryforwards of approximately $19,500,000 and $21,200,000, respectively. The U.S. federal and state net operating loss carryforwards expire through 2015. At September 30, 2001, the Company has approximately $450,000, $3,100,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively, which expire through 2007. At September 30, 2000, the Company had U.S. federal and state net operating loss carryforwards of approximately $15,100,000 and $17,700,000, respectively. At September 30, 2000, the Company had approximately $541,000, $3,200,000 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 third quarter of 2001 and 2000 to 7 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 fully offset deferred tax assets relating to U.S. federal, state, and foreign net operating loss carryforwards and other temporary differences. 8 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 Significant components of the Company's deferred tax liabilities and assets were as follows:
September 30 December 31 (thousands) 2001 2000 - ---------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating losses $ 9,711 $ 8,556 Alternative minimum tax credit carryforward 168 168 Depreciation 92 92 Charitable contribution carryforward 53 53 Inventory valuation 531 553 Inventory 180 180 Accounts receivable reserves 712 2,057 Goodwill 782 206 Vacation accrual 231 216 Other 155 156 --------------------------------------- Total gross deferred tax assets 12,615 12,237 Deferred tax liabilities: Revenue recognition - milestone and retainer contracts (4) Depreciation and other (329) (449) --------------------------------------- Total gross deferred tax liabilities (333) (449) Valuation allowance (12,282) (11,788) ---------------------------------------- Net deferred tax asset $ - $ - ========================================
9 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 NOTE 5 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share:
Three Months Ended Nine Months Ended September 30 September 30 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Numerator: Net loss $ (1,809) $ (1,781) $ (3,413) $ (7,312) =============================================================== Denominator: Denominator for basic and diluted earnings (loss) per share (weighted-average shares) 7,026,232 7,027,861 7,026,232 7,022,267 =============================================================== Basic loss per share $ (.26) $ (.25) $ (.49) $ (1.04) =============================================================== Diluted loss per share $ (.26) $ (.25) $ (.49) $ (1.04) ===============================================================
NOTE 6 - Comprehensive Income The components of comprehensive income (loss), net of related tax, for the three and nine months ended September 30, 2001 and 2000 are as follows:
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Net loss $ (1,809) $ (1,781) $ (3,413) $ (7,312) Foreign currency translation adjustments 38 (47) (320) (144) --------------------------------------------------------------- Comprehensive loss $ (1,771) $ (1,828) $ (3,733) $ (7,456) ===============================================================
10 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 The components of accumulated comprehensive loss, net of related tax, at September 30, 2001 and December 31, 2000 are as follows: September 30, December 31, (thousands) 2001 2000 - ------------------------------------------------------------------------------- Foreign currency translation adjustments $ (944) $ (624) --------------------------------- Accumulated comprehensive loss $ (944) $ (624) ================================= 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 Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------ Revenues Solutions and products $ 2,372 $ 6,436 $ 12,973 $ 19,923 Access services 3,106 3,073 9,733 9,625 Contract manufacturing services 108 506 779 1,493 --------------------------------------------------------------- Total revenues 5,586 10,015 23,485 31,041 Cost of solutions and products 1,926 5,010 10,170 17,291 Service expenses 2,621 2,708 8,051 8,459 --------------------------------------------------------------- Gross profit margin 1,039 2,297 5,264 5,291 Operating expenses and other income, net 2,847 4,062 8,646 12,556 --------------------------------------------------------------- Loss before income taxes $ (1,808) $ (1,765) $ (3,382) $ (7,265) =============================================================== Total expenditures for additions to long-lived assets $ 6 $ 47 $ 79 $ 128
11 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended September 30, 2001 NOTE 8 - Acquisition Settlement On June 19, 2001 the Company reached a settlement with the former owners of Southern Computer Systems (SCS) regarding certain disputes that arose under their original stock purchase agreement executed in June 1998 pursuant to which Scan-Optics acquired 100% of the equity in SCS. As part of the stock purchase agreement, Scan-Optics was required to make certain payments to the former owners of SCS in connection with a consulting and non-compete agreement, some of which remained due. The stock purchase agreement also required the deposit of funds in a representation and warranty general escrow, which funds were to be released to the former owners of SCS on the second anniversary following the date of purchase. The settlement provided for the release of all claims made by Scan-Optics relating to the former owners' representations and warranties and the release of all claims made by the former owners against Scan-Optics. In exchange for this release, the former owners forgave $.5 million due under the consulting