UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1994
( )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)
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common stock, $.02 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (common) held by non-
affiliates of the registrant: $38,891,323 as of March 27, 1995.
The number of shares of common stock, $.02 par value, outstanding as of March
27, 1995 was 6,914,013.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement, relating to the 1995 Annual
Meeting of Stockholders, which will be filed pursuant to Regulation 14A with
the Securities and Exchange Commission not later than 120 days after the end
of the fiscal year, are incorporated by reference and included in the
following:
Part III-Item 10 - Directors and Executive Officers of the Registrant
Part III-Item 11 - Executive Compensation
Part III-Item 12 - Security Ownership of Certain Beneficial
Owners and Management
Part III-Item 13 - Certain Relationships and Related Transactions
<PAGE>
PART I
ITEM 1 - BUSINESS
Scan-Optics, Inc. (the Company) was incorporated in Delaware in 1968 and has
its principal office at 22 Prestige Park Circle, East Hartford, Connecticut
06108.
The Company's business includes document scanning, imaging, and optical
character recognition ("OCR")/ intelligent character recognition("ICR"). The
Company's Series 7000 Network Image Scanners and Series 9000 OCR/ICR scanners
deliver the most cost-effective, high volume imaging solutions. Its UNIX-
based post-scanning systems offer verification, image storage and retrieval,
and document management in an open-systems environment. The Company's
professional services integrate scanning platforms and networked tools to
deliver a turn-key system solution.
The Company designs, manufactures, markets and services information
processing systems which are used for imaging, data capture, document
processing and the management of information. The systems employ high speed
paper movement, OCR/ICR, high speed image capture, image storage and
retrieval systems, image information processing, key-entry, microfilming, ink
jet printing, high-speed paper handling with multi-pocket page and/or
document sorting, local area terminal networking, communications software and
software/hardware integration technologies. These systems and technologies
are used by subscription and catalog fulfillment companies, manufacturers,
government tax and employment agencies, financial institutions, healthcare,
and other business organizations. Typical applications for the Company's
products include the processing of credit card sales drafts, mail order
forms, federal and state tax forms, health care forms, automobile
registrations, shareholder proxies and payroll time cards.
PRODUCTS
Image Processing Systems
The Company markets a line of image processing products to address the high
speed, high volume, full page requirements of the emerging market for
document image capture, storage, and retrieval. The Series 9000 has the
ability to convert images into a form suitable for storing and processing by
the markets' most popular and frequently used imaging systems. Software
control permits selection of image size, location, orientation and
resolution. The image processing capability of the Series 9000
simultaneously captures and recognizes data, such as an account number, to
generate the index which can be used to electronically sort the images in
subsequent computer processing.
In 1994, the Company introduced ScanGen, a Windows based software product to
easily define the fields and the type of processing required for forms being
scanned by the Series 9000. By utilizing icons and point-and-click Windows
dialog boxes, forms definition and processing can be accomplished quickly,
by non-technical individuals.
<PAGE>
Scanners for Imaging-Only
To simplify the sales cycle and address a potentially larger market, the
Company is modifying the Series 9000 system so it can deliver a lower cost
system for imaging and scanning purposes only.
The new system being developed by the Company, called the 7800 System, will
offer an alternative to the market served by low and medium speed scanners.
Network Based Systems
The Company's 7000 system, introduced in 1994, is now in the beginning
marketing stages. The concept of the 7000 System, based upon standardized
industry network techniques, will permit us to provide graduated solutions in
terms of both performance and price.
Image and Data Management
In the summer of 1994, the Company entered into a joint marketing agreement
with Elsag Bailey Document Processing Automation Division to market the
Archea System to existing Scan-Optics customers. We then expect to broaden
our objectives for a larger target market.
SONIX/UNIX/3200:
The Company's implementation of the industry standard Unix operating system,
the SONIX System, represents a transition from the previous generation of
specialized hardware and software systems to industry-standard open
architecture.
The Series 2000, a system designed for general release to Scan-Optics'
extensive system of distributors and Value Added Resellers (VAR's), was
announced in 1988 and the first system was shipped in 1989. The Series 2000
employs image information processing equipment and is Scan-Optics' entry into
the rapidly expanding document image/text, information processing
marketplace.
The ScanEdit and KeyPro systems are the Company's entries in the market for
general purpose multi-media data entry systems and are designed to capture
and process certain data which may not be OCR readable. Multi-media systems
can also combine key-entry and OCR data entry systems with data entry from
image (key-from-image).
ScanEdit systems integrate the Company's OCR products with a line of key-
entry equipment. In addition to OCR data capture, standard key-entry
operations and extensive data editing and error-correction functions,
ScanEdit systems provide high resolution capture and processing of data which
is not OCR readable.
These systems are also designed to permit operators to work at other tasks
while the OCR portion of the system is operating independently. ScanEdit
systems are used, among other applications, for high-volume credit card
processing, handprint payroll information collection, telephone order entry
and quarterly tax deposit processing.
By combining the speed of OCR, the flexibility of key-entry and the special
capabilities of image processing (see Image Processing Systems), ScanEdit
systems enable customers to lower their overall data capture and document
processing costs.
<PAGE>
Key Data Entry and Supermicrocomputer Systems
A common system-platform, System 3200, is used to support multi-user key-
entry (KeyPro), multi-media data entry (ScanEdit) and data processing. A
multi-phase replacement of the proprietary System 3200 with an open-
architecture UNIX based platform is substantially complete. In 1992, the
first phase of Series 6000/SONIX was released for general data processing and
in early 1994 the key-entry (KeyPro) application was available on the new
platform. The proprietary System 3200 will be phased out as the Series
6000/SONIX takes over. The Series 6000/SONIX systems include tabletop and
floormount models operating under industry-standard UNIX. It will fully
support the Company's other OCR, IICR and imaging products.
In 1993, the Company introduced ImageKey, a key-from-image system operating
in an IBM OS/2 environment. ImageKey software, remarketed from Southern
Computer Systems, Inc. and integrated with the Company's scanning and
recognition products, strengthens the Company's offerings of key-from-image
products.
Service and Maintenance of Systems
The Company offers service and maintenance contracts to its broad customer
base with either leased or purchased systems in both the domestic and the
international markets. Service is provided through a network of over 100
service centers in North America and the United Kingdom. Service revenue
accounted for 36%, 37% and 37% of the Company's total revenue for 1994, 1993
and 1992, respectively.
Software Services and Applications Programming
ScanEdit and Series 9000 software programs presently include programs for
processing cash remittances, proxies, payroll forms, credit card sales drafts
and fulfillment orders for publishers and other direct mail companies. These
software programs are available as modules of customized software systems.
