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 June 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 August 9, 1995.
Common Stock, $.02 par value 6,516,898
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 187 $ 178
Accounts receivable less allowance of $279
at June 30, 1995 and December 31, 1994 9,630 9,124
Inventories 16,649 14,223
Prepaid expenses and other 1,506 1,083
---------- ----------
Total current assets 27,972 24,608
Plant and equipment:
Equipment 14,250 13,928
Leasehold improvements 2,808 2,808
Office furniture and fixtures 1,161 1,158
---------- ----------
18,219 17,894
Less allowances for depreciation and
amortization 13,970 13,272
---------- ----------
4,249 4,622
Other assets 345 389
---------- ----------
Total Assets $ 32,566 $ 29,619
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
(UNAUDITED)
<C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 6,452 $ 2,265
Accounts payable 4,632 2,774
Salaries and wages 1,013 1,119
Taxes other than income taxes 454 348
Income taxes 180 175
Customer deposits 227 2,165
Deferred revenues, net of costs 30
Royalties payable 23 814
Other 867 903
---------- ----------
Total current liabilities 13,848 10,593
Other liabilities 366 295
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, 6,928,798 shares at June 30, 1995
and 6,906,080 shares at December 31, 1994 138 138
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 34,258 34,202
Retained-earnings deficit (12,718) (12,178)
Foreign currency translation adjustments (349) (388)
Unearned ESOP compensation (331) (397)
---------- ----------
20,998 21,377
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
---------- ----------
Total stockholders' equity 18,352 18,731
---------- ----------
Total Liabilities and Stockholders' Equity $ 32,566 $ 29,619
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Net sales $ 6,052 $ 7,159 $ 13,940 $ 13,789
Service revenues 3,400 4,343 6,889 8,510
Lease revenues 70 25 180 43
------------ ------------ ------------ ------------
Total revenues 9,522 11,527 21,009 22,342
Costs and Expenses
Cost of sales 4,273 4,549 9,689 8,558
Marketing and service expenses 3,950 3,975 7,590 8,014
Research and development expenses 1,086 1,751 2,586 3,339
General and administrative expenses 763 712 1,503 1,423
Interest expense 122 63 233 132
------------ ------------ ------------ ------------
Total costs and expenses 10,194 11,050 21,601 21,466
------------ ------------ ------------ ------------
Operating income (loss) (672) 477 (592) 876
Other income, net 17 17 32 21
------------ ------------ -------------------------
Income (loss) before income taxes (655) 494 (560) 897
Income taxes (benefit) (8) 15 (20) 30
------------ ------------ ------------ ------------
Net Income (Loss) $ (647) $ 479 $ (540) $ 867
------------ ------------ ------------ ------------
Earnings (loss) per share $ (0.10) $ 0.07 $ (0.08) $ 0.13
------------ ------------ ------------ ------------
Average common and common equivalent
shares 6,513,696 6,913,475 6,667,228 6,872,252
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
June 30 June 30
1995 1994
---------- ----------
<C> <C>
Operating Activities
Net income(loss) $ (540) $ 867
Adjustments to reconcile net income (loss)
to net cash used by operating activities
Depreciation 698 484
Amortization 330 476
Changes in operating assets and liabilities:
Accounts receivable (506) (1,008)
Inventories, prepaid expenses and other (3,179) (1,796)
Accounts payable 1,858 (941)
Accrued expenses (36) (163)
Royalties payable (791) 289
Income taxes 5 (22)
Deferred revenues, net of costs (30) (828)
Customer deposits (1,938) (203)
Other 220 179
---------- ----------
Net cash used by operating activities (3,909) (2,666)
Investing Activities
Purchases of plant and equipment (325) (1,028)
---------- ----------
Net cash used by investing activities (325) (1,028)
Financing Activities
Proceeds from issuance of common stock 56 231
Proceeds from borrowings 14,572 13,338
Principal payments on borrowings (10,385) (10,074)
---------- ----------
Net cash provided by financing activities 4,243 3,495
Increase (decrease) in cash and cash equivalents 9 (199)
Cash and cash equivalents at beginning of year 178 283
---------- ----------
Cash and Cash Equivalents at End of Period $ 187 $ 84
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended June 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 six month period ended June 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>
June 30 December 31
1995 1994
<S> <C> <C>
Finished goods $ 3,092 $ 2,533
Work-in-process 4,739 2,506
Service parts 2,082 2,409
Materials and component parts 6,736 6,775
------- --------
$ 16,649 $ 14,223
======= ========
</TABLE>
NOTE 3 - Credit Arrangements
On June 30, 1995 the Company amended its credit agreement (Agreement) with
the bank to extend the maturity date to May 31, 1996. 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 (9% at June 30, 1995); and a $4
million line (domestic) which is collateralized by domestic accounts
receivable and inventory, and which also bears interest at prime (9% at June
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%). The weighted average interest rates on borrowings during the first
half 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 1/4% 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 $1,131,000 as of June 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 June 30, 1995, the
Company defaulted on certain covenants which were subsequently waived by the
bank.
