10-Q 1 scanoptics10q.txt 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, 2003 --------------------- ( ) 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 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ( ) YES ( X ) NO The number of shares of common stock, $.02 par value, outstanding as of May 12, 2003 was 7,439,732. 1
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands, except share data) March 31, 2003 December 31, 2002 --------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 661 $ 274 Accounts receivable less allowance of $1,557 at March 31, 2003 and $1,574 at December 31, 2002 6,717 5,554 Unbilled receivables - contracts in progress 690 377 Inventories 8,628 9,139 Prepaid expenses and other 558 591 --------------------------------------------------------------- Total current assets 17,254 15,935 Plant and equipment: Equipment 8,839 8,836 Leasehold improvements 5,209 5,209 Office furniture and fixtures 724 725 --------------------------------------------------------------- 14,772 14,770 Less allowances for depreciation and amortization 13,540 13,456 --------------------------------------------------------------- 1,232 1,314 Goodwill 9,040 9,040 Other assets 117 117 --------------------------------------------------------------- Total Assets $ 27,643 $ 26,406 ===============================================================
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(thousands, except share data) March 31, 2003 December 31, 2002 ------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,440 $ 2,454 Notes payable 1,500 1,500 Salaries and wages 1,296 958 Taxes other than income taxes 386 501 Income taxes 53 45 Deferred revenue 2,324 2,217 Customer deposits 1,208 1,308 Other 1,694 1,669 -------------------------------------------------------------------- Total current liabilities 10,901 10,652 Note payable 9,592 9,042 Other liabilities 1,886 1,640 Mandatory redeemable preferred stock, par value $.02 per share, authorized 3,800,000 shares; 3,800,000 issued and outstanding 3,800 3,800 Stockholders' Equity preferred stock, par value $.02 per share, authorized 1,200,000 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, 2003 and December 31, 2002 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 38,354 38,354 Accumulated retained earnings deficit (33,471) (33,667) Accumulated other comprehensive loss (922) (918) -------------------------------------------------------------------- 4,110 3,918 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 -------------------------------------------------------------------- Total stockholders' equity 1,464 1,272 -------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 27,643 $ 26,406 ==================================================================== See accompanying notes.
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SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 31 (thousands, except share data) 2003 2002 ---------------------------------------------------------------------------------------------------------------------------------- Revenues Hardware and software $ 4,222 $ 3,407 Professional services 1,384 1,626 Access services 2,504 2,791 ----------------------------------------------------------- Total revenues 8,110 7,824 Costs of Revenue Hardware and software 2,628 2,084 Professional services 768 686 Access services 2,131 2,295 ----------------------------------------------------------- Total costs of revenue 5,527 5,065 Gross Margin 2,583 2,759 Operating Expenses Sales and marketing 928 850 Research and development 339 559 General and administrative 928 952 Interest 199 218 ----------------------------------------------------------- Total operating expenses 2,394 2,579 ----------------------------------------------------------- Operating income 189 180 Other income, net 17 6 ----------------------------------------------------------- Income before income taxes 206 186 Income tax expense 10 20 ----------------------------------------------------------- Net Income $ 196 $ 166 =========================================================== Basic earnings per share $ .03 $ .02 =========================================================== Basic weighted-average shares 7,026,232 7,026,232 Diluted earnings per share $ .03 $ .02 =========================================================== Diluted weighted-average shares 7,162,754 7,407,136 See accompanying notes.
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SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31 (thousands) 2003 2002 ---------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 196 $ 166 Adjustments to reconcile net income to net cash used by operating activities: Depreciation 97 104 Amortization of customer service inventory and software license 491 669 Changes in operating assets and liabilities: Accounts receivable and unbilled receivables (1,476) (440) Refundable income taxes (7) Inventories 20 (775) Prepaid expenses and other 33 (45) Accounts payable (14) (272) Accrued salaries and wages 338 (67) Taxes other than income taxes (115) (55) Income taxes 8 (5) Deferred revenues 107 226 Customer deposits (100) 579 Other 267 (177) ------------------------------------------------------ Net cash used by operating activities (148) (99) Investing Activities Purchases of plant and equipment, net (15) (14) ------------------------------------------------------ Net cash used by investing activities (15) (14) Financing Activities Proceeds from borrowings 1,700 700 Principal payments on borrowings (1,150) (1,225) ------------------------------------------------------ Net cash provided (used) by financing activities 550 (525) Increase (decrease) in cash and cash equivalents 387 (638) Cash and Cash Equivalents at Beginning of Year 274 1,662 ----------------------------------------------------- Cash and Cash Equivalents at End of Period $ 661 $ 1,024 ===================================================== See accompanying notes.