Standard software programs have been developed for the Company's EasyReader
system to process subscriptions, opinion surveys, fund raising returns,
membership dues, periodic inventories, payroll forms and proxies.
In addition to developing standardized "shell" software programs, the Company
provides a range of software services to its customers. Among these are
customized design and programming, consulting, software maintenance and
update service, system installation and post-installation support.
Customized design and programming services have resulted in the development
of a wide range of individual software products, including programs for
tabulating stockholder proxies in the securities industry; bank card
transaction processing; inventory control for manufacturers, wholesalers, and
retailers; insurance claims processing; payroll data input in manufacturing;
and auto registration and sales, real and personal property tax
record-keeping in government. Consulting services are available to customers
at an hourly fee or on a flat fee basis.
Revenues from software services accounted for 6% of the Company's total
revenue in 1994, 1993 and 1992.
SIGNIFICANT CUSTOMERS
Two customers accounted for approximately 22% of consolidated revenues in
1994, each at 11%. No single customer accounted for more than 10% of
consolidated revenues in 1993. In 1992, one customer accounted for
approximately 12% of consolidated revenues.
<PAGE>
CHANNELS OF DISTRIBUTION
The Company is augmenting its practice of selling directly to end-users and
distributors to respond to new opportunities in the marketplace. The focus
on providing more complete solutions to customers has stimulated the pooling
of resources with selected system integration firms and specialized niche
suppliers. The cooperative effort with system integrators and other vendors
has introduced the Scan-Optics logo to new markets in 1994, both domestically
and internationally.
BACKLOG
The backlogs for the Company's products and services as of December 31, 1994
and 1993 were approximately $19,775,000 and $34,821,000 respectively. The
backlog consists of equipment, software and services to be sold and
noncancelable rentals and maintenance due on existing rental and maintenance
contracts. The Company normally delivers a system within 30 to 180 days
after receiving an order, depending upon the degree of software customization
required.
MANUFACTURING
Manufacture of the Company's products requires the fabrication of sheet metal
and mechanical parts, the subassembly of electronic and mechanical parts and
components, and operational and quality control testing of components,
assemblies and completed systems. The Company's products consist of both
standard and Company-specified mechanical and electronic parts, sub-
assemblies and major components, including microcomputers. Most parts are
purchased, including many complex electronic and mechanical sub-assemblies.
The Company also purchases major standard components, including magnetic tape
and disk storage drives, display terminals, and microcomputers. An important
aspect of the Company's manufacturing activities is its quality control
program which uses computer-controlled testing equipment.
The Company has not experienced significant shortages of any components or
subassemblies; however, alternate sources for such components and
subassemblies have been developed.
<PAGE>
COMPETITION
The Company competes in the dynamic image and data entry/data capture systems
markets against other concerns which offer different technologies for
performing these functions. The Company believes that its systems, which
tightly integrate image processing technology as well as OCR and IICR, offer
customers competitive, price effective solutions. In addition, the Company
offers application software tailored to meet specific customer requirements.
PATENTS
The Company currently has ten United States patents in force which expire
between 1995 and 2012, and has applied for one additional United States
patent . The patents are on mechanical systems, electronic circuits, and
electronic systems which are used throughout the product lines. The Company
expects to continue to apply for patents on its new technological
developments when it believes they are significant.
EMPLOYEES
As of December 31, 1994, the Company employed 352 persons, including 19 with
administrative and support responsibilities, 165 in marketing, sales,
software and service activities and 168 in engineering and production
capacities. The Company considers its employee relations to be good. The
Company has not experienced any work stoppages.
PRODUCT DEVELOPMENT
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded during 1990 through 1992, which offset
related costs incurred to successfully develop the products. The agreements
provide the respective third party with exclusive rights to market the
developed product in its geographic market area while the Company will
manufacture the product and retain ownership and all other distribution
rights. Royalties and other considerations, up to a maximum of 130% of the
amount advanced to the Company, are required to be paid based on sales of the
new product technology through the termination dates of the agreements, June
30, 1995 and December 31, 1996. As of December 31, 1994 the Company had
repaid or accrued $2,417,000 or 51% of the maximum potential royalty.
During 1993 the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $790,000 in 1993 and
$370,000 in 1994. These revenues offset related costs incurred to develop
the modifications and enhancements. Two prototype systems were delivered in
the first quarter of 1994 and successfully passed customer acceptance
testing. An initial production contract was awarded and delivery was made
under this contract in the fourth quarter of 1994. The ownership of the
technologies created as a result of this development agreement remains with
the Company. No royalties or other considerations are required as a part of
this agreement.
In June 1992, the Company introduced the Series 9000 Scanner. The Series
9000 integrates the latest in character recognition, image capture, and paper
handling technology into a high speed scanner. During 1993, the Company
introduced several options for this scanner. These options permit character
recognition and image processing on the "reverse side" of documents; a
<PAGE>
special small document stacker module; and the ability to recognize several
industry standard bar-codes.
The Series 9000 interfaces with other company products to provide multi-
media data entry and image storage retrieval. During 1994, the Company
developed and delivered a network based scanning, recognition and data entry
product - the Series 7000 - which addresses requirements for a distributed
solution.
The Company considers product development to be a significant element in
maintaining market share. During the years ended December 31, 1994, 1993 and
1992, the Company's research and development expenses were $5,690,000,
$4,601,000 and $5,110,000, respectively. Some portion of these amounts were
funded under the development agreements described above.
The Company intends to continue its program of development of additional
options and capabilities for its existing products as well as the development
of new products which exploit the Company's core competencies: paper
handling, image processing, character recognition, multi-media data entry and
image storage and retrieval.
EFFECTS OF ENVIRONMENTAL LAWS
The effect of federal and state environmental regulations on the Company's
operations is insignificant.
GEOGRAPHICAL SEGMENTS
Sales of equipment to customers in the international market represent an
important source of the Company's revenues. The Company has international
distributors located in 40 countries and covering six continents. The
Company does not believe that there are any special additional risks
attendant to sales in its present international markets.
<PAGE>
The following table sets forth certain information relating to export sales
for the three most recent fiscal years ended December 31:
<TABLE>
<CAPTION>
Export sales
(thousands) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Latin America and
South America $ 1,577 14% $ 418 8% $ 509 5%
Europe 2,187 19% 2,022 39% 2,307 23%
Pacific Rim 7,534 67% 2,774 53% 7,145 72%
$11,298 $5,214 $9,961
</TABLE>
Export sales represented 42%, 26% and 47% of net sales for the
three years ended December 31, 1994, 1993 and 1992, respectively.