NOTE 4 - Income Taxes
The Company has approximately $7,200,000 and $12,800,000 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>
June 30 December 31
(thousands) 1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating losses $3,757 $ 3,541
Depreciation 97 97
Inventory valuation 837 964
Accounts receivable reserves 32 32
Revenue recognition 14 86
Vacation accrual 267 265
Other 252 253
----- -----
Total deferred tax assets 5,256 5,238
Deferred tax liabilities:
Depreciation and other (80) (100)
Valuation allowance (5,176) (5,138)
----- -----
Net deferred taxes $ 0 $ 0
=========================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
CONSOLIDATED FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash and cash equivalents remained relatively consistent with the December
31, 1994 balance.
Total Company borrowings increased $4.2 million from the end of 1994 to $6.5
million at June 30, 1995. The increase in borrowings is due to the timing of
sales transactions and related receipts. On June 30, 1995 the Company
amended the original loan agreement extending the maturity date of the
existing line of credit to May 31, 1996. (See Note 3 To Financial
Statements for further details). The available balance on the total line of
credit was $3,144,000 as of August 8, 1995.
Operating activities used $3.9 million of cash in the first half of 1995.
Accounts receivable increased $.5 million during the first half of the year
due to an increase in systems in acceptance.
Inventories increased $2.4 million in the first half of 1995, $1.3 million of
which occurred in the second quarter. Total manufacturing inventories
increased $2.3 million since the beginning of the year which consisted of a
$1.7 million increase in work in process inventory, and a $.6 million
increase in finished goods. The manufacturing production schedule was
derived early in 1995, orders that were expected to be received and shipped
during the second quarter were delayed which resulted in an increase in
manufacturing inventory. The delays that occurred in domestic sales were
caused by a conservative marketplace for large capital expenditures and the
downsizing of Corporate America which delayed the decision making in upper
level management. Engineering inventory increased $.4 million related to the
development of the Series 7800 and other projects. Customer service
inventories decreased by $.3 million in the first half of the year. During
the second quarter, work in process inventory increased $1.0 million and
finished goods increased $1.2 million, due to the delay in customer orders
expected in the quarter. The stockroom inventory decreased by $.7 million
which is reflective of the timing of inventory purchases and the future
build cycle. Customer service inventories decreased $.2 million during the
second quarter.
Prepaid expenses and other assets increased $.4 million due to increases in
deferred costs relating to systems in acceptance.
Accounts payable increased $1.9 million from December 31, 1994 due to the
increased inventory purchases which were necessary to support the second and
third quarter build schedule.
Customer deposits decreased $1.9 million reflective of certain large
international contracts recognized in revenue during the first half of 1995
which included substantial deposits.
Royalties payable decreased $.8 million due to the payment of royalties in
January on sales recognized in the third and fourth quarter of 1994.
<PAGE>
Results of Operations for the Three Months and Six Months Ended June 30, 1995
vs. 1994
Net sales increased $.2 million from the first six months of 1994 and
decreased $1.1 million from the second quarter of 1994 to 1995. Compared to
the first six months last year, international sales increased $2.7 million
but were offset by a decrease in North American sales of $2.5 million.