5 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2003 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, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002. Certain 2002 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) 2003 2002 -------------------------------------------------------------------------------- Finished goods $ 58 $ 56 Work-in-process 1,988 1,325 Service parts 3,615 3,715 Materials and component parts 2,967 4,043 ------------------------------ $ 8,628 $ 9,139 ============================= NOTE 3 - Credit Arrangements ------ Notes payable reflect borrowings under a credit agreement ("Agreement") with Patriarch Partners, LLC. ("Patriarch"). The Agreement allows for borrowings under a revolving line of credit facility of $10 million and a term loan of $2 million. As of December 31, 2002, the Company executed an amendment to the loan with Patriarch to modify the capital expenditure covenant, from a maximum of $50,000 per quarter, to a maximum of $375,000 per year. 6 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2003 The outstanding borrowings at March 31, 2003 and December 31, 2002 were $11.1 million and $10.5 million, respectively. The revolving line of credit has been classified as long term, with the exception of $1.5 million classified as current, since management has the ability to maintain the March 31, 2003 outstanding balance through the next fiscal year. The available balance on the outstanding borrowings was $.9 million and $1.5 million at March 31, 2003 and December 31, 2002, respectively. The weighted average interest rate for the first quarter of 2003 was 5.1% compared to 5.5% in 2002. The carrying value of the notes payable to bank approximates its fair value and is secured by all of the Company's assets. NOTE 4 - Income Taxes ------ At March 31, 2003, the Company has U.S. federal and state operating loss carryforwards of approximately $26,280,000 and $27,450,000, respectively. The U.S. federal and state net operating loss carryforwards expire through 2015. At March 31, 2003, the Company has approximately $194,000, $3,400,000 and $800,000 of net operating loss carryforwards for Canada, the United Kingdom and Germany, respectively, which expire by 2007. At March 31, 2002, the Company had U.S. federal and state operating loss carryforwards of approximately $18,000,000 and $19,700,000, respectively. At March 31, 2002, the Company had approximately $480,000, $2,700,000 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 2003 and 2002 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, 2003 NOTE 5 - Earnings Per Share ------ The following table sets forth the computation of basic and diluted earnings per share: March 31 March 31 2003 2002 -------------------------------------------------------------------------------- Numerator: Net earnings $ 196 $ 166 ===================================== Denominator: Denominator for basic earnings per share (weighted-average shares) 7,026,232 7,026,232 Effect of dilutive securities: Employee stock options 136,522 380,904 ------------------------------------- Denominator for diluted earnings per share (adjusted weighted-average shares and assumed conversions) 7,162,754 7,407,136 ===================================== Basic earnings per share $ .03 $ .02 ===================================== Diluted earnings per share $ .03 $ .02 ===================================== NOTE 6 - Stock Based Compensation ------ The Company generally grants stock options to key employees and members of the Board of Directors with an exercise price equal to the fair value of the shares on the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Therefore, the Company has elected the disclosure provisions only of FASB Statement No. 123. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model. 8 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2003 For the purpose of pro-forma disclosures, the estimated fair value of the stock options is expensed ratably over the vesting period, which is 36 months for key employees and 6 months for the Board of Directors. The Company's pro-forma information follows:
For the three months ended March 31 (thousands, except per share amounts) 2003 2002 --------------------------------------------------------------------------------------------------------- Net income, as reported $ 196 $ 166 Stock option expense (14) (164) ------------------------------------------ Pro forma net income $ 182 $ 2 ========================================== Basic earnings per share, as reported $ .03 $ .02 Stock option expense .00 (.02) Pro forma basic earnings per share $ .03 $ .00 ========================================== Diluted earnings per share, as reported $ .03 $ .02 Stock option expense .00 (.02) Pro forma diluted earnings per share $ .03 $ .00 ==========================================
NOTE 7 - Comprehensive Income ------ The components of comprehensive income, net of related tax, for the three-months ended March 31, 2003 and 2002 are as follows: March 31 March 31 (thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------ Net income $ 196 $ 166 Foreign currency translation adjustments (4) (19) --------------------------------------- Comprehensive income $ 192 $ 147 ======================================== The components of accumulated comprehensive loss, net of related tax, at March 31, 2003 and December 31, 2002 are as follows: March 31 December 31 (thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------ Foreign currency translation adjustments $ (899) $ (970) --------------------------------------- Accumulated comprehensive loss $ (899) $ (970) =======================================
9 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2003
NOTE 8 - 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) 2003 2002 ------------------------------------------------------------------------------------------------------------------ Revenues Solutions and products $ 5,598 $ 4,527 Access services 2,504 2,791 Contract manufacturing services 8 506 --------------------------------------- Total revenues 8,110 7,824 Cost of solutions and products 3,396 2,770 Service expenses 2,131 2,295 --------------------------------------- Gross margin 2,583 2,759 Operating expenses, net 2,377 2,573 ---------------------------------------- Income before income taxes $ 206 $ 186 ======================================= Total expenditures for additions to long-lived assets $ 53 $ 41