ITEM 2 - PROPERTIES
The Company's executive offices and principal research and development and
marketing activities are located in a one-story, thirty-five thousand square
foot brick and cinder block building located in East Hartford, Connecticut,
leased for a term expiring in December 1996. The Company has a eighty-four
thousand square foot manufacturing facility in Manchester, Connecticut, and a
sales, support, and research and development facility of twenty-eight
thousand square feet in Irvine, California, whose leases expire in December
1995.
The Company leases office space throughout the United States for sales,
service and administrative functions. Office space for administration and
equipment demonstration is also leased by Scan-Optics, Ltd., in the United
Kingdom and Scan-Optics (Canada), Ltd., both wholly-owned subsidiaries.
ITEM 3 - LEGAL PROCEEDINGS
There are certain claims pending against the Company which arose in the
normal course of business. In the opinion of management, the ultimate
outcome of these matters will not have a material impact on the Company's
financial position, results of operations or liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter during the fourth quarter of 1994 to a
vote of the stockholders.
<PAGE>
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The following is a two year history of Common Stock prices for each quarter.
The table sets forth the high and low closing quotations per share for the
periods indicated of the Common Stock in the over-the-counter market based
upon information provided by the National Association of Security Dealers,
Inc. The closing quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not represent actual
transactions. There were 1,520 Common stockholders of record at December 31,
1994.
The Company has not paid any dividends on its Common Stock and the Board of
Directors of the Company has no present intention of declaring dividends in
the foreseeable future. The declaration and payment of dividends in the
future will be determined by the Board of Directors in light of conditions
then existing, including the Company's earnings, financial condition, capital
requirements and other factors.
Quarter Ended March 31 June 30 September 30 December 31
High Low High Low High Low High Low
1994 8-1/8 4-3/4 9-1/8 5-3/8 7-1/2 5-5/8 7-3/8 5-1/2
1993 4-1/2 3 4-1/4 2-3/4 6-1/8 3 6-3/8 4-7/8
<PAGE>
<TABLE>
ITEM 6 - SELECTED FINANCIAL DATA
-------------------------------------
SCAN-OPTICS, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF OPERATIONS
SELECTED FINANCIAL DATA
<CAPTION>
(thousands, except share data) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenues $ 43,889 $ 36,381 $ 37,893 $ 42,374 $ 42,480
-------------------------------------------------------
Income (loss) before income taxes
and extraordinary gain $ 1,244 $ (932) $ (1,493) $ 687 $ 1,002
Income taxes (benefit) (40) 49 118 183 377
-------------------------------------------------------
Income (loss) before extraordinary gain 1,284 (981) (1,611) 504 625
Extraordinary gain on retirement of debt 185
-------------------------------------------------------
Net income (loss) $ 1,284 $ (981) $ (1,611) $ 689 $ 625
-------------------------------------------------------
Earnings (loss) per share before
extraordinary gain on retirement of $ 0.19 $ (0.15) $ (0.25) $ 0.08 $ 0.10
-------------------------------------------------------
Earnings (loss) per share $ 0.19 $ (0.15) $ (0.25) $ 0.11 $ 0.10
-------------------------------------------------------
Average common and common
equivalent shares outstanding 6,859,544 6,345,137 6,321,922 6,459,768 6,297,889
SELECTED BALANCE SHEET DATA
Total assets $ 29,619 $ 27,878 $ 26,995 $ 28,775 $ 29,386
Working capital 14,015 13,135 13,042 14,092 12,254
Total long-term debt (excluding
current maturities) 795
Total stockholders' equity $ 18,731 $ 17,097 $ 18,012 $ 19,798 $ 19,025
</TABLE>
The Company has not paid any dividends for the five year period
ended December 31, 1994.
The above financial data should be read in conjunction with
the related consolidated financial
statements and notes thereto.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $.1 million from 1993 to 1994.
Total Company borrowings increased $.3 million to $2.3 million at December
31, 1994. The average borrowing level for 1994 was $4.8 million compared to
$3.6 million for 1993. The change in borrowing level is due to the increase
in production volume and timing of cash flows.
Operating activities provided $1.2 million of cash in 1994 compared to $1.4
million in 1993.
Non-cash expenses recorded in 1994 were $2.6 million vs. $3.5 million in
1993. These expenses primarily relate to depreciation, amortization,
provisions for losses on accounts receivable and provisions for inventory
obsolescence.
Accounts receivable increased $.1 million from 1993 reflecting the increase
in sales in the fourth quarter of 1994 compared to 1993.
Total inventories increased $.4 million from 1993 levels. Manufacturing
inventories increased $.7 million during this period due to the increase in
sales volume. Customer service inventory decreased $.3 million due to the
reduced spare parts requirements related to the Series 9000.
Plant and equipment increased $1.6 million in 1994. The major components of
this increase are the purchase of engineering development equipment, test
equipment for engineering, manufacturing and customer service, and the
upgrading of the Company's information systems infrastructure.
Accounts payable and accrued expenses increased $.2 million from 1993 levels.
Accounts payable decreased $.5 million due to timing of cash flows related to
inventory purchases. Accrued expenses increased $.7 million due to the
increase in royalties payable from 1993 to 1994.
Deferred revenues, net of costs, decreased $.8 million from 1993 levels. The
decrease in deferred revenues is caused by a reduction in systems in
acceptance of $.4 million which is reflective of the timing of sales,
shipments and related acceptances. Deferred engineering revenue decreased
$.4 million from 1993 due to the completion of an engineering development
project.
Customer deposits increased $.5 million for deliveries of equipment in the
first quarter of 1995 to a Japanese health agency.
The Company received a commitment letter extending the maturity date of the
Company's outstanding bank line of credit to May 31, 1996. Management
believes that the line of credit provides the Company with sufficient
financial resources to meet its working capital and capital expenditure
requirements.
<PAGE>
RESULTS OF OPERATIONS -- 1994 VS. 1993
Total revenues increased $7.5 million from 1993.
Net sales increased $7.3 million from the prior year. North American sales
increased $2.7 million and international sales increased $4.6 million from
1993. The North American sales increases are reflective of the continued
acceptance of the Series 9000 product line as well as the fulfillment of the
primary implementation of the IRS SCRIPS award. International sales showed
significant growth from 1993 to 1994. The growth occurred in two of the
three major international marketplaces for the Company's products. Sales to
a Japanese health agency increased sales volume to the Pacific Rim by 191% or
$4.4 million. Sales to Latin America and South America increased 272% or
$1.2 million as the Company sold a major credit card system to a bank in
Mexico. Sales to Europe increased 8% or $.2 million over the prior year.
