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, 1995
( )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)
22 PRESTIGE PARK CIRCLE, EAST HARTFORD, CT 06108
(Address of principal executive offices) Zip Code
(203) 289-6001
(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 outstanding of each of the issuer's classes of common
stock, as of November , 1995.
Common Stock, $.02 par value
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
September December
30, 1995 31, 1994
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 222 $ 178
Accounts receivable less allowance of
$193 at September 30, 1995 and $279 at
December 31, 1194 10,167 9,124
Inventories 15,189 14,223
Prepaid expenses and other 1,296 1,083
Total current assets 26,874 24,608
Plant and equipment:
Equipment 14,376 13,928
Leasehold improvements 2,808 2,808
Office furniture and fixtures 1,161 1,158
18,345 17,894
Less allowances for depreciation and 14,296 13,272
amortization
4,049 4,622
Other assets 332 389
Total Assets 31,255 29,619
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 5,628 2,265
Accounts payable 3,237 2,774
Salaries and wages 920 1,119
Taxes other than income taxes 560 348
Income taxes 192 175
Customer deposits 1,214 2,165
Deferred revenues, net of costs 360 30
Royalties payable 22 814
Other 1,168 903
Total current liabilities 13,301 10,593
Other liabilities 403 295
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, 7,035,598 shares at
September 30, 1995
and 6,906,080 shares at December 141 138
31, 1994
Common stock Class A Convertible, par
value $.02 per share, authorized
3,000,000 shares; none issued or
outstanding
Capital in excess of par value 34,265 34,202
Retained-earnings deficit (13,569) (12,178)
Foreign currency translation adjustments (342) (388)
Unearned ESOP compensation (298) (397)
20,197 21,377
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
Total stockholders' equity 17,551 18,731
Total Liabilities and Stockholders' $ 31,255 29,619
Equity
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(thousands, except share data)
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Revenues
Net sales $ 6,275 $ 7,027 $ 20,286 $ 20,816
Service revenues 3,532 3,787 10,421 12,297
Lease revenues 8 111 117 154
Total revenues 9,815 10,925 30,824 33,267
Costs and Expenses
Cost of sales 4,817 4,551 14,506 13,109
Marketing and service expenses 3,738 3,727 11,328 11,741
Research and development expenses 1,149 1,633 3,735 4,972
General and administrative expenses 845 689 2,348 2,112
Interest expense 134 107 367 239
Total costs and expenses 10,683 10,707 32,284 32,173
Operating income (loss) (868) 218 (1,460) 1,094
Other income, net 5 28 37 49
Income (loss) before income taxes (863) 246 (1,423) 1,143
Income taxes (benefit) (12) (24) (32) 6
Net Income (Loss) $ (851) $ 270 $ (1,391) $ 1,137
Earnings (loss) per share $ (0.13) $ 0.04 $ (0.21) $ 0.17
Average common and common equivalent shares 6,517,964 6,820,379 6,617,964 6,854,961
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(thousands)
For the Nine Months Ended
September 30 September 30
1995 1994
<S> <C> <C>
Operating Activities
Net income(loss) $ (1,391) $ 1,137
Adjustments to reconcile net income (loss)
to net cash used by operating activities
Depreciation 1,024 760
Amortization 495 714
Changes in operating assets and liabilities:
Accounts receivable (1,043) (2,303)
Inventories, prepaid expenses and other (1,682) (2,984)
Accounts payable 535 (1,001)
Accrued expenses 228 103
Royalties payable (814) 731
Income taxes 17 (31)
Deferred revenues, net of costs 330 (828)
Customer deposits (951) (15)
Other 319 297
Net cash used by operating activities (2,933) (3,420)
Investing Activities
Purchases of plant and equipment (451) (1,196)
Net cash used by investing activities (451) (1,196)
Financing Activities
Proceeds from issuance of common stock 65 240
Proceeds from borrowings 21,303 20,207
Principal payments on borrowings (17,940) (15,313)
Net cash provided by financing activities 3,428 5,134
Increase in cash and cash equivalents 44 518
Cash and cash equivalents at beginning of year 178 283
Cash and Cash Equivalents at End of Period $ 222 $ 801
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended September 30, 1995
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, 1995 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1995. 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,
1994.