Certain 2002 amounts have been reclassified to conform to the current year presentation. The Solutions and Products Division includes the sale of hardware and software products as well as professional services. Contract Manufacturing Services provides assembly and test services under contracts with customers who develop and sell a variety of equipment. NOTE 9 - Bill and Hold Transactions ------ Revenues relating to sales of certain equipment (principally optical character recognition equipment) are recognized upon acceptance, shipment, or installation depending on the contract specifications. When customers, under the terms of specific orders or contracts,request that the Company manufacture and invoice 10 SCAN-OPTICS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Quarter Ended March 31, 2003 the equipment on a bill and hold basis, the Company recognizes revenue based upon an acceptance received from the customer. During the first quarter of 2003, the Company recorded $1.7 million of bill and hold revenue. At March 31, 2003, accounts receivable included bill and hold receivables of $1.5 million. There were no bill and hold transactions in the first three months of 2002. 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. Although the Company completed a total debt restructuring effective December 31, 2001 (see Note 3 to the consolidated financial statements for further information), the Company remains highly leveraged and could be adversely affected by a significant increase in interest rates or an inability to comply with financial covenants in its debt agreements. A one percent increase in the prime rate would increase the annual interest cost on the outstanding loan balance at March 31, 2003 of approximately $11 million by $.1 million. 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 achieved net income of $.2 million in the first quarter of 2003 consistent the first quarter of 2002. 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, introduction of a Business Process Outsourcing Service and expansion of the Access Services Division to include enterprise wide maintenance services. The inability of the Company to carry out these initiatives may have a material adverse effect on revenue growth and earnings. 11 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, assessment, financial and order fulfillment 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 increased $1.5 million from 2002 to 2003 mainly due to an increase in the government market. The second initiative, introduced in early 2003, is a Business Process Outsourcing ("BPO") Service to capture images of documents for subsequent document management, storage and retrieval. The Company's new BPO Services provide a low-risk, cost-effective solution for customers with document imaging needs. As increasing numbers of both government and commercial clients migrate from paper-based filing systems to image-based storage and retrieval systems, they are faced with the need to convert their existing paper files or to outsource the activity. The BPO services offer customers a high quality, turnkey outsourcing solution utilizing the Company's proprietary hardware technology, as well as its software skills, resources and process controls. The third initiative, recently announced by our Access Services Division, is an expansion to include enterprise wide maintenance services for network and network related equipment. Leveraging off the experience it has gained through its many third party agreements, Access Services is well positioned to expand maintenance coverage and provide customers with "one number to call" for maintenance services regardless of the equipment manufacturer. Through the division's 120 technical service representatives strategically located throughout the US, the Company believes that it can provide high quality, cost effective enterprise maintenance to its existing customer base as well as new accounts. While the Company is principally focused on improving the profitability of its existing operations, the Company may consider acquiring key strategic products or enterprises. Acquisitions will be considered based upon their individual merit and benefit to the Company. Results of Operations for the Three Months Ended March 31, 2003 vs. 2002 ------------------------------------------------------------------------ Total revenues increased $.3 million or 4% from the first quarter of 2002 to the first quarter of 2003. Hardware and software revenues increased $.8 million or 24% in the first quarter of 2003 compared with the first quarter of 2002. North American sales increased $.9 million or 28% due to increased order activity related to the replacement of older Series 9000 scanners with the new generation scanner, the 9000M. International sales decreased $.1 million or 75%. 12 Professional services revenues decreased $.2 million or 15% in the first quarter of 2003 compared with the first quarter of 2002, due mainly to reduced contract revenue and program change requests. The decrease is due to a change in sales mix from solutions sales to hardware replacement sales, which typically only contain a small professional services application conversion engagement. Access Services revenues decreased $.3 million or 10% from the first quarter of 2002, due mainly to a decrease in revenue from the Company's proprietary maintenance contracts as a result of lower maintenance rates for the latest generation of the Series 9000 scanner, the 9000M, as compared to the earlier Series 9000 scanner. The Company was also impacted by a few customers discontinuing maintenance due to changes in their business. Cost of hardware and software increased $.5 million from the first quarter of 2002 as a reflection of the increase in revenues. Cost of hardware and software sales as a percentage of revenue was 62% for the first quarter of 2003, compared to 61% in the prior year. Cost of professional services increased $.1 million from the first quarter of 2003 compared to the same period in 2002. The Professional Services organization includes software product support and professional services implementation. The product support organization recorded a gross margin of 63% in the first quarter of 2003 vs. 70% in the prior year. The professional services implementation group recorded a gross margin of 23% in the first quarter of 2003 vs. 47% in the prior year. The decrease in margin is mainly due to a decrease in