Service revenues increased $.2 million from 1993 to 1994. Customer service
revenue decreased $.2 million due to the replacement by the Series 9000 of
older product lines which included a significant maintenance surcharge.
Software service revenue increased $.5 million due to the increase in North
American sales and the continued Company focus on software as a growth
business line in the future. Engineering revenue decreased $.1 million from
1993 to 1994.
Lease revenues increased $.1 million due to a short term lease entered into
in the third quarter.
Cost of sales increased $5.7 million from 1993 to 1994. The gross margin
percentage decreased 4.8% from 39.6% in 1993 to 34.8% in 1994. The decrease
in gross margin is due to the increase in royalty expense incurred from 1993
to 1994 of $1.2 million. The gross margin percentage remained consistent
from 1993 to 1994 after adjusting for the change in royalty expense.
Marketing and service expenses decreased by $1.5 million in 1994. Customer
service expenses decreased $.6 million from the prior year due to parts usage
and amortization expense decreases related to customer service inventory.
Customer service staffing adjustments relating to changes in the installed
base of serviced equipment also accounted for a portion of the decrease.
Software service expenses decreased $.2 million due to the reduction in
travel expenses related to system acceptances in 1994. Marketing expenses
decreased $.7 million from the prior year of which $.2 million was due to
staffing reductions and the remaining $.5 million was due to the reduction in
the requirement for an accounts receivable provision from 1993 to 1994.
Research and development expenses increased $1.1 million from 1993 mainly due
to the use of consultants to augment existing staffing.
General and administrative expenses remained consistent with the prior year.
<PAGE>
RESULTS OF OPERATIONS -- 1993 VS. 1992
Total revenues decreased $1.5 million from 1992.
Net sales decreased $1.1 million from the prior year. North American sales
increased $2.8 million, international sales decreased $4.8 million and United
Kingdom sales increased $1 million from 1992. The North American increases
are reflective of the markets acceptance of the Series 9000 as the product
continues to mature. The international shortfall was due to a significant
decline in sales to our two Japanese distributors which is symptomatic of the
overall weakness of the Japanese economy. The increase in the United Kingdom
sales is directly reflective of a major contract completed with the
government.
Service revenues decreased $.3 million. Customer service revenue decreased
$.8 million due to the refurbishment and replacement of older product lines
which included a significant maintenance surcharge. Engineering revenue
increased $.5 million due to a new product development agreement in 1993.
Lease revenues decreased $.1 million due to the completion of operating
leases and no new sales type lease transactions entered into during 1993.
Cost of sales decreased $1.5 million from 1992. The reduction in sales volume
decreased cost of sales by approximately $.5 million. The gross margin
percentage increased by 3.8% from 36.0% in 1992 to 39.6% in 1993. In 1992 a
one-time inventory provision for $.3 million was allocated for an obsolete
product line which affected the gross margin percentage along with increased
efficiencies in the manufacturing of the Series 9000.
Marketing and service expenses remained consistent in total with 1992.
Customer service expenses decreased $.2 million from the prior year due to
staffing adjustments relating to changes in the installed base of serviced
equipment. Software service expenses increased $.3 million due to increased
depreciation of demo equipment and increases in travel expenses relating to
system acceptances. Marketing expenses decreased $.1 million from the prior
year due to staffing reductions.
Research and development expenses decreased $.5 million from 1992 due to
staffing reductions.
General and administrative expenses decreased $.1 million from the prior year
due to decreased data processing consulting and accounting fees.
<PAGE>
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<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Scan-Optics, Inc.
We have audited the accompanying consolidated balance sheets of Scan-Optics,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Scan-Optics, Inc. and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
February 2, 1995, except for the second paragraph of
Note D, as to which the date is March 7,1995
<PAGE>
<TABLE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
(thousands, except share data) 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 178 $ 283
Accounts receivable, less allowance of $279
in 1994 and $313 in 1993 9,124 9,009
Inventories 14,223 13,851
Prepaid expenses and other 1,083 463
---------------------------------
Total current assets 24,608 23,606
Plant and equipment:
Equipment 13,928 12,838
Leasehold improvements 2,808 2,432
Office furniture and fixtures 1,158 1,037
---------------------------------
17,894 16,307
Less allowances for depreciation and amortization 13,272 12,357
---------------------------------
4,622 3,950
Other assets 389 322
---------------------------------
Total Assets $ 29,619 $ 27,878
---------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31
(thousands, except share data) 1994 1993
--------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C> <C>
Current liabilities:
Notes payable to bank $ 2,265 $ 2,016
Accounts payable 2,774 3,349
Salaries and wages 1,119 1,034
Taxes other than income taxes 348 411
Income taxes 175 201
Customer deposits 2,165 1,623
Deferred revenues, net of costs 30 828
Royalties payable 814 125
Other 903 884
---------------------------------
Total current liabilities 10,593 10,471
Other liabilities 295 310
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, 6,906,080 shares in 1994 and
5,925,104 shares in 1993 138 118
Common stock Class A Convertible, par
value $.02 per share, authorized
3,000,000 shares; issued and outstanding,
854,464 shares in 1993 17
Capital in excess of par value 34,202 33,931
Retained-earnings deficit (12,178) (13,462)
Foreign currency translation adjustments (388) (331)
Unearned ESOP compensation (397) (530)
---------------------------------
21,377 19,743
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
---------------------------------
Total stockholders' equity 18,731 17,097
---------------------------------
Total Liabilities and Stockholders' Equity $ 29,619 $ 27,878
---------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31
(thousands, except share data) 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $ 26,988 $ 19,698 $ 20,770
Service revenues 16,616 16,458 16,782
Lease revenues 250 170 258
Finance income 35 55 83
-------------------------------------
Total revenues 43,889 36,381 37,893
Costs and Expenses
Cost of sales 17,584 11,902 13,383
Marketing and service expenses 16,437 17,940 17,990
Research and development expenses 5,690 4,601 5,110
General and administrative expenses 2,637 2,632 2,745
Interest expense 376 274 213
-------------------------------------
Total costs and expenses 42,724 37,349 39,441
-------------------------------------
Operating income (loss) 1,165 (968) (1,548)
Other income:
Interest income from short-term investments 7 4 22
Other income, net 72 32 33
-------------------------------------
79 36 55
-------------------------------------
