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, 1995
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( )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
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SCAN-OPTICS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-0851857
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
22 Prestige Park Circle, East Hartford, CT 06108
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(Address of principal executive offices) Zip Code
(203) 289-6001
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(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 May 10, 1995.
Common Stock, $.02 par value 6,926,197
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
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(UNAUDITED)
<C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 124 $ 178
Accounts receivable less allowance of
$279 at March 31, 1995 and
December 31, 1994 10,417 9,124
Inventories 15,388 14,223
Prepaid expenses and other 1,133 1,083
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Total current assets 27,062 24,608
Plant and equipment:
Equipment 14,384 13,928
Leasehold improvements 2,808 2,808
Office furniture and fixtures 1,163 1,158
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18,355 17,894
Less allowances for depreciation and
amortization 13,662 13,272
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4,693 4,622
Other assets 369 389
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Total Assets $ 32,124 $ 29,619
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
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(UNAUDITED)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 5,052 $ 2,265
Accounts payable 3,843 2,774
Salaries and wages 1,025 1,119
Taxes other than income taxes 349 348
Income taxes 182 175
Customer deposits 1,489 2,165
Deferred revenues, net of costs 0 30
Royalties payable 22 814
Other 910 903
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Total current liabilities 12,872 10,593
Other liabilities 328 295
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, 6,914,013 shares at March 31, 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 34,225 34,202
Retained-earnings deficit (12,071) (12,178)
Foreign currency translation adjustments (358) (388)
Unearned ESOP compensation (364) (397)
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21,570 21,377
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
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Total stockholders' equity 18,924 18,731
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Total Liabilities and Stockholders' Equity $ 32,124 $ 29,619
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</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
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March 31
1995 1994
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<S> <C> <C>
Revenues
Net sales $ 7,888 $ 6,630
Service revenues 3,489 4,167
Lease revenues 110 18
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Total revenues 11,487 10,815
Costs and Expenses
Cost of sales 5,416 4,008
Marketing and service expenses 3,640 4,040
Research and development expenses 1,500 1,588
General and administrative expenses 740 711
Interest expense 111 69
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Total costs and expenses 11,407 10,416
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Operating income 80 399
Other income, net 15 4
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Income before income taxes 95 403
Income taxes (benefit) (12) 15
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Net Income $ 107 $ 388
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Earnings per share $ 0.02 $ 0.06
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Average common and common equivalent shares 6,820,760 6,831,028
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
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March 31 March 31
1995 1994
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<C> <C>
Operating Activities
Net income $ 107 $ 388
Adjustments to reconcile net income
to net cash used by operating activities
Depreciation 390 213
Amortization 165 238
Changes in operating assets and liabilities:
Accounts receivable (1,293) (1,894)
Receivables from sales-type leases 0 21
Inventories, prepaid expenses and other (1,388) (787)
Accounts payable 1,069 1,245
Accrued expenses (86) (129)
Royalties payable (792) 190
Income taxes 7 (12)
Deferred revenues, net of costs (30) (492)
Customer deposits (676) (1,578)
Other 116 (44)
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Net cash used by operating activities (2,411) (2,641)
Investing Activities
Purchases of plant and equipment (453) (410)
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Net cash used by investing activities (453) (410)
Financing Activities
Proceeds from issuance of common stock 23 82
Proceeds from borrowings 7,410 6,583
Principal payments on borrowings (4,623) (3,791)
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Net cash provided by financing activities 2,810 2,874
Decrease in cash and cash equivalents (54) (177)
Cash and cash equivalents at beginning of year 178 283
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Cash and Cash Equivalents at End of Period $ 124 $ 106
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended March 31, 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 three month period ended March 31, 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>
March 31 December 31
1995 1994
-------- --------
<S> <C> <C>
Finished goods $ 2,092 $ 2,533
Work-in-process 3,567 2,506
Service parts 2,320 2,409
Materials and component parts 7,409 6,775
-------- --------
$ 15,388 $ 14,223
======= =======
</TABLE>
NOTE 3 - Credit Arrangements
The Company has a line of credit agreement (Agreement) with a bank which
expires on May 31, 1995. 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 March 31, 1995); and a $4 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and which bears
interest at prime plus 1/4% (9-1/4% at March 31, 1995). As of March 10, 1995,
the company converted $2.5 million of the international line of credit to a
60 day rate of 8% (LIBOR of 6-1/4% plus 1-3/4%). The weighted average interest
rates on borrowings during the first quarters of 1995 and 1994 were 8.6% and
7.5% 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 $2,507,000 at March 31, 1995. In addition, the
Agreement contains covenants
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended March 31, 1995
which, among other things, require the maintenance of specified working
capital, debt to equity ratios, net income levels and tangible net worth
levels.
On March 7, 1995, the Company received a commitment letter from the bank
extending the maturity date of the outstanding line of credit to May 31,
1996, subject to the extension of the guarantee by the third party bank on
the $4 million international line. The Company expects that the guarantee
will be extended.
NOTE 4 - Income Taxes
The Company has approximately $6,600,000 and $12,200,000 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>
March 31 December 31
(thousands) 1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 3,496 $ 3,541
Depreciation 97 97
Inventory valuation 891 964
Accounts receivable reserves 32 32
Revenue recognition 99 86
Vacation accrual 266 265
Other 252 253
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Total deferred tax assets 5,133 5,238
Deferred tax liabilities:
Depreciation and other (90) (100)
Valuation allowance (5,043) (5,138)
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Net deferred taxes $ 0 $ 0
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</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
CONSOLIDATED FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents decreased $.1 million from December 31, 1994.