revenue due to a change in sales mix from solutions sales to hardware replacement sales, which typically only contain a small professional services application conversion engagement. Cost of Access Services in the first quarter of 2003 decreased $.2 million in comparison with the first quarter of 2002. The decrease was mainly due to a reduction in salaries and related benefits as a result of a decrease in headcount and increased efficiency. Sales and marketing expenses increased $.1 million from the first quarter of 2002 mainly due to a increase in consulting fees and outside services related to third party contracts with a telesales organization as well as a dedicated reseller for certain government agencies. Research and development expenses decreased $.2 million from the first quarter of 2002 mainly due to a decrease in software license amortization related to the BlueBird software agreement, which has been fully amortized. The investment in research and development initiatives are consistent with the prior year. General and administrative expenses were consistent with the first quarter of 2002. Interest expense remained consistent with the first quarter of 2002. 13 Liquidity and Capital Resources ------------------------------- Cash and cash equivalents at March 31, 2003 increased $.4 million from December 31, 2002 levels. Total borrowings increased $.6 million at March 31, 2003 from $10.5 million at the end of 2002. The available balance on the line of credit was $.9 million at March 31, 2003. The Company is in compliance with all of the financial covenants as of March 31, 2003. The Company anticipates meeting its current obligations and resource needs through the funds generated from operations. (See Note 3 for further details.) Operating activities used $.1 million of cash in the first three months of 2003. Non-cash expenses recorded during the quarter were $.6 million vs. $.8 million for the same period in 2002. These expenses relate to depreciation of fixed assets (discussed in net plant and equipment below), amortization of customer service inventory and amortization of software license. Net accounts receivable and unbilled receivables increased $1.5 million from December 31, 2002 due to the timing of collection of outstanding receivables. Total inventories at March 31, 2003 decreased $.5 million from December 31, 2002. Total manufacturing inventories decreased $1 million, offset by a $.6 million increase in work-in-process, from the beginning of the year mainly due to timing for the second quarter build process. Customer service inventories decreased $.1 million due mainly to the amortization of inventory. Net plant and equipment decreased $.1 million from December 31, 2002 mainly due to depreciation expense reported during the quarter. Accounts payable was consistent with the balance at December 31, 2002. Salaries and wages increased $.3 million mainly due to the bonus accrual related to the 2003 bonus accrual and an increase in accrued vacation and commissions. Taxes other than income taxes decreased $.1 million from December 31, 2002 due to a decrease in sales and use taxes due to timing of payments. Customer deposits decreased $.1 million from December 31, 2002 due to the transfer of deposits to accounts receivable to offset recorded product sales. Deferred revenues increased $.1 million due to the timing of annual billings. 14 Other liabilities increased $.2 million due to the recording of a sales type lease that resulted in deferred income during the first quarter of 2003. 15 OTHER MATTERS Rider 17 A Critical Accounting Policies Our critical accounting policies are discussed in Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K For the year ended December 31, 2002. The preparation of our financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our accounting estimates on historical experience and other factors that are believed to be reasonable under the circumstances. However, actual results may vary from these estimates under different assumptions or conditions. Quantitative and Qualitative Disclosures About Market Risk In 2001, the Company completed a total debt restructuring (see Note 3 for further information), however, the Company remains highly leveraged and could be adversely affected by a significant increase in interest rates. A one percent increase in the prime rate would increase the annual interest cost on the outstanding loan balance at March 31, 2003 of approximately $11 million by $.1 million. The Company has minimal foreign currency translation risk. All international sales other than sales originating from the UK and Canadian subsidiaries are denominated in United States dollars. Refer to the Outlook section of Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. Disclosure Controls and Procedures The Company evaluated the design and operation of its disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q The principal executive officer and principal financial officer have concluded, based on their review, that the Company's disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. 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, 2003 No reports on Form 8-K were filed during the first quarter of 2003. 17 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, 2003 / ss/ --------------------------------- ----------------------------------- James C. Mavel Chairman, Chief Executive Officer, President and Director Date May 15, 2003 / ss/ --------------------------------- ------------------------------------ Michael J. Villano Chief Operating Officer, Chief Financial Officer, Vice President and Treasurer 18 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, James C. Mavel, Chairman, Chief Executive Officer and President of Scan-Optics, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scan-Optics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 Date: May 15, 2003 / ss/ ----------------------------------- James C. Mavel Chairman, Chief Executive Officer and President 20 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Michael J. Villano, Chief Operating Officer ,Chief Financial Officer, Vice President and Treasurer of Scan-Optics, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scan-Optics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 21 Date: May 15, 2003 / ss/ ----------------------------------- Michael J. Villano Chief Operating Officer, Chief Financial Officer, Vice President and Treasurer 22