Income (loss) before income taxes 1,244 (932) (1,493)
Income taxes (benefit) (40) 49 118
-------------------------------------
Net Income (Loss) $ 1,284 $ (981) $ (1,611)
-------------------------------------
Earnings (loss) per share $ 0.19 $ (0.15) $ (0.25)
-------------------------------------
Average common and common equivalent shares 6,859,544 6,345,137 6,321,922
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF
<CAPTION>
CHANGES IN STOCKHOLDERS' EQUITY Foreign
Capital i Retained- Currency Unearned
Common Stock Excess of Earnings Translation ESOP Treasury
-------------------
(thousands, except share data) Shares Amount Par Value Deficit Adjustments Compensation Stock Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1992 6,719,959 134 33,807 (10,870) 168 (795) (2,646) 19,798
Issuance of common stock upon
exercise of stock options 15,463 1 29 30
Unearned ESOP compensation
amortization 133 133
Net loss (1,611) (1,611)
Foreign currency translation adjustments (338) (338)
------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 6,735,422 135 33,836 (12,481) (170) (662) (2,646) 18,012
Issuance of common stock upon
exercise of stock options 44,146 95 95
Unearned ESOP compensation
amortization 132 132
Net loss (981) (981)
Foreign currency translation adjustments (161) (161)
------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 6,779,568 135 33,931 (13,462) (331) (530) (2,646) 17,097
Issuance of common stock upon
exercise of stock options 126,512 3 271 274
Unearned ESOP compensation
amortization 133 133
Net income 1,284 1,284
Foreign currency translation adjustments (57) (57)
------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 6,906,080 $138 $34,202 $(12,178) $(388) $(397) $(2,646) $18,731
------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
(thousands) 1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,284 $ (981) $ (1,611)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation 1,198 1,204 1,368
Amortization 923 1,128 1,431
Provision for losses on accounts receivab 287 100
Provision for inventory obsolescence 477 1,043 425
Deferred income taxes (140) (12)
Changes in operating assets and liabilities:
Accounts receivable (115) (372) (1,252)
Inventories and prepaid expenses and ot (2,392) (3,938) 85
Accounts payable and accrued expenses (534) 586 426
Income taxes (26) 91 (309)
Deferred revenues, net of costs (798) 601 (188)
Customer deposits 542 1,598 (456)
Royalties payable 689 61 (30)
Other (6) 233 (263)
------------------------------------------
Net cash provided (used) by operating act 1,242 1,401 (286)
Investing Activities
Purchases of plant and equipment (1,870) (396) (554)
------------------------------------------
Net cash used by investing activities (1,870) (396) (554)
Financing Activities
Proceeds from issuance of common stock 274 95 30
Proceeds from borrowings 25,219 23,149 20,690
Principal payments on borrowings (24,970) (24,133) (20,057)
------------------------------------------
Net cash provided (used) by financing act 523 (889) 663
------------------------------------------
Increase (decrease) in cash and cash equivale (105) 116 (177)
Cash and cash equivalents at beginning of y 283 167 344
------------------------------------------
Cash and Cash Equivalents at End of Year $ 178 $ 283 $ 167
------------------------------------------
Supplemental Cash Flow Information
Interest paid $ 342 $ 270 $ 185
------------------------------------------
Income taxes paid $ 79 $ 210 $ 157
------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the accounts of Scan-Optics, Inc. and its subsidiaries, all wholly-owned.
All intercompany accounts and transactions are eliminated in the consolidated
financial statements.
Inventories: Inventories are valued at the lower of cost (first-in, first-
out method) or market.
Equipment Leased to Customers: The Company leases its equipment to customers
for various lease terms. The leases are accounted for as operating or sales-
type leases.
Operating Leases: Rental revenues from such leases are recognized over the
life of the lease and the related rental equipment is depreciated over its
estimated useful life.
Plant and Equipment: Plant and equipment is stated on the basis of cost.
Maintenance and repairs are charged to expense as incurred.
Depreciation and Amortization: Equipment leased to customers, less 10%
residual value, and plant and equipment are depreciated principally using the
straight-line method over periods of 3 to 10 years. Leasehold improvements
are amortized over the useful life of the improvements or the life of the
lease, whichever is shorter.
Revenue Recognition: Revenues from maintenance and application software
services are recognized as earned. Revenues relating to sales of certain
equipment (principally optical character recognition equipment) are
recognized upon acceptance of the related application software.
Income Taxes: Deferred income taxes are provided for differences between the
income tax and the financial reporting basis of assets and liabilities at the
statutory tax rates that will be in effect when the differences are expected
to reverse.
Earnings (Loss) Per Share: Earnings (loss) per share amounts are computed
using weighted average common and common equivalent shares outstanding during
the year assuming conversion of the common stock equivalents into common
stock, if dilutive, at the weighted average market price of the stock for the
year. All shares held by the Company's Employee Stock Ownership Plan (ESOP)
are considered outstanding.
Cash Equivalents: Highly liquid investments purchased with maturities of
three months or less are considered cash equivalents.
Reclassifications: Certain 1993 and 1992 amounts have been reclassified to
conform to current year presentation.
NOTE B -- DESCRIPTION OF BUSINESS
The Company designs and manufactures information processing systems used for
imaging, data capture, document processing and information management.
<PAGE>
The Company's systems, software and service are marketed world-wide to
commercial and government organizations either directly by the Company
sales organization or through distributors.
<TABLE>
<CAPTION>
Year Ended December 31
Export sales
(thousands) 1994 1993 1992
<S> <C> <C> <C>
Latin America and South America $ 1,577 $ 418 $ 509
Europe 2,187 2,022 2,307
Pacific Rim 7,534 2,774 7,145
------------------------------------
$ 11,298 $ 5,214 $ 9,961
====================================
</TABLE>
Two customers accounted for approximately 22% of consolidated
revenues in 1994, each at 11%. No single customer accounted for
more than 10% of consolidated revenues in 1993. In 1992, one customer
accounted for approximately 12% of consolidated revenues.
NOTE C -- INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
December 31
(thousands) 1994 1993
<S> <C> <C>
Finished goods $ 2,533 $ 2,347
Work-in-process 2,506 3,066
Service parts 2,409 2,686
Materials and component parts 6,775 5,752
------------------
$14,223 $13,851
===================
</TABLE>
NOTE D -- 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 (8.5% at December 31, 1994); and a $4 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and which bears
interest at prime plus .25% (8.75% at December 31, 1994). The weighted average
interest rate on borrowings during 1994 and 1993 was 7.9% and 7.2%
respectively. The unused portion of the $4 million domestic line is subject
to a commitment fee of .25% 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 $3,663,000 at December 31, 1994. 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.