International sales, as a percentage of total sales, have increased due to
the first and second quarter sales of several enhanced Series 9000's to a
Japanese health agency for health claim processing. Domestic sales in the
first half of 1995 were disappointing, however, the Company expects that
domestic sales will rebound in the second half of 1995 to more consistent
levels.
Service revenues decreased $1.6 million from the first six months of 1994 to
1995 and $.9 million from the second quarter of 1994 to 1995. Software
revenue decreased $.6 million which was directly related to the decline in
domestic sales. R&D revenue decreased $.4 million due to the completion of
a significant development project which began in the third quarter of 1993.
Customer service revenue decreased $.6 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 $1.1 million over the first six months of 1995 vs.
1994 and decreased $.3 million from the second quarter of 1994. The year to
date increase is a reflection of a decrease in the gross margin percentage.
The actual gross margin percentage decreased to 30% in the first half of
1995 from 38% for the same period in 1994. The gross margin percentages
realized for the second quarter of 1995 and 1994 were consistent with the
year to date percentages. The decline in the gross margin was mainly due to
the sales discounts recorded under the terms of a research and development
agreement, which accounted for $1.0 million in the first half of 1995
compared to $.3 million in 1994. One of the two agreements relating to
discounts and royalties was completed at the end of the second quarter of
1995. The gross margin percentage without the required discounts and
royalties would be 38% for the first half of 1995 vs. 40% for 1994.
Marketing and service expenses decreased $.4 million from the first half of
1994 and remained consistent with the second quarter of 1994. Customer
service expenses decreased $.3 million due to staffing decreases, a reduction
in travel expenses and a decrease in depreciation expense related to customer
service inventory. Sales expenses decreased $.3 million due to reduction in
salaries, commissions and travel expenses. Marketing expenses and software
expenses each increased $.1 million due to increases in salary expenses.
Research and development expenses decreased $.8 million from the first half
of 1994 and decreased $.7 million compared to the second quarter of 1994
mainly due to a decrease in outside consulting services which were utilized
in 1994 for development projects related to the system for health claim
processing in Japan.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (A) - EXHIBIT COMPUTATION OF EARNINGS PER SHARE
(thousands except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------------ ------------ ------------ ------------
<C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Average common shares outstanding 6,513,696 5,604,732 6,505,404 5,577,585
Average Class A common shares
outstanding 854,464 854,464
Net effect of dilutive stock options
and warrants - based on the
treasury stock method using average
market price during the quarter 454,279 161,825 440,203
------------ ------------ ------------ ------------
Total 6,513,696 6,913,475 6,667,229 6,872,252
------------ ------------ ------------ ------------
Net Income (Loss) $ (647) $ 479 $ (540) $ 867
------------ ------------ ------------ ------------
Earnings (Loss) Per Share $ (0.10) $ 0.07 $ (0.08) $ 0.13
------------ ------------ ------------ ------------
</TABLE>
[CAPTION]
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended June 30, 1995
No reports on Form 8-K were filed during the First Six 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 August 9, 1995 /ss/
Richard I. Tanaka
Chairman, Chief Executive
Officer and President
Date August 9, 1995 /ss/
Michael J. Villano
Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 187
<SECURITIES> 0
<RECEIVABLES> 9,630
<ALLOWANCES> 279
<INVENTORY> 16,649
<CURRENT-ASSETS> 27,972
<PP&E> 18,219
<DEPRECIATION> 13,970
<TOTAL-ASSETS> 32,566
<CURRENT-LIABILITIES> 13,848
<BONDS> 0
<COMMON> 138
0
0
<OTHER-SE> 18,214
<TOTAL-LIABILITY-AND-EQUITY> 32,566
<SALES> 13,940
<TOTAL-REVENUES> 21,009
<CGS> 9,689
<TOTAL-COSTS> 21,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (560)
<INCOME-TAX> (20)
<INCOME-CONTINUING> (540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (540)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