NOTE 2 - Inventories
The components of inventories were as follows (thousands):
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
<S> <C> <C>
Finished goods $ 3,125 $ 2,533
Work-in-process 3,984 2,506
Service parts 2,177 2,409
Materials and component parts 5,903 6,775
$ 15,189 $ 14,223
******* *******
</TABLE>
NOTE 3 - Credit Arrangements
On August 9, 1995 the Company amended its credit agreement (Agreement) with
the bank. The Agreement has two components, a $4 million line (international)
guaranteed by a third party bank which is collateralized by international
accounts receivable and inventory, and which bears interest at prime (8 3/4 %
at September 30, 1995); and a $4 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and bears
interest at prime plus 1/2 (9 1/4 % at September 30, 1995). As of July 5,
1995, the company converted $2.5 million of the international line of credit to
a 90 day rate of 7.3% (LIBOR of 6.06% plus 1.25%). Upon maturing on October 5,
1995, the $2.5 million resumed the prime rate of interest. The weighted
average interest rates on borrowings during the first nine months of 1995 and
1994 were 8.6% and 6.8% respectively. The unused portion of the $4 million
domestic line is subject to a commitment fee of 3/4 % per annum. Borrowings
under the Agreement are subject to various limitations based upon percentages
of eligible receivables and inventories of the Company. The available balance
on the total line of credit was $1,622,000 as of September 30, 1995.
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended September 30, 1995
In addition, the Agreement contains covenants which, among other things,
require the maintenance of specified working capital, debt to equity ratios,
net income levels and tangible net worth levels. At September 30, 1995, the
Company defaulted on certain covenants. The Bank waived these defaults on
November 9, 1995, subject to execution of an amendment to the Agreement
modifying certain covenants and increasing certain interest rates.
bank.
NOTE 4 - Income Taxes
The Company has approximately $8,100,000 and $13,700,000 of net operating loss
carryforwards for federal and state income tax purposes, respectively, which
are scheduled to expire periodically between 1995 and 2009. For financial
reporting purposes a valuation allowance has been recognized to offset the
deferred tax assets related to those carryforwards and other temporary
differences.
Significant components of the Company's deferred tax liabilities and assets
were as follows :
<TABLE>
<CAPTION>
September 30 December 31
(THOUSANDS) 1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating losses $4,102 $ 3,541
Depreciation 97 97
Inventory valuation 782 964
Accounts receivable reserves 32
Revenue recognition 192 86
Vacation accrual 267 265
Other 253 253
Total deferred tax assets 5,693 5,238
Deferred tax liabilities:
Depreciation and other (72) (100)
Valuation allowance (5,621) (5,138)
Net deferred taxes $ 0 $ 0
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
CONSOLIDATED FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents remained consistent with the December 31, 1994
balance.
Total Company borrowings increased $3.4 million from the end of 1994 to $5.6
million at September 30, 1995. As of September 30, 1995 the Company amended
the loan agreement. (See Note 3 To Financial Statements for further details).
The available balance on the total line of credit was $2,300,000 as of November
7, 1995.
Operating activities used $ 2.9 million of cash in the first nine months of
1995.
Accounts receivable increased $1.0 million during the first nine months of the
year primarily due to an increase in systems in acceptance.
Inventories increased $1.0 million in the first nine months of 1995 and
decreased $ 1.5 million during the third quarter. The components of the
fluctuations are as follows:
Total manufacturing inventories increased $ 1.0 million from the
beginning of the year which consisted of a $ 1.3 million increase in work
in process inventory, and a $.6 million increase in finished goods, offset
by a $.9 million decrease in stockroom inventory. The manufacturing
production schedule was derived early in 1995; orders that were expected
to be received and shipped during the first nine months were delayed,
resulting in an increase in work in process and finished goods inventory.
In June 1995, the Company adjusted the production schedule and purchase
requirements to reflect the current level of sales activity resulting in a
decrease in stockroom inventory, $.8 million of which occured during the
third quarter.
Engineering inventory increased $.2 million related to the development
of the Series 7800 and other projects. Customer service inventories
decreased by $.2 million in the first nine months of the year and
decreased $.1 million during the third quarter.
Prepaid expenses and other assets increased $.2 million primarily due to
prepaid inventory related to engineering development projects.
Accounts payable increased $ .5 million from December 31, 1994 due to the
timing of cash flows.
Customer deposits decreased $1.0 million reflective of certain large
international contracts recognized in revenue during the first nine months of
1995 which included substantial deposits.
Royalties payable decreased $.8 million due to the payment of royalties in
January, 1995 on sales recognized in the third and fourth quarter of 1994.
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30
1995 VS. 1994
Net sales decreased $.5 million from the first nine months of 1994 and
decreased $.8 million from the third quarter of 1994 to 1995. Compared to the
first nine months last year, international sales increased $ 6.0 million but
were offset by a decrease in North American sales of $6.5 million.