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,
<PAGE>
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 E -- CAPITAL STOCK
The Board of Directors is authorized to issue shares of the Company's
preferred stock in series, to establish from time to time the number of
shares to be included in each series and to fix the designation, powers,
preferences and other terms and conditions with respect to such stock. No
shares have been issued to date.
Class A stock has the same rights as common stock, except that its holders
may not vote for the election of directors, and it is convertible into common
stock on a share for share basis. On September 2, 1994, all outstanding
shares of Class A stock were converted to common stock.
At December 31, 1994, the Company had reserved 1,219,981 shares of common
stock for the exercise of warrants (43,000) and the issuance or exercise of
stock options (1,176,981).
NOTE F -- COMMON STOCK WARRANTS
Warrants outstanding generally have anti-dilution provisions and expire
between 1996 and 1998.
<TABLE>
<CAPTION>
Price Per Share Shares
<S> <C> <C> <C>
Warrants outstanding January 1, 1992 $3.00- $3.63 20,500
Expired in 1992 3.00 (2,500)
----------------------
Warrants outstanding December 31, 1992 3.63 18,000
Granted in 1993 5.38 25,000
Warrants outstanding December 31, 1993 and 1994 $3.63- $5.38 43,000
=====================
</TABLE>
<PAGE>
NOTE G -- STOCK OPTION PLANS
The Company has five stock option plans for key employees and board members.
Options granted under the plans are for a period of ten years and at prices
not less than the fair market value of the shares at date of grant except
that the price for non-qualified options may not be less than the par value
of the stock. Options for employees are not exercisable for one year
following the date of grant and then are exercisable in such installments
during the period prior to expiration as the Stock Option Committee shall
determine. Options for Directors are not exercisable until six months after
the grant thereof. Options may be exercised from time to time, in part or as
a whole, on a cumulative basis as determined by the stock option committee
under all stock option plans.
The following schedule summarizes the changes in stock options for each of
the three years in the period ended December 31, 1994:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
<S> <C> <C> <S><C>
Outstanding January 1, 1992
(193,447 exercisable) 678,479 1.25 to 9.63
Granted 74,460 3.38 to 3.63
Exercised (13,013) 1.50 to 2.00
Cancelled (34,167) 1.50 to 9.63
-------------------------
Outstanding December 31, 1992
(390,266 exercisable) 705,759 1.25 to 9.63
Granted 139,000 3.25 to 6.00
Exercised (44,146) 1.50 to 3.13
Cancelled (16,502) 1.50 to 5.75
-------------------------
Outstanding December 31, 1993
(559,388 exercisable) 784,111 1.25 to 9.63
Granted 153,500 5.75 to 9.00
Exercised (126,512) 1.25 to 3.63
Cancelled (36,582) 3.13 to 6.00
-------------------------
Outstanding December 31, 1994
(531,273 exercisable) 774,517 $1.50 to $9.63
==========================
</TABLE>
At December 31, 1994 there were 402,464 options available for grant.
<PAGE>
NOTE H -- RESEARCH AND DEVELOPMENT AGREEMENTS
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products. The agreements provide the
respective third party with exclusive rights to market the developed product
in its geographic market area while the Company will manufacture the product
and retain ownership and all other distribution rights. Royalties and other
considerations, up to a maximum of 130% of the amount advanced to the
Company, are required to be paid based on sales of the new product technology
through the termination dates of the agreements, June 30, 1995 and December
31, 1996. As of December 31, 1994, the Company had repaid or accrued
$2,417,000 or 51% of the maximum potential royalty.
During 1993, the Company entered into a $1,160,000 product development
agreement for a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $790,000 in 1993 and
$370,000 in 1994. These revenues offset related costs incurred to develop
the modifications and enhancements. Two prototype systems were delivered in
the first quarter of 1994 and successfully passed customer acceptance
testing. An initial production contract was awarded for delivery in the
fourth quarter of 1994. The ownership of the technologies created as a
result of this development agreement remains with the Company. No royalties
or other considerations are required as a part of this agreement.
NOTE I -- EMPLOYEE BENEFITS
The Company maintains a Retirement Savings Plan for United States employees.
Under this plan, all employees may contribute up to 15% of their salary to a
retirement account up to the maximum amount allowed by law. The Company
contributes an amount equal to 25% of the first 4% contributed by the
participant. The Company's contributions to this plan were $107,000, $99,000
and $89,000 for 1994, 1993 and 1992, respectively.
The Company sponsors an Employee Stock Ownership Plan (the Plan) covering
substantially all full-time employees. The Plan, which is a tax qualified
employee benefit plan, was adopted by the Board of Directors of the Company
on January 29, 1988 to provide retirement benefits for employees. The Plan
borrowed $1,325,000 to purchase 260,000 shares of the Company's stock to be
allocated to participants ratably over a ten year period. The ESOP loan was
guaranteed by the Company and the outstanding balance of the loan was repaid
in 1991. At December 31, 1994, there were 78,000 unallocated shares. In
1994, 1993 and 1992 the expenses related to the Plan were $132,000 in each
year.
<PAGE>
NOTE J -- INCOME TAXES
The Company has approximately $6,700,000 and $12,300,000 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>
December 31
(thousands) 1994 1993
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 3,541 $ 3,093
Depreciation 97 130
Inventory valuation 964 1,906
Accounts receivable reserves 32 45
Revenue recognition 86 251
Vacation accrual 265 277
Other 253 262
--------------------
Total deferred tax assets 5,238 5,964
Deferred tax liabilities:
Depreciation and other (100) (134)
Valuation allowance (5,138) (5,830)
--------------------
Net deferred taxes $ 0 $ 0
====================
</TABLE>
For financial reporting purposes, income (loss) before income taxes is set
forth in the following tabulation:
<TABLE>
<CAPTION>
Year Ended December 31
(thousands) 1994 1993 1992
<S> <C> <C> <C>
Domestic $ 2,150 $(971) $(1,481)
Foreign (906) 39 (12)
--------------------------
$ 1,244 $(932) $(1,493)
==========================
</TABLE>
<PAGE>
Income taxes (benefit) are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(thousands) 1994 1993 1992
Currently payable
(refundable):
<S> <C> <C> <C>
Federal $ 20
Foreign $(100) $ 140 62
State 60 49 48
-------------------------
(40) 189 130
Deferred (benefit):
Foreign (140) (12)
-------------------------
(140) (12)
-------------------------
$ (40) $49 $118
</TABLE>
A reconciliation of the effective tax rate to the statutory rate is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
<S> <C> <C> <C>
Statutory federal income tax rate 34% (34%) (34%)
Alternative minimum tax 3
Effect on statutory rate
due to carryback position (1)
State income taxes, net of federal benefit 5 5 3
Foreign income taxes (benefit) (8) 3
Net operating loss carryforward
(benefit) limitation (34) 34 34
---------------------------
( 3%) 5% 8%
===========================
</TABLE>
Federal income taxes have not been provided on the undistributed earnings of
foreign affiliates and subsidiaries for which the earnings are considered
permanently invested.