Total Company borrowings increased $2.8 million from the end of 1994 to $5.1
million. The increase in borrowings is due to the timing of sales
transactions and related receipts within the quarter. On March 7, 1995 the
Company received a commitment letter extending the maturity date of the
existing line of credit to May 31, 1996. (See Note 3 for further details).
Operating activities used $2.4 million of cash in the first quarter of 1995.
Accounts receivable increased $1.3 million during the first quarter of the
year due to timing of first quarter sales whose collections will occur
subsequent to March 31, 1995 and payment terms extended to a customer with a
balance of approximately $1.8 million.
Inventories increased $1.2 million in the first quarter of 1995. Total
manufacturing inventories increased $1.3 million during the quarter which
consisted of a $.8 million increase in work in process inventory and a $.5
million increase in the stockroom inventory which is reflective of the timing
of the second quarter build process for the Series 9000 product.
Manufacturing inventory fluctuations also included a $.4 million decrease in
finished goods and a $.4 million increase in engineering inventory related to
the development of the Series 7800 and other projects. Customer service
inventories decreased by $.1 million in the first quarter.
Accounts payable increased $1.1 million from December 31, 1994 due to the
increasing purchasing requirements to meet the expanding build schedule of
the Series 9000.
Accrued expenses decreased approximately $.1 million from December 31, 1994
mainly due to a decrease in accrued salaries and wages as a result of
staffing reductions.
Customer deposits decreased $.7 million reflective of certain large
international contracts recognized in revenue during the first quarter of
1995 which included substantial deposits.
Royalties payable decreased $.8 million due to the disbursement in January of
royalties on sales recognized in the third and fourth quarter of 1994.
<PAGE>
Results of Operations for the Three Months Ended March 31, 1995 vs. 1994
- -------------------------------------------------------------------------
Net sales increased $1.3 million in the first quarter of 1995 compared with
the first quarter of 1994. International sales increased $1.8 million and
North American sales decreased $.5 million. International sales, as a
percentage of total sales, increased due to the first quarter sales of
several enhanced Series 9000's to a Japanese health agency for health claim
processing. International sales continue to be a focus for the Company's
future growth.
Service revenues decreased $.7 million mainly due to a decrease in software
revenue of $.3 million which was directly related to the decline in domestic
sales. R&D revenue decreased $.2 million due to the completion of a
significant development project which began in the third quarter of 1993.
Customer service revenue decreased $.2 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 from the first quarter of 1994 which was
a reflection of the increase in net sales combined with a decrease in the
gross margin percentage. The increase in net sales accounted for
approximately $.4 million of the cost of sales increase. The actual gross
margin percentage decreased from 40% in the first quarter of 1994 to 31%
for the same period in 1995. The decline in the gross margin percentage was
mainly due to the sales discounts recorded under the terms of a research and
development agreement, which accounted for $.6 million in the first quarter
of 1995. The gross margin percentage without the required discount was 36%
for the quarter. The remaining $.4 million increase was due to changes in
the overall sales mix compared to the prior year.
Marketing and service expenses decreased $.4 million from the first quarter
of 1994 to 1995. Customer service expenses decreased $.2 million due to
staffing decreases, a reduction in travel expenses and a decrease in
depreciation expense related to customer service inventory. Sales expenses
decreased $.2 million due to reductions in salaries, commissions and travel
expenses.
Research and development expenses decreased $.1 million from the first
quarter of 1994 to the first quarter of 1995 mainly due to a decrease in
outside consulting services which were utilized in 1994 for development
projects related to the pilot 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
--------------------------
March 31
1995 1994
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PRIMARY AND FULLY DILUTED
<S> <C> <C>
Average common shares outstanding 6,497,111 5,550,438
Average Class A common shares outstanding 854,464
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price during
the quarter 323,649 426,126
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Total 6,820,760 6,831,028
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Net Income $ 107 $ 388
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Earnings Per Share $ 0.02 $ 0.06
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</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended March 31, 1995
No reports on Form 8-K were filed during the First Three Months of 1995.
<PAGE>
SIGNATURES
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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 12, 1995 /ss/
-------------------- -----------------------------
Richard I. Tanaka
Chairman, Chief Executive
Officer and President
Date May 12, 1995 /ss/
-------------------- -----------------------------
Michael J. Villano
Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 124
<SECURITIES> 0
<RECEIVABLES> 10,417
<ALLOWANCES> 279
<INVENTORY> 15,388
<CURRENT-ASSETS> 27,062
<PP&E> 18,355
<DEPRECIATION> 13,662
<TOTAL-ASSETS> 32,124
<CURRENT-LIABILITIES> 12,872
<BONDS> 0
<COMMON> 138
0
0
<OTHER-SE> 18,786
<TOTAL-LIABILITY-AND-EQUITY> 32,124
<SALES> 7,888
<TOTAL-REVENUES> 11,487
<CGS> 5,416
<TOTAL-COSTS> 11,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 95
<INCOME-TAX> (12)
<INCOME-CONTINUING> 107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