and non-compete agreements and made a cash payment from the general escrow account of $.4 million to Scan-Optics. The forgiveness of the $.5 million for the consulting and non-compete retainer was recorded as a reduction in Scan-Optics' general and administrative expense in the second quarter of 2001. The $.4 million payment from the general escrow account was accounted for as an adjustment of the original purchase price through a decrease in goodwill. NOTE 9- New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141, "Business Combinations" and 142,"Goodwill and Other Intangibles". Statement No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. Statement No. 142 eliminates amortization of goodwill and requires at least an annual assessment for impairment applying a fair value based test. Furthermore, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. The Company is required to adopt Statement No. 142 for fiscal year 2002 and is in the process of determining the impact of these pronouncements on its financial position and results of operations. 12 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'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 Company experienced a net loss of $1.8 million in the third quarter of 2001, which was consistent with the third quarter of 2000. The Company experienced a loss in the first nine months of 2001 of $3.4 million, which is an improvement over the prior year loss of $7.3 million. Compared to the first nine months of 2000, hardware and software revenues decreased $6.4 million due to the concern over the expiration on July 1, 2001 and potential non-renewal of the bank agreement as well as the general economic environment for goods and services and the events of September 11th which created a major diversion for our employees, customers and community. In the third quarter of 2001 the professional services organization experienced another quarter of profitability improving over the positive results in the first and second quarters. The gross margin for professional services for the first nine months of 2001 was 37% compared to negative margin of 8% in the same period in 2000. This improvement shows continued 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 a $.3 million loss in the third quarter of 2001, as compared to EBITDA of $.2 million in the third quarter of 13 2000. EBITDA was $1.4 million in the first nine months of 2001, as compared to an EBITDA loss of $2.1 million in same period of 2000. 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 $5.6 million in the first nine months of 2001 as compared to 2000 and decreased $4 million during the third quarter of 2001 compared to the third quarter of 2000. 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 $2.2 million or 148% in Europe during the first nine months of 2001 from 2000 and decreased $.4 million from the third quarter of 2001 to 2000. The Pacific Rim declined in the first nine months by $3.6 million or 80% and decreased $2 million in the third quarter of 2001 as compared to 2000. The Company plans to continue its international 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 nine months of 2001 compared to 2000, Access Services revenue increased by $.1 million or 1% and was flat on a third quarter 2001 to 2000 comparison. Contract manufacturing revenue decreased by $.7 million 14 or 48% during the first nine months of 2001 compared to 2000 and decreased $.4 million or 79% in the third quarter comparison. 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 and Nine Months Ended September 30, 2001 vs. 2000 Total revenues decreased $7.6 million or 24% from the first nine months of 2000 to the first nine months of 2001 and decreased $4.4 million or 44% from the third quarter of 2000 to the third quarter of 2001. Hardware and software revenues decreased $6.4 million or 42% in the first nine months of 2001 compared with the first nine months of 2000. Hardware and software revenues decreased $4.4 or 83% in the third quarter of 2001 compared with the third quarter of 2000. Compared to the first nine months of 2000, North American sales decreased $5 million or 55% and decreased $1.9 million or 86% during the third quarter of 2001 compared to the third quarter of 2000 due to the concern over the expiration on July 1, 2001 and potential non-renewal of the bank agreement as well as the general economic environment and the events of September 11th. International sales during the first nine months of 2001 decreased $1.4 million or 23% and decreased $2.5 million or 80% during the third quarter of 2001 mainly due to a large parts order received in the third quarter of 2000. Professional services revenues decreased $1.3 million or 21% in the first nine months of 2001 compared with the first nine months of 2000 and decreased $.1 million or 7% during the third quarter of 2001 compared to the third quarter of 2000, mainly due to the completion of various contracts that were behind schedule during 2000 which allowed the Company to achieve expected profitability targets. Access services revenues remained consistent in the first nine months and the third quarter of 2001 as compared with the same periods in 2000. Cost of hardware and software decreased $3.5 million from the first nine months of 2000 compared to the first nine months of 2001 and decreased $2.4 million from the third quarter of 2000 compared to the third quarter of 2001. Cost of hardware and software sales as a percentage of revenue was 80% for the first nine months of 2001, compared to 70% in the first nine months of the prior year. 15 Cost of hardware and software sales as a percentage of revenue was 