NOTE K -- LEASE COMMITMENTS
The Company's principal lease commitments are for its corporate offices and
research and development facility in East Hartford, Connecticut, its
manufacturing facility in Manchester, Connecticut and its research and
development facility in Irvine, California. The East Hartford lease expires
on December 31, 1996, and the Manchester and Irvine leases expire on December
31, 1995. Minimum rental payments for all noncancelable leases which are
operating leases with terms equal to or in excess of one year as of December
31, 1994 are as follows: 1995 - $737,000 and 1996 - $168,000.
Rental expense for the years ended December 31, 1994, 1993 and 1992 was
$808,000, $792,000 and $927,000, respectively.
<PAGE>
NOTE L -- CONTINGENCIES
There are certain claims pending against the Company which arose in the
normal course of business. In the opinion of management, the ultimate
outcome of these matters will not have a material impact on the Company's
financial position, results of operations or liquidity.
NOTE M -- FOURTH QUARTER ADJUSTMENT (Unaudited)
Fourth quarter 1994 net income of $147,000 includes a credit to income of
$230,000 related to the reversal of a specifically allocated allowance for an
uncollectible receivable. Management believes the allowance is no longer
required due to the improved payment history of the customer.
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to Directors and additional information pertaining to
Executive Officers is included, under the caption "Governance of the
Company", and "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 15, 1995 and is incorporated herein by
reference and made a part hereof.
EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
Officers of the Company are set forth in the schedule below.
<TABLE>
<CAPTION>
Officer
Name Age Principal Occupation: Since
<S> <C> <S> <S>
Richard I. Tanaka * 66 Chairman, Chief Executive
Officer, President
and Director 1989
Robert L. Bell * 43 Vice President -
Product Development 1993
William H. Cuddy 59 Secretary 1984
James J. Everett 55 Vice President -
Government Sales 1988
David A. Newton 49 Vice President -
Engineering 1987
Jerry Putzer 51 Vice President -
North American Sales 1992
Clarence W. Rife * 55 Vice President -
Systems and Service 1975
John B. Sayre * 59 Vice President -
Facilities and Manufacturing 1988
Michael J. Villano * 35 Vice President and
Chief Financial Officer 1992
*Executive Officers of the Company.
</TABLE>
Dr. Tanaka joined the Company in September 1989 as Chairman of the Board and
Chief Executive Officer. In December 1989 he was also named to the position
of President. Prior to joining the Company, Dr. Tanaka was President of
Lundy Electronics and Systems, Inc., a division of TransTechnology Corp. from
1987 to 1989 and from 1980 to 1986 he was President and CEO of Systonetics,
Inc.
<PAGE>
Mr. Bell joined the Company in August 1993 as Vice President - Product
Development. Prior to this date, he was a consultant for the design and
development of information networks from 1991 to 1992 and from 1989 to 1991
he was President of Bluebonnet, a research organization for advanced
telecommunications systems. From 1979 to 1989 he held various positions with
Recognition International, Inc.
Mr. Cuddy has been a partner in the law firm of Day, Berry and Howard since
1968. He was elected to the position of Corporate Secretary in September
1984.
Mr. Everett joined the Company in 1988 as Vice President - Government Sales.
Prior to this date, he spent 22 years with Recognition International, Inc.,
most currently as a Branch Manager/Marketing Manager for the federal system
sales division.
Mr. Newton has been employed by the Company since 1970 and was elected to the
position of Vice President - Engineering in 1987.
Mr. Putzer has been employed by the Company since 1970 and was elected to the
position of Vice President - North American Sales in 1992.
Mr. Rife has been employed by the Company since 1969 and was elected to the
position of Vice President in 1975. He is currently Vice President - Systems
and Service.
Mr. Sayre joined the Company in December 1988 as Vice President - Facilities
and Manufacturing. Prior to this date he held various management positions
with Pratt and Whitney, Division of United Technologies Corporation, from
1985 to 1988 and previously with LTV/Republic Steel from 1980 to 1985.
Mr. Villano joined the Company in 1986 and in 1988 was named Assistant
Controller. In 1989 he was promoted to the position of Controller, in
February 1992 was named Vice President and Controller and in March 1994 was
named Vice President and Chief Financial Officer.
The executive officers are elected for a one year term at the Directors'
meeting following the Annual Meeting of Stockholders each year. There are no
family relationships between any of the listed officers and directors.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
This information is included, under the caption "Executive Compensation", in
the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 15, 1995 and is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included, under the caption "Share Ownership of
Management", in the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 15, 1995 and is incorporated herein
by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included, under the caption "Certain Transactions", in
the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 15, 1995 and is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and report of
independent auditors of the Company and its subsidiaries are included in Item
8:
(1) Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Operations for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements - December 31, 1994
(2) The following consolidated financial statement schedule is
included in Item 14(d):
Schedule VIII -- Valuation and Qualifying Accounts
<PAGE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
(3) Listing of Exhibits
*3.1(a) Certificate of Incorporation, including amendments thereto
(filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1, File No. 2-70277).
*3.1(b) Amendments to Certificate of Incorporation adopted May 17,
1984, included in Exhibits A, B, C and D in the Company's proxy
statement dated April 17, 1984 for the Annual Meeting
of Stockholders held May 17, 1984.
*3.1(c) Amendment to Article Tenth of the Certificate of Incorporation
included as Exhibit A in the Company's proxy statement dated
April 16, 1987 for the Annual Meeting of Stockholders
held May 19, 1987
*3.2(a) By-laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File No. 2-70277).
*3.2(b) Amendments to By-laws of the Company adopted May 17, 1984,
included in Exhibits A and B in the Company's proxy statement
dated April 17, 1984 for the Annual Meeting of
Stockholders held May 17, 1984.
*3.2(c) Amendment to By-laws of the Company adopted at the meeting
of the Board of Directors on January 28, 1991, included as
Exhibit 3.2(c) in the Company's Annual Report on Form 10K
filed for the year ended December 31, 1991.