International sales have increased due to sales of several enhanced Series
9000's to a Japanese health agency for health claim processing. During the
second quarter, the Company introduced two new products which are expected to
have a positive impact on future domestic sales.
Service revenues decreased $1.9 million from the first nine months of 1994 to
1995 and $.3 million from the third quarter of 1994 to 1995. Software revenue
decreased $.2 million which was directly related to the decline in domestic
sales. R&D revenue decreased $.7 million due to the completion of a
significant development project which began in the third quarter of 1993.
Customer service revenue decreased $1.0 million mostly due to the continued
replacement of older ReliaReader equipment with the Company's Series 9000
system which is less expensive to maintain.
Cost of sales increased $1.4 million over the first nine months of 1995 vs.
1994 and increased $.3 million from the third quarter of 1994. The change is
a reflection of decreases in the gross margin percentage and manufacturing
absorption. The actual gross margin percentage decreased to 28% in the first
nine months of 1995 from 37% for the same period in 1994. The gross margin
percentage realized for the third quarter of 1995 was 23% vs. 35% for the same
period in 1994. The decline in the gross margin realized for both the quarter
and year to date was a result of several factors: During the first nine
months, the sales mix shifted from domestic sales to international sales, which
carried a lower gross margin percentage, and sales recorded under the terms of
an agreement, which requires royalty payments to a third party, accounted for
$1.0 million in the first nine months of 1995 compared to $.4 million in 1994.
One of two agreements, requiring discount and royalty payments was completed
at the end of the second quarter of 1995.
Marketing and service expenses decreased $.4 million from the first nine months
of 1994 to 1995 and remained consistent from the third quarter of 1994 to 1995.
Customer service expenses decreased $.5 million due to staffing decreases and a
reduction in travel expenses. Sales expenses decreased $.7 million due to
reductions in salaries, resulting from a restructuring of the sales and
marketing departments. Commissions and travel expenses also decreased compared
to prior year. Marketing and software expenses each increased $.4 million due
to increases in salaries affected by the Company's departmental restructuring.
Travel expenses within the software department also increased compared to prior
year.
Research and development expenses decreased $1.2 million from the first nine
months of 1994 and decreased $.5 million compared to the third quarter of 1994
mainly due to a decrease in outside consulting services which were utilized in
1994 for development projects related to the system designed for health claim
processing in Japan.
In response to the decline in sales and margins in the third quarter, on
November 2, 1995, the Company announced a reduction in its work force of
approximately 40 employees from a total of 297 employees. Earlier, throughout
the year, the Company's work force declined by an additional 55 employees due
to attrition and other adjustments. The November cost cutting measures, along
with other steps to be executed, will not affect the results of the fourth
quarter of 1995, but are expected to have a positive impact on 1996 results.
<PAGE>
PART II - OTHER INFORMATION
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<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (A) - EXHIBIT COMPUTATION OF EARNINGS PER SHARE
(thousands except share data)
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1995 1994 1995 1994
PRIMARY AND FULLY DILUTED
Average common shares outstanding 6,517,964 6,476,462 6,509,590 5,877,211
Average Class A common shares outstanding 569,643
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price during
the quarter 343,917 107,883 408,107
Total 6,517,964 6,820,379 6,617,473 6,854,961
Net Income (Loss) $ (851) $ 270 $ (1,391) $ 1,137
Earnings (Loss) Per Share $ (0.13) $ 0.04 $ (0.21) $ 0.17
</TABLE>
<PAGE>
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Nine Months Ended September 30, 1995
No reports on Form 8-K were filed during the First Nine Months of 1995.
<PAGE>
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 14, 1995 /SS/
Richard I. Tanaka
Chairman, Chief Executive
Officer and President
Date NOVEMBER 14, 1995 /SS/
Michael J. Villano
Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 222,000
<SECURITIES> 0
<RECEIVABLES> 10,167,000
<ALLOWANCES> 193,000
<INVENTORY> 15,189,000
<CURRENT-ASSETS> 26,874,000
<PP&E> 18,345,000
<DEPRECIATION> 14,296,000
<TOTAL-ASSETS> 31,255,000
<CURRENT-LIABILITIES> 13,301,000
<BONDS> 0
0
0
<COMMON> 141,000
<OTHER-SE> 17,410,000
<TOTAL-LIABILITY-AND-EQUITY> 31,255,000
<SALES> 20,286,000
<TOTAL-REVENUES> 30,824,000
<CGS> 14,506,000
<TOTAL-COSTS> 32,284,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,423,000)
<INCOME-TAX> (32,000)
<INCOME-CONTINUING> (1,391,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,391,000)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