124% during the third quarter of 2001, compared to 66% in the third quarter of the prior year. This percentage increase is due to the reduced sales volume and product mix. Cost of professional services decreased $3.6 million in the first nine months of 2001 vs. 2000 and decreased $.7 million in the third quarter of 2001 compared to the prior year mainly due to a decrease in contractor expense, salaries and related benefits, travel expense and the Alabama facility closing. Cost of Access services decreased $.4 million in the first nine months of 2001 vs. 2000 and $.1 million in the third quarter of 2001 vs. 2000 due to a decrease in a provision for uncollectable accounts receivable, third party contractor expense, salaries and related benefits and travel expense. Sales and marketing expenses decreased $1.8 million from the first nine months of 2000 and decreased $.6 million from the third quarter of 2000 mainly due to a decrease in salaries, commissions and related benefits, travel expense and a provision for uncollectable accounts receivable. Research and development expenses decreased $.8 million from the first nine months of 2000 and decreased $.1 million from the third quarter of 2000 mainly due to a decrease in consulting expense, salaries and related benefits and the Alabama facility closing. General and administrative expenses decreased $.9 million from the first nine months of 2000 and decreased $.2 from the third quarter of 2000 mainly due to the recording of the settlement of the Southern Computer Systems stock purchase agreement which forgave $.5 million due under the consulting and non-compete retainer (See Note 8). Interest expense decreased $.4 million from the first nine months of 2000 and decreased $.3 million from the third 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 nine months of 2001 was 9.9% compared to 11.6% in 2000. Liquidity and Capital Resources Cash and cash equivalents at September 30, 2001 increased $1.6 million from December 31, 2000 levels. Total borrowings increased to $18.4 million at September 30, 2001 from $18 million at the end of 2000. The available balance on the line of credit was $.1 million at September 30, 2001. As of September 30, 2001, the Company is in compliance with all of the financial covenants related to its bank debt. On June 16 29, 2001, the Company announced that it had reached an agreement with Patriarch on terms and conditions to complete its debt restructuring. (See Note 3 for further details.) The Company entered into an amendment and waiver agreement with Patriarch on January 31, 2001 which waived defaults on the revolver and term loans through July 1, 2001. This amendment and waiver was extended on June 29, August 31, and October 31, 2001 each for a period of sixty days to allow adequate time to document the debt restructuring noted above. (See Note 3 for further details.) Operating activities provided $.9 million of cash in the first nine months of 2001. Non-cash expenses recorded during the first nine months of the year were $3.4 million as compared with $3.5 million from 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, amortization of software license, amortization of goodwill and provision for losses on accounts receivable. Net accounts receivable and unbilled receivables at September 30, 2001 decreased $6.6 million from December 31, 2000 due to the collection of outstanding receivables that were related to various contracts that were behind schedule in 2000, along with a lower than expected hardware and software revenue recorded in the third quarter of 2001. Total inventories at September 30, 2001 increased $.6 million from December 31, 2000. Total manufacturing inventories increased $.9 million from the beginning of the year mainly due to an increase in work in process inventory related to delays in expected orders that occurred in the second and third quarter of 2001. (See Outlook for further details.) Customer service inventories decreased $.3 million mainly due to amortization of inventory. Net plant and equipment decreased $.4 million from December 31, 2000 mainly due to depreciation expense reported during the first nine months of the year. Software license decreased by $.6 million from December 31, 2000 due to the amortization of the source code licensing agreement. Goodwill decreased by $1.4 million from December 31, 2000 due to amortization recorded for the first nine months of 2001 and a reduction in goodwill of $.4 million related to the settlement of the Southern Computer Systems stock purchase agreement dispute (See Note 8). Accounts payable decreased $2.4 million from December 31, 2000 due to the timing of payments. 17 Customer deposits decreased $.5 million from December 31, 2000 due to the completion of various contracts. Other current liabilities decreased by $1.2 million from December 31, 2000 due to the settlement with the prior owners of Southern Computer Systems that provided a reduction of $.5 million, a decrease in accrued interest expense and payments applied to accrued expenses. 18 ITEM 6 (B) - REPORTS ON FORM 8-K For the Nine Months Ended September 30, 2001 No reports on Form 8-K were filed during the first nine months of 2001. 19 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 November 13, 2001 /s/ James C. Mavel -------------------- --------------------------------------------- James C. Mavel Chairman, Chief Executive Officer, President and Director Date November 13, 2001 /s/ Michael J. Villano -------------------- --------------------------------------------- Michael J. Villano Chief Financial Officer, Vice President and Treasurer 20 -----END PRIVACY-ENHANCED MESSAGE-----