*+10.1 The Scan-Optics, Inc. 1979 Incentive and Non-Qualified Stock
Option Plan included in Exhibit B in the Company's Proxy statement
dated June 8, 1979 for the Annual Meeting of
Stockholders held on June 27, 1979.
* +10.2 The Scan-Optics, Inc. 1984 Incentive and Non-Qualified Stock
Option Plan included in Exhibit E in the Company's Proxy statement
dated April 19, 1984 for the Annual Meeting of
Stockholders held on May 17, 1984.
* +10.3 The Scan-Optics, Inc. 1987 Incentive and Non-Qualified Stock
Option Plan included in Exhibit B in the Company's Proxy statement
dated April 16, 1987 for the Annual Meeting of
Stockholders held on May 19, 1987.
* +10.4 The Scan-Optics, Inc. 1990 Incentive and Non-Qualified Stock
Option Plan included in Exhibit A in the Company's Proxy statement
dated April 30, 1990 for the Annual Meeting of
Stockholders held on June 12, 1990.
* +10.5 The Scan-Optics, Inc. 1990 Stock Option Plan for Outside Directors
included in Exhibit B in the Company's Proxy statement dated
April 30, 1990 for the Annual Meeting of
Stockholders held on June 12, 1990.
<PAGE>
* +10.6 Employment agreement between Richard I. Tanaka and Scan-
Optics, Inc. effective September 5, 1989, included as Exhibit 10.7
in the Company's Annual Report on Form 10-K filed for
the year ended December 31, 1991.
* +10.7 Severance agreement between Clarence W. Rife and Scan-Optics, Inc.
dated December 17, 1986, included as Exhibit 10.8 in the
Company's Annual Report on Form 10-K filed for the
year ended December 31, 1991.
* +10.8 Executive severance agreement between certain officers and
Scan-Optics, Inc. dated July 28, 1992, included as Exhibit
10.8 in the Company's Annual Report on Form 10-K filed for
the year ended December 31, 1992.
11. Computation of earnings per share for the last three
fiscal years.
* 22. List of subsidiaries of the Company, included as Exhibit
10.8 in the Company's Annual Report on Form 10-K filed for
the year ended December 31, 1993.
23. Consent of Independent Auditors.
27. Financial Data Schedule.
* Exhibits so marked have heretofore been filed by the Company
with the Securities and Exchange Commission and are incorporated herein by
reference.
+ Management contract for compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter ended
December 31, 1994.
(c) Exhibits
The exhibits required by this item are included herein.
(d) Financial Statement Schedule
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SCAN-OPTICS, INC.
Registrant
By: /ss/
-----------------------------
Richard I. Tanaka
Chairman, Chief Executive
Officer, President and Director
Date: March 20, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
/ss/
Richard I. Tanaka Chairman, Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: March 20, 1995
/ss/
Michael J. Villano Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 20, 1995
/ss/
Logan Clarke, Jr. Director March 20, 1995
/ss/
Richard J. Coburn Director March 20, 1995
/ss/
Bulkeley Griswold Director March 20, 1995
/ss/
Lyman C. Hamilton, Jr. Director March 20, 1995
/ss/
Richard Hodgson Director March 20, 1995
/ss/
Robert H. Steele Director March 20, 1995
A majority of the Directors
<PAGE>
SCHEDULE VIII
<TABLE>
SCAN-OPTICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(thousands)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-----------------------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions (1) Period
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1994:
Reserve for doubtful accounts $ 313 $ 34 $ 279
Year ended December 31, 1993:
Reserve for doubtful accounts $ 290 $ 287 $ 264 $ 313
Year ended December 31, 1992:
Reserve for doubtful accounts $ 140 $ 265 $ 115 $ 290
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11.
SCAN-OPTICS, INC., AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(thousands, except share data)
<CAPTION>
Year Ended December 31
------------------------------------------
1994 1993 1992
------------------------------------------
Primary earnings per share
<S> <C> <C> <C>
Average common shares outstanding 6,030,469 5,490,673 5,467,458
Average Class A common shares outstanding 427,232 854,464 854,464
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using the weighted average market
price for the year 401,843
------------------------------------------
Total 6,859,544 6,345,137 6,321,922
------------------------------------------
Net income (loss) $ 1,284 $ (981) $ (1,611)
------------------------------------------
Earnings (loss) per share $ 0.19 $ (0.15) $ (0.25)
------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-37253, Form S-8 No. 33-37829, Form S-8 No. 33-16362, Form S-
8 No. 2-93268 and Form S-8 No. 2-65503) and in the related prospectuses of
our report dated February 2, 1995, except for the second paragraph of Note D,
as to which the date is March 7, 1995, with respect to the consolidated
financial statements and the schedule of Scan-Optics, Inc. and subsidiaries
included in the Annual Report (Form 10-K) for the year ended December 31,
1994.
Ernst & Young LLP
Hartford, CT
March 27, 1995
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1993 DEC-31-1992
<PERIOD-END> DEC-31-1994 DEC-31-1993 DEC-31-1992
<CASH> 178,000 283,000 0
<SECURITIES> 0 0 0
<RECEIVABLES> 9,124,000 9,009,000 0
<ALLOWANCES> 279,000 313,000 0
<INVENTORY> 14,223,000 13,851,000 0
<CURRENT-ASSETS> 24,608,000 23,606,000 0
<PP&E> 17,894,000 16,307,000 0
<DEPRECIATION> 13,272,000 12,357,000 0
<TOTAL-ASSETS> 29,619,000 27,878,000 0
<CURRENT-LIABILITIES> 10,593,000 10,471,000 0
<BONDS> 0 0 0
<COMMON> 138,000 118,000 0
0 0 0
0 0 0
<OTHER-SE> 18,593,000 16,979,000 0
<TOTAL-LIABILITY-AND-EQUITY> 18,731,000 17,097,000 0
<SALES> 26,988,000 19,698,000 20,770,000
<TOTAL-REVENUES> 43,889,000 36,381,000 37,893,000
<CGS> 17,584,000 11,902,000 13,383,000
<TOTAL-COSTS> 42,724,000 37,349,000 39,441,000
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 1,244,000 (932,000) (1,493,000)
<INCOME-TAX> (40,000) 49,000 118,000
<INCOME-CONTINUING> 1,284,000 (981,000) (1,611,000)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,284,000 (981,000) (1,611,000)
<EPS-PRIMARY> .19 (.15) (.25)
<EPS-DILUTED> .19 (.15) (.25)
</TABLE>
